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Five Minute Finance: CPI Reaction, Do Kwon Arrest Warrant, ETH Merge Complete: Now What?

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:

  • ETH Merge Completed — Now a ‘Simulated Universe’?
  • Terra’s Do Kwon Facing Arrest Warrant
  • CPI Reaction and BTC Accumulation Rates
  • $16 Trillion Digital Asset Market by 2030?
  • CFTC Prepares to Regulate Crypto

Ethereum’s Merge was an Anticlimactic Success

  • Ethereum’s Pivotal Update Likely Already Priced in as Market Remains Flat (link)
  • Proof-of-Work ETHW Airdrop Live on FTX as Ethereum Completes Merge (link)

Ethereum Merge Successful, but the Playing Field is Just Starting to Level

As we’ve been hinting for the last two weeks, Ethereum’s “buy the Merge news” rally ran out of steam. At the start of July, ETH price was hovering at ~$1,000, reaching its three-month high in mid-August at $2,017. Given the bear market everywhere, this caught quite a bit of attention.

Since then, the closer the Merge date got, the more ETH price continued to deflate. In the last week, it flatlined. After the Merge, it went over the -7% cliff, from $1,585 to $1,466. Bitcoin even outperformed ETH during the last week.

The day after the Merge, all is back to bear normal. Image credit: Trading View

The main negative market driver is the macroeconomic outlook, with inflation and the Fed’s response at front and center. Although the inflation rate for August was recorded at 8.3%, the lowest since April, it was still above the 8.1% expectation. This is four times larger than the Fed’s 2% target, indicating more interest rate hike are coming to deflate the markets — and the economy.

Additionally, Ethereum’s recent upgrade doesn’t mean the full ‘Ethereum 2.0’ is here. It will not scale up its main chain until the Surge, so gas fees and transaction speed will remain roughly the same. What will change is a 99% drop in Ethereum’s energy footprint, which translates to a 0.2% reduction of the global electricity consumption.

But, other chains like AVAX or SOL already have proof-of-stake built-in from the start, with an emphasis on scalability — meaning fast, cheap transactions (not exactly Ethereum’s strong suit). Then, there is a major concern on PoS implication. Vitalik Buterin recently stated this:

“Proof of Work is based on the laws of physics, so you have to work with the world as it is…whereas because proof-of-stake is virtualized in this way it’s basically letting us create a simulated universe that has it’s own laws of physics…”

A blockchain’s consensus mechanism (proof-of-work, proof-of-stake, etc.) has one overarching mission: to secure the network. Buterin’s remarks beg the question then: which laws are more secure — the laws of physics, or Ethereum’s proof-of-stake-powered simulated universe with its own laws of physics?

In the case of Ethereum, this all comes down to ETH staking power allocation. Due to the use of centralized exchanges, it’s difficult to get an accurate depiction of the distribution of ETH holdings. But we can still get a pretty rough idea. Though there are exchange wallets in this figure, data from CoinCarp suggests 40% of Ethereum’s net worth are allocated among just 100 wallets:

Distribution of wealth on the Ethereum blockchain. Image credit: CoinCarp

You might say that Bitcoin has a similar top-heavy distribution. The difference is, ETH validators aren’t just securing the network, they’re enforcing the rules of the network. And the greater their ETH holdings are, the greater their staking yield is, making them even wealthier and more influential.

In theory, ETH holders who stake their valuable ETH won’t do anything to harm the network — they invested in their ETH and then staked it to get more ETH, meaning they’re incentivized to increase the value of ETH.

Yet another way to look at this, in terms of theoretical influence and power throughout the Ethereum network, is something that resembles the recreation of the traditional financial power hierarchy, mirrored on a blockchain — one that is “a simulated universe”.

For those who have such concerns, old Ethereum is continuing on as ETHPoW (ETHW). Yesterday, ETHW price went up to $60. After new tokens were airdropped on FTX and other exchanges, its price dropped to $14.

The blockchain trilemma — the idea that blockchains cannot simultaneously provide decentralization, security, and scalability — remains alive and well. Ethereum is continuing to try to solve it however, with the recent Merge as one milestone in its roadmap to Ethereum 2.0.

