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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:

  • Powell Abandons Soft Landing at Jackson Hole
  • DeFi Hacks Erode Confidence — TradFi to Help?
  • Fiat-Weakened Countries Seek Crypto Harbor
  • ETH Merge Hype Losing Steam?
  • NFTs Down but Ticketmaster and Meta Don’t Mind

Recession Outlook Remains High

  • Dollar Index Hits 20-Year High as Bitcoin Falls Below $20k (link)
  • Labor Market Remains Tight But 74% of Americans Prepping for Recession (link)

The Liquidity Boss: The Ultimate Reality Arbiter

If we were to pin down the single concept underpinning the world’s economic state, it would be liquidity management. It is no accident that currency is derived from the word current. It can either turn into a torrent or a trickle.

Depending on one’s market position at the time, an investor could end up flushed or dried up. But, after the $5 trillion current over the last two years, everyone is swimming in inflation.

The Federal Reserve has been in charge of that liquidity valve over the last 100 years. From gold and stocks to oil and crypto, the dollar is the dominant currency pair for every global asset. This includes currencies of other countries, expressed as the Dollar Strength Index (DXY).

When DXY goes up, Bitcoin typically goes down as the dollar strengthens against other currencies, mainly euros. As is the historic trend, BTC vs. DXY has exhibited an inverse correlation this week:

Almost every DXY spike is followed by Bitcoin dip, and vice-versa. Image credit: Trading View

When Fed Chair Powell started ramping up interest rates this April, he began tightening the liquidity valve. Because the USD current has been pouring into stocks, cryptos and NFTs, their liquidity began to retreat, sometimes up to -95%.

The Fed’s liquidity valve is so powerful that Powell’s Jackson Hole speech alone drained $1.25 trillion from the stock market, which is more than the entire crypto market cap.

The dollar’s strength is further boosted by Europe’s looming energy crisis. This places the Fed in a superior position in which it has more wiggle room to suppress demand, i.e., to lower inflation.

Most recently, Fitch Ratings increased likelihood of Eurozone recession. Image credit: Allianz Research

Moreover, the Fed has extra maneuvering space for higher interest rates because of the tight US job market. According to the Job Opening and Labor Turnover Survey (JOLTS), there were 1 million more job openings in July than available workers.

This causes employers to pay higher wages, which has an inflationary effect. Back in May, Powell explicitly said he wanted to “to get wages down and then get inflation down”.

What does all of this mean? As clearly outlined in the Jackson Hole speech, more interest rate hikes are coming. This will drain the liquidity further from both stocks and cryptos.

To make matters worse, we’ve officially entered September — which is historically, what many consider to be the worst month for investors.

Hang in there.

DeFi Bugs & Exploits Continue

  • Compound Reports Bug that Froze cETH Borrowing and Lending Markets for 7 Days (link)
  • Solana-Based DeFi Protocol Loses $661k After Shutting Down By Mistake (link)

TradFi’s Attempt to Rescue DeFi?

DeFi is not performing well on the respectability front.

In August, Chainalysis reported 13 cross-chain bridge hacks, with $1.3 billion stolen in 2022 alone. As smart contract repositories of digital assets, waiting to be transferred from one blockchain to another, token bridges have become piñatas for hackers.

Cross-chain bridge protocols remain a common target among hackers. Image credit: Chainalysis

Security experts admit that token bridges are still experimental as a tried and tested architecture — in terms of security — remains rare. If the purported metaverse is to be a network of blockchain networks, with fragile bridges connecting them, mass adoption will have to be put on hold. Even outside of bridges, code errors are deflating confidence.

On Tuesday, Compound’s lending dApp upgraded its price feed, causing a transaction-reversal error between ETH liquidity providers and borrowers. As the cherry on top, the code update containing the error was scrutinized by three code auditors and still got through.

Another mistake happened on Solana’s decentralized exchange this week, OptiFi. The team “accidentally closed” the dApp’s executing program, causing 661,000 USDC to be unrecoverable. Once again, a developer tried to upgrade the dApp, but because Solana was too congested, it didn’t take in.

In the meantime, the FBI took this spike in DeFi exploits and errors as an opportunity to recommend safety precautions. Are these tips useful? Not really, since the recommendation for code audits and due diligence is no guarantee of anything.

