Inflation Vs Crypto: An old enemy meets a very young asset by Boaz Shoshan

near me if you could please come and take a seat if you would like to watch this presentation of mine this is mostly for fun I'm not here to Shell a bag or anything like that or even to promote a project this is simply recreational public speaking which I thought may be of value to East Denver just to get us started my name is Boaz Shoshan I'm from Scotland and I do work in the web 3 space on the communication side which is helping projects communicate clearly however for the sake of East Denver I'm actually putting on my former hat which was in investment research and specifically to talk a little bit about how inflation will affect the crypto Market because after speaking quite a few to quite a few of you I found that a lot of you are quite wrong with what you expect may happen in a in the event of very high inflation or indeed in just dealing with the existing inflation that we have already so just to get us started so we'll start here this is simply the government reported inflation rates across the developed world I'm sure you're all very familiar with the fact that inflation is very high at the moment or at least it's a lot higher than you have experienced it in your lives I don't see many old people in the in the audience in East Denver and frankly crypto is a young man's game anyway so I wouldn't expect that in the first place before I do get into much of this I should say that while I did used to work in investment research none of this presentation is intended as financial advisor please don't take it as such if you do disagree with any of my views feel free to tell me afterwards and we can go outside and have a fight or something funnily enough I discovered today that uh you know you can actually still have a pistol duel in New Mexico it's completely legal and the police will not be able to intervene so maybe if anyone from the foundations of the other blockchains are listening perhaps we could host another conference there and we could finally settle the maximalism debate once and for all just to get us into it you know this is a very interesting metric which some dentists in the private private dental system in the US like to track even kids are demanding higher wages for their teeth just imagine if you had held on to your teeth back in uh well whenever it was that your teeth fell out and you had sold them today it would have been a fantastic profit that you could have made but you didn't because you didn't know just the bull market in teeth was going to take place anyway just to review on inflation in general why is inflation here in the very first place so the portrait that we have here on the right is actually I I was in the Bahamas recently in order just to get into the US due to certain immigration complications and I thought I'd drop by the Central Bank of the Bahamas because the Central Bank of the bombers actually released a cbdc a central bank digital currency in 2020 Everyone likes to moan about how bad Central Bank digital currencies are without actually investigating the ones that exist already the sand dollar is uh you know out in the wild at the open you can do whatever you want with it even though nobody in the Bahamas actually uses it but inside the Central Bank of the Bahamas there is an art gallery and there is this portrait there you can view the magnificence of uh you know this incredible work of art here of a man wearing his underwear over his head and I think it pretty safely sums up what central bankers and the monetary viziers of our respective countries have done over the past few years so the Central Bank of the Bahamas deciding it was a good idea to actually hang this in their Central Bank speaks volumes of uh you know just how self-aware they really are why is inflation here well it it turns out that all of the unexploded ordinance of the post-financial crisis era of the last 10 years has certainly suddenly starting to catch light so very low interest rates for a very low period of time accumulated with lots of debt and the desire for the government to spend more is actually starting to have some pretty severe repercussions in a lot of the world uh yeah just in terms of uh why I think this is going to continue so we've already got all of this High inflation in the developed World why will this keep going you couldn't you can't see in some countries that inflation has started to tape up taper off maybe we will just get back to the Glory Days of the 2010s but I doubt it why is this well Senator Banks don't want to stop inflation it's destroying the debt broke the debt problem over the past 10 years there's been an enormous amount of debt that's accumulated in the public and the private sector as a result of very low interest rates Central Bankers were keeping the rates very low in order to try and create inflation but actually had the reverse problems so you end up with lots and lots of debt because it was very very cheap and what happened instead was that the debt burden actually made it harder to create inflation in the first place so central banks don't want to spoil the show now that it has now that it started they waited forever for inflation to finally begin and finally start burning away the debt they do not want to Halt it right as uh right as it arrived you all noticed uh if you've been paying attention to some of the central banks over the past several years that they started advocating for things like catch-up policies where they let inflation run significantly above their Target because inflation hasn't been running at their target for so long so the idea is when you finally let inflation arrive you let it run