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How record inflation impacts crypto

How record inflation impacts crypto

Despite choppy markets, Miami remains bullish on BTC. [Bloomberg via Getty Images]

There’s never a dull moment on the blockchain. Here’s what you need to know this week:

Surging inflation is pressuring crypto. Red hot inflation numbers are impacting stocks, crypto, and beyond.

Bitcoin fans flocked to Miami for Bitcoin 2022. Celebs, creators, and investors gathered to discuss all things BTC.

The week in numbers. The record amount of VC investments flowing into crypto, and other key figures to know this week.

MARKET UPDATE

As inflation and interest rates spike, how will crypto react?

As you’ve probably noticed, crypto prices have been trending downward in April, with both BTC and ETH down more than 10% since the beginning of the month. So what’s behind the dip? The major economic story continues to be inflation, which has been chipping away at the purchasing power of the U.S. dollar for months. On Tuesday, the Consumer Price Index (a proxy measure for inflation) recorded an 8.5% increase in March over the same time last year — a 40-year high. (The CPI includes gas prices, so some of the increase is likely the result of the war in Ukraine and energy supply disruptions.) In response, the Federal Reserve is widely expected to announce another interest-rate hike of 0.5% later this month. Let’s dig into what it all means.

  • Despite the latest inflation report, prices of crypto and stocks both rebounded slightly after the announcement. Some investors may have already “priced in” forthcoming interest-rate hikes, while others may believe that inflation rates are close to peaking. But what happens if inflation and interest rates continue to rise? Investors may be pressured to sell riskier assets like tech stocks and crypto in favor of a guaranteed return on their dollars in a savings account. 

  • Bitcoin has historically had a very low correlation with traditional assets like stocks and bonds — so why has that changed in recent months? This may simply be the result of crypto’s increasing popularity as a multi-trillion dollar asset class. Given that cryptocurrencies are now held by millions of individuals and many of the biggest institutions on Wall Street and beyond, it's not surprising that the same macroeconomic forces that shape other major asset classes are also impacting crypto markets. 

  • Inflation in developing economies is driving crypto adoption — could the same happen in the U.S. and Europe if purchasing power continues to decline? According to one recent global survey, nearly 60% of adults in Latin America and Africa (home to some of the world’s highest-inflation countries) say that crypto is “the future of money” and about 46% of people in those regions say “cryptocurrencies are a good way to protect against inflation.” 

  • Wall Street continues to make new bets on crypto. In a new shareholder letter, JPMorgan Chase CEO Jamie Dimon (a longtime crypto skeptic) touted his bank’s adoption of crypto technology: “Decentralized finance and blockchain are real, new technologies that can be deployed in both public and private fashion, permissioned or not. JPMorgan Chase is at the forefront of this innovation.” Another longtime crypto skeptic, Carlyle Group co-founder David Rubenstein, has evolved his stance — including investing in crypto-industry companies. “It’s clear to me now that many younger people don’t think there’s much underlying the dollar or the euro or other currencies,” he noted. “Having some cryptocurrency probably enables you to feel better when you can have something that’s outside of the government’s control.” 

Why it matters… While rising interest rates may have slowed speculative investment in crypto and other higher-risk asset classes, rising inflation is also shrinking the value of the dollar, euro, and other fiat currencies. So what will happen with crypto over the longer term? In one scenario, rising interest rates make cash more appealing, causing capital to move out of crypto markets. In another scenario, crypto’s value proposition as a decentralized alternative to fiat currencies grows more compelling, attracting both retail and institutional investors. As always, only time will tell.

COINCHELLA

Bitcoin fans flood Miami for annual crypto bash

If you’re a Bitcoin maxi, all roads lead to Miami — home to BTC-boosting mayor Francis Suarez, the most yacht parties this side of Cannes, and the world’s biggest annual BTC convention. With roughly 30,000 in attendance (double last year’s event!) Bitcoin 2022 had it all: an interactive screen that gave attendees laser eyes as they walked by, Suarez unveiling a 3,000-pound bull statue, and EDM-powered after-hours parties galore. Of course, there were also plenty of panel discussions and keynote speeches from industry leaders about the future of Bitcoin. Let’s take a closer look at the highlights.