However, none of this suggests that DeFi interest is waning.

Former Goldman Sachs and Robinhood veterans are employing their expertise to launch a new crypto startup, Sei Labs. Having just raised a $5 million seed round, they aim to make DeFi transactions lightning fast, at 600ms. They called the current state of affairs — 5min transaction time on Ethereum — a “deal breaker” for DeFi. They’re building a blockchain specifically centered around an order book rather than “games and other use cases”.

Even Solana’s OptiFi example shows how crippling network congestion can be. Interestingly, Solana’s key investor, Multicoin Capital, has been leading Sei Labs’s funding.

It’s clear that DeFi isn’t going away anytime soon, despite its constant growing pains. But it looks more and more as though DeFi will become a part of TradFi, rather than supplanting it.

Enjoy 5MF? Click to forward it to three friends.

Fiat-Weakened Countries Seek Crypto Harbor

  • Argentina’s Major Wine-Making Province Now Accepts Tax Payments in Crypto (link)
  • Iran Turns Around on Crypto, Approves Imports and Mining (link)

3 Fiat-Crippled Nations, 3 Crypto Opportunities

Nations with failing currencies have not shied away from dabbling in digital assets as perhaps a last resort measure.

Remember the Venezuelan Petro (PTR) stablecoin that was supposedly backed by the nation’s ample oil reserves? It never really took off because both Venezuelans and foreigners distrust the government’s competency.

Instead, with the bolivar collapsing amid quadruple and triple-digit inflation (137% in July), Venezuelans took to decentralized cryptocurrencies. As of last year, Triple A reported that 10.3% of Venezuelans own cryptocurrencies.

Under two times lower inflation stress, at 71%, Argentinians partook in twice less crypto adoption, at 5.2%. But, seeing the obvious devaluation trend, Argentina’s Mendoza province opened its doors to using digital assets to pay regional taxes and fees.

At 148,827 km², Mendoza Province is larger than Greece, but it has a population of only 1.9 million. Image credit: Google Maps

Because a nation’s currency represents its sovereignty and strength, this is quite a significant move. (think of how the USD would react to US authorities accepting crypto for taxes) For this reason, there is a caveat — cryptos will be converted to Argentinian pesos before being handed to the administration.

Nonetheless, the cracking of fiat walls is plain for all to see. Iran serves as another example. In 2019, the hyper-sanctioned nation banned crypto trading, largely because of the toll that Bitcoin mining took on its electricity grid.

Iran has a lower inflation rate than Argentina, at “only” 52.2%. But because of the sanctions, Iran’s crypto intake is substantially higher, at 14%. With the crypto ban in the rear-view mirror, Iran’s latest bill authorizes local businesses to use cryptocurrencies when importing goods.

This is not surprising. On a state level, in early August, Iran made a $10 million import deal in cryptos, the first ever foreign trade milestone. This trend of nation-state crypto adoption is indicative of digital assets’ underlying value.

In a unipolar world, the trade would likely be dominated by a collection of interchangeable CBDCs, with emphasis on the suppression of what we consider to be ‘crypto’ today.

In a less unipolar world, failing monetary policies and geo-rivalries are keeping the doors open for a stateless money.

Is the Merge Hype Priced In?

  • Ethereum Funds Recorded $1M in Net Outflows Despite the Merge’s Hype (link)
  • Ethereum Gains Likely Overstated Ahead of the Merge (link)

Merge Hype Softens as Transition Approaches

Ethereum’s transition to proof-of-stake, the Merge, is neither going to lower gas fees nor speed up transactions anytime soon. Both of those are scheduled well into late 2023. So, what is the recent, non-stop hype all about?

Some recent KPIs:

  • Over the last month, Ethereum outperformed Bitcoin by +10%.
  • From July to mid-August, ETH went up by roughly +50%.
  • In mid-August, Ethereum’s futures open interest rates surged to an all-time high of $8.5 billion.

The closer ETH gets to the Merge, the lesser the power behind the hype. Image credit: Coinalyze

The running theory was that ESG-oriented investors will increase their ETH positions. That’s because proof-of-stake lowers Ethereum’s energy footprint by ~99.95%, as computational miners are ditched for economic validators.

