President Biden released an executive order on cryptocurrencies this week, which signaled his administration’s cautious plan for addressing risks and “harnessing the potential benefits” of crypto. The executive order’s relatively thin details were cause for optimism among many crypto investors.
Meanwhile, the official inflation rate in the U.S. reached 7.9% in February, a 40-year high. So why isn’t Bitcoin up? Scott and Andy discuss.
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FACT SHEET: President Biden to Sign Executive Order on Ensuring Responsible Development of Digital Assets: “The rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier, but also has substantial implications for consumer protection, financial stability, national security, and climate risk. The United States must maintain technological leadership in this rapidly growing space, supporting innovation while mitigating the risks for consumers, businesses, the broader financial system, and the climate.” (Whitehouse.gov)
Why the cryptocurrency community is celebrating Biden’s executive order: “People were concerned it would focus solely on the risks,” says Blake Estes, a partner at Alston & Bird, who focuses on Fintech. “Hopefully, it gives more serious people comfort that they can enter the space and do serious projects and they won’t be regulated out of existence.” (The Verge)
Inflation Reached 7.9% in February; Consumer Prices Are the Highest in 40 Years: “Rising energy, food and services prices pushed already elevated U.S. inflation to a 7.9% annual rate last month—another four-decade high—with oil and commodity market disruptions from the Ukraine crisis expected to add more cost pressures. The consumer-price index, which measures the cost of goods and services across the economy, hasn’t been this high since it was 8.4% in January 1982, when the nation was in recession and trying to tame what had been double-digit inflation.” (Wall Street Journal)
Today’s Guest: Andy Hagans
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Cryptogic is the show for crypto investors who are focused on long term results. Follow Scott Hawksworth and Andy Hagans as they explore the investable world of blockchain technology, NFTs, Bitcoin, Ethereum, and other cryptocurrencies.
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Scott: Hello, and welcome to another episode of Cryptogic. Your host, Scott here with you once again and once again joined by Andy Hagans. And today we’re going to be talking about a topic that is near and dear certainly to Andy’s heart, inflation.
Andy: I love it. I love inflation.
Scott: And the impact or lack thereof on the crypto market in a positive way. And I guess really that’s the big question is why isn’t crypto on a bull run when, Andy, we just had it released? What is it? 7.9% the inflation rate, the highest in 40 years, the highest in my lifetime. What’s your take, Andy?
Andy: Well, Scott, I want to get into that, but… And by the way, I’m not quite 40. I’m almost 40. So, this is higher official inflation than I’ve ever seen. Yeah. I heard about it.
Scott: Right. So, that makes both of us. Yeah.
Andy: Yeah. I heard about stagflation in the ’70s and all that, but I think maybe we should rewind and cover the executive order as well. I know you wanted to cover that. And I think these two things kind of interrelate.
Scott: Right. And that’s a good point, Andy. So, I guess we should wind back a little bit. So, they released the inflation rate today. We know what the CPI is, but yesterday the Biden Administration released an executive order that talked about cryptocurrency. And in this executive order, it had a lot of focus on some of the risks of crypto and the idea of, you know, addressing some of the climate risks that have been expressed due to mining and power usage, and then some of the concerns about consumer protections, regulation, but then there was, you know, some phrases about creating a framework to take advantage of the underlying technologies and helping foster some of that.
So, I thought that and other folks in the crypto world felt that this actually was a good sign for cryptocurrency because instead of coming out with, which I thought many people thought they would do, coming out with a statement saying, “We are going to regulate cryptocurrency into the ground,” they didn’t exactly say that.
They said, “We’re going to keep an eye on it and we’re concerned about some of these areas, but there’s some opportunity in other areas.” So, my take was, and the markets for a brief time actually responded positively to this executive order.
Andy: Yeah. And, you know, Scott, a couple of things. One, I saw the executive order and I thought after all of the hype and all of the rumors, you know, I’ve been reading about this on Blockworks several times over the past several months.
So, leading up to it all this hype, and then my reaction was, “This is the nothing burger of all nothing burgers.” I mean, it… But there was still something there that we can tease apart, right? So, even if there wasn’t a lot of substance, even its framing and its language, as you say, you know, is notable sort of being parsed by crypto investors.
And I actually want to rewind a little bit and go back to the 1990s when it was clear that, you know…it started to be clear that the internet was going to be this big thing, that it was going to revolutionize our economy and, you know, the consumer economy and be this giant, you know, technological innovation. And, you know, looking back, you know, our government gets so many things wrong, so many things wrong, right?
But in this instance, they had a sales tax moratorium on e-commerce, you know, internet-based retail sales. And they attempted to have a little bit of a hands-off approach with regulating the internet to sort of let it develop and let it incubate.
