FIVE MINUTE FINANCE: LEAKED TERRA CHAT LOGS, BITCOIN’S RECESSION TEST, NFTS WORTHLESS?
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:
- White House: All Hands On Deck to Rally Against Inflation
- Why Education is Needed for Bitcoin to Reach Full Potential
- Terra’s Collapse: Internal Chat Logs Leaked
- Most NFTs ‘Worthless’, but They’re Not Going Anywhere
- OPEC+ to Increase Oil Production
The Biden-Powell-Yellen Meeting: Why It’s So Significant
- President Biden and Fed Chair Powell Meet as Inflation Remains Top Priority (link)
- CEOs Warn That US Households Are Burning through Savings at an Alarming Rate, and Could Run Out within Months (link)
If the Fed Mis-Calculated “Transitory” Inflation, Can We Trust the Forecast of a “Soft-ish” Landing?
In the fictional Dune universe, “He who controls the spice, controls the universe.” This principle accurately translates to our world where “spice” is money and “universe” is the economy. In Dune, spice makes faster-than-light (FTL) travel possible, while in our (mundane) world, money makes trade possible.
Given the tremendous responsibility imbued with money control, the Federal Reserve creates and implements monetary policy independent of the US government. The reason is important: US presidents (on a four-year term) could otherwise sway monetary policy for short-term benefits to increase their ratings, and consequently, their chances of a successful re-election. Often times however, short-term benefits have devastating long-term drawbacks, which is bad for the currency and the consumer.
That’s why this week’s Powell-Biden-Yellen summit is such a big deal. With President Biden’s ratings now at 39%, he has to take control of inflation as talks of a recession continue to loom in the background. Both the Fed and the European Central Bank (ECB) injected trillions of dollars/euros to prop up their economies over the last two years:
Image credit: ECB
The result was predictable as US inflation increased by 3–4x from the Fed’s 2% target. Further, things aren’t looking good in the EU either. Germany, the EU’s economic engine, has an inflation rate at 7.9%, the highest it has seen since the early 1970s. This is anticipated to only get worse as Russia continues to cut off its natural gas spigot to countries refusing to pay up in rubles.
What is especially jarring is US Treasury Secretary Yellen’s statement following the summit. She said: “I was wrong then about the path that inflation would take”. (Reminder, this is the US Treasury Secretary and Powell’s predecessor speaking). Make no mistake, the Yellen situation is exceedingly bizarre. After all, Yellen, a Yale graduate, was of a small minority when she made those “transitory inflation” statements in the first place.
The largest money supply increase in the history of the dollar was not supposed to have decreased the dollar’s purchasing power, and subsequently trigger inflation?
Regardless, the Fed is now taking steps in an attempt to rectify the situation we’re currently in. We can expect more interest rate hikes to come in June, as the Fed starts to shrink its $8.9 trillion balance sheet.
June’s rate hike probability is at 97.42% for 125–150 basis points (1.25–1.5%) Image credit: CME Group.
This will undoubtedly make consumer and business loans more expensive, at a time when personal savings rates are at a 14-year low of 4.4%. In other words, the high inflation + high spending combo leads to diminished consumer power in tandem with a cooled down economy. This is why there are growing concerns of a recession around the corner.
Can Bitcoin Unscramble Money Market Signaling?
- What Would a Long-Lasting Recession Mean For Bitcoin? (link)
- Bitcoin Adoption Largely Depends On Increased Knowledge (link)
Bitcoin’s Recession Test is Likely Ahead
In a world of central banks, it’s easy to understand how the value of an entirely new asset could become obfuscated. We are seeing this now when the Fed is on a path to raise interest rates by reducing its balance sheet. All those companies that relied on cheap capital are taking an L as the Fed needs to cool things down a bit.
What about an alternative like Bitcoin? Instead of being subject to an ever-changing monetary policy, Bitcoin relies on people understanding its value through an algorithmically enforced policy, which can’t be changed overnight.
Sure — all of that sounds great. But — Bitcoin emerged on the scene in 2009, just when the Great Recession ended.
For this reason, Bitcoin is untested, making proper forecasting for future recessions difficult. There was something of a mini-recession in February-March of 2020. In those two months, Bitcoin moved from $8,800 to $6,500, only to close the year at nearly $30,000. However, growth tech-stocks followed a similar path, demonstrated by Bitcoin’s high correlation to the Nasdaq 100 index since.
