Email of the day on velocity of money and inflation

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Comments of the Day

12 November 2020

 

Video commentary for November 11th 2020

 

Eoin Treacy’s view

A link to today’s video commentary is posted in the Subscriber’s Area. 

Some of the topics discussed include: China tech sector hit by more regulation, Wall Street steady, dollar steady, gold eases back, bitcoin firm, treasury yields testing 1%

 

Email of the day on velocity of money and inflation

Can you please help me understand the attached article that says prices are not related to the velocity of money.  It even includes a Fed chart (page 5) to support its case. 

 

Eoin Treacy’s view

Thank you for this question which is very relevant to the current market environment and may be of interest to the Collective. Here is a section from the article:

GDP can be thought of as Prices * Transactions or (P * T).

This leads us to: V = (P * T) / M2

Observations
Velocity can rise if prices fall if the number of transactions goes up.
Velocity can rise if prices stay the same and M2 goes down.
Velocity can fall if prices rise if M2 goes up
Velocity can fall if prices rise and the number of transactions drops.

Key Points
Prices can rise, fall, or stay the same, no matter what velocity does.
Velocity does not determine prices.
Velocity does not determine or even influence anything at all.

Velocity of Money is reported in arrears with a quarterly lag so whatever data we look at is six months out of date. I agree velocity of money does not itself lead to higher inflation. However rather than think about how velocity of money can rise or fall in the abstract let’s think about what it has been trending lower since 1997.

 

Email of the day on hydrogen investments

Given hydrogen powered energy is an emerging trend I would be grateful! Mr. Treacy could mention the name of related ETFs or any other tradable security that would provide exposure to this trend.

 

Eoin Treacy’s view

Thank you for this question which may be of interest to the Collective. I’ve been anticipating a new use case for natural gas since the price collapsed with the introduction of unconventional supply. It was simply inevitable that with so much supply and low prices for a vital commodity that someone would find something to do with it. The hydrogen market is almost completely dependent on supply from natural gas at present. Efforts to produce green hydrogen are underway but are uncertain and will take years to build.

 

Email of the day on investing in Ethereum

As you are an investor in Ethereum (it also comprises 35% of our fund), I’ve attached my recent Fact Sheet comments fyi :

Ethereum announced on 4 November (after a lengthy period of research, development and extensive testing) the imminent launch of the first phase of the major ETH2 upgrade. Ethereum, like Bitcoin, currently uses Proof Of Work (POW) to secure its blockchain while ETH2 will use Proof Of Stake (POS). POS requires that sufficient quantities of ETH are deposited on the blockchain and that these depositors also run a validator/node to process transactions and reach consensus on their validity.

Depositors/validators are rewarded for the risk they take and the service they perform by receiving additional ETH (the total quantity of ETH issued is determined by a sliding scale depending on the total amount staked). Should depositors act with malign intent they stand to lose their ETH, while tardy maintenance or excessive downtime will result in depositors/validators being penalised. Should the minimum threshold of 524288 ETH and 16384 validators be reached on 24 November, the ETH2 Beacon chain will go live on 1 December (if not then 7 days after the thresholds are reached). Running a validator is not without its technical challenges, and any ETH staked cannot be withdrawn until the current ETH1 chain becomes a shard of the ETH2 chain. That could take anything from one to two years from now. We are potentially keen to stake some of our ETH, but are proceeding cautiously and would likely use a third party to run the validators on our behalf.

Vitalik Buterin, the founder of Ethereum, recently posted a blog post https://vitalik.ca/general/2020/11/06/pos2020.html on why the new POS will be more decentralised, more secure and far more resistant to attack than the current POW used by ETH and Bitcoin. It is worth remembering that the majority of Bitcoin’s mining is in China – and ANT Financial’s IPO travails demonstrate yet again the extent that power is centralised in China. The next priorities for Ethereum are to release Sharding on ETH2 (which will increase the potential transactions per second to 100k) sometime in the next year as well as Ethereum Improvement Proposal (EIP) 1559 which will substantially improve Ethereum’s fee model – including burning the bulk of the fees generated on the system. EIP1559 will likely have the effect of reducing Ethereum’s net issuance (after ETH1 becomes a shard of ETH2) to negative.

On a one to two year horizon, Ethereum therefore offers the following advantages relative to Bitcoin :1) greater security and resistance to attack, 2) more decentralised (an average consumer laptop can run many nodes easily vs the large server farms needed to mine Bitcoin ), 3) lower inflation/issuance, 4) vastly higher scalability (100k transactions per second vs 7), 5) full programmability from inception (while Bitcoin’s programmability is limited), 6) the ability to earn a yield on your ETH through staking (which will become very easy in time and with no lockups), 7) the centre of the DEFI (Decentralised Finance) ecosystem, which it is already, and 8) use vastly less electricity (Bitcoin’s POW uses as much as say New Zealand).

I am however also very bullish on Bitcoin….the bull case of which is becoming increasingly well known (for example https://winklevosscapital.com/the-case-for-500k-bitcoin/). The Ethereum bull market has barely started in my opinion.

I can send the full Fact Sheet if you are interested.

 

Eoin Treacy’s view

Thank you for this detailed email which summarised a great deal of information relating to the evolution of the Ethereum network. I agree that the transition to the proof stake rather than proof of work model is a significant catalyst for investor interest. I’m sure subscribers would be gratified to see your fact sheet.

 

Eoin’s personal portfolio – new trading position opened October 21st

 

Eoin Treacy’s view

One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change.

 

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