FIVE MINUTE FINANCE: CELSIUS MELTDOWN, ECONOMISTS SEE RECESSION, BTC BOTTOM CLOSE?
The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.
Let’s see what’s going on this week:
- Fed’s Aggressive 75 bps Raise: Recession?
- Technical Data Suggests a BTC Bottom is Close
- Celsius in Latest DeFi Meltdown Explained
- Deja Vu: TRON’s USDD Stablecoin Destabilized
- Bill Gates, Former Tech Visionary, on Crypto and NFTs
Yellen Says a Recession “Not Likely”, but Economists Disagree
- 68% of Economists Believe US Will Enter a Recession by 2023: FT Survey (link)
- BlackRock Plans for Markets to Dip More as 0.75% Rate Hike Seems Evident (link)
Keeping Up With Inflation-Stopping Appearances
Aggressive inflation must be countered with aggressive interest rate hikes. That’s the decision the Federal Reserve arrived at this Wednesday, at no one’s surprise. In a continuing effort to undo its money printing spree, the Fed raised the interest rate by 0.75%, the highest increase since 1994.
However, inflation is as high as it was in 1981, not 1994. For this reason, the Fed aims to persist in further hikes: reaching 3.4% by 2022-end and 3.8% by 2023. This may seem high compared to the near-zero interest rates enjoyed by the many companies who sought cheap capital over the last two years, or the new home owners who took out a mortgage.
Yet, the Fed’s targeted rate isn’t aligned with previous attempts to use interest rates to battle inflation:
In 1980, a rate of 19% (green) was needed to vanquish 14% inflation (red). Likewise, in 1990, an 8.5% rate was needed to bring down 6% inflation. Image credit: fred.stlouisfed.org
And this is just part of the reason why so many believe a recession is around the corner. We’re witnessing reduced economic activity, hiring freezes along with job cuts, and reduced spending and borrowing.
In the middle of this mess, Treasury Secretary Yellen continues to raise eyebrows with bizarre statements. Less than two weeks ago, she stated to NYT that “There’s nothing to suggest a recession is in the works”.
Ben Bernanke said something similar in March 2007:
We all remember how that turned out.
According to a Financial Times survey, 68% economists now see a recession on the horizon, starting in 2023. On the upside, a recession is a way to douse the flames of inflation, the so-called hard landing.
After all, if economic activity is reduced on the demand side of the equation, the supply prices have to be deflated because of the surplus. The problem is, this leads to another wave of wealth transfusion. For instance, raised interest rates elevate mortgage rates, which could lead to millions of individuals priced out of the mortgage market.
Interest rate hike is poised to lessen the housing market demand by 36%. Image credit:
Likewise, people get indebted to simply survive, as the $1.1 trillion credit card debt surge alone demonstrates.
But remember — Yellen says there’s nothing to suggest a recession here.
Bitcoin’s Bottom — the Pressing Question of the Decade
- MicroStrategy (MSTR) Down 24% as Bitcoin Dips Below $23,000 (link)
- El Salvador’s FM Says $40M BTC Loss Not Real as They Haven’t Sold Any Coins (link)
Bitcoin Oversold, but the Power of Fear Is Unpredictable
Michael Saylor, the head of MicroStrategy business intelligence firm, is known to use poetic language to paint a certain picture of Bitcoin. His company is one of the few corporate actors that went all in on Bitcoin, going so far as to use BTC as debt collateral to, well, buy even more BTC.
Overall, Saylor’s firm accumulated 129,218 bitcoins at an average price of ~$30k, in addition to getting a $205 million BTC-backed loan three months ago. All of this means that, out of a $4 billion Bitcoin plunge, MicroStrategy is now $1 billion in loss, as Bitcoin hovers around $20k.
With these strong headwinds, Saylor is as adamant as ever. He dismissed margin call concerns, assuring that MicroStrategy is 10x overcollateralized on the BTC-backed loan, so the price would have to go under $3,500 before more debt would have to be taken. This week, he further emphasized how Bitcoin’s fundamentals remain unchanged:
“Bitcoin is the only digital scarcity, backed by the world’s most secure computer network, and meets the fundamental need everyone has for a long term Store of Value.”
One could certainly see truth in that statement when contrasted against the Fed’s manipulation of the money supply, which constantly scrambles market signals. Yet it’s easy to see how Bitcoin’s recent performance is attracting negative press, as BTC is approaching potentially its worst quarterly performance in history.