And of course, now there’s sales tax on all these transactions, but not until e-commerce became very mature. And so looking…
Scott: Yeah. And totally settled. Yeah.
Andy: And looking back, I mean, and whether you have a conservative bent or a progressive bent, you know, from either way, I would argue it was successful policy. From the conservative point of view, you would say, “Look, there was this new industry that was creating tons of jobs, tons of innovation, creating wealth.” And our government just sort of got out of the way and let it develop, which it did and, you know, now we have all of these internet companies.
I mean, I’ve pretty much only worked for internet companies my entire career or these companies that, you know, transacted primarily on the internet, so it’s like this wonderful innovation entrepreneurial success story. From the liberal point of view, there was this new industry that was located in the United States, you know, or at least, not located, but sort of the epicenter of…
Scott: A lot of the activity and growth. Yeah, absolutely.
Andy: Exactly. And so all of these mega-corporations ended up getting headquartered in the United States and now they pay billions and billions of tax dollars. So, even if you are a tax and spend liberal who wants, you know, a huge government with lots and lots of government spending, it’s still a good policy, I guess, to let this industry develop into this, you know, giant powerhouse of tax revenue, right?
So, think how much tax revenue that this, you know, internet-related companies generate to the United States Treasury every year. So, I think there’s a little bit of that thought with the crypto industry. And crypto is even more probably global than the internet was in the ’90s. So, I think, you know, let’s take the Elizabeth Warren’s and kind of put them to the side, you know, sort of the outliers who just sort of use crypto as a rhetorical punching bag and don’t really seem to care about it beyond, you know, getting into the new cycle.
Andy: Putting those folks to the side, there does seem to be at least enough people on either side of the aisle, sort of a bipartisan core that understand if you regulate this industry out of existence in the United States, it’s simply going to move overseas and now we’ve lost the job creation and we’ve lost the tax dollars of that industry in the future. And so, you know, I think…
Scott: And perhaps ceded control of it or outsized influence of it to a nation we aren’t as exactly friendly with or something.
Andy: Right. Right. And, you know, that pertains to the whole Russia sanction thing. And maybe we get there today, maybe we don’t. I have some thoughts on that. But in this executive order, I think there is sort of that frame, though, understanding that we don’t want to choke off this industry. Of course, it included some standard Democrat talking points about climate change and so forth.
But I agree with you, Scott. I think that the headline was, maybe if people were scared that this executive order was going to be very, very hostile, it wasn’t. In practical terms, it does almost nothing. It’s sort of just a punt.
As far as I can tell, they’re just punting the ball, and then, of course, the very next day, we have the CPI print inflation yet again going way, way higher. And so I think crypto is out of the new cycle already.
Scott: Yeah. And I guess the last thing I would say before we move on to inflation because, really, there’s just a lot to dig into there. But I think that it’s clear that there needs to be some kind of regulatory framework for cryptocurrency in the United States and that’s going to happen eventually. But you’re right in the sense that this is not imminent, this is not something happening next week even.
It’s the kind of thing where it’s good news because it’s not going the other way, it’s not a super hostile while we’re just going to push this through as quick as we can to stop this. That’s not happening either. So, I think you’re right in the sense of there still seems to be a hands-off approach and people weren’t necessarily were concerned, rather, that the Biden Administration would go the other way with it and they clearly haven’t done that.
So, what you’re saying, though, is maybe part of this is that they just have a lot bigger fish to fry and that kind of brings us to inflation today. So, I’ll let you kind of take it from there because I know you’ve got some thoughts.
Andy: Well, I’m sure every American has some thoughts. Right? I mean, because inflation where it is, I mean, it was already high. The CPI print last month was at 7.0, I believe. It was seven exactly. And, you know, I’ve said before that’s the CPI.
A lot of people would argue, probably myself included, it understates what actual inflation is. But really every person, every American has their own personal inflation rate, right? My inflation rate living in southwest Michigan is going to be slightly different than your inflation rate living in northern Chicago land.
Andy: Right. So, the fact that it already has spiked to 7.9% and that number doesn’t even reflect inflation from the past couple of weeks since, you know, Russia invaded Ukraine, that means…
Scott: Right. We’ve got some energy issues and all of that.
Andy: Right. It’s going to get worse before it gets better. Now, the administration has…they’ve dropped the whole transitory. I mean, mainly because I think it was making them the target of so many memes.
Scott: Yeah. I think they realized that was just, you know, people have eyes.
Andy: Right. Right. So, they’ve dropped that. I don’t know that they’ve totally dropped the, you know, snarky comments about how we all need to move to electric cars, but I think they probably will before November before the midterm. But I think it’s very clear to this administration. They’ve had… This administration, let’s be honest, they’ve had a rough first year with the pullout from Afghanistan, with saying, “We’re going to crush COVID,” you know, then Omicron wave hit.