really hot in order to make up for all the inflation that you didn't create over the past several years at the same time governments don't want to rein in spending as they'll get voted out Thatcher and Reagan are not coming back guys it's just not going to happen nobody is interested in small government low taxation or at least nobody in the the broader electorate I'm afraid so no no point in voting for that even in the first place because it's just not going to happen governments are going to keep on spending they're going to find new ways of doing it and Pandora's pandemic stimulus so all of the new spending techniques that were discovered during the pandemic they're not going away and they're going to stay there for some time you're going to see a lot of interesting ways where the government can incentivize betting or incentivize the printing press of the Commercial Banking system one way or another I'm from the UK I'm from Scotland and we had what was called the bounce back loan scheme the bbls whereby the government would guarantee private sector debt that had been created by the commercial banking system so to give a little review the overwhelming majority of money in the private sector is generated by Banks not by governments and this is done through the creation of loans one of the reasons why China has been so successful in growing its economy over the past 20 years is that they figured out well if you can just make Banks make loans you will create GDP growth you will get economic growth maybe malinvested however it there will be GDP growth in the first place so in a classic example of capitalism with Chinese characteristics we're now seeing a lot more of that in uh in the UK and in the US and in developed Nations whereby the government is trying to correct trying to get commercial Banks to issue debt in order to Spur economic growth so with the bounce back loan system the idea was if you you just get all the bank to make loans to businesses that are in need of loans and you guarantee the debt so what happened uh in in the case the UK had more than 600 000 loans that were issued by Banks and some senior Bankers went on the record with the financial times and were happy to admit that 40 to 60 of those loans could easily be defaulted upon and a quarter of them wouldn't even be issued in the very first place so this pandemic stimulus response or pandemic uh sort of insurance response could easily be issued in the future when you consider that the government wants to make the world green it wants to cure poverty it wants to wager war on whatever and it's very easy in this case to just get commercial Banks to write loans in this way by saying well just if if the investment goes bad fine the government will pay for it in the future a few instances that the the loan is not repaid of course over here in the States you add your stimulus checks uh I doubt they'll be the last we see of stemi checks they were great for the last bull market so if you are here at East Denver you're probably not complaining and at the same time we of course have commodity price instability as a result of geopolitical instability so in Germany of course they're heavily reliant on on Russian gas and the rest of the world is actually having heavily relied on Ukrainian and Russian exports in the agricultural sector particularly fertilizers and Grains when the price of these things go up well the price of everything goes up and when the price of everything goes up in America the price of the dollar goes down and when the price of the dollar goes down the the price of everything else in the rest of the world goes up so I think inflation is going to be here with us for quite a long time and we're all just going to have to deal with it what does this mean well uh just to take any to give an example of high and for how high inflation is and how we are in an era of financial repression this is all of the debt that as uh is currently in issuance from the United States government this is the key piece of collateral inside the banking system and all of it is yielding less it is paying you less than the CPI inflation in the United States so the recent CPI print came in I think at 6.4 percent and all across the yield curve every different type of bond you are going to be receiving less than that so your Savers are effectively getting slowly uh euthanized as as uh as we might say now this is uh this image requires quite a bit of context so we're talking about crypto in the first place but uh the last time we had a really strong Global inflationary shock was in the 1970s 1970s none of you guys well maybe a few of you were around to experience it very few people around here were investing during it it's a very difficult time to be an investor but there are plenty of lessons that we can actually learn from the 1970s when we were thinking of crypto today so back in the 1970s even though that was an awfully long time ago there were plenty of tech stocks or there at least quite a few big ones so in this example we have Hewlett Packard we have Intel and we have IBM and we've got the yellow line there which is just US inflation this is over the entire decade of the 1970s and you know you may look at the chart and say well at least the lines go up sure but this is a decade where by the end of it you had 44 of your purchasing power according to the government's own statistics so this is a very politically sensitive figure is the rate of inflation in your own country plenty of former officials from Plenty of different developed countries have gone on the record and say yeah we massage the figures because if the inflation was too high then we would look bad and we wouldn't get elected