Notes 2/8: Bitcoin Price, MakerDAO

Bitcoin price continues to be at the mercy of Fed pronouncements.

It slid to a three-week low, below $22,000, yesterday after Federal Reserve Chairman Jerome Powell suggested during a Congressional testimony that they would consider a half percentage hike in interest rates at its next meeting. It jumped above that figure this morning after Powell stressed that a decision about the extent of the hike had not been made yet.

During its last meeting, the agency had hiked interest rates by a quarter percent, leading to speculation that it was tamping down its previously aggressive stance towards inflation. High interest rates decrease liquidity for crypto by dissuading investors from putting their money into risky assets.

After staging a rally last month, the top cryptocurrency by market capitalization had mostly remained range bound for most of this month. Powell’s remarks today are a relief to bitcoin bulls, who have already been hammered by a steep decline in the cryptocurrency’s price from last year.

A Complicated Problem  

While a moderation in interest rate hikes is good news for risky assets, the complicated nature of crypto’s problems means that prices for tokens are still not out of the woods yet. And it is open to question whether they will survive the current crypto winter.

A slew of enforcement actions by regulatory agencies has dented confidence and exposed the ecosystem’s rickety plumbing. Meanwhile, the interconnected dealings within crypto, once a clever strategy to escape regulation and mint profits, have brought down a house of cards and sent token prices tumbling. Regulatory action has also cleaved earlier partnerships: crypto players are now pitted against each other when they previously benefitted from a mutual dependence.

“Taking Great Care”

In yesterday’s testimony, Powell said that he saw “a lot of turmoil” in crypto. To that extent, the agency is “making sure that the regulated financial institutions that we supervise and regulate are careful and taking great care in the ways they engage with the whole crypto space.”

That care has translated to restrictions for banks regulated by the agency in their dealings with cryptocurrencies, a strategy that the crypto community has dubbed “Operation Chokepoint 2.0.” According to them, it is designed to starve and, subsequently, kill crypto by denying access to mainstream financial services and enforcing regulatory action.

That may or may not be the case.

But the Fed’s caution towards cryptocurrencies has certainly affected liquidity in the ecosystem. The net result is an outflow of bitcoin whales from its ecosystem. According to blockchain analytics firm Glassnode, the number of addresses holding more than 1,000 BTC in their wallets declined to its lowest level last month. This means that accredited investors and institutions – because they are the only ones who can afford to hold such a large amount of bitcoin – are exiting its ecosystem and depleting it of liquidity.     

MakerDAO Drama

The drama at MakerDAO never stops.

A co-founder at MakerDAO, which claims to adhere to decentralized governance, further consolidated his hold on decision making for the protocol by selling off his stash of LDO, a governance token of Lido – another supposedly decentralized platform – for MKR, the governance token for MakerDAO.

In keeping with the incest that pervades crypto, Rune Christensen co-founded MakerDAO and invested in Lido. His sale is an opportunistic profit making opportunity. With an upcoming deadline for withdrawal of staked tokens from Ethereum’s blockchain, Lido’s future is uncertain and its governance token, which has rallied since the beginning of this year, might not be worth much after the event.

A Decentralized Transaction

On the face of it, the transaction is an exchange of two worthless tokens. But its implications are important within the confined world of cryptocurrencies. MakerDAO, as I mentioned earlier, claims to be a decentralized autonomous organization (DAO), a democratized style of corporate governance.

DAOs are supposed to work for the little guy, the average investor with small holdings who are often overlooked in important company decisions. Except the little guy, in this case, is a big co-founder, who has gotten into brawls earlier and is amassing tokens to further tighten his grip on the system.

Treasury Securities for Your DAI

DAI stablecoin is also an important component of the decentralized finance (DeFi) ecosystem. It was the first stablecoin with algorithmic fundamentals, wherein it attempted to collateralize its stablecoin with crypto tokens.

Not surprisingly, given the inherent instability of cryptocurrencies, that experiment was unsuccessful, and DAI lost its peg on several occasions. It voted yesterday to increase its Treasury holdings, meaning that it is planning to move towards a fiat-backed transformation.

But being backed by treasuries is no guarantee that the stablecoin will not lose its peg as we have seen in the case of Tether and USDC.

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