Officials Cheer Drop in Inflation as Households Still Struggle, Marathon Issues Debt to Buy More Bitcoin, Recent Crash Wiped Out Speculators and Traders
News Block #49 (08/15/2024)
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Officials Cheer Drop in CPI Inflation as Households Still Struggle
Let’s kick things off with a topic that has become one of the biggest issues for voters in the upcoming election — inflation.
It’s been more than three years now since Jerome Powell was asked about inflation and responded quote, “It'll turn out to be a one-time sort of bulge in prices, but it won't change inflation going forward."
In fact, the Fed went on for years denying that inflation was going to be a long-term problem.
Since then, let’s just say inflation has stuck around. In fact, it’s wreaked havoc on people’s finances as well as the Fed’s credibility since Powell made those claims.
But this year, we’ve seen inflation finally start to come down. On Wednesday, White House officials cheered as CPI inflation came in at 2.9% YoY, the first time it’s dropped below 3% since early 2021. This led to many people calling for the Fed to cut rates now that inflation has apparently been defeated.
But many Americans might hear this and wonder, “What the heck are they talking about?”
Life still feels expensive for them; in fact, much more expensive. And they’re not wrong!
Although inflation has declined, prices remain sky-high compared to 4 years ago.
According to Truflation, the dollar has lost 25% of its purchasing power since 2021. In other words, a dollar today can buy 75% of the goods it could buy three years ago.
This week, the Wall Street Journal published a great article explaining why many Americans still feel like inflation is crushing their budgets and why measurements like CPI fail to reflect reality.
The piece highlighted how the prices of things that are hard to live without—think food, electricity, rent—remain well above their levels just two years ago.
It’s not really a surprise — it’s become widely known by now that CPI understates the actual level of inflation. But to see it displayed like this on the chart above is shocking.
The article went on to share stories of middle-class people who are struggling today, such as an accountant and a father who struggles to afford his higher insurance and rent costs. Or an operations manager who had to cancel her young son’s tutoring sessions and shop at discount grocery stores.
A young mother was quoted saying, “I have middle-class pay, but I feel like I’m lower income.”
And that’s exactly what inflation does to a society. It hollows out the middle class and makes it difficult for individuals to get ahead and provide for their families.
Although officials are celebrating CPI dipping below 3% today, it still remains above the Fed’s 2% target. And it’s important to note that this decline in the RATE of inflation will not bring price levels back down for these families.
And with a Fed rate cut now almost assured for September, given that inflation is no longer a concern – at least for some people – inflationary pressures are only likely to increase from here.
Bitwise CIO Matt Hougan summarized all of this well by tweeting:
I couldn’t agree more with Matt. It just goes to show that the only way for everyday people to truly declare victory against inflation is to opt out and save in something that can’t be inflated in the first place.
Marathon Digital Issues Debt to Buy More Bitcoin
One topic we’ve discussed on the News Block before is how much corporations can benefit from adopting a Bitcoin standard.
MicroStrategy was famously the first publicly traded company to prove that a Bitcoin treasury strategy could be extremely effective for a company’s performance.
MicroStrategy doesn’t just buy and hold Bitcoin though; it also uses what it calls “intelligent leverage” to make additional Bitcoin purchases. By issuing debt or new shares and using the proceeds to acquire more Bitcoin, MicroStrategy has been able to consistently increase its Bitcoin holdings and, consequently, its shareholder value.
MicroStrategy’s recent stock performance proves that this strategy is working. Since adopting a Bitcoin treasury strategy, MicroStrategy is the second-best-performing stock in the entire S&P 500 index.
It seems that their success is inspiring other companies to follow suit, including Marathon Digital, the largest publicly traded Bitcoin miner in the world.
About two weeks ago, Marathon announced it had bought 100 million dollars worth of Bitcoin.
In the announcement, Marathon CEO Fred Thiel said, “Adopting a full HODL strategy reflects our confidence in the long-term value of bitcoin…We believe bitcoin is the world’s best treasury reserve asset,”
But Marathon took it one step further this week when it announced that it would raise 250 million dollars via a convertible debt offering to buy more Bitcoin – just like MicroStrategy has done in the past.
And how did that offering go? Really well, apparently. The offering was oversubscribed, meaning there was a ton of demand for their debt, and they raised more than they had anticipated.
