Despite the continued expansion in crypto markets and the continued mainstreaming of digital asset investment strategies and business projects such as non-fungible tokens, the gulf between crypto people and “normies” still seems pretty wide. That’s a consistent theme in both this week’s column, which deals with competing theories of inflation following a provocative tweet from Twitter CEO and bitcoin enthusiast Jack Dorsey, and “The Conversation” section, which picks up on another provocative tweet, this one from a U.S. Senate candidate and prepper.

In this week’s “Money Reimagined” podcast, former Commodities and Exchange Commission Chairman Christopher Giancarlo offers an escape from this divisiveness with a guest appearance to accompany the release of his memoir, “Crypto Dad.” Having crossed the chasm from traditional Wall Street man to regulator and then to crypto convert, Giancarlo embodies a bipartisan view of the opportunities posed by this technology and offers an impassioned argument for why the U.S. should lead in promoting it.

Have a listen after reading the newsletter.

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Twitter and Square CEO Jack Dorsey caused a stir among mainstream economic and political commentators when he tweeted last week about a threat to society from hyperinflation.

MSNBC’s Chris Hayes called it an “incredibly revealing tweet,” later suggesting it was self-servingly motivated by Dorsey being “heavily into crypto.” Calling the United States’ current bout of rising prices “hyperinflation,” Hayes said, is akin to promoting the antiparasitic drug Ivermectin as a cure for COVID-19. Wired columnist Virginia Hefferman called Dorsey’s tweet “insanely reckless,” suggesting that someone with his reach can deliver a self-serving prophecy.

Many in the Bitcoin community, on the other hand, applauded the Twitter CEO. Alex Gladstein, chief strategy officer of the Human Rights Foundation argued that Hayes’ perspective was too narrow and that Dorsey was referring to people’s experience with inflation around the globe.

For the record, I tend to agree with the more measured view of another Bitcoiner, Cathie Wood, who disputed that there is any sign of hyperinflation in the data. The term is typically reserved for cases where inflation of more than 50% per month, which when compounded results in an almost 13,000% annualized increase. (The latest U.S. consumer price index readout was up 5.4% from a year ago – the highest rate in 30 years, but nothing like Weimar Germany or Zimbabwe in the 2000s.)

But what I really want to focus on is how this episode reveals two different world views of inflation’s origins and, by extension, on how to keep it under control. I also argue that the Bitcoiner perspective offers a valuable framework for understanding the biggest risk factor in all this: a decline in public trust in policymakers. This loss of trust challenges the incumbent financial system and is a key reason why bitcoin, which stands as a hedge against that system’s outright failure, hit new all-time highs last week and is now up 20x since March 2020.

Balancing act

To break down how traditional central bankers see inflation risks, it’s useful to dissect Wired columnist Hefferman’s assertion that “the word @jack tweeted should not be uttered unless you’re trying to bring it into being.” As Castle Island Ventures partner Nic Carter pointed out, Hefferman was expressing Federal Reserve dogma: that inflation is derived from “expectations.”

The idea is that if people expect inflation, they will preemptively protect their purchasing power by asking for higher prices, or wages, for their goods or services, which reinforces other people’s inflationary expectations and prompts them to do the same, creating an upward spiral.

As Carter notes, this makes central bankers obsessed with their own messaging.

We’ve seen this concern with messaging take on special significance over the past decade, although throughout that time the Federal Reserve’s concerns were not with the psychology of inflation but with the opposite: a deflationary spiral, where expectations of falling prices lead people to postpone spending, which lowers demand for goods and services, which in turn pushes prices lower. To manage that, the Fed’s 12 voting members had to try to manipulate the thinking of the bond market.

With interest rates at virtually zero for over a decade, the Fed and other central banks instead tried to charge up a still-sluggish global economy via “quantitative easing,” printing money to purchase trillions of dollars in bonds and other assets to drive down market interest rates and keep credit flowing. That led to an increasingly complex psychological relationship between the Fed and the market.

On the one hand, the Fed worried that bond traders were overly worried that it was getting overly worried about inflation. If traders thought the central bank was going to prematurely stop bond purchases to let market rates rise to slow growth and curtail inflation, then there was a risk those traders would prematurely sell bonds, which would have the unwelcome self-fulfilling effect of driving up rates before a sustained recovery could take root.

On the other hand, the Fed also worried that if it was too overt in telling the market not to worry, it could drive asset prices too high, fostering a dangerous bubble.

Continue reading this column here.

–Michael J. Casey

Given that all the attention last week was on bitcoin breaking through its all-time highs and peaking at a whopping $69,974 as a new BTC futures exchange-traded fund went public in the U.S., one might think the biggest cryptocurrency is again dominating crypto markets.

But take a look at this chart of “bitcoin dominance,” which measures how much of a proportion of overall crypto market capitalization bitcoin represents.

Price gains for ether and other altcoins through the late winter and into the spring meant that even when bitcoin’s price was rising sharply during the first part of this year, its dominance of the overall market was declining from a peak around 70% in January to below 40% in late May. Then, over a sluggish summer, it oscillated between 40% and 50%, but never broke out of that range.

What’s striking is that even as the price of bitcoin has recovered greatly in the early weeks of fall, dominance hasn’t budged. One possible conclusion: the increasing diversification of the crypto economy.

It was a gift for critics, who saw Mandel’s doomsday prepping as a silly bravado of a paranoid anti-government extremist. Predictably, bitcoin was ridiculed along with him, in this case by University of Denver political scientist Seth Masket.

But Masket’s joke about “fake currency being in the fridge” exposed an ignorance on the part of critics like him. “Cold storage” means crypto stored in an “cold” offline medium such as a paper wallet, rather than a “hot” wallet that can be hacked or otherwise accessed by third parties.

The same ignorance undermined this tweet from economist and frequently misguided bitcoin knocker Paul Krugman. One of the main reasons why a prepper who foresees a dystopian meltdown would put bitcoin in cold storage is precisely that it would survive a collapse in the internet.

Or as Nic Carter joked in reply to Krugman, surviving bitcoin HODLers may actually control the internet while everyone else is thrust into dystopia.

It is with great reluctance that I highlight our coverage of the shiba inu (SHIB) token’s spectacular price run this past week, not because CoinDesk’s coverage wasn’t excellent, but because the whole thing further highlights the speculative crypto mania that critics love to attack.

The token, named after the same breed of dog the other big meme coin, dogecoin (DOGE), uses as its symbol, soared in price this past week. As Muyao Shen reported, the influx of “smart money” from some surprisingly sophisticated accounts helped it briefly “flippen” dogecoin on Wednesday, attaining a higher market capitalization as the pair jockeyed for 9th and 10th place in CoinMarketCap rankings.
A day later, however, and it was DOGE that was on a tear. It seems the SHIB mania has translated into demand for the original joke dog coin. Omkar Godbole reported that some investors were playing a short-SHIB, long-DOGE bet.
By Friday morning, the SHIB craze had spilled over to yet another prominent cryptocurrency, ether. As Godbole also reported, holders of SHIB have been burning ETH, which drives up its price.