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FIVE MINUTE FINANCE: ROBINHOOD’S DEFI WALLET WILL PAY YOUR GAS FEES, ESG AWAKENING, MORE

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:

Bitcoin Reasserts Crypto Dominance

May’s Week of Terra Terror Refreshes Bitcoin’s Dominance

Despite the negative pressure coming out of the Fed’s quantitative tightening (QT), Bitcoin is steadfast within the $30k range. However, during this bear-stagnation period, Bitcoin is reclaiming its dominance. At the end of 2020, Bitcoin made up 70% out of the total market cap of all cryptocurrencies.

This changed abruptly as smart contract platforms, led by Ethereum, started churning out their dApps, creating a $223 billion DeFi market throughout the following year. As a result of a diversified crypto market, in January 2022, Bitcoin’s dominance hit a low mark, representing about 40% crypto’s total market cap. Yet, in the middle of the current bear market, Bitcoin’s dominance sharply climbed up.

Bitcoin dominance chart year-to-date. Image credit: Trading View

This coincided with the week of Terra’s reckoning. The second largest smart contract ecosystem dropped like a rock, losing 99.99% of its value (and wiping out $40 billion in a little over a month). Neither LUNA nor Bitcoin collateral were able to defend UST’s peg, with the LFG ending up selling nearly all of its 80k bitcoins.

Terra’s $40 billion death spiral took a 15–20% bite out of the entire crypto market, but it also reinvigorated faith in the OG digital asset, boosting its dominance. It is now plain to see why one would not want additional layers of complexity in a digital asset.

Following the fallout, we are yet to absorb juicy details as South Korean regulators conduct an official investigation. After all, this once premium crypto project negatively affected at least 200k South Korean investors. In the meantime, Do Kwon, the founder of Terra, is proposing the classic fix — hard forking.

Just as Ethereum hard-forked in 2016 to recover stolen funds, creating Ethereum Classic, Do Kwon is aiming to hard-fork Terra into Terra Classic. The new old tokens would then be called Luna Classic (LUNC), co-existing with the new Terra chain, but without its devastating UST algorithmic stablecoin via anchor protocol.

Whatever happens next, Bitcoin is approaching 50% of the entire crypto market cap. Web3 and smart contract platforms are poised to disrupt existing Web2 platforms, but their fundamental technology is quite a bit more sophisticated than Bitcoin’s ‘simple’ — yet secure and robust — coding practices. It’s safe to expect only more turbulence as Web3 grows, matures, and evolves.

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The Fed’s QT is Resetting Bitcoin’s Price, but Over 50% of BTC Holders in Profit

Gentle Rug Pull vs. Rough Plane Crash

In the latest installment of the Fed’s juggling act, the central bank is slowly preparing the market for a landing. With so much power invested into the Fed’s Chair, Jerome Powell, his every word is scrutinized like the kings of old. In last week’s interview, he noted that the best case scenario translates to a “soft landing” — and even that might be out of the Fed’s control.

It’s not really a good sign when airplane metaphors are used for the entire economy. A lot can happen when a plane lands. It can break in half and explode or we could merely lose a few wheels in the process.

Between these two scenarios, the fiery one is stagflation — an economy that lost its steam while both unemployment and inflation are high. On the more integrity-saving end of the spectrum, with just the few wheels flying off, is stamped out inflation without a recession. The French bank’s research team, Societe Generale Quant Research, put the monetary options available into graph form.

Image credit: Societe Generale Quant Research

The left side represents a reversal of the Fed’s quantitative easing (QE), as quantitative tightening (QT). This just means that the Fed is reducing its enormous balance sheet to a pre-2020 level of $3.9 trillion, from its present $8.5 trillion. By doing this, it is making the dollar scarcer, which increases interest rates and pushes down inflation.

To shift metaphors from airplanes, such a move would also pull the rug under the equity market because it has grown very familiar with cheap capital, powered by near-zero interest rates. The question then is, by how much should the rug be pulled and how fast? SocGen suggests a 9.5% interest rate hike to be really effective at squashing inflation, while a measure at roughly half of that figure would still provide equity market growth.

