WEEKLY, Dec 16, 2023

the dollar tailwind, crypto and corporations, Christmas music with a twist

Hi everyone! I hope you’re all well, and getting ready (or already enjoying!) an uplifting festive season. Loved ones, community, good food, sparkly decorations and everyone celebrating the end of a turbulent year… May your heart be full as we close one chapter and enter another.  ❤

You’re reading the free weekly edition of Crypto is Macro Now, where I update and/or re-share a couple of things I wrote in more detail about during the week. If you’re a premium subscriber, you’ve probably already read them, so feel free to scroll all the way down for some non-crypto links.

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Programming note: The free weekly Crypto is Macro Now will take a break next Saturday, December 23rd. Back in your inboxes on December 30th! The premium daily will be taking some time off over the holidays as well, I’ll have details on that on Monday.

In this newsletter:

• The outlook for the US dollar and what it means for crypto

• New crypto accounting standards and corporate demand

• Christmas songs with a twist

Some of the topics discussed this week:

• Bitcoin bonds and sovereign demand

• Google ads and retail demand

• Blockchain games as bank accounts?

• BTC holder temperature check

• On-chain signals: the market is far from overheated

• About those supply chains

• So many inflation expectations

Dollar down and what it means for crypto

This week seems to have marked an inflection point in dollar sentiment. The currency had been trending down anyway since the local high back in October, but the Fed’s comments turned the downward slope into a sharp drop.

(chart via TradingView)

What has shifted? It’s not just the FOMC statement and Powell’s comments. John Authers’ newsletter in Bloomberg yesterday pointed out that the Fed’s “pivot” gave other central banks the opportunity to also talk up the possibility of cuts – and none of them took it. The Bank of England stressed that there is still “a way to go” before rate cuts can be contemplated. Norway actually hiked. And the ECB energetically pushed back against expectations of cuts in Q1, even though it has more room to cut than the US (a faster CPI deceleration) and has more urgency to do so (a weaker economy).

(chart via Bloomberg)

Plus, there’s growing expectations of a Bank of Japan hike. A Reuters poll published yesterday shows that 80% of surveyed economists expect an unwinding of Japan’s easy monetary policy by the end of 2024, with 20% betting that the first move comes as soon as next month.

So, if markets are interpreting the Fed’s statements this week correctly and US rates do start to come down within the next few months, funds are likely to flow out of dollars into other currencies. We’re already starting to see this – in the 24 hours following Wednesday’s FOMC statement, the DXY index dropped around 2%.

(chart via TradingView)

This is even before we take into account the likely “money printing” that will be needed next year to finance the ballooning deficit. The accumulated US deficit for the first two months of the 2024 fiscal year was announced on Tuesday – already it is up to $381 billion. Annualized, this gives a deficit of $2.3 trillion (vs $1.7 trillion in FY 2023 and $1.4 trillion in FY 2022), and that’s not taking into account any extra pre-election spending or defense measures. According to the Committee for a Responsible Federal Budget (CRFB), lawmakers are currently pushing for bills that would add another $675 billion to the total if enacted on a temporary basis. The extra load would be $2.73 trillion if the bills become permanent.

So, the shifting rate outlooks (with US rates coming down ahead of those in other key economies) could soften demand for dollars, just as their supply increase ratchets up yet again. These two forces are likely to bring the USD down further, relative to other currencies.

This, coupled with the drop in yields, should be good for commodities and crypto assets, especially the “macro” representative bitcoin. Global assets priced in dollars increase in value when the denominator is falling, all else being equal. And assets with no yield become more attractive in relative terms when yields elsewhere are heading lower.

The outlook for a weaker dollar is yet another tailwind to add to the growing list, along with an ETF demand boost, deepening global uncertainty and the upcoming halving.

New crypto accounting standards and corporate demand

Crypto accounting just got a lot fairer, and this could stimulate more corporate demand for crypto assets. The Financial Accounting Standards Board, which sets general accounting practices in the US, has finally published standard for the disclosure of certain crypto assets.

