First Mover: Ethereum, DOGE on Own Journeys as Inflation Bets Fuel Bitcoin

Ethereum pauses at record high, bitcoin's rally stalls, DOGE Moons

Ether (ETH) prices were lower after surging 10% on Wednesday to a new record, climbing past $1,600 for the first time.

The recent gains appeared driven by signs of growth on the cryptocurrency's underlying Ethereum blockchain network, as well as interest from institutional investors starting to venture beyond bitcoin, the oldest and largest cryptocurrency.

“Ethereum is in such high demand because the asset is undergoing changes to make it even more decentralized and even more secure," said Simon Peters, an analyst for the trading platform eToro. "This is attracting buyers from both the institutional and retail world."

Bitcoin (BTC) appeared to lose momentum after its steady rise over the past week from $30,000 to about $38,000.

The price level of $38,190 proved tough to pierce, according to Matt Blom, head of sales and trading for the cryptocurrency exchange firm EQUOS.

"Once it hit that level, prices seem to struggle and actually just retraced lower, overtaken by massive sell orders on both spot and derivatives exchanges," Blom wrote. "Stagnation in the $34K-$38K range probably can't be avoided, and eager bulls might be cooled down by relentless sellers before BTC progresses higher again."

And dogecoin (DOGE)? The digital token launched in 2013 as little more than a joke is up about 50% in just the past two days, for a market value of more than $6 billion. Elon Musk, the electric-vehicle and private-spaceflight entrepreneur who's also reportedly the world's richest man, tweeted about it early Thursday. There was also heavy chatter about the token on social media forums, and probably a lot of speculation about the chatter.

In traditional markets, the Reddit-fueled whiplash in shares of "meme stocks" like GameStop (GME) appeared to subside, but the regulatory fallout might just be getting going: U.S. Congresswoman Maxine Waters, who heads the House of Representatives Financial Services Committee, said Wednesday she wants Reddit user Keith "DeepF***ingValue" Gill to testify at a Feb. 18 hearing along with executives from the retail trading platform Robinhood and the hedge funds Melvin Capital and Citadel.

Stocks were pointing higher while gold weakened 1.1% to $1,814 an ounce.

Visa's plans push crypto industry closer to point of no return

With 3.3 billion payment cards in use, Visa (V) is a household name. It's also one of the biggest players in the global financial infrastructure, processing some 188.1 billion transactions a year.

That's why it was such big news for the cryptocurrency industry on Wednesday when Visa announced it is piloting a new program that will allow banks to offer bitcoin services. Previously, Visa had been focused on helping crypto companies issue bank cards and has partnered with 35 crypto firms to date, but this is the first time the company has offered crypto services to banks.

The market impact? Edward Moya, senior market analyst for the brokerage Oanda, wrote Wednesday the news may have helped to push up bitcoin's price. "Bitcoin’s acceptance continues to improve," Moya wrote.

Another takeaway might be that Visa's splashy move could make it harder for U.S. lawmakers or regulators to thwart bitcoin's growth. Ray Dalio, of the giant hedge fund Bridgewater, and former Goldman Sachs CEO Lloyd Blankfein have suggested that authorities might look to crack down on the fast-emerging cryptocurrency if it really starts to take off.

Think of the operational, technological and marketing expenses involved in Visa's new project. The chances are low that a big, heavily regulated financial company would push forward without some assurances that there's no turning back from crypto. Or that Visa would make this move before heavy consultations with key corporate customers, including big credit-card lenders such as JPMorgan Chase, Citigroup and Bank of America.

The more investments established companies make in the business, the less likely authorities are to force write-offs.

Ether rally spreads beyond ether. Dogecoin has nothing to do with it.

It’s not just ether rallying to a new all-time high this week: Also rising were major digital tokens from the realm of decentralized finance, or DeFi, where entrepreneurs are building software-automated versions of banks and trading platforms atop decentralized, Internet-based networks, mainly the Ethereum blockchain, CoinDesk's Muyao Shen reported Wednesday.

DeFi tokens including price-feed-provider Chainlink's LINK, the decentralized exchange SushiSwap's SUSHI and the DeFi lender Aave's AAVE have logged new historic highs.