again so this is by the government the US government's own record you lost or 56 of your purchasing power over the course of a decade and of course it was actually a lot more than that because 1970s were a period where gold was completely on board from the financial system in the first place so if memory serves gold was uh 35 an ounce back in 1971 when Nixon decided it was time to get rid of it and allow for uh well the monetary system as we know it today so at 35 an ounce that works out to effectively one dollar per uh 0.88 grams by the end of the 1970s that 0.88 grams was worth more than 13 so that was how much inflation you were getting during this period now IBM Hewlett-Packard Intel are all fantastic companies or they if you could see you know you had a good vision of the future and what tech would do and how the world would change you know all three of these companies did go on to change the world they went on to conquer the world and yet during this period you didn't really make much money off them instead you actually would have made conservative considerably more money if you just held a pet rock or gold in this instance so this is the same chart but we're using gold uh adding gold to it makes all of the performance of those Tech nominees look considerably worse so it's up by I think 1300 during that decade as it was a very Grim decade for the average man and when it's a very Grim decade for the average man the price of gold goes up an awful lot so the main moral of the story is even if you're right and the project or the technology you're backing does end up changing the world depending on the economic conditions you are investing in that might not mean that you make a lot of money I mean thanks for the money you are investing in the future you're helping these companies go on to conquer the world but if you're trying to make money this might not actually be the best thing for you so why is it why is it that the market does not like high inflation or raised inflation when it is looking uh you know why is it not like growth companies tech stocks during periods of high inflation well to put it simply what happens is uh over the past you know 20 years when we've been investing in crypto we've been in a period where in the developed world crypto has existed when there's been low interest rates and low inflation now when there's low interest rates investors want to uh you know they they need yield somehow and if they are not desperate for yields they are willing to go way out in the risk curve and just give money to companies or write checks to companies which claim that they are going to conquer the world and once they've conquered the world they will go on and pay you a real return so for this you know just imagine the likes of Uber or the likes of plenty of the web 2 apps which were not very profitable or which to this day remain cash flow negative which have consumed enormous amounts of money you know they've managed to get all of this money because there's low interest rates and there's low inflation so investors are very happy to write you a big check because they're confident that the value of their money will be roughly the same in the future in the event of a high inflation environment and investors are very unsure of the value of their money in the future well this all changes it also changes because low interest rates stop being low and this makes uh you know the market much more interesting so at the moment you can get five percent on U.S five-year treasuries I believe so it's very easy to get five percent yield if you had a bit of risk on top of that you can then enhance that and it becomes much more attractive than simply you know effectively writing a check for a VC fund when interest rates are zero or negative so just to uh just summarize so previous crypto Cycles have taken place in a low interest low and low inflation environment and crypto is actually just one of the numerous asset markets that have boomed during this period so we're all very aware of crypto because we're in it but actually if you look around to some of the alternative yield Investments uh there have been quite quite an extraordinary boom in them so you found Pension funds that are giving Bridge loans to fast food franchises you've got a very large traditional investors that have been getting into commercial airline Leasing and my personal favorite buying music royalties from pop stars who are getting very old you'll notice that is in fact still happening now so you find these very traditional conservative investors have been forced into these much more risky much more speculative asset classes as a product of the being low interest rates and low inflation and crypto is just one of these so we're not really aware of it because we're in crypto but all around the world has been an incredible reach for yield so the bad news is that at the moment crypto just trades like a tech stock on steroids so tech stocks have been the ones who've benefited from the low interest rate low inflation environment there's this growth environment and sadly Bitcoin and ethereum both trade like that so if this correlation continues in the future Bitcoin ethereum are actually going to have a pretty bad time and the next cycle is going to look a lot different in my view to be clear I've not just overlaid one line over the other the Bitcoin chart here has been put on a logarithmic scale in order to make sense of some of its volatility but when you do do that and you strip away the volatility which is a product of low liquidity actually it's pretty hard to deny that Bitcoin just trades like the NASDAQ on steroids ethereum is a similar story though hopefully we are seeing