They’ve had a rough go of things this year. But I don’t think anything scares them politically as much as inflation. And that is actually wise of them because I think inflation in and of itself can 100% sink a presidency. And so I think all signs are they are focused on inflation now.
I don’t know that they have the right answers, the right policies. I don’t know that they’re going to beat it with, you know, their playbook of, “Well, we need to pass a giant spending bill and spend more money. That’s what’s going to beat inflation.” So, I’m not confident that they really have the toolset or policies to fight it, but at least they are focused on it.
And I think what that meant for crypto and for this executive order was that it looks to me like it’s an afterthought to this administration already and I wouldn’t be surprised if they barely even mentioned it for the next year or so, with the possible exception of if it gets back into the headlines in relation to this war in Ukraine, then I could see it, you know, becoming a political…
Scott: There could be some pressure there to do something, at least say something.
Andy: Sure. What do you think, Scott?
Scott: I mean, I think you’re spot on in the sense that clearly there are bigger issues here for them and it really ties well to what you were saying about, you know, the early days of the internet in the ’90s and maybe there’s just a philosophical, “Well, let’s just see where this goes and keep researching and watching as we can while we try to put out bigger fires.”
I think what’s interesting about this inflationary cycle we’re in and what we’ve seen from crypto markets themselves is how… I firmly believe that cryptocurrencies, particularly, those like Bitcoin can provide investors with great hedges against inflation, yet we’re seeing the crypto markets not necessarily respond.
Just looking just today, you would think looking at these numbers released that cryptocurrency would be up in a huge way and it’s just not. And it’s not responding that way. And my take is I still believe that long-term, we may…this inflation period may not last but I think long-term if you think about inflation, it makes sense to me that Bitcoin, for example, would be a great hedge there, but in the short-term, it seems like crypto is behaving a lot more like risk assets in the stock market.
So, that’s kind of been interesting for me to see that clearly, the markets don’t necessarily think at least in the short-term exactly the way I do on this.
Andy: You know, that’s… As you were talking there, Scott, I was thinking, you’re totally right in the United States that crypto reacted to the CPI print just like another risk asset today, right? It wasn’t that big. But let’s pivot and talk about Russia for a second.
Andy: If you hold a lot of your savings in rubles, Russian rubles, versus in Bitcoin, Bitcoin would have been a pretty good hedge against your currency taking a nosedive in the past 30 days. Right?
So, if you look at it globally, there have been, you know, certain geopolitical situations where it actually has been a pretty safe store of value, you know, relative to your local fiat currency. So, I think maybe what’s a little confusing, you know, for people is that it’s not just this one-to-one, you know, behaving perfectly as we would expect type of phenomenon, but I think…
Scott: Inflation up, crypto up.
Andy: Exactly. But I think maybe if you zoom out and sort of digest, you know, what’s happening to some foreign currencies, you know, specifically the Russian ruble, you can kind of see the case for no, no, no, this actually is a good store of value compared to a fiat currency that’s just getting annihilated right now.
Scott: Right. Right. And then I think then that makes… If you are a lo…if you’re long on cryptocurrency, I think that’s where the real compelling case comes in as well because then that just allows you to, okay, well, don’t just focus on what’s going on in the United States right now. Look globally.
Look at the long-term borderless nature of cryptocurrency and the potential there and realizing that governments rise and fall and you have so much chaos that we’ve seen that can happen in the world and that’s where I think the investing case for cryptocurrency has that hedge against inflation is still pretty strong even if when we dial in and it’s the United States here and it’s, wow, you know, what are gas prices doing?
Wow. Inflation is going this way. It’s not necessarily being reflected in the markets as we see them.
Andy: Absolutely. Absolutely. Yeah. And, you know, to take it back to the executive order for a minute, it did leave the future a little bit ambiguous, right, a little bit unclear. And so we can only wait and see what this administration does in relation to crypto. But I think, unfortunately, we may even learn some lessons about what happens when you seed an industry, you know, voluntarily to others, you know, to foreign companies.
So, for instance, we were talking in a recent episode about these economic sanctions against Russia. Right? And, you know, I think, especially the first few days after the invasion of Ukraine, I think some sanctions made a lot of sense, sort of a quick thing you can get everybody behind to put at least a little bit of initial pressure.
But I think at some point, we need to take a step back and look at the bigger picture because now, you know, the international community has been escalating sanctions. Not only that, we also have some global corporations, some American corporations voluntarily leaving Russia.
Scott: McDonald’s just this week, right?
Andy: Yeah. I think they’re claiming they’re temporarily closing, but we’ve also had some payment processing companies voluntarily announce they’re pulling out of Russia. And, you know, that got me thinking, well, isn’t that just going to, you know, encourage Russia to either develop that infrastructure internally or ally with, you know, the PRC, with China, you know, on an alternative financial network that is not rooted in the United States that’s sort of outside of our…
Scott: It’s not tied to the West.
