Are You Brave?

The Rake Review: January 2022

Welcome to the Stormrake Monthly Australian crypto market & education update.
For sophisticated investors who want to expand their crypto knowledge.

Summary:

If you are a busy investor that doesn't have time to read this whole newsletter here is a brief summary:

* The Federal Reserve is talking up higher interest rates with 5-7 already priced in
* Inflation Running hot
* Crypto down around 50% off ATH but recovering
* Whales spotted - picking up bargains

or Read below for all the detail.

How Brave Will You Be in 2022?

We are always hopeful on New Year's Eve that the year ahead will be a panacea for all our problems. But alas, it's never that easy. Successful people know that nothing is given and everything should be earned. In that spirit, January has turned out to be a shocker with most investors seeing red reports as their crypto slid on the back of tapering talk in the USA.

What is Tapering?

As we've covered in many reports the US and the rest of the developed world has spent 20 years propping up their economies artificially through manipulating interest rates, bond prices and money supply. The pace of this intervention has stepped up over the years and especially in the Covid-19 years and has directly caused inflation. Inflation is running hot and the only way to reduce it is "tapering". Tapering involves removing some of the stimulus that's been provided. That may take the form of rolling back bond buying and direct QE (Quantitative Easing).

Why tapering may not last?

Tapering is going to hurt. The Fed is stuck between a metaphorical rock and a hard place. The "Rock" is inflation. The "Hard Place" is a market and economic collapse. Right now the Fed thinks that inflation (which is 7% and climbing) needs to be controlled so they start tapering. Once they start markets will fall (equities, property), confidence will take a hit and businesses will fail. At that point the Fed might decide that tapering is too hard and opt for a break. If the economic problems are too dire the Fed may reverse course completely and opt for more easing - meaning they will again flood the economy with cheap money. This will further reduce the value of a dollar and will increase the ratio of dollars to bitcoins.

Why Bitcoin doesn't care.

Either way Bitcoin is a safe haven. If the Fed's tapering fails and easing comes back bitcoin will appreciate as there will still be the same bitcoin supply but a much larger dollar supply. If the Fed increases rates and the economy struggles, bitcoin will still outperform other assets which got inflated by previous money printing.

Why the Whales are buying?

Either way, whales have been spotted in on-chain data. Whales are the large investors who have massive holdings. They tend to sell down part of their holdings when there is boom and they tend to top up when prices are low. Guess what? They seem to have smelled a bargain (a chance to buy Bitcoin at half of its all time high). Generally, the accepted rule is follow the whales, not the retail investors. We've put together this meme to show that the retail crowd tends to hang in large groups. In 2018, they disappeared, expecting bitcoin to die. They sold up their bags instead of buying at the $3,100 level. Just 2 short months ago every retail investor thought they would be rich and fomo'd in at $69,000. Now the same exact bitcoin is available under $40,000 and the line is empty. Empty, apart from a few whales getting their fill. Don't follow the crowd, follow the whales.

Why has Bitcoin outperformed all asset classes?

Showing Asset Class Performance including BTC by Year. Colour image.

Quite a few people have asked me "why bitcoin is so low". Not why it's fallen but specifically why it's so low. Yes, it has fallen off its all time high but its certainly not low. For the whales that bought at $3,100 the current price represents more than a 1000% gain. For the ones that bought in 2015 it's a hell of a lot more. Bitcoin is the best asset in the world 10 of the last 12 years. That is simply staggering.

It outperforms because supply is fixed and adoption (demand) is constantly growing. Success comes with volatility though. You can't grow from zero to 1 Trillion in 12 years and not be volatile.

Buy Low Sell High

That brings me to the last point which is the simplest, age old, adage that has always served me well. BUY LOW SELL HIGH. Or if you are into property - "when there's blood in the streets, buy real estate" - Baron Rothschild.

Or in the original
"Buy when there's blood in the streets, even if the blood is your own."

The point is the same. When it's hardest, and the end seems close you should be buying, and when every taxi driver agrees that bitcoin is going to a million, remember to take profits. You have to be brave but it will be worth it!

[

](https://www.youtube.com/watch?v=DUrlNHTxuJM)

Video of the Month

Neel Kashkari went on 60 minutes as the pandemic started and told the interviewer that there is no limit to the Fed's ability to print money and intervene in the cash markets.
It was the first time in history a Federal reserve president was so brazen. This was the era of easy money. The Fed had no concern over future inflation.

Just a short time later Fed Chairman Jerome Powell called the burgeoning inflation rate "transitory". He wanted to calm the situation and say that inflation wasn't going to last.

But he was very wrong and it did last and now is the highest inflation many people have ever seen. Now the Fed has announced "tapering" and all of a sudden Jerome Powell's future is uncertain.

