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| The biggest crypto news and ideas of the day Dec. 10, 2021 If you were forwarded this newsletter and would like to receive it, sign up here. Sponsored by Welcome to The Node.
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Today’s must-reads Top Shelf SOLANA DOWN: The Solana network, which usually processes 2,000 transactions per second, slowed to a relative crawl Thursday morning due to an unidentified congestion event. That comes after an outage in September that took the blockchain, reportedly run by 1,000 nodes and supporting a $12 billion economy, offline for 18 hours. By comparison, Thursday’s issue, already resolved, was slight. In a conference call yesterday, stakeholders and developers floated the idea of a centrally run Solana Labs network “observer,” which could help prevent future outages. Meanwhile, popular web browser Opera announced plans for a SOL wallet integration next year.
GLOBAL POLICY: Indian Prime Minister Narendra Modi called for a globalized, standardized way to regulate internet technologies – including social media and crypto – at the Summit for Democracy. India is drafting a “crypto bill,” which at this stage would be a hard line against digital assets. Modi said at the summit that crypto should be used to empower democracies, not undermine them. Meanwhile, the International Monetary Fund (IMF) has proposed its own global regulatory crypto framework. Though a “daunting task,” imposing rules could “maintain financial stability” while benefiting from the “technology innovations” of blockchains.
BIG DOGS: Binance is reportedly in talks with PT Bank Central Asia (BCA), which is controlled by billionaire brothers Budi and Michael Hartono, and state-owned PT Telkom Indonesia, the country’s largest telecom operator, about a possible crypto venture, according to Bloomberg sources.
META WORST? DeFi Land, a decentralized gaming studio, and Audius, a music streaming platform built on the Ethereum and Solana blockchains, have partnered to build a radio station “in the metaverse.” Users will now be able to stream millions of songs from the Audius library while playing DeFi Land’s agriculture-themed game that teaches people about yield farming and other concepts in decentralized finance (DeFi). Separately, a ConsenSys-backed virtue gaming company has launched a poker game where you can’t lose. The game calls itself “play-to-earn,” but I think that applies to normal gambling too.
–D.K.
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What others are writing... Off-Chain Signals South Africa’s Financial Sector Conduct Authority (FSCA) is preparing a regulatory framework for crypto to protect the more vulnerable members of its society following a series of scams in the country. (Bloomberg) Ethereum developer Joseph Delong resigned from Sushi, a DeFi network, this week. He reflects on his “failures in leadership” (Mirror) A rare CryptoPunk has sold at a record $10.2 million (The Block) The crypto industry spent $5 million lobbying the Senate in 2021 (The Economist) SEC Obtains Judgments Against Bitconnect's Lead National Promoter and His Company for Antifraud and Registration Violations (SEC)
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Putting the news in perspective The Takeaway Why Is Bitcoin Dropping If It’s an ‘Inflation Hedge’? Hey, David Z. Morris writing. This morning, the U.S. Bureau of Labor Statistics released updated numbers for its inflation-tracking Consumer Price Index (CPI), showing U.S. inflation has hit a 6.8% annualized rate. That adds up to the highest year-over-year inflation rate since 1982, which is decidedly not great. Among other implications, the number is another nail in the coffin of U.S. President Joe Biden’s “Build Back Better” social spending package.
And asset markets? Wall Street had already priced in 6.7% inflation, so the Dow Jones Industrial Average has been pretty much stable as of this writing. Gold saw a modest but noticeable morning bump, while gold futures have seen a choppy but decent runup over the last six months as inflation fears gestated.
Bitcoin, meanwhile, was flat to down this morning, and down more than 25% over the past 30 days. That contradicts one of the most widely cited selling points of bitcoin – that it’s an “inflation hedge,” a place to put your money when fiat is losing real-world value.
So what gives? Why isn’t bitcoin rallying as inflation in the world’s biggest economy touches 40-year highs?
Here’s the secret that your average YouTube crypto shillfluencer will pretty much never spill: The idea that bitcoin is an inflation hedge is purely speculative. It may become true in the future, and it may be a rational reason to speculate on bitcoin right now, but it’s not a mechanism that actually functions in the present day.
It certainly seems very structurally plausible that it eventually will if bitcoin adoption continues on its current path. If enough companies, economies and individuals transfer a lot of their wealth into bitcoin, its price will become more stable, making its steady and tight issuance policy much more appealing, and reducing the risk of rotating into it when inflation is running hot.
That’s how some people use gold, which is why bitcoin is sometimes referred to as “digital gold.” Investor and CoinDesk columnist Nic Carter recently pointed out that if bitcoin were to gain adoption similar to gold, it would mean growing 10x from where we are now. That seems like a quite likely future scenario to me.
But that’s not where we are now. Currently bitcoin prices are unstable for a number of reasons that have no direct tie to inflation, and if recent price moves are any indication, those forces remain considerably more powerful than the “digital gold” narrative.
First and foremost, bitcoin has been on a nearly two-year bull run. The simple mathematics of reversion to the mean and/or the emotional gravity of profit taking made a pullback inevitable. That’s especially true because bitcoin is still quite clearly a speculative asset – its current total valuation of nearly $1 trillion (wow) is based not on current adoption, but on a scenario of future growth. Any speculative asset is particularly vulnerable to uncertainty: Tesla stock, which is now largely a bet on Elon Musk inventing general artificial intelligence, is off roughly as much as bitcoin over the last 30 days.
That points to anxiety over the strength of the real economy, most of it focused outside the U.S. China in particular is beginning to show signs of a looming unwind, which would have serious impacts around the globe. But debt and other forms of leverage (including leverage buried in stock prices) are at record levels basically everywhere.
So things are choppy and could go in a lot of different directions without much notice. A major downward shock would knock a lot of wind out of future-oriented assets, and some investors are de-risking to be on the safe side.
Relative to bitcoin’s inflation thesis, the scenario demonstrates the most inconvenient truth of economics and finance: that it’s very hard to definitively prove why nearly anything happens. There’s almost never a chance for a “controlled experiment” in the real economy, a situation where only one variable changes at a time, allowing its specific impact to be fully observed. The clearest way to really affirm bitcoin’s role as an inflation hedge would be if nearly nothing but inflation was going on, and that’s just not a situation we’re ever going to see in the real world.
Instead, on any economic or financial question, there are nearly always a large number of moving parts – including elements even professionals may be completely unaware of. Predicting the future depends on picking the right moving parts to focus on. For bitcoin, at least for now, inflation doesn’t seem to be the story the markets are listening to.
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