Let Me Explain What ECB and Biden Mean for Crypto #52
Market Meditations | December 11, 2020
Let Me Explain What ECB and Biden Mean for Crypto
Stimulus, stimulus and more stimulus. Besides being one of this year’s buzzwords, the topic has been one of the driving factors behind this year’s price action across all markets. The economy has become addicted to cheap money and government stimulus and just like any other addiction, it will almost be impossible to stop.
With continued monetary and fiscal support for the economy to be expected, I wanted to take a look at this week’s news about the European Central Bank (ECB) boosting the size of their emergency bond-buying program and the potentially new U.S. stimulus package by the end of the year. After outlining the news, we take a look at why all this ‘money printing’ potentially weakens a country’s currency and motivates investors to look for a hedge against rising inflation. And what’s a hedge against rising inflation? Yep, that’s right: crypto.
Fear of Strong Euro: ECB Pumps Another €500bn Into Recovery
The ECB doesn’t see inflation rising to anywhere near its target of just below 2% for the foreseeable future. Christine Lagarde, president of the ECB, said that she will deploy emergency stimulus measures longer so that the eurozone can recover from the Coronavirus pandemic. A pandemic asset purchase program was extended to March 2022 and the amount of bonds that the ECB will buy increased by another 500 billion euros, now totaling 1.85 trillion euro, although she clarified that the scale of bond purchases will depend on the economic situation and might not be used in full. Additionally, banks that lend to businesses will be able to borrow money from the ECB and very favorable conditions until 2022, also a year longer than originally planned. Whilst it all may seem like rainbows and smiles, the tweet below conveys how all this debt is sort of like putting a plaster on a broken mirror, you can still see all the cracks. In this case, the cracks are the structural weaknesses in the economy.
Meanwhile in the U.S. talks about the new government stimulus package continues as lawmakers are running out of time to push through another coronavirus relief package before Congress adjourns for the holidays. Whether it will be $908 or $916 billion, it’s increasingly clear how dependent the stock market has become on further stimulus for further gains. Reuters wrote that:
“positive updates on the COVID-19 vaccine development along with hopes for a fresh fiscal stimulus package have helped fuel a rise in Wall Street’s main indexes to all-time highs, with the S&P 500 surpassing 3,700 points for the first time on Tuesday. With overall valuations now at extremely high levels, some investors worry stocks could be more vulnerable to any bad news such as unexpected setbacks in the roll-out of coronavirus vaccines or delays in stimulus.”
What About Inflation?
Continued money printing by central banks and new rounds of government stimulus has investors paying attention to a possible increase in inflation down the line. The Biden administration is planning another $7 trillion recovery package to tackle the impact of the coronavirus, adding another wave of debt on the already huge mountain that exists today.
Meanwhile, the U.S. dollar has been on downtrend since March. With stock markets at all-time highs, people tend to forget that all this money printing doesn’t come without consequences. Coindesk writes:
“Against the backdrop of an already weakening dollar, the U.S. could thus face a potent cocktail of dangerous economic factors driving down wealth. The appeal of a safe haven has thus never been so real.”
The Flight To Safety
Because of the excessive money printing this year, investors naturally started looking for assets that could protect them against a possible increase of inflation. Hard assets, naturally limited in supply traditionally benefit from loose monetary policies and that’s why real estate, gold, bitcoin and other scarce assets saw a huge increase in demand during this “age of currency and asset price manipulation.”
Increasingly, institutional investors like Paul Tudor Jones, Ray Dalio & Stan Druckemiller started paying attention to bitcoin specifically because of the similarities with gold while having a relatively low market cap compared to other major asset classes. Wall Street has woken up to the digital gold narrative that bitcoiners have been preaching for a while and it doesn’t seem that this institutional wave of demand is stopping anytime soon. The picture is clear, as long as central banks and governments continue their monetary and fiscal support, demand for scarce assets will remain high with further price appreciation on the table for. Are central banks once again creating an unsustainable asset price bubble? One thing is certain: in the current environment, ‘cash is trash’.
