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"The Last Best Price"
Friday March 25, 2022 - Issue # 9
I’ll hold my breath this morning as to not jinx the moves we’ve seen over the last week…I even knocked on wood for just thinking about it.
It has been a busy week for Bitcoin and the broader crypto market and if you live on crypto twitter, it certainly seems like sentiment is shifting. It’s really hard to tell — do stories follow price or do prices follow stories? My observation is that bearish news follows negative price action, and bullish news leads positive moves in price. Haters gonna hate.
Here’s a brief breakdown of what happened this week:
Goldman Sachs became the first major U.S. bank to trade crypto over the counter. Goldman traded a bitcoin-linked instrument called a non-deliverable option with crypto broker Galaxy Digital.
Following that announcement, they gave the front page of their website a bit of a facelift…
What do Malaysia and El Salvador have in common? Ignoring where they are on the map and the 24+ hour travel times I just checked in on — news of Malaysia becoming the next country to adopt Bitcoin as legal tender made the rounds this week. One should definitely take these headlines with a grain of salt as you can never really tell what’s what on the other side of the world.
How about one of El Salvador’s neighbours, Honduras? A lot of notable people had their bets on Honduras being the next country to declare bitcoin legal tender and it got crypto twitter very excited this week. Apparently, they lost. The country’s central bank issued a statement in which they announced their intention of going the CBDC route and issuing their own digital currency. Pretty much the exact opposite of bitcoin adoption. Oh well.
El Salvador’s Nayib Bukele met with Binance’s CZ on progressing bitcoin adoption. Rumours had it that Binance was going to replace Bitfinex as the issuer of El Salvador’s Volcano Bonds but Bukele quickly shut those rumours down with a few tweets confirming that Bitfinex will be the sole issuer.
While some folks are skeptical as to whether or not these bonds will be a success (click this link to view an article from this week which I think is pretty fair), my sources with boots on ground tell me that things are going well. Grain of salt.
Putting aside the tragic situation in Ukraine — this week we caught a glimpse of something that some bitcoiners had been talking about for some time now: oil and natural gas might one day be priced in BTC. After sanctions imposed by the US, UK and the EU, following the invasion of Ukraine — Russia is using their status as the world's biggest exporter of natural gas and the second largest supplier of oil to apply pressure. Yesterday, a high-ranking lawmaker by the name of Pavel Zavalny said that "friendly" countries could be allowed to pay in bitcoin, while earlier this week Putin said that he wanted "unfriendly" countries to buy its gas with roubles.
The world relies on oil and nat gas to quite literally keep things moving. These invaluable commodities have always traded in the dominant world reserve currency for good reason. However, after the US decided to seize Russia’s foreign reserves displaying that they would in fact make good on that threat like they did in Afghanistan last year, signals that countries may not be able to rely on dollar assets in the event of conflict. Central banks may now seek to diversify their foreign currency holdings or re-anchor to assets less influenced by Western governments. This may, in turn, also usher in a new monetary order in which countries are less financially interconnected.
Gold stands out as a clear favourite due to it being held at scale by central banks and it’s millenia old track record as hard money but this openness by Russia to accept BTC for its oil and gas exports could be a sign of things to come especially because oil and gas and bitcoin are so interconnected…
Exxon Mobil, the largest oil producer in the world, is mining Bitcoin. As per a report this week, it is running a pilot program to leverage BTC mining using an excess of natural gas from their oil wells and to prevent a process known as flaring. Exxon is piloting this program with Crusoe Energy Systems whose mission is to eliminate routine flaring of natural gas and reduce the cost of cloud computing by utilizing bitcoin — backed by Bain Capital Ventures, Tesla Inc., and other prominent investors. Although the overall size of this joint operation is relatively small, the fact that this news made the rounds strongly signals that bitcoin mining and the oil and gas industry are extremely well aligned.
We know first hand that these types of operations have already been in place for years in Canada (more specifically, Alberta), and in other parts of the world with smaller producers.
Lastly, and potentially most bullishly (in the short-term, at least) top 10 token project, Terra’s algorithmic stablecoin competitor, UST has been making waves across the market as it made the decision to include BTC as part of it’s treasury reserves — in a big way. Terra is planning on building a $10bn treasury of BTC and has recently started to ramp up with massive purchase announcements which has added a lot of buy side pressure to BTC this week. There’s currently over $3bn in the Luna (Terra’s native token) Foundation that are quickly moving into BTC. Terra’s founder, Do Kwon announced yesterday that they’ve purchased just shy of $1bn in BTC, with another $1.5bn or so in Tether (USDT), and another billion or so in UST.
Do Kwon said yesterday that everytime a new UST is minted 40-50% will be used to buy BTC for their reserves. Currently, there’s roughly $100m-$200m in new demand, per day for UST. If even a conservative percentage of that issuance is directed to purchase BTC to be locked in reserves they could be in a position to be purchasing over 100% of newly mined BTC. It’s always best to approach these things with skepticism but in any event, they’ve been purchasing a ton of BTC lately and if demand for UST continues to grow as projected then it’s certainly worth keeping an eye on. We’ve seen a similar strategy in TradFi - Grayscale Bitcoin Trust, and MicroStrategy come to mind. This strategy could be copied by other algorithmic stablecoins in the future or be adopted by reserves of other token projects which could bring a new form demand side pressure to the market. As exciting as this all sounds, as we’ve seen over the years, many of these token projects are more like token ponzi schemes that tend to unravel over time so it is best to err on the side of caution. Here’s a link to Pomp’s interview with Do Kwon yesterday for a more indepth good overview.
The last best price. This is what many are hoping for. I’ve mentioned this in previous letters but it seems that when everyone is hoping for a certain move to the upside, or more recently, the downside — bitcoin and the broader crypto market tends to do the opposite. While it is easy to see that we are on shaky ground from a financial markets perspective — record inflation, tighter monetary policies, war, etc, etc.. — it is only a matter of time that bitcoin breaks away from its strong correlation to risk assets and then it is off to the races. I’m in the camp that not owning bitcoin is a greater risk than owning bitcoin at these levels versus waiting for “the last best price.”