After a price pullback last week in the vein of the obvious uncertainty affecting all markets (except possibly commodities, which are benefiting), crypto investors woke up to bitcoin back north of $40,000 this morning. What explains this rally? Aside from the obvious correlation still present with the U.S. stock market, it’s the U.S. executive order on cryptocurrencies that is getting today’s attention.

The rise did indeed occur in tandem with Treasury Secretary Janet L. Yellen’s premature – by mistake – release of planned comments related to the executive order late last night. Gemini’s Cameron Winklevoss said at the time that, based on Yellen’s remarks, the impending cryptocurrency order was positive and supportive of responsible innovation. The document was quickly removed from the web, but the reaction of the markets, however, was not long in coming, as seen after 10pm last night.

“A presidential executive order on cryptocurrencies would support responsible innovation by coordinating U.S. policy across agencies,” Yellen said in the statement. “Under the executive order, Treasury will partner with interagency colleagues to produce a report on the future of currency and payment systems.”

The executive order has since officially been issued early this morning. Let’s focus on it.

The document essentially represents a request to the various federal agencies to coordinate their approach related to the emerging sector. These same agencies will evaluate their approach according to six defined priorities, namely consumer protection, financial stability, unlawful use, [U.S.] leadership in the global financial sector, financial inclusion and responsible innovation. The order essentially calls for interagency communication, but does not specify any administrative position vis-à-vis the industry. No new regulations are included in the document.

The tone of the document is deliberately neutral. In commenting on the document, a government administrator shared with reporters that the growth of the cryptocurrency sector could threaten the U.S. financial system, national security or business stability. Without “sufficient oversight,” criminals can use cryptocurrencies to launder funds or evade sanctions. “At the same time, however, digital assets can also provide opportunities for American innovation and competitiveness and promote financial inclusion,” the official said. “Innovation is central to America’s story and our economy, generating jobs and opportunities, creating and building new industries, and sustaining our global competitive edge and leadership.”

Part of the order calls for the U.S. Treasury Department to prepare a report on “the future of money and payment systems.” The interagency report will analyze the impact of cryptocurrencies on economic and financial growth, financial inclusion, national security and “the extent to which technological innovation can influence that future.” The report is also expected to answer the previous question of how the current financial system is or is not meeting the needs of consumers.

Finally, the executive order will also ask the agencies to evaluate how the U.S. could issue a central bank digital currency, “if issuance is deemed to be in the national interest.”

In short, while many investors feared a demand for fierce regulation or a defensive government stance towards the sector, this neutrality with some openings exceeds market expectations, spurring the surge of the past few hours.

It was particularly interesting to note that it was the anonymity-based cryptocurrencies that led the surge, climbing even before bitcoin followed. Monero and ZCash in particular have seen double-digit increases. Both use a cryptographic technique called zero-knowledge proof, which allows users to make transactions without specifying any details about the transaction other than that it is legitimate. The Russian context where the national currency is crashing and cross-border exchanges are cut off, as well as the discussions of regulatory framework on our side of the Pacific, certainly play in this sense.

Last week, we emphasized the anti-censorship nature of cryptocurrencies. We will not repeat our analysis regarding the conflict between Russia and Ukraine, but let’s point out that the Great Bear persists and signs, preventing from now on the withdrawals of foreign currencies to the ruble (at least in substantial amounts) until September 9^th. In short, not only does the Russian national currency plunge, but citizens are no longer allowed to convert their wealth into a more stable fiat currency. How can we not see the appeal of bitcoin, with its stable, unalterable, unchanging and known monetary policy under such a context?

Many were startled when the regulatory guidelines draft, similar to those in the United States, but built by the European Union instead, suggested banning bitcoin on environmental grounds. The adoption of MiCA was as a matter of fact delayed in order to rework the language regarding a possible ban. The bill has just been reintroduced and, to the relief of investors, the entire passage relating to such a ban has been removed. The lawmaker suggested that it could be “misinterpreted & understood as a [proof-of-work] ban.” Ultimately, the entire passage was deleted, though concerns remain in some corners about the environmental impact of Bitcoin, which purposely uses high amounts of electricity to secure the network. What remains of the bill, originally proposed in September 2020, is still a heavy regulatory package covering stablecoins and cryptocurrency services. A vote is scheduled on the bill on March 14th.

According to a Credit Suisse strategist, we are witnessing the birth of a new world monetary order. “Money” will never be the same after the war in Ukraine, writes Zoltan Pozsar, and bitcoin could be a beneficiary. Pozsar wrote that the U.S. is going through a commodity crisis that is giving rise to a new world monetary order that will eventually weaken the current dollar-based system and lead to higher inflation in the West. “This crisis is unlike anything we have seen since President Nixon removed the U.S. dollar from the gold standard in 1971.” Pozsar concludes his note with a comment on bitcoin. He expects it to benefit, but only “if it still exists.” This is an existential concern that we certainly do not share.

A mathematical miracle is not so easily discarded. These are the words used by Apple co-founder Steve Wozniak in a recent interview to describe the mechanics behind bitcoin. Comparing it to all other cryptocurrencies, he says that BTC is “the only one that’s pure-gold mathematics”. Wozniak has long been an advocate of bitcoin. Last year, he described bitcoin as a “mathematical miracle,” hailing its “mathematical purity” and the fact that it “cannot be easily changed by humans controlling it,” unlike the U.S. dollar.

Bitcoin remains in a consolidation channel from which we hope to break out to the upside in order to confirm the technical picture of the double bottom of the past few weeks. The overnight rise was spurred by $95M in margin calls from short positions. Despite the decline week to week, the market is sending encouraging signals, having held relatively steady in the face of the drop observed on the stock market. However, there are multiple macroeconomic factors that call for caution. The war between Russia and Ukraine and inflation are the main ones. The US inflation data tomorrow morning will be interesting to watch. As long as bitcoin is more correlated to the US stock market than to gold, uncertainty will be high. We hope that this decoupling of risk asset to digital gold will continue in a global context, which, it must be said, gives bitcoin every chance to finally assert itself.

The fund remains fully invested, mostly in bitcoin. Last night’s rise will be reflected in next week’s results for investors, with the fund’s net value is calculated late each Tuesday afternoon.

Rivemont Investments, manager of the Rivemont Crypto Fund.

The presented information is as of March 9th, 2022, unless otherwise indicated and is provided for information purposes only. The information comes from sources that we believe are reliable, but not guaranteed. This statement does not provide financial, legal or tax advice. Rivemont Investments are not responsible for any errors or omissions in the information or for any loss or damage suffered.