Arrest Warrant Issued for Do Kwon

  • LUNA Drops 40% as Arrest Warrant Issued for Do Kwon and 5 Others (link)

Terra Drama is Entering the Climax Stage

The fall of Terra (LUNA) was one of the most embarrassing and reputation-crippling events in blockchain’s 13-year-old history. In its wake, multiple platforms and firms fell — Celsius, 3AC, and Voyager Digital — to just name a few. It is now commonly referred to as an event cited by legislators to bring in stringent stablecoin rules.

With so much wealth lost, at least $45 billion in just the first week, it was not uncommon to see life-ruination testimonies across social media. Surprisingly though, Terra Classic (LUNC), as the rebranded Terra (LUNA), has been one of the few altcoins that was popping off during September.

Terra has fallen to the bottom of bottoms since the lofty $119 ATH in May. Image credit: Trading View

Following the UST stablecoin depegging, the Revival Plan 2 forked the ecosystem into two coins, the old LUNC and the rebooted LUNA, but without the algorithmic stablecoin.

The problem is, there is too much ill will present for such a small ecosystem. The latest blow may be the finishing move. The infamous Terraform Labs founder, Do Kwon, along with five others, are now wanted by South Korean authorities.

One of the charges relates to the violation of South Korea’s capital markets law. In addition to arrest warrants, South Korean prosecutors are about to issue Interpol’s red notice for Kwon.

This would allow other nations to apprehend Kwon and extradite him. Purportedly, he is presently residing in Singapore. If their arrests and trials fulfill prosecutors’ goals, it will be fascinating to see how the struggling Terra ecosystem will fare.

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Bitcoin Surge Ended After a Lousy CPI Report

  • Crypto and Stocks Take a Hit As Federal Reserve Prepares To Meet Next Week (link)
  • Bitcoin Down 10% Following August’s CPI (link)

Will Bitcoin Accumulation Be Sufficient to Save the Bottom?

All BTC holder hands are on deck to defend the $20k price support level. Since the dreaded Fed rate hikes began in March, Bitcoin price dipped four times under the $20k mark. All four dips didn’t last more than a couple of days, however.

To put things into perspective, Bitcoin reached its first $20k milestone on December 17, 2017. Therefore, a five-year setback would have quite a demoralizing effect, with unpredictable consequences.

In other words, even long-term hodlers could be waned. By how much, we can guess with the Bitcoin HODL waves chart, as it shows us the price points were most bitcoins are bought.

HODL waves represent collective cost-basis, indicating at which point investors may get spooked. Hotter areas represent recent BTC holders (accumulation). Image credit: Chain Exposed

At present rate, bitcoins that haven’t moved for over one year comprise 65% of total supply. Overall, about 4.7 million BTC hasn’t moved in over 5 years. Given that Bitcoin price has now entered the 2-year green zone, some could interpret this as the best time to buy more BTC at this undervalued price point.

Indeed, we are seeing the strongest accumulation of BTC addresses holding over 1BTC in Bitcoin’s history. But, that doesn’t mean anything if dark macroeconomic winds are more powerful. Ultimately, it is such factors that determine Bitcoin’s bottom.

After the lackluster CPI report, which insufficiently dropped to 8.3% instead of the expected 8.1%, the Fed is bound to continue increasing interest rates to bring down inflation. So far, the Biden admin managed to keep inflation above June’s 9.1%.

The admin did this largely by depleting strategic oil reserves at record pace. Energy prices make half of the inflationary pressure, so this suppressed inflation.

US Crude Oil in the Strategic Petroleum Reserve (SPR) Stocks. Image credit: Ycharts

It is then a high likelihood that a two-month inflation decrease was heavily related to the US government’s use of its Strategic Petroleum Reserve. The Fed would then have to severely tighten its dollar liquidity spigot to compensate. If this is the case, the markets are not anticipated to react favorably.

Now that the Merge is Over, What’s Next?

  • On-Chain Tokenized Assets Could be a $16T Market by 2030: BCG Report (link)
  • Crypto Gender Gap Likely Narrowed in 2022 as Global Adoption Continues: Report (link)

Digital Economy to See Increased Tokenization

With the Merge hype failing to perform as the biggest thing ever, in terms of an immediate market rally at least, what else is there to look forward to? In the (fairly) short-run, it is highly dependent on the state of the global economy. In the long-run, there are plenty of growth signals to keep one warm in cold bear nights.