So, in a sentence, what should you take away from this? Well. The current political and economic environment is in a condition that bodes well for crypto-currencies. The recent ECB packages and Biden’s fiscal stimulus agenda show that further money supply remains on the table. And it isn’t going anywhere for a long time. This increases market participants’ inflation expectations. Naturally, we have seen a huge increase in demand from institutional investors to hold anti inflationary assets. Crypto-currencies fall into this world. It seems each day we see another massive hedge fund or asset manager enter the space. And, this wave of demand doesn’t seem to be stopping anytime soon.
Ethereum Far Outpaces Bitcoin in Developer Activity in 2020: Electric Capital Report. The amount of developers working in crypto is growing for the first time since 2017, according to an annual report from venture firm Electric Capital. 80%+ of all active developers today became active in the last two years and one network remains the clear winner in terms of attractiveness to coders. More than 300 new devs join Ethereum (including ERC-20 projects) per month and there has been an 67% increase in monthly active developers in Decentralized Finance since January 2020. Monthly average of developers working on Ethereum sits at 2300, with Bitcoin taking the second position with an average of slightly below 400. Read more.
Insurance Firm Massmutual Buys $100 Million Worth of Bitcoin Through Nydig. Yesterday, The Wall Street Journal reported that a Massachusetts-based insurance company acquired $100m worth of bitcoin for its general insurance account, calling it ‘the latest sign of mainstream acceptance for the upstart digital currency.’ MassMutual bought bitcoin through a New York-based fund management company called NYDIG, who owns $2.3b worth of bitcoin and other cryptocurrencies under management. MassMutual said that their purchase was to take advantage of new opportunities while simultaneously remaining diversified. Read more.
Oil Rally Momentum Slows After Previous Day’s ‘Feeding Frenzy’. Oil took a breather following a swift run-up to a nine-month high, as concerns over an impasse in Washington about stimulus tempered optimism around an eventual demand recovery. Futures fluctuated near $47 a barrel in New York alongside a broader market decline as bipartisan talks on another round of U.S. fiscal stimulus stalled. Meanwhile, following Brent’s rally above $50 a barrel on Thursday, the benchmark settled technically overbought in a sign it was due for a pullback. Read more.
Defi Lending Protocol Startup Swivel Finance Raises $1.15 Million. In a seed round led by investment firm Multicoin Capital, DeFi lending protocol Swivel Finance has raised $1.15m in funding. The seed round is joined by some well-known investors like Electric Capital, CMS Holdings and Divergence Ventures. The project will use the funds to hire additional engineers and launch the protocol on the Ethereum mainnet in the next few months. Swivel co-founder Traversa said “we’ve been hearing lenders ask for fixed-rate products for a long time, but when it came to backing those fixed-rates, the incentives just weren’t there previously.” Read more.
Boxmining: Mining vs. Staking, Ethereum’s Future and Content Creation
Michael (@boxmining) is a popular crypto content creator and influencer, investor and advisor. He has built one of the biggest Youtube accounts (217k subscribers) in the space and was recently appointed as a strategic advisor by Genesis Block. Michael also hosts a personal website where he and his team of contributors provide updates on the latest developments in the cryptocurrency space.
In this episode, we discuss whether or not mining can still be profitable today. We look at other potential revenue streams in crypto and proceed by discussing Ethereum’s future after the Eth2 upgrade. We also discuss what it takes to become a successful content creator and how boxmining got so popular in 2017 and end with investing in an industry that moves incredibly fast.
Things I learned:
The new generation of graphic cards are absolute killers. Technology made a huge leap which means you can make money with the new graphic cards as long as you can buy them around retail prices.
From a pure business perspective, you should always mine whatever is the most profitable in terms of USD. You should always be looking for maximum profit.