  • The weekend’s headliners ranged from Peter Thiel to Serena Williams. Thiel delivered a provocative speech calling Warren Buffett a “sociopathic grandpa” for not believing in the future of Bitcoin, while Williams (joined by NFL stars Aaron Rodgers and Odell Beckham Jr.) hosted a more measured panel. The tennis icon praised BTC for its scarcity, Beckham Jr. added that crypto is a popular topic in NFL locker rooms, and Rodgers opined that the original crypto “is the best defense against inflation.”

  • Shark Tank investor Kevin O’Leary gave a speech encouraging U.S. lawmakers to pass sensible crypto regulations, a move he said would send “spigots of capital” into the crypto industry and pave the way for crypto to become the 12th sector of the S&P 500 index. Also in attendance: Wyoming Senator Cynthia Lummis, who described her forthcoming bill (co-sponsored by New York Senator Kirsten Gillibrand), as "a legislative framework that we hope will provide the sandbox for innovation to occur, but also put some regulatory parameters so you all know the rules of the road.”

  • Officials from Honduras, Portugal, and Mexico appeared, though none matched El Salvador’s Bitcoin 2021 news, when President Nayib Bukele used the event to announce his country would be the first to make BTC legal tender. Honduras announced a “special economic zone” called Próspera, where BTC will be accepted as legal tender without capital gains taxes; the president of Madeira, an autonomous group of Portuguese islands, also said that BTC would be adopted as legal tender there; and a Mexican senator announced that she’d be proposing a law that would legalize BTC.

  • Are Bitcoin maximalists finally opening up to DeFi? Bitcoin’s most hardcore supporters usually recoil at any mention of crypto beyond BTC as decentralized money. But there are signs that view might be shifting — a few presentations at Bitcoin 2022 focused on bringing DeFi, NFTs, and stablecoins to the Bitcoin network. One product, called ALEX, allows BTC holders to pool liquidity, similar to ETH-based apps like Uniswap. Another, called Sovryn, uses Bitcoin-based smart contracts and allows bitcoiners to lend, borrow, and trade on margin with their BTC.

Why it matters… Prices may have slumped in recent weeks, but among Bitcoin 2022 attendees, BTC fever was very much on the rise. Among the weekend’s main takeaways? A broad alignment on the need for clear, fair regulation and a sense that the biggest cryptocurrency by market cap has evolved from a niche asset into a mainstream preoccupation. MicroStrategy CEO Michael Saylor illustrated the shift in an anecdote. Two years ago, Saylor approached a Merrill Lynch broker about aquiring some BTC with MicroStrategy funds: “They laughed at me and said, not only will I not sell it to you, we're not allowed to talk about it or we get fired. Now my inbox has Bitcoin research from Merrill Lynch, sent to me by the same broker.”

NUMBERS TO KNOW

$12.5 billion

Estimated amount of VC funding raised by crypto startups in the first quarter of 2022 — the most ever. March’s total was $3.5 billion, the third-highest monthly fundraise stat in crypto history (behind January and February).

129,218 BTC

Amount of bitcoin currently on MicroStrategy’s balance sheet, after CEO and longtime crypto booster Michael Saylor disclosed adding an additional 4,167 BTC (about $191 million) in a statement last Tuesday. 

4

Number of bitcoin futures ETFs currently available to investors, after the SEC approved Vermont-based Teucrium’s new fund on April 6. The SEC has yet to approve any “spot-based” bitcoin ETFs, which would hold crypto directly (as opposed to holding bitcoin futures contracts).

TOKEN TRIVIA

Which of the following is taxable as income?

A

Getting paid in crypto

B

Receiving an airdrop

C

Earning staking rewards

D

All of the above

Find the answer below.

Trivia Answer

D

All of the above