FIVE MINUTE FINANCE: DECIPHERING THURSDAY’S DIP, NFT MINT COSTS $165M IN FEES, BTC BONDS BACKFIRE
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:
- Yuga Labs NFT Mint Costs Over $165 Million in Gas Fees
- Musk Calls Out NFTs, but Still Causes Apecoin Surge
- El Salvador Volcano Bitcoin Bonds: Too Soon?
- Fed Rates: Not Great, Not Terrible
- Thursday’s Dip: 25k BTC in Open Interest, Closed
Botched Coding and Scaling: Lessons for DeFi Adoption
- Yuga Labs to Mint Otherside NFTs for 305 APE: Community Token Hits ATH (link)
- ApeCoin to Integrate with Polygon After Causing Ethereum’s Largest Gas Spike in History with NFT Mint (link)
Popularity = Traffic = Unaffordable Network
Yuga Labs made a name for itself as a $4 billion web3 company in a single year. Some say this success is a mirage, built on the backs of speculative Bored Ape NFTs. However, after a $450 million seed funding round, it became clear that Apes were just a launching ramp for building an enthusiastic online community.
Riding on the coattails of that energy, Yuga launched ApeCoin (APE) as a governance token for the upcoming main project — Otherside. Ahead of the launch of this metaverse/blockchain game, Yuga released Otherdeed NFTs, virtual land plots in Otherside.
Web3 pioneers rushed to grab cyber lands in Otherside. image credit: OpenSea.io
The public sale was astonishing. As of May 5th, Otherdeeds generated $741.2 million total secondary market volume. The problem is, 60,234 ETH ($165.6 million) was spent on ETH gas fees. Such market inefficiency is off the charts, to say the least. It would be like going to a stock broker and they ask for an 87% commission rate instead of 1%. It was literally the largest gas spike in the history of Ethereum.
Suffice to say, this doesn’t bode well for web3’s mainstream adoption. To exacerbate things further, the avalanche of NFT speculators was too much for Ethereum to handle, resulting in the temporary crash of Etherscan.io, the main tool by which people monitor transactions on Ethereum.
With that said, it is clear why this happened, so there is a remedy for an easy fix. First, Yuga Labs did not erase the canceled Dutch Auction code from its Otherdeed smart contracts. The obsolete code created significant gas waste, according to a former Coinbase engineer.
Second, the heightened Ethereum traffic load increased gas fees, as it always does. Yuga Labs even expected it to happen, as indicated by smart contract code.
Image credit: Twitter
In part of a twitter thread to clarify what had happened, Yuga Labs wrote:
“We’re sorry for turning off the lights on Ethereum for a while. It seems abundantly clear that ApeCoin will need to migrate to its own chain in order to properly scale. We’d like to encourage the DAO to start thinking in this direction.”
Understandably, this caused some speculation among the community that Yuga’s poorly written smart contracts were a setup to eventually build its own layer-1 blockchain.
Whatever occurred, Yuga promised to refund excessive gas fees. In the future, code auditing and not pretending that Ethereum is scalable on its own are great things to keep in mind.
Elon Musk Dumps On NFTs
- Elon Musk Mocks Twitter’s NFT Integration Using BAYC PFP (link)
- Goldman Sachs to Explore NFTs as Financial Instruments (link)
Musk Picks Low Hanging NFT Fruit
Elon Musk is very successful at many things, but being ‘the center of attention’ seems to be his specialty. Now that he’s on the road to seal the $44 billion deal and become Twitter boss, his every tweet is hyper-scrutinized. This week, Musk (very) temporarily switched his profile pic to a Bored Ape Yacht Club (BAYC) collage just to jab the NFT community with the line “I dunno … seems kinda fungible”.
Some jumped the shark and assumed that the Apes’ profile pic alone means Musk’s entry into the NFT market. Accordingly, ApeCoin (APE) surged by 20% in a span of a few hours.
Elon Musk inadvertently gave ApeCoin (APE) a momentary reprieve from Otherdeed’s clumsy gas launch. Image credit: Trading View
However, those who have been paying attention could see it for what it is — mocking NFTs as “annoying” and portraying web3 as “bs”. Does Musk not see the web3 for the Apes? Even China launched a state-backed NFT infrastructure to employ NFTs as digital receipts and ownership documents.