If you want to make more Ethereum, you could stake your position. Staking your Ethereum in the Eth2 contract is less risky than yield farming but can make some nice returns (~$200/month).
The number of developers on Ethereum is an important factor to pay attention to. Pretty much all the innovation in DeFi is built on Ethereum and it has become so dominant that it is very hard to beat by other projects.
Being ultra aggressive with the speed of execution was one of the reasons ‘Boxmining’ saw a huge success in 2017.
Don’t pay attention to what people say, pay attention to what they do.You shouldn’t always trust what big personalities publicly say. Most of the time they don’t have your best interest in mind.
One of the benefits of crypto is the pace at which it moves. You can see the fruits of your labour or someone else’s rather quickly. The space is full of opportunities ready to be explored.
Most people who really know their stuff are also okay with admitting they don’t know something. It’s the people who say they know everything you have to watch out for.
Ray Dalio: What Can We Learn From Him?
Market Meditators, when it comes to self improvement, it is no secret that there is a wealth of literature on the topic. With so many resources, it can be difficult to decide which person’s guidance to follow. As a general rule of thumb, it is helpful to consider who is writing the guidance. The person on the other end of it should be someone you admire, or at least hope to have a similar type and level of success to. There are many good examples in this space. In today’s letter, we take a look at lessons from Ray Dalio. Our recently turned crypto bull.
Ray Dalio is the founder of the world’s biggest hedge fund firm, Bridgewater Associates, which manages roughly $140 billion. According to Forbes, his real time net worth is $16.9 billion. Dalio grew up in a middle class Long Island neighbourhood. The story of how he got into markets is fascinating. He started playing the markets at age 12, getting tips from golfers for whom he caddied. Because of the firm’s many industry-changing innovations over its 40-year history, he has been called the “Steve Jobs of investing”.
Dalio has written a bestselling book titled ‘Principles’. It is also available as a 30 minute YouTube miniseries titled ‘Principles For Success’. One of his principles is particularly helpful for traders. He calls it the ‘5-Step Process’. The 5-Step Process is designed to help you achieve your goals. I believe all traders have a vision or a goal for their trading. Perhaps you want to be able to be self employed with financial freedom or maybe you want to be able to support your family. Whatever that underlying goal or driving factor is, this 5-Step Process can help you achieve it.
Have clear goals
Did you read the paragraph above and not really have a goal come to mind for why you trade? According to Dalio, this is really important. How can you chase after your goals if you don’t know them? You need to understand yourself and know what you want to achieve. This isn’t an easy task but it will help motivate your trading.
Identify the problems that stand in your way
Once you understand your goal, you can identify the problems. To build on the example earlier, if your goal is financial independence, maybe one problem is that you can’t dedicate as much time as you would like to to trading. Maybe the coins that interest you are super volatile and you can’t be sat watching the price action all day.
Accurately diagnose the problems to get at their root causes
Take a step back and reflect in order to identify the symptoms from the disease. What is causing the problem? In the example above, is it really that you don’t have time or is it that you aren’t trading the most suitable coins given your current time constraints. Perhaps a trading strategy like scalping is not sensible for you.
Design plans that will get you around them
To eliminate the problems, you need to create a plan. Following the example, you can set a plan to educate yourself on exactly what kind of time commitment different coins require and what trading strategies are out there. Perhaps you can take a more medium term view on prices. Or, maybe you have more free time than you think.
Do what’s necessary to push these design through to results
Push yourself to do what is needed to progress. The above is not a one time job. It is a process: a process of personal evolution. You might need to constantly refine the way you trade to suit your lifestyle and goals. A successful life consists of repeating these 5 steps time and time again.
Hopefully at this point, you can think about your trading journey in a different way. Hopefully you have a goal in mind, have identified what might get in the way of your goal and are set to strive to solve these challenges everyday. It might be difficult but you are not alone, that’s what we have set up the Market Meditations for.
Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. I am not a financial advisor. Every investment and trading move involves risk. Do your own research when making a decision.