Further, the transition to Ethereum 2.0 is anticipated by some to solidify Ethereum’s position as the leading smart contract blockchain.

These aspects are expected to grow ETH’s value further.

But now, instead of seeing investment inflows, we are seeing digital asset investment outflows. Specifically, three straight weeks in a row, at a total of $46 million, with Ethereum stake declining by $1 million.

With August behind us, September is typically less-than-stellar for digital assets. Image credit: CoinShares

Year-to-date, Ethereum saw $297.2 million worth of investment exits, while Bitcoin gained $275.8 million. This indicates that investors are holding their positions, not counting on the Merge hype. More importantly, with two weeks left for the Merge, the momentum seems to lose steam with each day.

Part of that is due to the macro-economic outlook, which we all know plays a big role in crypto’s price action.

After the market beating that Powell’s Jackson Hole speech delivered, many investors expect further declines or sideways chop with additional interest rate hikes. The next FOMC meeting is set for September 20th, while the soft deadline for the Merge is just a day earlier.

In order to not lose credibility, the Fed would have to stay the course on the 2% inflation target.

Cleveland Fed President Loretta Mester, with regard to the recent wage increase report, says that “current wage increases are not consistent with inflation returning to our 2% goal.”

A tight jobs market is still exerting inflationary pressure, so future hikes could even go beyond 75 bps.

NFT Market On Pause, Kinda

  • Did Meta Roll Out NTFs at the Worst Time? (link)
  • Ticketmaster Partners with Dapper Labs to Mint NFL Memorabilia as NFTs (link)

Will Corporate Sports Revive NFTs?

Like most digital assets, NFTs have been unable to escape the market’s broad decline. Just look at popular NFT marketplace OpenSea: from its May peak, the platform saw a -99% decline in trading volume.

OpenSea, the dominant NFT marketplace, doesn’t have much work to do. Image credit: Dune Analytics

After months of preparation, Meta picked this downturn to enable NFT sharing on Instagram. Meta users can now connect their digital wallets to either Meta or Instagram, and showboat their digital feathers as NFTs.

But, just like with VR and the Metaverse, Meta’s deep pockets are placing long bets. For the NFT market to revive in harsh macro conditions, ETH gas fees would have to be consistently low. This isn’t really expected to arrive until late 2023, with the Surge update.

In the meantime, Dapper Labs continues to forge partnerships with its fast and cheap Flow blockchain, designed from the ground-up for high throughput and scalability.

Ticketmaster seems to be pleased with Flow’s performance, having minted over 5 million NFTs in the last six months, mostly as NFL memorabilia. Following the success of its pilot program, event organizers using the Ticketmaster ecosystem will be able to deploy Flow-minted NFTs.

However, it won’t be for NFT ticketing as a counterfeiting tool. Ticketmaster already has that covered:

“Knowing who sits on that seat, who is actually coming to the venue, having a communication directly with them, having a verified ticket, being able to trade that ticket, putting rules on that ticket. We currently do that now.”

Ticketmaster CEO Michael Rapino

Instead, the most prevalent use of Ticketmaster NFTs will likely be proof-of-attendance and celebrity meet-and-greets. Case in point, an NFT ticket that granted access to a beer with Bill Murray was recently sold for 119.2 ETH ($185,000) at a charity auction. (as much as I’d like to say it was, it wasn’t anyone from The Tokenist)

Because NFTs are smart contracts tied to unique wallets, which can serve as verifiable identities, the proof-of-attendance use-case goes hand in hand with the social status aspect of NFTs.

Tweets of the Week

Bitcoin has…

no charismatic leader

no funded foundation

no governance token

no vesting schedule

no steering council

no partnerships

no fancy offices

no VC backing

no legal team

no pre-mine

no roadmap

no rulers


How profitable is Google really?


1/ Babylon Finance is Shutting Down

Despite our efforts, we haven’t been able to revert the negative momentum caused by the Rari hack.

Market hasn’t helped.

TLDR below


NEW — British pound is crumbling against the US dollar — moving closer toward parity week by week.


The #USD is getting stronger basically vs everything.

As it gets stronger, it causes a wrecking effect across all asset classes. Given the size of global USD-denominated debt, as the USD strengthens, so does the bid for USDs. It’s a self-reinforcing loop 👇


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Five Minute Finance

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