Jason and the Argonauts on Lemnos

 

It’s not every day that a country’s leader endorses a cryptocurrency project. Nayib Bukele, the President of orange-pilled El Salvador, was the first leader to endorse Bitcoin (BTC). 

Now, the prime minister of Vanuatu, the Honourable Bob Loughman, has officially given the green light to Satoshi Island.

Satoshi Island is the megaproject crypto utopia in the South Pacific tha recently disclosed to Cointelegraph its vision, progress and preparation. Hot on the heels of news that they received 50,000 citizenship nonfungible token (NFT) applications, the prime minister of Vanuatu has given his blessing to “watching the development of Satoshi Island unfold.”

For the team at Satoshi Island, the endorsement is welcome news:

“With this full endorsement from the prime minister of Vanuatu in hand, we can show everyone that Satoshi Island is as real as it gets, and the kind words of the PM inviting our community to their home could not be a warmer welcome.”

The official letter states that “the overnment of Vanuatu welcomes the Satoshi Island project and its community to our country,” while highlighting that “Vanuatu is looking for new ways to attract investment and people to our country.”

The COVID-19 pandemic “severely affected the tourism sector,” a mainstay of the Vanuatu economy, contributing 34.7% to total GDP in 2019. According to World Bank data, visitor numbers to the paradise-like archipelago 2,000 kilometers (or 1,243 miles) from Brisbane dropped from circa 300,000 to 80,000 in 2020.

The team at Satoshi Island had previously told Cointelegraph that the “lack [of] tourism” was one of the pain points they wished to alleviate with their project. Fundamentally, however, the “crypto industry finally has a physical home” in Satoshi Island.

Satoshi Island is a space in which crypto enthusiasts plan to reside — not visit. Community members will be living in sustainably-built homes in a community organized by decentralized autonomous organizations, or DAOs, where ownership is represented by NFTs.

Many of the past crypto megaprojects, from Akon City in Senegal to CryptoLand in Fiji, have failed. Satoshi Island’s team advises others to “keep ideas on a need-to-know basis within the team until everything is in place to turn the idea into a reality.”

The team recommends that others "be very selective with the location and ensure it [is] logistically, environmentally and legally possible," as well as to

“Be very selective with the location and ensure [...] most importantly, owning the land before you release your project is an essential step to showing your target market that what you are promoting is real and not just a pipe dream.”

With the prime minister of Vanuatu's approval, the Satoshi Island crypto "pipe dream" is nearing reality.

 

In this episode of the “Fed Watch” podcast, CK and I had the privilege to chat with Matthew Pines from the Bitcoin Policy Institute. He recently wrote the fantastic and comprehensive Bitcoin essay for policymakers and the general public, “Bitcoin and US National Security: An Assessment of Bitcoin as a Strategic Opportunity for the United States.” Our conversation was a summary of the essay, digging deeper into quality vs quantity adoption, stablecoins, and ways that nations view Central Bank Digital Currencies (CBDCs) differently. It ends with talking about the Federal Reserve (Fed) and their predicament right now over rate hikes with an inverted yield curve.

“Fed Watch” is a podcast for people interested in central bank current events and how Bitcoin will integrate or replace aspects of the traditional financial system. To understand how bitcoin will become global money, we must first understand what’s happening now.

REPORT SUMMARY

We started out by discussing who was Pines’ target audience and how that affected the structure of the paper. I was curious because the paper is very comprehensive, covering Bitcoin’s technical mechanics, recent monetary history and the ways bitcoin could be used to the strategic advantage of the United States.

Pines responded that he anchored the structure of the paper around Biden’s recent executive order. As people are taking a closer look at these topics and as they are writing reports themselves in response to that order, Pines wanted to give them an analytical primer and a summary of how Bitcoin can address the specific concerns of the administration about national security.

BITCOIN ADOPTION

Next, we get into some specifics from the report. He mentions that 16% of U.S. adults own bitcoin and other cryptocurrencies. However, this is an overall figure and doesn’t speak to the quality of that adoption. For instance, it could be gamblers buying tokens on Coinbase. I wondered if he had insight on adoption by the politically powerful, i.e., business leaders, government officials, influencers, millionaires and billionaires. In essence, I asked Pines to speculate based on his unique knowledge set.

Pines has a great line when he says, “The power of selective high-value orange-pilling can’t be overstated.” He says that it’s kind of what we all want, but it can turn out badly. He also warns against concentrating too much on politicians. In other words, let Bitcoin’s incentives do the work.

Staying on the policy front for one more question, we ask if adoption is closing the window for potentially devastating policy decisions. If 16% of the public own bitcoin now, how much will that be in one or two years? If 50% of people own bitcoin and even more people within the politically influential class own bitcoin, does that make it nearly impossible to get bad policy? Once again, I’m asking him to speculate on this question.

