We mentioned at the end of last week’s letter that the price of bitcoin was mainly driven by global macroeconomic factors, and that the next piece of data that could potentially affect its direction would be the US Consumer Price Index for June. That statistic came out this morning, showing a 9.1% annualized increase in inflation, a rate even higher than the already pessimistic forecast of 8.8%. As has been the case since inflation has been rising at a breakneck pace, this piece of data has created downward pressure on all markets, including cryptocurrencies.

The Federal Reserve’s monetary policy committee is scheduled to meet on July 26-27 to discuss further monetary tightening. The new inflation spike could give the central bank the green light for another aggressive rate hike.  All this while the Bank of Canada itself has just announced a hundred points hike. The recent drop in energy prices, however, could suggest that inflation has peaked.

Troubled crypto lending company Celsius continues to be in the news. According to a new report from blockchain analytics firm Arkham Intelligence, the company allegedly used $534 million worth of customer funds to execute “high-risk leveraged crypto trading strategies” through a third-party asset manager. A lawsuit by KeyFi’s founder against the company also paints a completely surreal picture of Celsius’ operations. Jason Stone alleges that hundreds of millions were managed through his firm without any written agreement and in a completely amateurish manner, with no structure to protect the funds. The lawsuit also alleges that Celsius used customer deposits to buy the CEL token with BTC to manipulate the markets, a practice that is obviously highly illegal. Tether, meanwhile, announced to have liquidated a bitcoin loan to Celsius. The stablecoin issuer said the loan was over-collateralized and was liquidated in a way that minimized the impact on the market.

Vermont became the sixth U.S. state to open an investigation against Celsius. The state’s financial regulator alleged that the company violated state tax laws by offering customers high-interest cryptocurrency accounts and unethically using customer funds to invest in illiquid products. The latter claims that Celsius is now “deeply insolvent”. “Celsius deployed customer assets in a variety of risky and illiquid investments, trading, and lending activities,” the DFR said in a statement. “Celsius compounded these risks by using customer assets as collateral for additional borrowing to pursue leveraged investment strategies,” the statement added.

It’s not much better for investors in the former Three Arrows Capital fund. In April, the crypto hedge fund had assets under management totaling $3 billion. In July, it filed for bankruptcy. A New York bankruptcy judge on Tuesday gave the liquidators full control of Three Arrows Capital’s U.S. assets and authorized them to issue subpoenas to co-founders Su Zhu, Kyle Davies and other parties with information about the Singapore-based crypto hedge fund. The order comes after liquidation attorney Adam Goldberg filed a request Friday to block the sale or transfer of 3AC’s assets. Su Zhu, co-founder of 3AC, broke a month-long silence yesterday by posting screenshots on Twitter of a recent email sent by Advocatus Legal LLP, the law firm acting on behalf of 3AC, to the company’s liquidators’ legal representatives. One of the letters made public accuses some of 3AC’s liquidators of “baiting” Su and Kyle Davies. “Unfortunately, our good faith in cooperating with the liquidators was met with baiting,” Su Zhu tweeted.

Exchange platform CoinFLEX this week detailed its strategy to combat the company’s ongoing liquidity crisis, which has prevented users from withdrawing funds for nearly three weeks. In a blog post on Saturday, co-founders Sudhu Arumugam and Mark Lamb announced that the company had initiated arbitration proceedings in Hong Kong to recover $84 million in losses from a “large individual customer”, which late last month CoinFLEX said was none other than Roger Ver. Arumugam and Lamb said they expect a verdict in the arbitration case to take up to 12 months. Because it is a personal liability, both men are optimistic that the case will result in a substantial recovery for CoinFLEX. “The individual is personally liable to pay the full amount,” Arumugam and Lamb wrote, “so our lawyers are very confident that we can enforce the award against him.”

South Africa’s central bank will regulate cryptocurrencies as financial assets, and new laws are expected in the next 12 months. Cryptocurrency use in South Africa is quite popular, with about 13% of the population holding some form of it, according to research from global exchange Luno. The South African National Treasury budget released in February 2022 officially introduced the move to declare cryptos as financial products. The state also plans to strengthen the monitoring and reporting of cryptocurrency transactions to comply with exchange regulations in the country. South African Reserve Bank Deputy Governor Kuben Chetty today confirmed that new legislation will be introduced within the next 12 months.

In new correspondence dated July 6, attorney Nobuaki Kobayashi, who was appointed as a trustee in the Mt. Gox rehabilitation process, confirmed that he is “preparing to make refunds” to account holders. More than eight years after the implosion of Mt. Gox, it appears that those who lost money are about to receive BTC. The event raises concerns about its impact on the market. As the distribution likely approaches, this will be a scenario to watch closely.

Long-term bitcoin investors have preserved their holdings in recent weeks, even as speculators have fled the market. At least that’s the conclusion of analyst David Duon, head of institutional research at Coinbase. “Recent BTC sales have been almost exclusively by short-term speculators.” The persistence of long-term investors is a sign of confidence in bitcoin’s ability to survive in what appears to be a Federal Reserve-induced bear market and thrive as an alternative and one day become a true digital gold, something the asset is struggling to do today.

Rivemont Investments, manager of the Rivemont Crypto Fund.

The presented information is as of July 13th, 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.