Correlation between BTC and NDX has largely been near its maximum 1. Image credit: Trading View
Therefore, Bitcoin’s perception is the critical factor. Will it be viewed as a tech stock, something like a higher-yielding gold, or will the perception align with Bitcoin’s original vision — an alternative to central banking? Moreover, how many people will adopt Bitcoin?
If the world were to implement a Microstrategy-level adoption of Bitcoin, and use its Lightning Network for payments, the Fed’s strength would seemingly disappear. But, the perception of Bitcoin may never reach such a level.
A recent report from Block (formerly Square) dove into the sentiment around Bitcoin’s current perception. First of all, people who are on the lower end of the income tend to be less optimistic about Bitcoin’s prospects.
Image credit: block.xyz
This makes a lot of sense as they don’t have the luxury of making wrong calls. Furthermore, from where could optimism draw its strength? Of course, from knowledge, as it breeds confidence. The lack of knowledge remains the primary culprit against Bitcoin’s wider adoption.
Image credit: block.xyz
With enough knowledge, other reasons could be eroded. For example, “too expensive” loses power once you understand Bitcoin’s relative pricing and unit allocation.
In the end, it’s all about perception and framing. Without the right knowledge, people are subject to whatever popular and ‘easy-to-understand’ perception is thrown their way.
Terra’s Multi-Layered Deception is Peeling Off
- Nassim Taleb Calls LUNA a Ponzi Scheme, Compares Do Kown to Bernie Madoff (link)
- Terra Validator Leaks Chat Revealing How Team Responded to UST Crisis (link)
Terra’s House of Cards
As we learn more and more about Terra’s downfall, the worse the situation is becoming. Nassim Taleb, the author of “The Black Swan”, which explores the concepts of robustness and fragility, said outright — Do Kwon is the crypto equivalent of Ponzi con artist Bernie Madoff.
Image courtesy of twitter.
Both Do Kwon and Madoff relied on widening the bottom of the pyramid for it to not collapse. Likewise, both have caused up to $65 billion in lost wealth. The key difference is that Kwon counts on blockchain novelty and hunger gains to pull it off:
- It is not me, market volatility is too high!
- It is not me, algorithmic stablecoin is experimental!
- It doesn’t matter that the first stablecoin Basis Cash (BAC) also failed. Third time’s a charm!
When it comes to transparency, an alleged Terraform Labs’ (TFL) telegram chat log was leaked this week. It shows the absolute chaos that transpired during LUNA’s collapse. No one knew what was going on.
And now, a further slew of allegations against Do Kwon and Terra have emerged. The individual who originally leaked the chat logs alleges that Kwon and Terra have mislead their community in a number of ways, including:
- Lying about not knowing the impending Terra blockchain halt, which is at odds with LUNA validator wallet transfers.
- Lying about $3 billion UST collateral being used as a peg defense. Instead, the funds were used after the peg collapse, as a bailout treasury.
- Lying about issuing reports on the new “Project Dawn”, for which TFL members gave themselves 3 million monthly LUNA.
- Lying about the mobile app Chai’s user base.
- Lying about Luna Foundation Guard wallet access. Not only was the multi-sig wallet NOT controlled by 7 LFG directors, but Do Kwon alone emptied the last LUNA/UST coins without a vote.
To top it off, it has been recently revealed and confirmed by security firm BlockSec that Terra’s Mirror Protocol dApp had a major exploit. Since October 2021, this code vulnerability caused $90 million in lost funds, which was only spotlighted last week by BlockSec. In fact, BlockSec confirmed FatManTerra’s own findings on this matter.
The dust is still settling, and likely will be for quite some time. But one thing is clear: Do Kwon and TerraForm Labs have a lot of clearing up to do if Terra is to survive at all.
NFTs: Unsustainable Virtual Value?
- Solana’s NFT Market Gets Crowded: 6 Sellers for Every Buyer (link)
- Binance Exec Warns Most NFTs Have No Long-Term Value (link)
Don’t Conflate Creation Inflation with the NFT Space Itself
It is understandable that NFTs go through disbelief cycles. For the uninitiated, the low hanging fruit is really low — ‘Ape pictures costing as much as a mansion?! We are truly at the end of civilization!’.