The bottom line is, the future is digital. And the digitization is yet to spread in its full measure. Once upon a time, in the 1990s, this was obvious. Now, it is obvious that digitization will be tokenized. But by how much?

BCG global consulting firm and ADDX exchange project a 50,000% increase in tokenized assets, or $16 trillion by 2030. The main reason for this optimistic forecast is that illiquid assets can be tokenized. These not only include fine art or real-estate, but exclusive assets such as private equity, commodities, credit/debt, hedge funds, and more.

In other words, tokenization breaks down limited access while increasing fractionalization of illiquid assets. In turn, this deepens the pool of potential investors.

Even in the present, crypto adoption continues to grow — in-part fueled by the devaluation of local currency:

The greater the country’s currency devaluation, the greater the crypto adoption uptick. Image credit: Gemini 2022 State of Crypto Report

Last year, 51% of new crypto owners came from developing nations, headed by Brazil and India. However, the crypto adoption wave has educational barriers yet to overcome. Respondents to a Gemini survey who are crypto-curious exhibit reluctance based on:

  • lack of government backing
  • security (custody of digital assets)
  • using and buying digital assets
  • trust

To boost their confidence around these issues, they are twice as likely to prioritize legit educational resources (40%) over friends’ recommendations (22%). Interestingly, “lack of government backing” means that more crypto regulation would actually be net-positive for crypto adoption.

CFTC is Trying to Regulate Crypto in the US

  • CFTC Chair Requests More Authority Over the Crypto Market (link)
  • CFTC Already Preparing to Be Crypto Watchdog, Behnam Tells US Senators (link)

Glaring Holes in the DCCPA Bill Still Unpatched

Since Gary Gensler took the SEC helm in 2021, we have seen important trends unfold:

Moreover, Gensler has a habit of declaring nearly all cryptocurrencies as securities, but not following through with enforcement at full capacity. It is as if some inter-governmental turf war is yet to be resolved. In the case of the SEC, this specifically involves the Commodity Futures Trading Commission (CFTC).

Are we seeing the end of that turf war now? According to CFTC Chair Rostin

Behnam, it could be. At the recent hearing before the Senate Agriculture Committee, Behnam said that he instructed his agency to prepare to be the fully-funded overseer of the crypto market.

The CFTC would then need an extra $112 million budget for the task, dispensed across three years. This is in line with August’s proposed bill, by which the CFTC would take control of digital assets. However, it would still be up to the courts and the SEC to define which assets are securities.

So far, only Bitcoin and Ethereum would count as commodities. If there is further leeway in defining “digital commodities”, the CFTC would be in charge of brokers, dealers, custodians, and exchanges. In the bill’s current form, DeFi platforms would receive the shorter end of the stick, effectively banning them as they lack the necessary nuance between custodial and non-custodial platforms.

For example, the DCCPA bill would treat every liquidity provider on Uniswap as a “digital commodity dealer”, requiring CFTC registration. Likewise, the bill invokes

the Bank Secrecy Act to perform warrantless surveillance over all transactions on “digital commodity platforms”.

Tweets of the Week

Price increases over last year (CPI report)…

Fuel Oil: +68.8%

Gas Utilities: +33.0%

Gasoline: +25.6%

Electricity: +15.8%

Food at home: +13.5%

Transportation: +11.3%

New Cars: +10.1%

Overall CPI: +8.3%

Food away from home: 8.0%

Used Cars: +7.8%

Shelter: +6.2%

Medical Care: +5.6%

@charliebilello

😬Big Problems ahead for Real Estate Investors.

The 6-Month US Treasury now yields basically the same as Buying & Renting Out a House in America (aka Cap Rate).

Translation: Big Real Estate Investor selloff coming. Especially among Wall Street owners. 📉

@nickgerli1

The S&P 500, Gold, Bitcoin and EURUSD after the CPI Print:

@tradingview

When the Euro goes down the EU trade surplus should go up. But now the Euro is at a record low and the EU trade surplus is crashing.

@KimDotcom

Just bought a 52-week T-bill at 4%

A year ago exactly, I refinanced my mortgage at 1.8%

After inflating the value of my home beyond my wildest dreams, the Fed & US Treasury are now paying off my mortgage.

Feeling super grateful, but how does any of this make sense??

@VincentDeluard

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Five Minute Finance

Latest blockchain, financial, and fintech news — everything that matters in the new era of finance. Read