How to Protect Your Capital from Inflation, Crumbling Banks & the War on Crypto
How to protect your portfolio against regulatory instability and looming inflation.
This week, the Federal Reserve raised interest rates by 0.25% amid banking turmoil, marking the ninth increase in a year and placing rates between 4.75% and 5%. The Fed aimed to balance fighting inflation and addressing banking sector upheaval. Powell mentioned that despite plans for further rate increases, the ongoing banking instability was already akin to a"tightening" of the money supply which in itself is deflationary.
The decision, heavily scrutinized by investors and economists, has drawn criticism for potentially prolonging economic turmoil. Powell said strong economic data justified the hike, but acknowledged tighter credit conditions could further negatively impact households, businesses, and the economy. Fed officials anticipate slower growth and higher inflation, with interest rates peaking at 5.1% in 2023 before dropping to 4.3% in 2024. Powell reassured the public of the banking system's resilience, with the Fed ready to deploy all necessary tools to ensure its stability, but critics weren’t convinced.
Is The Banking Crisis Over?
Powell assured the public that the American banking system was sound and resilient. The Fed's post-meeting statement acknowledged the effects of problems in the banking sector and emphasized the need to strengthen the supervision and regulation of banks.
As rising rates threaten the banking sector's stability, Deutsche Bank emerges as the next potential casualty. Deutsche Bank's shares plummeted over 11% in Frankfurt as the cost to insure the lender against default soared.
Deutsche Bank, Germany's largest lender, wasn't the only bank affected—other European banks saw declines as well. The Euro Stoxx Banks Index dropped 5%, Germany's Commerzbank fell 5.9%, and France's BNP Paribas lost 5.8%.
These declines underscore global concerns about the banking sector's health. Although the European Central Bank (ECB) declared the sector resilient when raising interest rates, and the Federal Reserve echoed this sentiment, investors remain skeptical—especially after UBS's recent intervention to save Credit Suisse.
Is the Federal Reserve failing at its job?
The Federal Reserve's ability to successfully navigate the deflationary path is vital for maintaining the USD's status as the reserve currency and upholding America's global influence. While Bitcoin enthusiasts often promote the cryptocurrency, the US dollar's failure would have detrimental consequences for nearly everyone in the West.
China is poised to take a shot at global leadership, with Saudi Arabia considering accepting yuan instead of dollars for oil, and countries like Russia discontinuing dollar usage entirely.
Moreover, as investor David Sacks highlights on Twitter, a potential commercial real estate (CRE) crisis looms, given that the extensive CRE lending portfolio in the U.S. is predominantly backed by regional banks.
Crypto Sector is Under Regulatory Attack
Meanwhile, the U.S. Government is continuing a coordinated attack on the crypto sector.
As Nic Carter writes -
In the last month, regulatory attempts to kneecap the crypto industry in the US escalated dramatically:
The SEC announced a lawsuit against the crypto infrastructure company Paxos for issuing the BUSD stablecoin.
Crypto exchange Kraken settled with the SEC for offering a staking product.
SEC Chair Gensler openly labeled every cryptoasset other than Bitcoin a security.
The Senate Committee on Environment and Public Works held a hearing lambasting Bitcoin for its environmental footprint.
The Biden admin proposed a bill that singles out crypto miners for onerous tax treatment.
The NY Attorney General declared Ethereum, the second-largest cryptoasset, a security.
The SEC continued its anti-consumer protection efforts by doubling down on their attempts to block a spot Bitcoin ETF in court as well as trying to stop Binance US from buying the assets of the bankrupt Voyager.
The OCC let crypto bank Protego’s application for a national trust charter expire without approval.
The SEC sent Coinbase a Wells Notice, indicating its intent to bring enforcement actions against them for a variety of their business lines.
So how do we protect ourselves against current economic turbulence?
At present, inflation hovers around 6.0% (according to February's CPI report), significantly exceeding the Fed's 2% target despite multiple tightening measures. As a result, the Fed is likely to continue raising rates.