Marathon wasted no time buying Bitcoin with the money raised. It announced that the company had acquired an additional 4,144 BTC at an average price of $59,500 per Bitcoin. According to bitcointreasuries.net by Coinkite, in terms of publicly traded companies, only MicroStrategy holds more Bitcoin than Marathon today.
This is an interesting strategy coming from a miner like Marathon. It’s certainly a way for Marathon to separate itself from the pack. As it stands now, Marathon holds more than double the amount Bitcoin than any other public miner. What they are essentially doing here is using their ability to raise money and buy more Bitcoin as a competitive advantage over other miners.
Marathon is unique because its market cap is so big, and it has a ton of daily trading volume in its stock. In other words, they have the liquidity to raise the money and execute on this strategy. Other smaller miners – not so much.
And when you consider Bitcoin’s performance historically, this actually makes a lot of sense. Marathon offered its convertible notes at an interest rate of around 2% per year. Over the last five years, Bitcoin has gone up, on average, about 40% per year. So as long as the Bitcoin Marathon bought with the proceeds outperforms the 2% interest rate on the loan, then it should increase Marathon’s shareholder value.
On the flip side, there are some risks here. Unlike MicroStrategy, Marathon’s core business is deeply tied to Bitcoin’s price. As a miner, they have operational risks to consider. If Bitcoin’s price tanks, Marathon could be forced to sell its Bitcoin holdings to cover operational costs or its debt obligations. This would only add sell pressure on the very commodity that their entire business revolves around, further jeopardizing their margins.
One could argue that nobody is as long Bitcoin as owners of a mining business. But by holding Bitcoin and using leverage to buy more Bitcoin while mining it, Marathon has taken it to a whole new level. In the end, this strategy is all about timing. If they are wrong and Bitcoin tanks, then they might be in for some challenges. But, if they are right, they will win big.
Bitcoin's Recent Crash Wiped Out Speculators and Leveraged Traders
One risk factor that all corporations have to consider when buying Bitcoin is its volatility. That’s just a fact. We saw that volatility on full display last week when Bitcoin dropped more than 15% in a couple of days.
Bitcoin has since rebounded and stands at around $60,000 at the time of writing.
Now that the chaos has calmed down, we can get a better sense of where things stand today. My take is that this flush out was actually quite positive for Bitcoin in the long term.
Several metrics indicate that this price crash has mostly wiped out short-term holders, speculators, and leveraged traders.
This can be seen by looking at on-chain metrics like Short-term Holder Realized Loss. Short-term Realized Loss measures the losses that occur when Bitcoin, held for a short period, is sold at a price lower than what the holder originally paid. This metric helps to identify when newer or short-term investors are selling their Bitcoin at a loss, which can indicate market stress or panic selling.
Well, last week, we saw these short-term holders realize around $1.3 billion in losses. Ouch. To give you an idea of how big this was, there were more realized losses than when FTX blew up.
But on a positive note, the amount of supply held by long term holders actually increased during the drawdown. This suggests that more experienced long-term holders were actually buying as newcomers were panic selling. Same as it ever was.
Lastly, the amount of leverage that was wiped out in this crash was significant. According to the Block, the amount of open interest – which represents the total number of outstanding futures or options contracts that have not been settled – dropped $10 billion during the week of the crash.
When open interest is high, it often indicates that a large number of traders are holding positions, potentially using leverage to amplify their bets on the price of Bitcoin. If the market moves against them, this could lead to forced liquidations, which is exactly what we saw happen.
According to the Block, there was nearly $700 million in long liquidations on August 5th alone.
So, all in all, during this latest drawdown, we saw Bitcoin move from leveraged traders and speculators into long-term convicted holders. This is good news.
It’s what we should expect to see in periods of sideways, choppy price action, and it's exactly what’s needed to get Bitcoin to that next level.
Remember, holders set the floor. And the more Bitcoin that finds its way into these holders’ hands, the less available Bitcoin becomes on the market, and the only way a new buyer is going to get Bitcoin from these holders is by offering a higher price.
Now, I can’t speak for all the holders out there, but I think the price to make them part with their Bitcoin is much, much higher.
Until next week, keep stacking.
- SC
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Great as usual. Thx!!
Great write up all around. It's also interesting to see a couple companies up more than NVDA this year, one being basically a leveraged Bitcoin ETF, but the media not giving either much attention relative to NVDA.