Now, accounting is generally pretty boring – but in this case, the change removes a significant barrier to corporations holding bitcoin on their balance sheet. This debate was kicked off in 2020 when MicroStrategy started adding bitcoin to its treasury, to avoid the accelerating drip of US dollar depreciation from the “printing” of new money.

At the time, that made a lot of sense. Corporate treasurers could hold company reserves in a hard, liquid asset whose supply could not be manipulated and that could be moved 24/7/365. Plus, in theory, the price appreciation could feed through to the company valuation.

Only, that didn’t work so well when the price was plummeting. And accounting rules didn’t help.

Guidance at the time stipulated that crypto tokens had to be valued on the balance sheet as a “long-lived intangible asset”, like a patent or trademark. (You can already see how crazy this is – crypto tokens have 24/7/365 market prices, patents and trademarks don’t.) This meant that tokens were reflected on balance sheets at the lower of cost or market value. If the price of the tokens went up, they had to be sold for the gain to be reflected in company accounts. And if the price of the tokens went down, the balance sheet took the hit. The balance sheet valuation for crypto tokens could only go down, it could not go up. Not a great situation for corporate treasurers.

These new FASB standards change all that. Now, crypto assets can be valued for balance sheet purposes at “fair market value”.

This is better for businesses, which now are no longer blocked for accounting reasons from diversifying corporate reserves should they want to. And with the growth of the CME crypto derivatives market, the volatility can be hedged.

And it’s better for investors, who get a more transparent view of a company’s holdings.

The new rules apply for fiscal years beginning after December 15, 2024 (a year from now), but can be applied earlier on financial statements that have not yet been issued. They cover tokens that have not been issued by the reporting entity or related businesses, that are not NFTs, and do not provide the holder with claims on underlying assets or services. Bitcoin, ether, solana, etc. – they’re covered. To be honest, I’m not sure about stablecoins (since they do represent a claim on an underlying asset), they don’t tend to have write-downs anyway.

One immediate consequence of this should be a big jump in MicroStrategy’s balance sheet valuation. The company had applied a total of roughly $2.5 billion of impairment charges to its bitcoin holdings. Presumably the balance sheet valuation can now be revised up, giving the impression that the value of the company is increasing (which, in accounting rather than real terms, it is).

And, presumably, other US-based companies could start to experiment with treasury diversification into hard-cap, liquid assets, which over the longer term could help protect corporate balance sheets from fiat depreciation.

Have a great weekend! And happy holidays!!!

Since this is the last free weekly Crypto is Macro Now before Christmas, I want to share with you some of my favourite seasonal songs, but with a twist.

First, here’s the well-known and breathtakingly beautiful “Carol of the Bells”, sung in its original Ukrainian, and with a literal English translation – the chorals are gorgeous as is the singer’s voice, but the words are maybe not exactly what we’re used to:

And now, Gabriel’s Song, sung by Sting with some haunting harmonies:

Since I’m sure that we all have permission to go really retro at Christmas, here’s Elaine Paige with a beautiful rendition of The Coventry Carol:

Speaking of retro, here’s Enya singing Silent Night in Gaelic (this one makes me weep):

And finally, something perhaps more uplifting, here’s “Christmas” from Blues Traveler – the words always get me, as someone who has often struggled with stress and regrettable cynicism at Christmas time. Like the song says, though: “As if Christmas had made the winter warmer.”

For what it’s worth, this is the first Christmas in a very long time that I’ve really looked forward to – it feels simpler and yet also more important.

Personally, I’m grateful for what the past year has taught me about so many things, I’m proud of the work I’ve done and I’m excited about the coming year – it will be different than the past few years, I am sure, and that’s always an opportunity. I’m also grateful to all of you who give this newsletter some of your time every week. Thank you for being here, and from the bottom of my heart, I wish you all a peaceful and festive holiday season.