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BITCOIN PRICE REACTS POSITIVELY AS EUROPEAN RISKS INCREASE

The latest central bank news, emerging financial risks in Europe, Japanese inflation, and other topics are discussed.

 

EUROPEAN INFLATION

This week, European inflation figures for January 2022 were released, and they set another Euro-era record of 5.1 percent, up from 5.0 percent in December. This 5.1 percent increase in consumer prices must be viewed in the context of the worst energy and supply chain crisis in two generations.

Natural gas and electricity prices have skyrocketed in Europe, causing most other prices to follow suit. These price increases are not a direct result of money printing; rather, they are a result of the pandemic response, which nearly shut down the global economy for two years.

We attempted to play the two-minute clip below of President Lagarde discussing inflation, but due some technical error the live stream was not properly set up. The full-length press conference can also be found here.

COMPARISON OF THE ECB’S AND THE FEDERAL RESERVE’S POLITICS

On the podcast, I compared the ECB’s highly-produced press conference style to that of the Federal Reserve. Christine Lagarde, President of the European Central Bank, appears to have a list of special interest groups that she must mention and appease. It appears to be a political process, whereas Federal Reserve Chair Jerome Powell appears to be far more concerned with economics.

As evidenced by Sarah Bloom Raskin’s testimony before the Senate Banking Committee, it is critical for the Federal Reserve to remain fiercely independent of politics. Her progressive views were being scrutinized, and they wanted to ensure she wouldn’t bring her politics to her job at the Fed. The European Central Bank, on the other hand, includes politics in its mandate.

EUROPEAN POLICY DIRECTIVES FOR 2022

Lagarde stated at the press conference that the bank would let its quantitative easing (QE) program runs their course and conclude in late March to early April. That came as no surprise. What surprised the market was Lagarde’s refusal to repeat her statement from December’s press conference, in which she stated that the ECB would not raise interest rates in 2022.

The market objected to this seemingly minor detail because it portrays the ECB as capricious. In comparison to Powell, who made his pivot and later doubled down on it, Lagarde does not exude confidence in her opinions or assessment of the economy. By the way, I blame the overly politicized ECB for this. It is unable to focus on a clear mandate because its policy is being pulled in multiple directions by political forces.

EUROPEAN CREDIT SPREADS AND RISK OF REDENOMINATION

This is where I linked everything back to bitcoin. Credit spreads in Europe have recently increased. France’s five-year CDS is priced at 20, Italy’s at 103, Spain’s at 40, and Greece’s at 127. Investors face an increasing implied redenomination risk as the spread between these CDS contracts widens (with a possibility of an exit from the euro).

As these CDS spreads have increased in recent weeks, so has the price of bitcoin. When Greg Foss appeared on “Fed Watch” a few months ago, he discussed this. Bitcoin, as sound money with no counterparty risk, should correlate with CDS prices and the risk of redenomination in Europe.

I’ll be watching these prices for any correlation in the coming months, but it’s a good sign for bitcoin that it performed well as European tensions rose this week.

JAPAN

Over the last few decades, the Bank of Japan (BoJ) has been the most consistent. It has done the most QE of any central bank, but it is still struggling with low growth, low inflation, and low interest rates (these things always go together by the way, as I wrote here).

After three decades of ultra-low inflation, I read a story about Umaibo, a Japanese snack that has been selling for 10 yen a piece for 40 years but is now raising its price to 12 yen. The horror, the horror.

Some believe that this development, combined with the recent creeping up of the 10-year Japanese Government Bond rate to 21 basis points (BPS), indicates that inflation may be on its way to Japan as well.

I seriously doubt it. The amount of QE done by the BOJ over the last two decades puts the Federal Reserve to shame, and it is not a stimulus. Long-term QE acts as a damp squib over the economy, dampening any growth. Just look at the three major central banks: the Fed, the ECB, and the Bank of Japan. Their CPI inflation rates are ranked in the opposite order as the central bank balance sheet as a percentage of GDP. The greater the central bank’s QE programme, the lower the CPI inflation rate.

BLOCKFI AND BITCOIN’S CREDIT MARKET

This week, we wrapped up the show by discussing the nascent bitcoin credit market. BlockFi is a key player in this ecosystem, and it has been at the centre of a growing bitcoin scandal.

A post on the company’s subreddit quickly went viral. In the post, a person claims that BlockFi called in his loan because the bitcoin he used had a history of mixing. It’s a bad omen for many BlockFi customers, who probably mix their coins as part of a good financial hygiene routine.

Another development this week is the increase in BlockFi’s minimum withdrawal limits. “At this time, we are only supporting wire withdrawals of $50,000 USD or more for US-based clients, or $5,000 USD for international clients,” according to the company’s subreddit. Because we do not currently support ACH withdrawals for international clients, I may recommend withdrawing to a different platform/exchange that does. This is why we provide one stablecoin (plus BTC or LTC) withdrawal per month.”

–u/Brandon_BlockFi, Community Manager

 

Finally, BlockFi has reduced its interest rates to extremely low levels. Tier one (less than 0.1 BTC) now offers 4.5 percent. However, if you had a withdrawal amount greater than $50,000, you’d be in tier three (more than 0.35 BTC), earning only 0.1 percent on your bitcoin.

What is going on at BlockFi is very suspicious. In the bitcoin ecosystem, there are alternatives. Ledn is one example, and Hodl Hodl is another. Be extremely cautious when it comes to bitcoin lending.

 

Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

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