at the very end of these charts some kind of on Mooring maybe not with Bitcoin but maybe a bit with ethereum so some key takeaways from this from my point of view at least is that if we are going to see another great cycle Bitcoin ethereum need to decouple from tech stocks because when you think about it they're not really tech stocks in the first place we are always telling people that they're not Securities why can't that actually be true in order for a new a new cycle I think there will be this is just my personal view but I do believe that there will be a decoupling that will be a product of a market crash in Tech so when tech stocks get really wrecked I can easily imagine uh something like Bitcoin or ethereum to do pretty well out of it and the reason for that in bitcoin's case at least is the result of its scarcity so maybe in the future we will see Bitcoin start to trade like digital gold maybe we will see ethereum start to trade like digital oil or something similar but they are certainly not doing that now and that's the main point I want to get across to everybody lots of people say oh man the government is inflating the money away at this crazy rate and then they'll show you a chart of what Bitcoin costs in Zimbabwe or in Venezuela and yes in these countries where there is hyper inflation there is a Perpetual bull market for crypto assets but what we're talking about here is just higher inflation in developed economies rather than hyperinflation and the the market for Bitcoin and ethereum other crypto assets is made in these markets and it's not made as a product of it being an inflation Hedge it is made as a product of it being a tax stock on steroids so in order for this to change we need to see Market Behavior to change and that's not happened yet hopefully it will happen in the future when it comes to the broader crypto Market I think the growth in infrastructure may not lead to higher token prices as it has previously so imagine we all keep building all the developers these Denver keep building there's all this incredible growth of the ecosystem loads of very talented software developers and token prices do absolutely nothing they stagnate people don't expect that but that actually could happen because the market simply does not favor this so when we're looking at the price of IBM in the 70s it's not like they were just sitting on their hands right there was plenty of development going on they were actually going on to conquer the world but the market was not interested so this is something that we need to be prepared for if you're a Speculator you may actually be very disappointed if crypto does not decouple from tech stocks uh wild BC funding harder to come by so when FTX was getting you know 420.

69 million dollar checks you know just ridiculous stuff uh using meme numbers this is not going to take place again in the future as a uh as you know the the appetite for this dries up and while Econo tokenomics are much less likely to be successful uh we need much more mature token Utilities in order for tokens to actually hold their own in this kind of market so having trillions of tokens in a high inflation environment is just it's just not going to work it's not an appealing proposition and saying well we're just doing a token and it's going to be a governance token but in terms of the actual governance structure we thought up we're working on it we've not really got anything yet but you will at some point in the future be able to vote on something in a dow while the quartet members of the team maintain most of the voting power this is just not a very sexy proposition in this kind of environment so in order for the uh the token you know tokens to really hold their own in the market they do actually need some kind of mature token utility tokenization of yield bearing instruments uh is something which is started to happen you have seen I think backed in Switzerland where they've started tokenizing U.S treasuries so that owners of the stablecoin can actually start earning some of the yield as a product of the US government uh I think that's going to grow a lot as a product of a high inflation environment when you're we're in the crypto space uh you know there's plenty of room for growth here but at the same time uh there is still an enormous demand for yield and one thing which the crypto Market has been actually very poor at doing is developing a credit Market when you consider that the traditional Financial system is built on credit this is the the core pillar of the traditional Financial system the the banking system it's quite extraordinary how we don't really have many uh versions of credit inside crypto and this is you know a very difficult problem of course uh when there's not a security when you're not relying on actual government to uh you know to uphold the law when it comes to creditors and debtors I can understand why it's very hard to do this but development of a credit Market which can adjust for inflation is uh is something that is still will need to be developed in crypto and will uh in a lot of ways help out in an inflationary period because you're in Bear markets trying to find investors turn to credit why should that not happen in the crypto Market the unfairness in a high inflation environments you know credit can get wrecked as well but I think that has covered most of the points that I would like to show today lastly uh this is just a for fun presentation on Market commentary if you are interested in uh listening to more of my musings we do have a podcast where we drink beer and give credit ratings to breweries but my name is Shoshan that's all for today thank you all very much for listening foreign