Depending on how severely the market slips on the rug pull, we may end up with either a recession or a stagflation. In the middle ground, with hands just flapping about to retain balance, lies a temporary market downturn. With that said, even Elon Musk thinks a recession is in order for up to 18 months.

Whatever the future holds, this central banking mayhem is resetting Bitcoin’s price. Spooked investors and short-term holders are leaving. In turn, nearly 60% of BTC holders remain in profit, not succumbing to fear-induced selling.

Despite Bitcoin’s price decline, over 50% of BTC holders remain in profit. Image credit: PlanBTC.com

The fact that Bitcoin remains steady at around $30k, means that more of the strong-hands are persevering. In the end, this makes Bitcoin more resilient to present and future central banking moves.

Is Musk’s Twitter Takeover Going Down the Drain?

ESG at the Center of the Nexus Web

The nexus of power in any society is largely influenced by financial institutions and media. There is mutual feedback between them, as the former may own the latter. Elon Musk seemingly upset this nexus with his $44B Twitter bid.

However, Musk has to draw from the health of his Tesla stock to make the deal happen. Since he put forward the proposal in mid-April, by backing it with a $6.25 billion margin loan, Tesla stock dropped by roughly 30%. Keeping this in mind, Musk is widening his options.

Depending on how Musk’s debt-financing dynamic goes, the Twitter deal may go through or fall apart. Image credit: Wall Street Journal

The bigger question is, what kind of pressure can the nexus exert for Musk not to own Twitter? Those who paid attention to last May’s crypto market crash may remember Cathie Woods speculating that it could have been BlackRock that pushed Musk to publicly denounce Bitcoin as dirty, due to its energy consumption.

This would be the same $10 trillion-bloated BlackRock with a substantial Twitter stake, along with its interlinked asset manager Vanguard and other funds.

Top Twitter shareholders. Image credit: money.cnn.com

Their unified commonality is the push for ESG — environmental, social and governance. This nebulous rating framework is government without government, as it marks financial entities for their good-boy behavior. Peter Thiel, the co-founder of PayPal, dubbed ESG as “hate factory for naming enemies” at this year’s Bitcoin Miami conference.

What he meant by this was recently exemplified by CFTC Chairman Rostin Behnam at the POLITICO’s Sustainability Summit this week, as he attacked Bitcoin mining. Would it surprise you to learn that an agency tasked with matters such as protecting the public from fraud in futures and commodities trading, set up a Climate Risk Unit task force?

Or, that Exxon, of all corporations, is one of the top rated ESG companies, while Tesla itself didn’t even make it into the S&P 500’s ESG Index? Does it make sense for an EV company to be removed from the list while carbon-belching Exxon giant is hailed as an ESG laureate?

Musk certainly doesn’t think so, according to his tweet:

Image credit: Elon Musk’s Twitter account

Prioritizing ESG and sustainably consuming energy is obviously a good thing.

But when Exxon is identified as a top ten ESG company in the world per the S&P 500’s ESG Index, and JPMorgan — the largest lender to the fossil fuel industry — also remains in the Index, but not Tesla, it’s hard to take the world’s practical concept of ‘ESG’ seriously.

Melvin Capital Shuts Down but Retail is Not Doing Well Either

Plotkin Closes Doors, Dialo Buys AMC and GME Shares

Last month, we reported that one of the main villains of the GameStop short squeeze saga, Melvin Capital, was restructuring. That storyline is now null and void. Having bled for $6.8 billion as its short bets against GameStop turned sour, it had accrued a staggering 54.5% loss.

It appears there weren’t any substantial takers for Melvin’s downsizing. Gabe Plotkin abruptly announced a permanent shutdown after racking up additional losses throughout 2022. As the fund dies, Plotkin will redeem at least 50% of investor cash by May 31, and the rest by June 30.

