Fed’s inflation fight batters crypto market as pressure mounts

From the Editor’s Desk

Dear Reader,

We may be more than three months from the official beginning of winter, but another cold blast has hit cryptocurrency markets in recent days.

Indirectly, the chill has been coming from a country where, in the movies, at least, it’s always winter: Russia, and the inflation and myriad economic woes that Moscow’s war on Ukraine have done much to create.

But more directly, the cold arrived from Jackson Hole, in the U.S. state of Wyoming, where Federal Reserve Chairman Jerome Powell gave a speech making clear that — short-term gains be damned — the Fed’s muscular approach to tackling inflation is here to stay until the beast is tamed.

Not so long ago, the prospect of rising prices and consequently rattled equity markets might have prompted crypto investors to double down on their bets, and encouraged more of the crypto-curious looking to get in on the action. Now, not so much, as cryptocurrencies that have become household names have seen their values fall alongside those of traditional assets.

Yet amid the market misery, the work of building the future of finance continues. Just days ago, Forkast’s latest Crypto Rising event refused by its very name to succumb to the gloom, drawing some of the industry’s best and brightest in a forward-looking assessment of the biggest challenges and opportunities awaiting the sector as it continues to develop.

Issues such as regulatory cooperation, exchange licensing and consumer protection all sparked energetic discussion that defied the downbeat state of the crypto market. These are hardly topics that would set the agenda for any event in an industry that didn’t have a promising future, and, as such, they represented a strong statement of faith that the good times, like fairer weather, will return.

Facing what appears likely to be a long crypto winter, we should be reminded by such expressions of determination that the present moment, despite the difficulties it has brought, offers a valuable opportunity to take stock, strategize and set in motion the next stage of our industry’s incredible journey.

Until the next time,

Angie Lau,
Founder and Editor-in-Chief
Forkast

Forkast.Insights | What does it mean?

The days of crypto being a hedge against broader market trends appear to be over. Historically, crypto — and Bitcoin’s appeal to Wall Street — was that its erratic price movements offered opportunities for gains when other asset prices were heading south. But that’s changing.

Bitcoin’s correlation with Invesco QQQ, a popular exchange-traded fund that tracks the tech-heavy Nasdaq 100 Index, has reached a score of 0.894, its highest level in nearly three years.

The slow convergence of the two asset classes represents an inflection point for the industry at large. Traditionally, crypto did a good job of attracting money from big investors on the promise they could make significant returns. But capital inflows into the crypto space have been negative for the past three weeks, and overall activity among institutional investors is at its lowest ebb since October 2020. 

As traditional investment vehicles such as bonds offer an improved performance amid high inflation, crypto is heading into an era where big money looks elsewhere for gains. 

All of that suggests that the crypto winter is just getting underway and that more pain is to come. Indeed, indicators suggest that Ethereum, despite the much-vaunted Merge that promises to make it a proof-of-stake network, is likely to fall to multi-year lows. Hold on to your hats.  

Forkast.Insights | What does it mean?

The rumors surrounding Ava Labs’ alleged deal with a law firm to attack its rivals share striking similarities with some of the tactics employed by Big Tech and the American robber barons of the 19th and early 20th centuries. 

Economic historians would find such conduct unsurprising. Capitalist industry has an inbuilt tendency to become more anticompetitive over time, and crypto may be going through its first phase of that. 

The bigger question is: If the allegations are borne out, what will the industry do about it? By press time, Solana and DFinity, both claimed to be targets of Roche Freedman’s alleged activities, had said nothing publicly. 

The second, broader concern facing the industry relates to the role that local law enforcement can play in keeping a global industry in check. If Ava Labs has been using a law practice to stifle competition, antitrust legislators may have a tough time proving it. Antitrust law in New York, where AVA Labs is based, was drafted to protect consumer purchasing power and jobs. Federal antitrust law — used in such cases as the break-up of Standard Oil — focuses on monopolies that crush competition at an interstate level. Tech companies have frequently exploited that fact to argue that they’re not engaged in monopoly conduct. In the crypto industry, such an argument is even easier to make, and for Ava Labs, whose competitors are spread across the world, may be all but unassailable.

Forkast.Insights | What does it mean?

China has had an increasingly bifurcated approach toward blockchain. Beijing has been cracking down on cryptocurrency trading for several years and last year announced a nationwide ban on crypto mining. But China has also been investing heavily in blockchain technology, and its energy agency’s openness to blockchain-based electricity trading is consistent with Beijing’s embrace of the technology’s non-crypto uses.

In fact, in March last year, the word “blockchain” was featured for the first time in the country’s 14th five-year Plan, a blueprint for its economic development covering the period 2021 to 2025.

The idea to use blockchain technology for China’s electricity trading comes as the nation’s power trading market has become too big to ignore. Last year, the country’s power-exchange centers collectively handled an electricity trading volume of 3,778.74 billion kWh, accounting for 45.5% of all electricity consumption and representing a 19.3% increase from the previous year, according to a report by law firm Dentons Shanghai that cited statistics from China Electricity Council.

To accommodate the growing market, China has built regional electricity centers in Beijing and Guangzhou, the capital of the southeastern province of Guangdong, and in dozens of other provincial centers. 

Those trading centers are also exploring ways to make it easier for market participants to exchange electricity. Kunming Power Exchange Center, for example, launched an e-commerce platform in 2020 on which companies can trade electricity and even customize deals.

Differences between trading rules and data entry protocols among the exchange centers remain major challenges for inter-provincial and inter-regional power trading, which has caused some surplus power to go to waste, according to the Dentons report. 

By using blockchain technology, authorities are hoping to address those problems and create a nationwide system to make power trading easier for local grids, national grids and enterprises alike.