This is how the low hanging fruit is usually tugged. However, what is missing in that outlook is that a notable portion of our social interaction has largely migrated to cyberspace. And what does that cyberspace migration entail?
People need to discern their online personas, just like they do in the physical realm. After all, entire industries and brands exist for the sole purpose of differentiating one human being from another. Twitter’s “blue check” alone speaks volumes on the importance of social status signaling and virtual asset ownership.
As unique and verifiable digital assets, NFTs facilitate that instinctual need perfectly. However, the migratory cyberspace road is filled with pitfalls. Most commonly, they come as copycats, flooding the NFT market in which sellers far outnumber buyers, as is the case with Solana.
It is no secret that Yuga Labs’ Apes alone have spawned hundreds of other Apes.
At this point, another Ape collection is as certain as another sunrise. Image credit: OpenSea
The creators behind these projects are not developing a blockchain game/metaverse platform like Yuga Labs’ Otherside. That would increase their utility and long-term value. Instead, they are hoping for a quick buck, counting on the mass NFT hype and headless speculation.
Unlike last year, 2022 year-to-date NFT sales were not exempt from crypto market’s downturn. Image credit: The Block
To conclude, it’s hard to disagree with the Binance exec saying “most NFTs are worthless”. Most NFTs will indeed go to zero because most are opportunistic trash. That doesn’t mean that the NFT market won’t expand though.
NFTs are quite feasible to mint. As a result, entrepreneurs can flood the makrets and make a buck off of the hype. From this imbalance comes the illusion that NFTs as a whole are doomed to fail.
OPEC+ Raises Oil Production
- OPEC+ Raises Output Faster than Expected as Russia’s War Roils Global Energy Markets (link)
- OPEC’s Oil Deal Is Too Little, Too Late to Reduce Prices (link)
Russian Sanctions Felt Around the World
Consisting of 24 oil-rich countries, OPEC+ is set to ramp up its oil production ahead of President Biden’s visit to Saudi Arabia, by 648,000 barrels per day (b/d) in July and August — 0.7% of global oil demand.
Due to the Russian invasion of Ukraine, gas is at its highest level in over 20 years, at an average $4.7 per gallon in the US. Image credit: GasBuddy.com
Not to be confused with classic OPEC, which consists of 14 nations and was founded in Iraq, OPEC+ has an additional 10 non-OPEC nations in which Russia is the biggest oil-producer. At this point, the inevitable impact from Russian sanctions are being felt by much of the world, as the Russian ruble has propelled as a top performing currency in 2022.
Croatian (NATO member) President Milanović recently noted as much:
“Russia is not feeling the financial impact, and when it does feel it, the war will be over. But the price will be paid by European citizens, Putin will keep his smug smile and oil and gas will just go elsewhere because the demand is high,”
When it comes to oil demand, OPEC recently cut down its global demand forecast for 2022 by 210,000 b/d. That’s because it also lowered its global economic growth forecast from 3.9% to 3.5%.
Image credit: S&P Global
Likewise, US domestic oil production increased over 3% in March, the highest level since November 2021, according to EIA. Given all these factors which are pushing the supply side of the equation, we may see a decline in gas prices this year.
With that said, due to a supply lag, gas prices are likely to go up before they go down. JPMorgan analysts think they will surge 37% by August. Either way, suppressing gas prices will be critical to combat inflation alongside the Fed’s balance sheet reduction.
The situation will become clearer once President Biden visits Saudi Arabia, which is scheduled for sometime in June.
Tweets of the Week
Economic Confidence Index from @Gallup now lower than 2020’s COVID recession, though not yet down to GFC levels.
The perfect storm is hitting Europe
- Squeezed as a net commodity importer, with the economy sleepwalking into recession
- Strong & broadening inflationary pressures
- Forced to set the same monetary policy for Germany and Italy
And to top if off: we are in Lagarde’s hands.
Retail has sold all their US equity purchases from the last two years — Goldman
Bitcoin lightning network capacity continues pushing to new all-time highs despite the recent price decline.
Although still in its infancy, Bitcoin’s L2 continues to show consistent growth; allowing BTC to scale as a medium of exchange.
A primary reason that people get confused about #Bitcoin is that they are pricing a transition to an emerging monetary system with strong network effects….through a failing one.
Priced in #Bitcoin — ALL prices will trend lower over time.