Andy: Outside of our influence and outside of our control. So, I really think, you know, I got to say, whether they’re good, whether they’re bad, you know, that’s a pretty loaded question. But I will say this is, some of these actions have long-term consequences that I don’t know that people are really thinking through.
Even from the perspective of American interests, I don’t think people are really thinking through the long-term ramifications of these. And so, again, back to this crypto executive order, for me it’s wait and see because it’s ambiguous, but, like you said, it’s at least positive that the administration didn’t take, you know, the Elizabeth Warren wing of their party and have that sort of hostile stance because this crypto industry is going to continue to exist, right?
The question is, do we want to encourage it and incubate it somewhat in the United States, which if we do in the long-term, I think will be in our national interest and our strategic interest, and so on. So, hopefully, in my opinion, that rationale will win out within this administration because it seems like they’re kind of on the cusp of, you know, both of those arguments right now.
Scott: Absolutely. So, I guess, Andy, to kind of wrap things up, I’m just curious, you had mentioned earlier you’re not sure that this administration necessarily has the proper playbook to address inflation. And we’ve talked before how we’re certainly in an inflationary cycle right now, but there’s this argument of, “Well, is there actually a long-term deflationary cycle that we’re going to see?”
So, I’m just curious to hear your take on, you know, where do we go from here and especially as we consider cryptocurrency? And, you know, are we just not out of the woods yet? Is this just going to be a runaway train? But I’m curious what your thoughts are?
Andy: Boy, that’s a good question. And, you know, I don’t have my crystal ball with me today, but I will. I’m going to make a couple of points. Okay? First, I said, I think, you know, this administration they’re focused on inflation now at least in terms of the new cycle, in terms of their talking points, in terms of their messaging.
So, on the political end, they appear to be smart enough to understand, “This is a major problem for our administration. It’s going to continue to dog us most likely. It’s going to be a major drag on us during the midterms,” and so on and so forth. But from the policy end, you know, the administration has discussed passing Build Back Better, which is a giant spending bill pouring more money into all sorts of areas of the economy.
They’re claiming that that will lower inflation, which doesn’t really pass the laugh test. And meanwhile, you know, energy is a huge component, you know, of the CPI. And by the way, the recent energy price increases are not even reflected hardly in this print.
So, wait for next month’s print. But I noted that the administration, Jen Psaki, their, you know, spokesperson has already started trying out the phrase, “The Putin gas price hike” or something like that, trying to frame all of these as on Putin. And I don’t think that’s going to work because, you know, energy prices were already rising, you know, because I think there’s just this stance of we need to make sure that energy costs go up to incentivize the use of alternative energy.
And I sort of follow that logic. I don’t know that that logic will be very popular with voters as the CPI, you know, goes towards 10%. So, you know, in the long run, I’ve continued to say, I just can’t get comfortable with the idea that we’re just going to have runaway inflation for, like, let’s say, the rest of my lifetime.
Andy: I don’t think that’s supported by the trends of economic efficiency gains, by technological innovation, and most importantly, by demographics, which are sort of on a one-way hill downward. So, you know, I’m not signing off on runaway inflation forever, but I have said, I think that high inflation is likely to sustain for the next two or three years.
And certainly, nothing I’ve seen in the past 30 days has done anything to change my opinion there. And the reason is, you know, again, I think policymakers are smart enough…or excuse me. Politicians are smart enough to understand when inflation is a major political problem for them, but they either don’t seem aware or they’re simply unwilling to make any major course correction because the only answer I’m hearing is, “Well, we need to have more spending and then blame everything on Russia.”
That’s the answer. And, you know, that’s not going to make much of a dent. And as you already mentioned earlier in today’s episode, a 25 basis point hike in interest rates, that’s not going to make much of a dent either. And, you know, I think they dare not raise interest rates…
Scott: They do not want to go too far with that. And that fear of, okay, now we’ve got this in a recession.
Andy: Exactly. And, you know, I think, Scott, you know, hearing as you laid out your thesis, I agree there’s a lot of noise, short-term noise with Bitcoin pricing, Ethereum pricing, crypto pricing in regards to inflation. I do think it is a good hedge against long-term currency devaluation or even these, you know, short bursts, you know, if you’re holding Russian rubles.
So, I think I agree with you there. But it can be frustrating to sort of, you know, see in the short-term day-to-day that crypto is not… Actually, that might be my prediction. Whatever you think crypto is going to do, it’s not going to do that. It’s going to do something else.
Scott: I think that’s a great place to end it because we’ve seen time and time again that that is true. So, thank you, Andy. We’ll be interested to see what happens as we go on and what’s the print going to be this time next month.
Andy: All right. Sounds good, Scott. I can’t wait.