Bitcoin is approaching a -50% loss in Q2 2022. Image credit: skew
With that said, at the $20k — $21k price range, less than half of BTC holders remain in the profit range.
Analysis of the Relative Strength Index (RSI) clearly suggets Bitcoin is as oversold as it ever was, alongside Ethereum. This implies Bitcoin is approaching a bottom. But — Bitcoin’s current price action is largely influenced by macro economic factors at the moment — not fundamentals or technical data related to Bitcoin itself.
The rest is a matter of will and perspective. Bitcoin was conceived in the US’s last recession. So how will BTC perform in its first recession? We may soon find out.
Bear Market Tears Up Mutually Leveraged Staking
- Three Arrows Capital’s Insolvency Rumors Sparks More Terra-Like Meltdown Fears (link)
- Lido’s Staked Ether (StETH) Trading at 6% Discount as ETH Down 77% From ATH (link)
Wishful Thinking, Greed, or Incompetence?
The current market crash will be referenced for years to come. Although the Fed’s monetary policy is the primary trigger, the market stress it caused exposed DeFi’s porous underbelly. For a decade since Bitcoin launched in 2009, the crypto market was fairly simple (compared to today). There were cryptocurrencies, speculation, and spot-trading.
At the turn of the new decade, this shifted to Ethereum’s dApps that provided lending and borrowing — birthing the derivatives market. At the core of the new DeFi ecosystem is staking — a process which is (superficially) equivalent to depositing money into a high-yield savings account, but with smart contracts lending out those funds to other borrowers as opposed to banks.
Of course, DeFi staking offered drastically higher rates than in traditional banks, 0.06% vs. 8% APY and above. This was both an incentive and a trap. dApps began competing with each other by offering unsustainably high yields to grow way too fast. Terra offered a 19.5% yield before its meltdown.
Likewise, Celsius offered double-digit yields, prior to suspending all account trades to preserve its “withdrawal obligations”. So, what happened?
It turns out, Michael Burry of the Big Short was onto something when he tweeted last year:
“When crypto falls from trillions, or meme stocks fall from tens of billions, #MainStreet losses will approach the size of countries(…). If you don’t know how much leverage is in crypto, you don’t know anything about crypto”
What he said there exactly one year ago is a reference to inter-dependent staking. For lending platforms to generate attractive yield percentages, they have to pay up those yields from somewhere. Celsius relied on stETH — staked Ethereum — to do the job.
Celsius Network is the largest stETH stakeholder. Image credit: Twitter
On top of that, DeFi lending platforms stake between each other. From Celsius to Terra and vice-versa. Then came Terra’s trouble with maintaining its algorithmic stablecoin peg. No more gains from Terra. The +$44 billion market fallout + the impact to crypto from a large tech stock selloff contributed a suppression of Ethereum itself, lowering ETH by 77% from its ATH. Say goodbye to stETH gains, as it even lost its peg to Ethereum by 6%.
Crypto hedge fund 3AC relied both on Terra and stETH for investor returns, now facing a $400 million wipeout. This seems more likely by the minute as the fund failed to meet lender margin calls. In turn, this represents another suppressive selloff force. Simply put, DeFi platforms relied on high-yielding gains to spur growth, but failed to take measures to shore up their reserves in case of extreme market distress.
In light of such an environment, some have asked if much of crypto revolves around Ponzi schemes. After all, don’t these platforms depend on endless user growth, so that the pyramid’s bottom keeps expanding? That would be the wrong conclusion to draw from the chaos.
We’re witnessing DeFi’s growing pains (and they’re very painful). DeFi moved fast and broke things — exploiting greed, at the expense of liquidity providers.
It’s certainly the end of DeFi as we know it. But that doesn’t mean DeFi can’t bounce back in a more realistic manner which still offers better opportunities than available in TradFi.
TRON’s Stablecoin Troubles
- TRON DAO Reserve Deploys $2B to Protect Stablecoin as Market Crashes (link)
- TRON’s USDD Stablecoin Still Below $1 Despite $2B Cash Injection (link)
Deja Vu: TRX Instead of LUNA, USDD Instead of UST
Could it be? Another algorithmic stablecoin fail so soon after Terra’s UST collapse? If you’ve been following 5MF for the last month, you wouldn’t be surprised one bit. Similar to the inception of Terra, the TRON network launched as a smart contract blockchain alternative to Ethereum.