To illustrate, the South China Morning Post (SCMP) tokenized a 118-year-old archive to immutably preserve cultural artifacts on the blockchain. Likewise, Goldman Sachs sees NFTs as “suitable financial instruments”. After all, what is not flexible about non-fungible smart contracts tokenizing traditional financial contracts (futures, bonds, etc.)?
For a man reputed as the IRL Tony Stark, it seems as if Musk can’t extrapolate the obvious from monkey jpegs. In the meantime, while Musk was once again displaying his displeasure at Twitter’s NFT integration, Binance came through and committed $500 million to bolster Musk’s Twitter takeover.
The future of any NFT integration on twitter looks quite blurry right now.
Knife-Edge Investing: Did El Salvador Go Overboard?
- El Salvador Has No Takers for its Volcano Bonds: Some Fear Country Near Default (link)
- Cybersecurity Expert Thinks Bitcoin Investing is Gambling, but these Hedge Fund Managers Disagree (link)
Wrong Timing or a Rigged Game?
El Salvador made everyone happy (except the IMF) when it became the first country to elevate Bitcoin to legal tender status. Soon after, a plan emerged to reorient the tropical nation toward the digital future with Bitcoin at the helm. Specifically, to fund a new urban zone, Bitcoin City, with Bitcoin volcano bonds.
The latter is just a Bitcoin-backed debt, distributed to investors via Blockstream’s Liquid Network. For their debt acquisition, investors would gain a 6.5% interest yield over 10 years. Sounds like a solid plan, right?
Except, there are no investors forthcoming, resulting in a volcano bond postponement. This is highly problematic for two reasons:
- El Salvador’s traditional $800 million bond debt is due early next year, with the IMF on its heels alongside degraded Fitch Ratings to CCC (vulnerable to nonpayment).
- If El Salvador’s Bitcoin experiment fails, it would send a chilling effect to other prospective nation-level adopters.
In fact, it may happen that El Salvador is forced to sell its 1,801 BTC treasury to repay outstanding debt and not default. This itself would then add a selling pressure to an already borderline bearish crypto market. More importantly, is the crypto market mature enough to sustain a nation-level investing venture?
Cybersecurity expert Bob Seeman of CyberCub thinks investing in Bitcoin is like “gambling in a rigged game”. However, many hedge fund managers, banks, and companies think otherwise.
Just yesterday, LGT, the world’s largest family-owned bank holding $280B in assets, announced cryptocurrency custody for its private clients in Switzerland and Liechtenstein.
By the same BTC token, luxury yacht company Prime Experiences announced Bitcoin payments, expecting it to grow the business by 40%. Moreover, did you know that the top 10 most watched episodes of The Joe Rogan Experience on YouTube have over 245 million views? Why is that important?
Because yesterday, Joe said this:
“I think of Bitcoin the same way I think of the early internet. They [the government] didn’t see it coming and now it’s a viable form of currency–you can actually buy things with it.”
There are too many such examples to count this year alone — Bitcoin is spreading to the masses. But the pattern is always the same — financial institutions read the market demand and deliver it to wealthy clientele.
Why? Because Bitcoin cannot be tampered by central banking. It is some times volatile, for sure, and volatility causes anxiety. While Bitcoin’s future remains unknown, zooming out tends to calm those anxieties:
Bitcoin Fear & Greed Index from January 2021 compared to May 2022. Image credit: Alternative.me
Can the Fed Deflate Inflation?
- Fed Likely to Raise Interest Rate by 0.5%: IMF Deputy Warns Inflation Could Get Worse (link)
- Bitcoin Could Outperform Equities Despite Rate Hike, Report Suggests (link)
Powell Is Piloting a Bloated Monetary Plane; Will It Land Softly?
Imagine you need to deliver bad news to someone. How would you go about it? One trick you could employ is to hint that the news is much worse than it is. Then, when you deliver the real bad news, the blow loses its punch. Or, you could say the bad news first, but emphasize the fact that something worse could have happened.
Something like that transpired at the Federal Reserve’s press conference this Wednesday. The Fed Chair Powell explicitly removed the 75-basis-point rate hike off the table, at least for the foreseeable future. What is the real bad news then?