However, concerns persist that the current tightening approach via interest rate hikes may be superficial. To avert a financial crisis and prevent widespread bank runs, the government may be compelled to guarantee all bank deposits. This move would necessitate printing new money, which could paradoxically fuel inflation.
In 2020, when the government initiated money printing in response to COVID-19, Paul Tudor Jones penned a compelling investor letter, widely regarded as the rational case for hedging one's portfolio against inflation with Bitcoin. (Full Letter Here.)
In the letter, PTJ writes:
Below is a list of inflation hedges, rank-ordered in what we call the Inflation Race. While some of this list will track inflation in the classic sense, other instruments have been added to pick up the assets that will respond best to an acceleration in monetary growth not just consumer goods and service price inflation. So, it includes a host of assets that at one time or another have worked well in reflationary periods:
1. Gold – A 2,500 year store of value
2. The Yield Curve – Historically a great defense against stagflation or a central bank intent on inflating. For our purposes we use long 2-year notes and short 30-year bonds
3. NASDAQ 100 – The events of the last decade have shown that quantitative easing can rapidly leak into equity markets
4. Bitcoin – There is a lengthy discussion of this below
5. US cyclicals (long)/US defensive (short) – A pure goods’ inflation play historically
6. AUDJPY – Long commodity exporter and short commodity importer
7. TIPS (Treasury Inflation-Protected Securities) – Indexed to CPI to protect against inflation
8. GSCI (Goldman Sachs Commodity Index) – A basket of 24 commodities that reflects underlying global economic growth
9. JPM Emerging Market Currency Index – Historically when global growth is high and inflationary pressures are building, emerging market currencies have done quite well
At the end of the day, the best profit-maximizing strategy is to own the fastest horse. Just own the best performer and not get wed to an intellectual side that might leave you weeping in the performance dust because you thought you were smarter than the market. If I am forced to forecast, my bet is it will be Bitcoin.
PTJ then outlines 4 categories to analyze inflation hedges:
1. Purchasing Power – How does this asset retain its value over time?
2. Trustworthiness – How is it perceived through time and universally as a store of value?
3. Liquidity – How quickly can the asset be monetized into a transactional currency?
4. Portability – Can you geographically move this asset if you had to for an unforeseen reason?
His analysis leads him to identify Bitcoin as the top candidate due to its ability to retain purchasing power (as the best-performing institutional asset of all time), trustworthiness (backed by cryptography), liquidity (tradeable 24/7), and most importantly, portability.
The SVB bank run highlighted the power of digital finance, as VCs managed to bring down a bank using smartphones a matter of hours. In times of political upheaval, such as wars, pandemics, or governmental changes, digital portability is key. After all, no one is likely to carry gold or paper bonds across borders.
I have personally interviewed several refugees from Lebanon and Ukraine who credit Bitcoin as the reason they were able to flee conflict zones with anything at all.
How To Store Your Bitcoin Safely?
Balaji doesn't dismiss the possibility that the U.S. may attempt to ban Bitcoin if the dollar continues to face threats. After all, there is a historical precedent with gold.
Securing your Bitcoin in cold storage, like Ledger, is essential. Balaji also recommends considering relocation to crypto-friendly states like Texas and Wyoming or even the UAE for a more extreme approach.
As the U.S. government tightens restrictions on cryptocurrency access, new opportunities for digital asset investments are emerging quickly. For example, Fidelity recently introduced a fully regulated platform for retail users, featuring commission-free trading of Bitcoin and Ethereum.
The tug-of-war between citizens and regulators only proves that Bitcoin has captured enough attention and is finally enjoying its well-deserved spotlight.
This Week By the Numbers 📈
Following the rate announcement, stocks rose immediately, but the rally soon faded, and the S&P 500 index tumbled to a loss at the close of trading. The two-year Treasury yield, which is sensitive to changes in interest rates, fell sharply to around 4 percent. This suggests that investors think Wednesday's interest-rate move could be the Fed's last for a while, despite policymakers' projections for one more increase.