And just like Terra, TRON launched its own algorithmic stablecoin USDD, overcollateralized by its own TRX token. TRON founder Justin Sun said:
“USDD is different. For one thing, the stability of USDD is backed by its peg to TRX, which absorbs short-term volatility; for another, the highly liquid billion-dollar reserve assets from the TRON DAO Reserve will swiftly stabilize the price of USDD against extreme industry-wide volatility.”
You guessed it, a nearly identical scenario unfolded. Extreme market duress toppled the stablecoin’s peg. TRON tried to unsuccessfully defend the USDD peg with $2 billion more reserves. Although the stablecoin didn’t crumble nearly as much as Terra’s UST, its stability doesn’t inspire confidence for future use.
USDD’s stability has wobbled, causing concern and a rush to intervention. Image credit: Trading View.
For now, investors are sticking to the classically pegged stablecoins backed by 100% redeemable cash reserves. They may be controlled by companies, which erodes the “De” in DeFi, but they continue to inspire confidence.
Managed by Circle and Coinbase, USDC is one of the most regulated stablecoins, at $54 billion in circulation. Interestingly, this is now much higher than the TVL of the entire DeFi market at $38.7 billion.
Yesterday, to further cement its stability track record, Circle announced the launch of Euro Coin (EUROC) for the Euro-zone. EUROC too will be fully reserved, but with euros instead of dollars. Silvergate Bank will be the major custodian, the same FDIC-insured bank Saylor used for Microstrategy’s $205 million BTC-backed loan.
It seems that banks will stick with digital assets for a while longer. Perhaps, lessons will be learned for the next round of algorithmic stablecoins. In the meantime, investors prefer certainty over unstable innovation.
Bill Gates Calls Out Both Cryptos and NFTs
- Bill Gates Says Crypto and NFTs Are “100% Based on Greater Fool Theory” (link)
The Creator of Internet Explorer Not Stepping on the Internet’s Next Evolutionary Ladder
Bill Gates is widely known as a visionary. There’s a classic YouTube clip of Gates on the David Letterman show in 1995.
Letterman asks Gates about the internet, and Gates describes it as “the next big thing”, explaining a few of its (then) capabilities.
Letterman says he heard how a baseball game could be broadcasted on a computer. His response to hearing such news was, “does ‘radio’ ring a bell”?
The crowd laughed, as Letterman went on to poke fun of the internet and computers in a number of other ways.
Gates saw and understood something then that most couldn’t even imagine.
When it comes to crypto and NFTs, Gates now says “I’m not long or short any of those things”. This Tuesday at TechCrunch talk, Bill Gates further revealed that cryptos and NFTs alike sit on top of the “greater fool theory”.
Yes Bill — we get it. NFTs got a little carried away. We can all see that.
But in a world that’s becoming increasingly digital, with no signs of slowing down, NFTs can offer ownership tied to digital scarcity and uniqueness. Such features aren’t otherwise available right now.
With tech giants such as Meta (Facebook) spending billions and billions of dollars to build a Metaverse, our digital world is poised to change. The same world that Gates helped create.
It’s hard to see this digital world evolve without somehow offering the benefits that digital assets can provide.
Tweets of the Week
More than 90% of stocks in the S&P 500 declined today.
It’s the 5th time in the past 7 days.
Since 1928, there have been exactly 0 precedents. This is the most overwhelming display of selling in history.
One of the LARGEST Crypto Venture Capital firms:
Three Arrows Capital.
They’re becoming insolvent.
With potentially $18b under management, this could be catastrophic for Crypto.
Here’s a timeline of what’s going on and the possible consequences:
Current #BTC sell-side volume has eclipsed 2018 Bear Market seller volume levels at the 200-week MA
The people would understand where #inflation comes if they knew its correct definition. The government redefined inflation to mean “rising prices,” from its originally definition of “an expansion of the money supply,” so the public wouldn’t realize that the government creates it.
Is this Housing Bubble BIGGER than 2008? Yes.
2008: Prices 8.0x higher than Avg Worker Earnings
2022: 8.5x higher
Price/Earnings tells you how OVER/UNDER valued your Housing Market is. This example used Phoenix.
Buckle up. Buying opportunities are coming.