The interest rate will rise by 50bp (0.5%), the largest hike since 2000. Moreover, Powell announced the shrinkage of the Fed’s record-breaking $9 trillion balance sheet starting on June 1st. The Fed will do this not by actively selling assets, but by not buying new bonds to replace them when they expire.
The federal funds rate throughout history, showing how the economy has become so fragile and dependent on the Fed that even a tiny rate shift is grounds for an uproar. Image credit: MacroTrends
Will a 20-year-high interest rate crush the 40-year-high inflation rate?
Nobody knows. In the best case scenario, the prognosis is a “softish landing”. Jamie Dimon of JPMorgan, the world’s largest commercial bank, placed the odds of a recession at 33%. The better question is, what will this do to the average Joe?
Interest rate hike cools down an overheated economy by making credit more expensive. This translates to more expensive credit cards, car loans, mortgages, etc. In turn, more expensive borrowing incentivizes people to not spend money unnecessarily, which (in theory) lowers the prices of goods.
But, if there is lesser demand for goods and services, this could decrease employment, putting the economy into a recessive slump, the very thing the Fed tried to avoid when it pumped trillions into the economy for the last two years. Therefore, we are now in the thread the needle stage, in-between squashing inflation and preventing a recession.
Where does Bitcoin stand in this delicate balancing act? So far, it behaved like a growth tech stock, cowering at the very mention of interest rate hikes. However, a recent Bloomberg report suggests a turning point, eventually leading Bitcoin to outperform the stock market and become a risk-off asset.
Bitcoin appears to be growing a resistance to the Fed’s easing and tightening cycles, achieving new high lows with each one. Source: Bloomberg Intelligence Report.
In essence, new avenues keep opening for Bitcoin adoption. In turn, this opens new streams of funds, escaping the manipulative world of central banking. To illustrate, Turkey’s April inflation rate went up to 70%. They don’t have the Fed, but they do have permissionless Bitcoin with its tamper-proof finite money supply.
Bitcoin and Equities Dip on Thursday: Gambling Doesn’t Pay Off
- Bitcoin Slides Below $37,000 as Investors Unwind Risky Bets (link)
Leveraged Longs Promptly Canceled
Following Powell’s press conference on Wednesday, both the equity and crypto market surged. Into Friday, the trend abruptly shifted. Bitcoin went under $36.5k, which is an 8.4% drop from Wednesday. Likewise, S&P 500 is down by -2.56% while Nasdaq dropped by -3.6%.
BTC vs. S&P 500 vs. Nasdaq, Image credit: Trading View
Moreover, it seems that NFT speculators are not the only ones biding for opportune market entries. During Wednesday’s brief rally, there was a massive futures contracts surge, worth 26.5k BTC. By today (Friday), almost all of those bets have been liquidated.
Image credit: glassnode
Perhaps, Bob Seeman was right after all. Maybe Bitcoin trading is a rigged game. That is, if one adopts a speculative and leveraged mindset instead of an accumulative one.
It also bears keeping in mind that the SEC Chair, Gary Gensler, has been avoiding the approval of a single spot-traded ETF in favor of futures-based ETFs. By now, I think we can all agree: it’s time for a spot-traded BTC ETF.
Tweets of the Week
I often hear that US housing supply is very tight and hence even if demand drops, all is going to be fine.
When looking at supply, I’d suggest to also include houses under construction as they will ultimately come on the market too.
And this is how that looks like.
NEW: Bank of England puts up interest rates by 0.25% to 1%, and warns inflation could hit 10% by end of year, the highest since 1982.
The Bank also warns the economy is set to shrink next year putting the UK at real risk of recession. Grim times ahead.
The stock market right now:
S&P 500 -4.34%
There have been 2 days in the past 25 years when S&P 500 futures were down 3% and 10-year Treasury futures down 1%:
👉 October 9, 2008
👉 March 18, 2020
Someone is blowing up, and this is forced liquidation.
The fact that all it took was for Powell to say that 75 basis points is off the table to elicit a 932-point surge in the Dow only attests to how oversold the stock market was going into the meeting. The best days of all time in equities happened in bear markets, not bull markets.
The adoption grows and it’s only accelerating.