This Week in Crypto: August 12, 2022

I discuss the recent market action and news events, with focus on the Ethereum Merge and the unprecedented OFAC sanctioning of Tornado Cash, which is an open source protocol.

Read the video transcript

Good afternoon everybody. This is Dave Weisberger, CEO of CoinRoutes. And it is Friday, August 12, and it’s time for this Week in Crypto. Well let’s quickly talk about the markets because there’s not really a lot to talk about. The thesis that I have been promulgating since, I guess, for the last few weeks that we are in the eye of the hurricane and that August would see a slow motion rally is still intact.

Bitcoin this week is up around 4 to 5% depending on how you measure it. I think last week when I did this show it was 23,000, now it’s a little over 24. So kind of keeping pace with other risk markets which have had similar rallies. Ethereum on the other hand has rallied substantially more up somewhere around 15% from last week, and we’ll get to that. In one of the major news items of the week was that Ethereum’s merge date is now officially set for September 15th, and we’ll talk about that in the context of news in a heartbeat.

The only other thing that is worth talking about is that volumes are still relatively low, and this is not indicative in my opinion of any massive bullish breakout, although the shorts are being ground down and the market is looking to be climbing a wall of worry. The big economic news for the week was the inflation print and the inflation print being set at flat July over June, which still was an eight and a half percent year over year increase. And that flat year over that flat July over June of course is excluding is with the gas prices with food and energy. When you exclude food and energy it was actually a 0.3% which is still over the Fed’s target inflation rate. So I think people are getting overly excited that the Fed’s cycle might be over.

Kashkari from Minnesota, traditionally one of the biggest dubs on the Fed has actually came out and gave a hawkish speech and markets basically yawned at him and kept going higher. He talked about the need to keep pushing rates up. I talked about it extensively last week. I still think that the Fed will continue to raise rates but I think that they will pump liquidity in when and if the market does have a significant down leg in the fall,which sadly is still in my opinion is likely.

Now let’s talk about cryptospecific news. There are three pieces of news we’re talking about. By far the most important is Tornado Cash flow. I’ll cover that last. There are two other pieces of news that is relevant. The first is the Ethereum merge.

So the Ethereum merge being set for September 15th is very important. CryptoHayes gave a nice Twitter’ thread talking about what he thinks is going on and his synopsis of the situation, which looks accurate to me, is that market makers are positioned because the futures are anticipating are at a higher premium that the market makers are net positioned short, and have been having to sell spot into this rally and hedging themselves with futures. Well what that is indicative of is nervousness about the potential for the merge, and generally, as I said before, when these sorts of events happen my first instinct is to think buy the rumor, sell the news.

So buy Ethereum will rally into September 15th and then when it goes well. People who are expecting everybody to get excited and jump in at that point won’t get that excitement and not to take their profits and will cause a profit taking shortfalls so selling the news. This time it might not be that way because there are a lot of people who are worried about the technology and what could happen. Obviously if the merge were to fail, Ethereum could have a rather significant fall and so I think that what we will see and I’ve not talked options market makers friends yet, but I certainly will as we get closer we will probably see high premium being paid for out of the money put options given that potential risk, but it’s worth keeping an eye on how the premium and all that works because that’s the only way you’re really going to know whether to buy the rumor. Sell the news is happening or it’s, you know what, we really need to buy it if the news goes and you have strong opinions and it’s going to be successful and sell it. Obviously if you think it isn’t. So that’s what’s going on with Ethereum.

The other piece of news that’s interesting is BlackRock followed up their announcement with Coinbase, with another announcement saying they’re going to provide Bitcoin market access to their client base. There are a lot of people in the Bitcoin community once again predictably saying: oh no, the arch evil trad five firm is coming to take our money. It’s the bully on the playground is going to take our lunch money away. That’s a bunch of garbage basically. I mean effectively there are people who are never going to have a wallet, who are never going to want to try to understand crypto, might be older, maybe they’re doing something for their kids and their way of investing is through firms like BlackRock or firms or brokerage accounts.

So those types of firms need access and frankly the more they have, the more likely adoption gets. And adoption being the key metric to having Bitcoin go on what would be effectively a 20x rampage at this point to replace gold in terms of its market cap in the monetary system, adoption is the single most important thing. So there’s no way for me to read that news anything other than bullish. Obviously there’s a lot going on under the current. So let’s talk about one of the major things going on, which is Tornado Cash.

Tornado Cash is a mixing software. It is open source, there is a token associated with it. There are estimates in the press that $7 billion have been laundered by North Korea through it. But Elliptic, who I tend to trust more because they’re one of the best forensic analysis firms in the space, thinks the number is slightly over $1 billion. But either way there is a significant use case for Tornado Cash by money launderers. That much is true.

There is also a significant use case for Tornado Cash by people who simply want to keep their transactions private. If you do transactions on the Ethereum blockchain and people know your address, then they can know exactly what you’re buying, particularly in the world of NFTs or etcetera, but anything you’re buying it natively, people can track your financial activity. There are many people who do not want their financial activity tracked.

That is a very viable use case. It is the reason cash is still very popular. It is the reason that people use LLCs when doing real estate. There are many reasons why people want financial privacy and to wave it away with a wave of an arm, say money laundering oh no! is absolutely the wrong thing to do. The fact is we need to find a middle ground.

This case is unprecedented because unlike going after a firm that is doing something bad or a bad actor themselves and freezing their funds, they’re going after open source software. Now the news out of yesterday, I guess it was, was that one of the programmers on the project was arrested in Norway. This is starting to seem very serious. The reality is Tornado Cash being open source is important, and sorry for a little bit of the rant, but the fact is if you think about Linux as an operating system, one of the things that was great about Linux, in addition to being freely available, having armies of developers wanting to work on it and powering most of the world server technology these days, is that Linux has significant privacy features and significant antivirus features built into it. But there was no way to compensate Linux developers directly. Crypto changes that, all these sorts of projects that are open source you can be compensated with tokens, and that actually means significantly more global productivity on projects like this, unless of course the government cracks down on them.

So it is important that open source projects be something that the government is willing to effectively facilitate, actually encourage. But obviously they have interest in money laundering. So this is going to be a very interesting question as it develops over the next few weeks and months. In the meantime, there have been people who have carpet bombed various public addresses with small amounts of Ethereum from Tornado Cash just to see what would happen if their wallets are, quote, “tainted”. Obviously this is going to develop as an ongoing story because no one is going to be able to block you or should be able to block your access to finance because somebody else gave you basically tainted money.

It’s more or less the same thing. If a bank robber stole, let’s say they stole $20 million from a bank vault and took 100,000 of them into $1 bills and gave them to 1000 individuals. And let’s just say for the sake of argument, the bank had put something on these bills to trace them, and now all of a sudden, a hundred thousand people have stolen property. Well, theoretically that’s illegal, but there’s not a person on the planet who would actually say that that’s something they should be prosecuted for. These are the sorts of issues that when it comes to digital, we’re going to have to wrestle with.

It will not be easy, but it is something that has to happen. In the meantime, we need a model that will encourage open source software. We need a model that will allow for privacy and internet. Consider just for one last second, that back in the early days of cryptography that those in the government who said, no, we can’t allow cryptography to be used, consider how secure transactions via credit card and internet are actually done with cryptography.

If people had been allowed to stop that from occurring, we would have no ecommerce today. Just consider that, not saying that that’s what’s going on here. This is obviously, definitely more of an edge case, but it is an important issue and one that we need to stay tuned to. So that’s more than enough time for today. Thank you very much and have a great weekend.

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