Prices for SUSHI, whose launch last year met with immediate controversy, have quadrupled already in 2021 amid bullish speculation over the future of DeFi. Based on data from the analysis firm Messari, that's the second-highest gain among digital assets with a market capitalization of at least $1 billion – after dogecoin (DOGE), which offers little more than meme-y yuks to its adoring fans. (Dogecoin has nearly sextupled this year, for those keeping track.)

Also getting a lift were prices for cryptocurrencies associated with blockchains that are competing with Ethereum to become dominant platforms for decentralized computer applications. Sometimes referred to colloquially as "Ethereum killers," they include Polkadot's DOT token and Solana's SOL.

“Ether made a significant push, and that is causing projects linked to the DeFi space" to rise, said Hunain Naseer, senior content editor at crypto exchange OKEX’s research unit, OKEx Insights.

One downside from the flurry of activity on the Ethereum blockchain might be elevated fees for sending transactions over the network, since the rate paid rises with increasing congestion. As reported by CoinDesk's Will Foxley, the average transaction fee early Thursday climbed above $20 for the first time, reflecting growing demand for tokens launched atop the Ethereum blockchain. Those include the dollar-linked digital tokens known as stablecoins as well as DeFi-related tokens.

A catalyst for further price action might come from the Chicago-based CME's launch of a new futures contract on ether next week. The listing should give more institutional investors a way to bet on the second-largest cryptocurrency after they took positions in bitcoin last year.

“The institutions are buying ether,” Ryan Sean Adams, founder of newsletter Bankless, wrote in a tweet. “And they’re just getting started.”

Bond traders are increasing their expectations for inflation

The Federal Reserve's mantra over the past year as the coronavirus wreaked a devastating toll on the economy is that there's no need to worry about inflation; in fact, as Chair Jerome Powell was quick to point out, recessions often lead to deflation because flagging consumer demand can prompt businesses to cut prices while elevated unemployment mutes upward pressures on wages.

Despite the assurances, big investors and corporations have piled into bitcoin over the past year, betting the cryptocurrency, whose supply is limited under the blockchain network's underlying programming, could serve as a hedge against loose monetary policy, aka near-zero interest rates and trillions of dollars of money printing.

But now there are signs another key market segment might be getting more concerned about inflation: bond traders.

The five-year "breakeven inflation rate," which can be derived by examining the yields on various U.S. government bonds, is now signaling a 2.2% average rate over the next five years. That's the highest in eight years, and it's also above the Fed's long-term target of 2%. What's more, the figure appears to be rising fast: As recently as September, the breakeven inflation rate was below 1.5%.

As noted this week by First Mover, economists are already starting to sketch out how fast the economy might heat up as more people get vaccines and consumers start to get their confidence back. Bank of America estimates there's some $1.6 trillion of excess savings on consumer balance sheets, which could quickly translate to pent-up spending demand. And the economy has yet to feel the impact of the stimulus package now being debated in U.S. Congress, likely to total at least $1 trillion.

The national employment situation will become clearer on Friday when the U.S. Labor Department's Bureau of Labor Statistics releases its jobs report for the month of January. On Wednesday, Pantheon, a macroeconomic forecasting firm, revised its projection to an increase of 200,000; previously the firm was expecting a decline of 100,000 in the nonfarm payrolls. The average expectation of Wall Street economists is for an increase of 100,000, according to Bloomberg. (U.S. jobless claims were lower than expected last week, at 779,000, according to a report early Thursday.)

"The reflationary trends we are seeing in markets are likely to continue throughout 2021," according to a report Wednesday from the Wells Fargo Investment Institute.

Bitcoin Watch: Increasing signs of demand from institutional investors

Although bitcoin has failed to sustainably push past the psychologically important $40,000 price level, signs continue to mount of growing interest in the cryptocurrency from big institutional buyers.

• NYDIG, a cryptocurrency asset manager, could see its bitcoin investments more than quadruple this year to about $25 billion, CEO Ross Stevens said this week.
• The Chicago-based futures exchange CME's chief economist said Tuesday that "gold appears to have an emerging competitor in bitcoin" for use as an inflation hedge.
• Dan Tapiero, an investor and entrepreneur, is launching a $200 million fund called 10T to invest in cryptocurrency startups.
• MicroStrategy (MSTR) CEO Michael Saylor, who has become one of bitcoin's most prominent boosters, said at his own conference this week there's a "macroeconomic wind blowing" that's "gonna impact $400 trillion of capital." and "this is where bitcoin comes in."