FIVE MINUTE FINANCE: WHY JPMORGAN SAYS BTC IS UNDERVALUED BY 28%, TERRA 2.0 EXPLAINED, 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:
- Diving into Fed Minutes, JPMorgan Says BTC is Undervalued
- What Happened: Terra 2.0 Explained
- ARKK Down 55% YTD, Yet Has Seen $1.5B Inflows in 2022
- More Talks of CBDCs: How Will They Impact Crypto Adoption?
- Can ESG Be Friendly to Crypto Assets?
As the Fed Continues to Hike Rates at Record Levels, JPMorgan Says BTC is Undervalued by 28%
- Bitcoin Sees Weakness at $29K as Traders Assess Fed Minutes (link)
- Fed Minutes Point to More Rate Hikes That Go Further than the Market Anticipates (link)
Is Bitcoin Done Reacting to the Fed?
The Covid-19 pandemic and subsequent global lockdowns sledgehammered the economy like little else in history. In the immediate aftermath, the IMF estimated the largest global GDP drop since the Great Depression of the 1930s, at 3.9%.
The world is still trying to patch up that damage. The Covid lockdown rupture was most visible in economic productivity reduction, measured by labor productivity:
Lockdown nailed the economy. Image credit: U.S. Bureau of Labor Statistics
This is inflation’s core cause, drastically exacerbated by the Fed’s $4.6 trillion balance sheet hike. Not only did Covid lockdowns cripple global aggregate supply but they crushed the world’s delicate just-in-time (JIT) supply chain, permanently damaging the global economy’s productive capacity.
In other words, a textbook inflation scenario happened — the Fed’s radical money supply output outpaced real economic output. Yet, it appears this textbook lesson evades most economists. After all, they are consistently wrong on inflation rate expectations.
Image credit: Bloomberg
And if you think that’s bad, the IMF itself concluded that economists predicted only 5 out of 153 previous recessions. It seems that the same faulty economic school of thought has been prevailing within the Federal Reserve as well.
This is disturbing since, at a base level, the Fed is an information shuffling machine, in which money is the information. Because it is not a giant factory, the Fed cannot solve a supply-side crisis by money printing.
What it can do is reverse the damage by raising interest rates and reducing its balance sheet, so the economy is realigned with reality. The Fed’s QE reversal will only increase the cost of capital, reducing economic growth. This is already visible in the Q1 2022 labor productivity downturn.
Nonetheless, the latest Federal Open Market Committee meetup (Fed minutes) shows that it must go against the market sentiment if there is to be any chance to squash inflation (mentioned 60 times). This translates to a shift from “neutral” to “growth restrictive”. In turn, this means a more aggressive and frequent increase in borrowing rates, at 50 basis points (0.5%), the largest one-month rate hike since the year 2000.
That may happen or it may be the Fed’s “talk to talk, not the walk” as it has done many times previously. After all, if the Fed dumps acquired assets back to the economy, it could balloon deficit spending, once again triggering inflation down the road.
Amid this market realignment, Bitcoin is holding up within the $30k band. Every time a new sell-off pressure is exerted, strong hands jump in to take BTC off weak hands. Moreover, as an asset that is neither stock nor real estate, Bitcoin can be used as an alternative that is more resistant to the Fed’s pressure.
In Wednesday’s note to clients, JPMorgan did exactly that. Not only did the world’s largest bank note that Bitcoin is undervalued by 28%, but that it is preferred amid “potential lagged repricing” in real estate and equity markets. Of course, this repricing can only happen as a byproduct of the Fed’s policies in the first place.
Jamie Dimon, JPMorgan’s CEO, is known to have previously called Bitcoin a “fraud”, saying it’s “worthless”. My, how times have changed.
Can Terra 2.0 Grow Without the Stablecoin Responsible for its Previous Growth?
- Terra to Start New Blockchain on 27th May, Will Abandon UST (link)
- Exchanges Back ‘Terra 2.0 Revival Plan’ via Airdrops, Listing, Buyback and Burning (link)
What Will Differentiate Terra Now?
Terra’s collapse was not one of the brute Bitfinex hack, which ended up in largely restored funds. Instead, Terra collapsed under the weight of its UST algorithmic stablecoin experiment. The path to restored funds then follows a different arc, one in which Terra would need to repeat its previous growth.
Do Kwon’s proposal featured a governance vote, which the community passed. 65.5% of votes supported the proposal, 20% abstained, 13.2% voted “no with veto”, and 0.33% voted “no”.
The “Terra Ecosystem Revival Plan” will happen without the TerraUSD (UST) algorithmic stablecoin though, as Terra’s new blockchain excludes it.
Terra 2.0 will then have to make due without a stablecoin. Reminder, Terra’s whole growth story was underpinned by UST because the network was supposed to be a crypto version of Visa — cheap and instant payments through stablecoins.
Nobody knows if the previous success will follow Terra 2.0. Nonetheless, those who were participating in its collapsed ecosystem do have a chance to recoup their losses via the new token distribution:
- 30% to the community pool
- 35% to pre-crash LUNA holders
- 10% to post-crash LUNA holders
- 15% to post-crash UST holders
- 10% to Anchor UST stakers
New tokens will be distributed according to a vesting model, where tokens will be received periodically to prevent an immediate dump.
Here’s how Terra 2.0 is expected to be brought to life:
- The old (existing) Terra blockchain will be renamed as Terra Classic. All current LUNA tokens will become LUNC.
- The new blockchain will use the name ‘Terra’, and new tokens will be referred to as LUNA.
- New LUNA tokens will be airdropped to LUNC and UST holders.
