Weekly Update – Week 178
Rivemont is the portfolio manager responsible for the investment decisions of the Rivemont Crypto Fund.
This Wednesday began with the release of the U.S. consumer price data. The index jumped by 4.2% while estimates were around 3.6%. This annual increase is mainly the result of the last month, which recorded an increase of 0.8% against 0.2% expected. In short, inflation is on the rise, a scenario that was expected with the massive capital injections under the Fed's economic stimulus plans.
The relationship between inflation and bitcoin is natural. Indeed, the cryptocurrency is deflationary in nature, therefore offering protection against the loss of purchasing power of inflationary fiat currencies. This role that has historically been reserved to gold equally applies well to digital gold. A rise in inflation should therefore be beneficial to the crypto market. Relentless logic... on paper.
This topic is the subject of many internal discussions in the development of plausible scenarios for the evolution of the markets. The context now seems right to present an alternative picture of the effect of such inflation data. This is a rare position from crypto analysts, but one that we on our side believe is entirely plausible.
The crypto bull market, like the stock market, is part of this wave of liquidity injection coupled with historically low interest rate. Higher inflation means higher interest rates at the next turn. It is also, by the same token, a signal to stop the liquidity injection programs so as not to exacerbate the problem. As we saw with the NASDAQ’s reaction to the announcement this morning, this creates a wave of uncertainty for growth stocks.
What has bitcoin been correlated to this past year? Gold or the NASDAQ? The latter, without a shadow of a doubt. It was in the growth of the technology sector that the bitcoin bull market was born. So why would paper logic suddenly take over? Just because it appeals more to the desired narrative does not mean it is the most plausible. A rise in inflation may have consequences that will put an end to the bullishness of all assets, and if so, bitcoin may well suffer the same fate.
In any case, this logic is only at the speculative stage today. We are far from a hyperinflationary trend and the effects on the markets today are very slight, not to say almost nil. Certainly nothing to draw conclusions from. Financial analysis is the evaluation of all scenarios to gauge their respective plausibility. We wanted to share with you one of our own that you probably won't read on sites dedicated to cryptocurrencies.
Stanley Druckenmiller, one of the best money market brokers in history, weighed in on this very dynamic this week. Relating to the massive printing of new dollars, he said on CNBC that it is “more likely than not” the U.S. dollar will lose its status as the global reserve currency within 15 years. It is often said that to invest in cryptos is to "short" the dollar. Druckenmiller seems to agree. Indeed, he doesn't see another fiat currency that can play the universal mediation role of the dollar anytime soon. Instead, he thinks “the most likely replacement” for the dollar would be a “crypto-derived ledger system.” In short, the blockchain.
The week that ended yesterday was once again marked by a strong rise in Ethereum. Always great news for our investors as about 70% of the fund's assets are exposed to it! Indeed, although bitcoin rose by 6.6% from Wednesday last week to Tuesday, ETH rather increased by 28.9%.
What explains this sudden and pronounced rise of the crypto asset? If we cannot reduce a complex dynamic to a single element, it is nevertheless obvious with the available data that it is a real game of supply and demand in full imbalance. This three-month chart shows the extent to which the price is rising as the supply of ETH continues to be reduced. In short, there is not enough Ethereum available at the current price to meet the demand of investors, who are constantly withdrawing Ethereum from exchanges. Where will this equilibrium point be? No one can claim to know, as the price is currently in a real discovery zone.
This new rise has allowed Ether to reach a capitalization of over $500 billion. This puts it above JPMorgan and Visa. Need we remind you that it was only last December that bitcoin passed that same threshold, before hitting the $1 trillion mark in February? Ethereum has the wind in its sails and if Greg Magadini, CEO of Genesis Volatility, is to be believed, the future capitalization of the ETH market at $1 trillion is a "no-brainer".
Speaking of the wind in the sails of the cryptocurrency industry, let's mention that Coinbase just surpassed TikTok as the most popular app in the Apple Store. Coinbase is currently the most popular app in the U.S., ahead of TikTok, YouTube, Facebook, Instagram and trading app Robinhood. Cash App, which allows users to send money and buy bitcoins, is in 12th place.
U.S. tech giant Palantir Technologies could be the next to add bitcoin to its balance sheet. This was indeed announced during its financial results call this week. The CEO also said that the company might not be limited to bitcoin. The company's stock is in a steep decline in these early days of 2021. Could such a financial move reverse this trend?
Let's conclude with a short look back at our analysis of the madness surrounding DOGE and what it means for the markets. At that time, we wondered whether this was a genuine social movement or rather an irrational wave of speculation. While the price of the asset unsurprisingly dropped after Elon Musk mentionned it on Saturday Night Life, we certainly can't call it a collapse. The token is indeed trading at around $0.50/coin, a fortune considering the capitalization of DOGE. However, to the question about speculation, we certainly have part of the answer. Fortunes are currently being thrown at empty projects such as SHIB, AKITA, KISHU, ELONGATE or any other token with a canine flavor or in the air of the moment. There's no doubt about it, we're squarely in the pump and dump zones. Will DOGE have a different fate? The jury is still out on that.
Even if we have to repeat ourselves, the technical picture seems to be identical to what it has been for several weeks. So we'll keep it short. Bitcoin remains in a consolidation zone on its key moving averages. Meanwhile, the altcoin season continues, with ETH leading the way for large-cap ones. There is no indication of a reversal of this current trend at this time.
Rivemont Investments, manager of the Rivemont Crypto Fund.
The presented information is as of May 12th, 2021, unless otherwise indicated and is provided for information purposes only. The information comes from sources that we believe are reliable, but not guaranteed. This statement does not provide financial, legal or tax advice. Rivemont Investments are not responsible for any errors or omissions in the information or for any loss or damage suffered.