Markets

The crypto market had a horrible month with bitcoin down around 50% off the ATH of $69,000 USD. All the other major coins followed with some having larger falls. BTC Dominance actually increased and is now almost 40%. SOL was decimated but has recovered some ground to $100 USD. BTC ($38,350 USD) is leading a recovery - up around 16.5% since going below $33,000 USD

* Top 8 Coins by Market Cap thanks to Coin Gecko

In the NEWS

1. Putin said to back crypto mining despite proposed ban

One of the reasons given for Bitcoins slide this month was the proposed ban on crypto by the Russian parliament. However, news has it that the Kremlin is keen to keep Bitcoin mining due to cheap sources of energy around the resource rich Russian land. As we've seen before Putin tends to get what he wants.

2. Arizona wants bitcoin as legal tender

A republican Senator introduced a Bill to make bitcoin legal tender in the state of Arizona. While there is very little chance that this gets through due to a clash with the US constitution it is nevertheless an important trend that mainstream politicians are swallowing the orange pill and driving the adoption of Bitcoin. Texas and Miami as well as Wisconsin and Nevada have also made waves with pro Bitcoin legislation.

3. Solana experiences network issues

Of the many competitors to Ethereum's network Solana has arguably become the most likely to succeed. SOL has flown into the top 5, but then lost almost 70% of its ATH value during the recent fall with a network issue affecting the price. The network problems caused cascading liquidations which hurt the confidence in SOL's network.
While ETH struggles with high network fees prior to the proposed ETH 2.0 implementation, other networks actually help with congestion by offering an alternative route. ETH has fought and won many battles in network issues and has come through. Younger networks like SOL have those issues still ahead of them.

4. Vegas and Miami Bitcoin conferences

Back, Saylor, Ammous and even El Presidente (Bukele) will be in the US for major conferences. Both conferences are held in Bitcoin friendly cities and will feature brilliant speakers as adoption of Bitcoin heats up. Will you be there?

5. Crypto eating Banks

News this month that BitMex (a cryptocurrency exchange) is buying a German Bank. As we have said for years, each Bank must make a decision, embrace crypto or go the way of the fax machine. CBA is embracing the trend. What is NAB, WBC and ANZ doing?

Education: The battle for Layer 1

This month, I’d like to spend some time exploring the layer 1 space with a focus on the projects contending to win the smart contract use case.

The rise & success of Ethereum and its massive user and developer adoption has heralded a wave of other projects. Ethereum exploded in 2017 due the number of ICO projects and again in 2021 as NFTs and DeFi boomed. But with each of these rapid expansions in use, the network strained with congestion, causing high fees which allowed competing networks to compete for user adoption. Projects such as BSC (BNB), SOL, ADA, AVAX & NEAR (and many others) have subsequently soared in price.

Current leading smart contract platforms (by market cap).
A small tribute to the previous “ETH killers”, EOS, NEO, Tezos that have fallen off this list.

Is this sustainable and where is this all leading? There are two important factors to consider.

How important is decentralisation?
Will a particular technology be able to capture all network effects?

Decentralisation

Decentralisation refers to the lack of any critical components or people that could cause the network to fail. We could put all crypto networks on a scale between centralised and decentralised. An example of a fully centralised network would be facebook, whereas bitcoin would be the most decentralised network.

It was Facebook's centralisation that allowed US congress to pour so much cold water on its “libra” crypto currency project.

Being too centralised, has two systemic risks

A single point of failure can be attacked (both physically and digitally),
At a particular, but unpredictable point, the benefits will collapse and the system will fail.

Centralisation brings incredible efficiency. Just as a benevolent dictator is the most efficient form of government, a centralised crypto is the most efficient way to transact. If trust were not a problem, then an oracle database would be a million times more efficient than a blockchain can ever be.

The “winning” tech

I won’t be able to outline and compare all the layer 1 technologies in today’s newsletter but can explore particular ones in future episodes. Let us know if you have a project in mind.

Today I’ll give you some key points to consider.

All projects will give reasons why their project with technology “XYZ” will win
These projects are open source, meaning projects can borrow/steal each other’s technology.
A globally scalable smart contract platform is an incredibly complex undertaking.
The technical roadmap for Ethereum is detailed and well researched.
Newer projects will appear to work better but may suffer similar congestion issues with user adoption (see recent SOL issues)
We are still very early and the final users may not know nor care what technology is powering their experiences.
It is possible that multiple networks will endure.
It is also possible that none of these tokens will survive if the protocols/tech are ported onto bitcoin.

I can’t tell you which tech will win out but it’s exciting to see it all unfold. If you think a particular project will beat ETH from a technical standpoint, then make sure you understand the ETH technology and roadmap first. Here are some recent and great resources exploring where ETH is going.

Vitalik’s updated roadmap with progress shaded in green
And listen to this interview as he explains it. (I’ve skipped you to the start at 7m30s)

Stock to Flow Valuation:

The stock to flow shows we are still way below trend this month. This is what I would call "oversold territory". This is the biggest deviation from model since its inception in 2017.

Monthly Memes

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Until next month, Happy Investing!

Stormrake Team

custody@stormrake.com

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