Melvin Capital’s returns never recovered after the GameStop short squeeze. Image credit: Bloomberg.

In the meantime, GameStop is down -30% for the month, yoyoing on a weekly basis. However, this is nothing to write home about as the entire retail market is taking a pause. Walmart (WMT), BestBuy (BBY) and Target (TGT), with their $415 billion market cap, have also been a part of the large market downturn.

Retail is having a poor month across the board. Image credit: Trading View

Given our current environment, this comes as no surprise. We’re facing the highest inflation rate in decades, Russia’s war in the Ukraine continues to have far reaching effects, and the Fed’s QT is on its way to make capital more expensive. With that said, billionaire Ray Dalio of Bridgewater hedge fund seems to think people will escape their woes in video games and movies.

The fund bought over 4,000 GME shares, alongside over 21,000 AMC shares in the first quarter of 2021. However, Bridgewater’s plunge into meme stocks is barely a blip on the radar compared to its other equity holdings worth nearly $25 billion. The fund’s current GME stake is also small potatoes compared to March 2018 when it held 3.1 million GME shares.

Robinhood to Enter Web3/DeFi Arena

The Most Popular Gasless Wallet on the Horizon

Every system has its pros and cons. Following Terra’s collapse, one of the cons for centralized exchanges (CEXes) was spotlighted. Crypto.com took to reversing trades involving LUNA tokens that were erroneously priced within a specific time frame.

There are definitely two sides to this coin: The benefit is that a centralized entity exists and can attempt to rectify errors. The drawback is the potential for users to sacrifice their own autonomy because of an over ruling centralized entity. While a CEX is a more convenient trading platform with typically better liquidity, no transaction is reversible with a DEX, nor is a pricing error likely.

Moreover, traders can access DEXes with non-custodial wallets instead of relying on CEXes’ hosted wallets that hold your private key. Do you truly own an asset if a third party has your private keys?

We’re now seeing something quite interesting in the realm of non-custodial wallets: Robinhood is turning to tap into DeFi following decreased revenue and user growth. The best way to accomplish this would be to become the next MetaMask, the most popular wallet with over 21 million users. Robinhood has 22.8 million verified users, as of this March, so this is a good matchup to bolster dwindling revenue numbers.

Robinhood revenue over the last two years. Notice the stimulus checks boosts. Image credit: businessofapps.com

As one would expect from the zero-commission pioneer, Robinhood is polishing its hook in the form of gasless transactions. The catch is, for the privilege of Robinhood paying your gas fees, the broker is likely to rely on third-party liquidity providers for best token-swapping prices, and get a cut in return.

Does this sound familiar to payment for order flow (PFOF), the same business model that triggered dozens of class-action lawsuits and eroded the platform’s reputation? With that said, blockchain transactions are light years ahead in the transparency department compared to the stock market, so it might not matter much.

If all goes well with the new web3 wallet, Robinhood may end up with a solid redemption arc while users rush to the new wallet and popularize DEXes to boot.

Tweets of the Week

Something interesting is happening in US markets.

Michael Burry (of Big Short fame) has a big shorting position in Apple ($AAPL) which came to light yest. Also Warren Buffett bought more Apple stocks recently.

The stock moved from +3% to -2% today. It’s classic bulls vs bears.

@abhymurarka

80+ stablecoins in crypto are facing the toughest time

To avoid making mistakes, you should understand #stablecoin

A thread on types of stablecoins 🧵

@Coin98Insights

“Mission Accomplished”

Ruble now at 4 year high

@JordanSchachtel

Inflation :

India: 7.79%, highest in 8 years.

Brazil: 12.1%, highest in 26 years.

USA: 8.3%, highest since 1981.

Euro Zone: 7.5%, lifetime high.

UK: 7%, highest since 1992.

Turkey: 70%, highest since 2002.

Srilanka: 30%, highest since 1948

Germany: 7.4%, highest since 1981

@AskAnshul

The 2022 Market Crash Explained Simply

(explained with memes and graphics)

🧵

@shivsakhuja

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