Top Stories 🗞️
Interpol says a man arrested in Montenegro is Kwon Do-hyeong, also known as Do Kwon, the disgraced founder of a collapsed crypto company who is wanted in South Korea and the United States on fraud and other charges. Kwon, a South Korean national, founded the blockchain platform behind the TerraUSD stablecoin and its sister coin Luna. Both coins lost their value in a matter of days in May 2022, wiping about $40 billion from the crypto market and setting off panic across the speculative sector. Kwon’s identity was confirmed through a fingerprint match. Kwon was believed to be in Serbia, where he was in hiding after leaving Singapore via Dubai.
The Securities and Exchange Commission issued crypto exchange Coinbase a Wells notice, warning the company that it identified potential violations of U.S. securities law. “Based on discussions with the Staff, the Company believes these potential enforcement actions would relate to aspects of the Company’s spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet,” Coinbase said in a regulatory filing. “The potential civil action may seek injunctive relief, disgorgement, and civil penalties.” The SEC has ramped up its enforcement of the crypto industry, bearing down on companies and projects that the regulator alleges were hawking unregistered securities. Reports first surfaced of an SEC probe into Coinbase in mid-2022. A Wells notice is typically one of the final steps before the SEC formally issues charges. “Although we don’t take this development lightly, we are very confident in the way we run our business – the same business we presented to the SEC in order for us to become a public company in 2021,” Coinbase Chief Legal Officer Paul Grewal.
Among the celebrities who settled with the SEC for their role in promoting TRX and BTT were actress Lindsay Lohan, YouTuber Jake Paul, Soulja Boy and singer Akon. The SEC has called for a jury trial against Tron founder Justin Sun for the “orchestration of the unregistered offer and sale, manipulative trading, and unlawful touting of crypto asset securities.” In a March 22 filing in U.S. District Court for the Southern District of New York, the SEC named Sun, the Tron Foundation, the BitTorrent Foundation and Rainberry over the offer and sale of Tron and BitTorrent (BTT), alleging the tokens were securities. The financial regulator further alleged Sun engaged in “manipulative wash trading,” driving drive public interest in the two tokens by enlisting the help of celebrities. Akon was also behind projects to create a “crypto city” in Senegal and Uganda.
A media and legal dispute between FTX’s new U.S. owners and regulators in the Bahamas has worsened as the two prepare to take their case to a full court hearing later this week. Each side is seeking to associate the other to the alleged underhand dealings of the crypto exchange's former CEO, Sam Bankman-Fried, who is awaiting trial for fraud in the U.S. after being extradited from the Bahamas and released on bail. Central to the dispute is who can have access to FTX’s internal systems, such as internal Slack messages and the QuickBooks accounting software. Bahamas liquidator Brian Simms says he needs the data to wind up his side of the company, as a local court ordered him to do in November. New FTX chief John Ray III says the request has “staggering overbreadth.”
The Central Bank of UAE launched the CBUAE Central Bank Digital Currency (CBDC) Strategy, one of the nine initiatives of the CBUAE’s Financial Infrastructure Transformation (FIT) Programme. CBDC is a risk-free form of digital money issued and guaranteed by the central bank and serves as a secure, cost-effective and efficient form of payment and a store of value. As part of the UAE's digital transformation, CBDC will address the challenges of domestic and cross-border payments, enhance financial inclusion and the move towards a cashless society. The first phase of the strategy, which is expected to complete over the next 12 to 15 months, comprises three major pillars, the soft launch of mBridge to facilitate real-value cross-border CBDC transactions for international trade settlement; proof-of-concept work for bilateral CBDC bridges with India; and proof-of-concept work for domestic CBDC issuance covering wholesale and retail usage.
Thank you for reading this week’s edition of the Myth of Money.🚀
Until next week,
About the Author: Tatiana Koffman
Hi there and thanks for reading! If you stumble upon my newsletter, you will notice that I write about money, economics, and technology. I hold a JD/MBA and spent my career in Capital Markets working across Mergers & Acquisitions, Derivatives, Venture Capital, and Cryptocurrencies. I write to make financial topics more accessible and create equal opportunity for the next generation of investors. I have personally invested in 20+ companies and funds (👉 my portfolio).