Pines’ answer is very constructive. He points out that the window of policy is moving in a positive direction, citing Senator Lummis’ recent work. He makes the distinction between the legislative and executive branches and says each has a different relationship to policy. The lawmakers are oblivious, but an average employee of the executive branch could perpetuate misunderstanding because they are in a rush to write a brief or complete a report.

STABLECOINS AND EUROPE

Now we get into the CBDC discussion, focusing on Europe first. Pines claims that the European Union is inherently threatened by USD stablecoins and bitcoin, because it is the monetary union that underpins the political union. Therefore, the EU is naturally drawn to CBDC solutions.

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Pines also agrees that the Fed differs from the European Central Bank in terms of its pursuit of a CBDC. Basically, the Fed has a great grasp on the issues and forces at play in a CBDC. They are already much more friendly to USD stablecoins than a CBDC, even though they might not know all the strategic advantages that Pines has outlined in his report.

One of Pines’ great points from his report is the ability for the Fed to regulate USD stablecoins and force them to be buyers of U.S. Treasury securities. This could add more demand for Treasuries and even give the Fed a new policy tool.

THE FED IS TRAPPED

In the last part of the interview, we have time to quickly cover the Fed’s predicament. They have made a massive move to hawkishness, and after only one tiny hike, the yield curve is already inverting, signaling recession. I asked Pines what he thought of this development and what his take on the Fed’s options are at this point.

Pines goes on to expertly describe the situation in which the Fed finds itself as an “irreducibly complex system.” The Fed has to poke this complex system increasingly harder each time and wait to see what breaks. Pines says if we want to see where we are headed, we should look to Japan because they are five to 10 years ahead of the rest of the world in monetary experiments like quantitative easing and yield curve control.

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Bitcoin (BTC) has been unable to break from the 26-day-long descending channel. Investors are uncomfortable holding volatile assets after the United States Federal Reserve pledged to reduce its $9 trillion balance sheet.

While inflation has been surging worldwide, the first signs of an economic downturn showed as the United Kingdom's retail sales fell 1.4% in March. Moreover, Japan's industrial production dropped 1.7% in March. Lastly, the U.S. gross domestic product fell 1.4% in the first quarter of 2022.

This bearish macroeconomic scenario can partially explain why Bitcoin has been on a downtrend since early April. Still, one needs to analyze how professional traders position themselves, and derivatives markets tprovide some excellent indicators.

The Bitcoin futures premium is muted

To understand whether the current bearish trend reflects top traders' sentiment, one should analyze Bitcoin's futures contracts premium, which is also known as a "basis."

Unlike a perpetual contract, these fixed-calendar futures do not have a funding rate, so their price will differ vastly from regular spot exchanges. A bearish market sentiment causes the three-month futures contract to trade at a 5% or lower annualized premium (basis).

On the other hand, a neutral market should present a 5% to 12% basis, reflecting market participants' unwillingness to lock in Bitcoin for cheap until the trade settles.

The above chart shows that Bitcoin's futures premium has been below 5% since April 6, indicating that futures market participants are reluctant to open leverage long (buy) positions.

Options traders remain in the "fear" zone

To exclude externalities specific to the futures instrument, traders should also analyze the options markets. The 25% delta skew compares equivalent call (buy) and put (sell) options. The indicator will turn positive when "fear" is prevalent because the protective put options premium is higher than the call options.

The opposite holds when market makers are bullish, causing the 25% delta skew to shift to the negative area. Readings between negative 8% and positive 8% are usually deemed neutral.

Deribit Bitcoin 30-day options 25% delta skew. Source: laevitas.ch

The above chart shows that Bitcoin option traders have been signaling "fear" since April 8, just as BTC broke below $42,500 following a 10% drop in four days. Of course, such a metric could be reflecting the 16% negative BTC price performance over the past month, so not exactly a surprise.

Margin markets sustain its optimism

Margin trading allows investors to borrow cryptocurrency and leverage their trading position, thus potentially increasing returns. For example, a trader can buy cryptocurrencies by borrowing Tether (USDT) to increase their exposure.

On the other hand, Bitcoin borrowers can only short the cryptocurrency as they bet on its price decline. Unlike futures contracts, the balance between margin longs and shorts isn't always matched.

The above chart shows that traders have been borrowing more Bitcoin recently, as the ratio decreased from 20 on April 30 to the current 12.5. The higher the indicator, the more confident professional traders are with Bitcoin's price.

Despite some additional Bitcoin borrowing activity aimed at betting on the price downturn, margin traders remain mostly optimistic, according to the USDT/BTC lending ratio.

Bitcoin traders fear further correction as macroeconomic indicators deteriorate because investors expect a potential crisis impact on riskier markets. However, there are no signs of leverage short (negative) bets using margin or futures, meaning sellers lack conviction at $38,000.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.