Welcome to The Node. This is Daniel Kuhn and Prachi Vashisht, here to take you through the latest in crypto news and why it matters. In today’s newsletter:
On Tuesday, the U.S. Supreme Court will hear its first crypto-related hearing. Sorta. Though the case the high court will hear today involves crypto, it instead focuses on a procedural argument over whether a lawsuit can proceed in federal court while one party – in this case, Coinbase – is attempting to send the dispute to arbitration. Coinbase asserts its user agreement requires disputes to be resolved out of court, which a federal judge denied in two cases, leading Coinbase to appeal the decision. In one case, a former user is suing the exchange for violating the Electronic Funds Transfer Act after not crediting his account following a scam. The other class action asserts Coinbase violated California’s false advertising laws through a dogecoin promotion. Elsewhere, Florida Gov. Ron DeSantis proposed legislation that would prohibit the use of central bank digital currency (CBDC) as money within his state, claiming a “digital dollar” would stifle innovation and promote government-sanctioned surveillance. DeSantis, who is also a potential Republican U.S. presidential candidate, called on other states to adopt the same legislation.
Taxation Is Theft?
The U.S. Internal Revenue Service is considering whether to tax non-fungible tokens (NFT) on a par with other collectibles such as stamps, works of art and fine wine, in a move likely to have an impact on those including the digital assets within their retirement plan, according to a document published Tuesday. The proposed guidance represents the first move by the U.S. tax authority in a while to clarify the tax treatment of digital assets, addressing a vacuum that has left some taxpayers guessing about their liability. The IRS and Treasury Department are “soliciting feedback” on the proposal which could result in a less favorable treatment of “digital collectibles” under capital gains tax rules. In other news likely with tax implications, crypto users are bridging millions of dollars in funds to the zkSync network in hopes of an unconfirmed token airdrop – an adoption strategy where firms send masses free tokens. So far the network has seen over $8 million worth of token inflows in the past week.
Of the other participants that were actively involved in the conference, no other made an impact quiet like Near Protocol. Until recently, Near was a super-charged, proof-of-stake platform designed for speed, security, and scalability. Building on such a strong platform, people too often view Near as a competitor to Ethereum. However, Near’s presence at ETHDenver showed that the blockchain is not out to compete against Ethereum, but instead compliment the blockchain and support Ethereum for its shortfalls. Continue reading.
*This is sponsored content from Near Protocol.
The Takeaway: Bitcoin’s Hot Streak
Bitcoin (BTC) has rallied stupendously this week, up 38% since March 11. It has outperformed basically every altcoin, including Ethereum. All of this has happened as various banks were self-immolating in protest of Jason Calacanis’ hairline.
Some have argued this is a vindication of bitcoin’s “inflation hedge” thesis, which was looking very battered, if not dead, just nine months ago. Bitcoin was going down as inflation was at its peak. But the argument is that we are only now seeing the real impacts of that inflation on the financial system, and Bitcoin is finally reacting. This would broadly track with crypto’s thinner market, making it less likely to respond, so to speak, ahead of time to various leading indicators.
That systemic chaos, not the erosion of consumer spending power, is what bitcoin is a “hedge” against. The idea that bitcoin would move neatly in response to dollar inflation was always at best a simplification of the actual argument. For one thing, as I’ve argued elsewhere, bitcoin will need wider adoption before those mechanisms can possibly work. There’s just too much speculation baked into the price right now for it to respond linearly to inflation, a problem we’ll dig into more here.
But beyond that, a more nuanced version of the inflation hedge thesis would spell out that the real risk bitcoin can hedge is the structural chaos of a financial crisis – say, the shutdown of a bank holding your savings. As we’re seeing right now, financial crises are increasingly tied to interest rates and other central bank maneuvers – about half of which come in response to inflation. But there’s also a case that this was a misinterpretation of the bitcoin price signal. Rather than spiking because of the long-tail impacts of inflation, maybe it’s spiking because markets see the opposite: an end or pause in central bank rate-hiking, signaling a glorious return for risk assets of all kinds.
The sharpest part of bitcoin’s rally, after all, has come since Monday, March 13, when it was announced that the floundering Silicon Valley Bank would get a bailout. Or as Joe Wiesenthal at Bloomberg tweeted “MAYBE YOU DON’T GOTTA HAND IT TO BITCOIN.” He points to this piece by Bob Elliot of Unlimited Funds, on recent hedge fund which took double reverses due to macro events. First, funds ate the 2022 risk-off battering that nuked tech stocks under interest rate hikes. Then in the past week, newer trading positions premised on higher rates for longer also got blown up. Basically, that’s because the bank failures are being seen as a red light for Fed rate hikes, a signal that the economy has slowed down enough.
“Many of these funds were positioned for a continuation of the inflationary, late cycle tightening of monetary policy,” Elliot writes. “The deflationary risk from a banking crisis quickly drove a change in fundamental conditions and market action, which caught many of these funds offside.” That dynamic may also be helping bitcoin rally. After three banks blew up in a week, markets might be thinking the Fed is likely to stop hiking rates or even reverse, leading to a renewed risk party. That might have simply added to the deeper shift to bitcoin by those anxious about banking.
We’ll find out more on the question this week. The Fed’s Federal Open Market Committee is meeting Tuesday, and is expected to announce any interest rate hikes Wednesday. If the FOMC decides the threat of bank runs is high enough it could pause interest rate hiking. On the other hand, we’re still staring down 6% inflation, so I personally think another hike is still likely – maybe 0.25% to split the difference, but definitely not nothing. If we get no hike, markets could interpret that as renewing the cheap-money bonanza, and bitcoin could truly go wild as a risk asset even as the Fed renews its commitment to fighting inflation at any cost.
The real test for a more nuanced version of the “inflation hedge” thesis will be whether further bank trouble leads to further bitcoin price rises, without interest rates directly in the mix. Until then, it’s all (in multiple senses) speculation.
We know that the recent events with the U.S. banking system have put many in the crypto and Web3 community in a challenging situation. That’s why we have decided to extend our current prices for Consensus 2023. This means that you have a few more days to take advantage of these savings on your registration for the most important event in crypto and Web3.
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