The transition is similar to Ethereum’s hardfork which created Ethereum classic back in 2016. While Terra’s move resembles a hardfork, Terra developers have clarified that Terra 2.0 will constitute an entirely new and independent blockchain rather than a hardfork.
Terra’s new network launch is expected to go live May 27th.
The Terra ecosystem has attracted a number of developers throughout its drastic growth period, and it’s trying to retain them to save the community. But, all of this begs the question — if much of the community was there for the unsustainable 20% APY provided to UST holders via Anchor protocol, and that’s out the window, who will stick around, and why?
For the time being, it is encouraging that all major exchanges — Binance, Kraken, KuCoin, FTX and others — are participating in Terra’s migratory revival.
Short Interest in ARKK Decreases: What it Means
- Desire to Short Cathie Wood’s ARKK Is Dropping Almost as Fast as the Fund (link)
- ARKK Inflows Stay Strong Despite Underperformance: $1.5B in 2022 So Far (link)
The Power of Investor Belief Pays Off
What do growth assets need? Cheap capital. And what does the Fed accomplish with its quantitative tightening (QT), the reversal of QE? It increases the cost of capital by raising interest rates.
This dynamic is the culprit for Cathie Wood’s ARKK fund to decline by 60% since December. During 2020–2022, as the Fed airdropped trillions to “stimulate” the economy, ARKK was the rising star.
Wood took advantage of the boon by committing to companies with cutting-edge technologies, from AI to gene-editing.
ARKK short interest as a percentage of shares out. Image credit: Bloomberg
This futuristic outlook alone nurtured a loyal base of investors that maintained a $1.5 billion net influx during 2022. Additionally, it appears the $7.7 billion fund bottomed out as shown by drastic decrease in shorts. Those who took bets against ARKK had a 17% foothold in April, which had fallen in May to 9.2%.
What are we seeing here? Steadfast ARKK investors are spooking shorters in spite of the ongoing market downturn. Some see this as an indicator that we’re approaching the bottom. But, it’s still very early.
CBDC Shadow is Looming Over Crypto’s Adoption Rate
- SWIFT Could Use CBDCs to Improve Cross-Border Payments (link)
- Fed Survey: 12% of US Adults Held Crypto in 2021 (link)
Crypto Adoption May Hit CBDC Ceiling
If anything, the meteoric rise and fall of Terra showed high demand for borderless payments. Those that are cheap, 24/7, near-instant, and secure from chargeback fraud. Few options are available that fit the bill. Except for upcoming CBDCs — central bank digital currencies.
CBDCs will upset many things, including the world’s largest payment global network, SWIFT. In fact, Mastercard CEO Michael Miebach doesn’t expect SWIFT to exist in 5 years. Or, at least not in its current form as the world’s financial artery.
To not become totally obsolete, SWIFT is exploring multi-CBDC cross-border transfers. Imagine sending digital euros to China, with its digital yuan. SWIFT’s proposed network, thanks to a partnership with French Capgemini, would facilitate the conversion of CBDCs in an automatic and frictionless manner.
For users, this means transfers would not cost an arm and a leg. More importantly, such a system would replace the current cumbersome method of several banks protractedly cooperating to execute a single cross-border transaction. Altogether, this is a recipe for the pinnacle of convenience, the greatest driver of adoption.
While worldwide crypto adoption jumped by 880% from July 2020 — June 2021, what will happen to crypto adoption rates when CBDCs are introduced? Image credit: Chainalysis.
The question is, will crypto adoption reach a high level by the time CBDCs are deployed to actually intercept the adoption of CBDCs? After all, the Canadian bank account freezes clearly outlined a future of what it means when you don’t actually own assets that are hosted by either banks or exchanges.
The Fed’s annual survey of 11,000 people showed that 12% of US adults held crypto assets in 2021. More tellingly, only 3% have used them for payments, while the rest used them as an investment. Out of those 3%, 13% didn’t have a bank account, while people who perceive crypto assets as investments all have bank accounts.
The survey indicates that crypto may be cemented as a niche market. It is all well and good to bring up adoption curves and benefits of non-custodial wallets, privacy coins, and atomic swaps. But, at the end of the day, the most numerous and lowest common denominator may not care to learn as CBDCs are placed front and center.
Can ESG Be Friendly to Crypto Assets?
- BNY Mellon Unit Fined $1.5M for ESG Misstatement as SEC Deals with “Greenwashing” (link)
- ESG Study Shows Bitcoin Mining’s Potential to Eliminate 0.15% of Global Warming by 2045, Claims No Other Technology Can Do Better (link)
BlackRock is ESG’s Prom King
By the words of Larry Fink, the CEO of BlackRock and self-accredited ESG leader, the environmental, social, and corporate governance investing generated massive flows. Specifically, from $1 trillion in 2019 to $2.7 trillion by Q1 2022.
However, did investors suddenly take to ESG because of elevated environmental consciousness, or did funds and companies take to ESG because doing otherwise would limit their financial access? The removal of Tesla from the S&P ESG Index certainly suggests the latter.
This is a tale as old as time — creating lists and judging criteria to disincentivize unwanted behavior. Then, to propel a different agenda and get ahead of competition, exclude others beyond the original criteria. People may have liked sustainability within ESG, but there is nothing an ESG cannot encompass.
When all is said and done, the three words encompass nothing less than the entirety of human existence. As such, it is very difficult to standardize an ESG package, despite the SEC fining BNY Mellon for greenwashing their portfolios. If anything, this fine could serve as further incentive to get into the ESG fold, whatever the criteria ends up being.
For example, we may end up in a situation in which cryptocurrencies are deemed anti-Social, a viewpoint which the ECB president Christine Legarde proclaims.
“My very humble assessment is that it is worth nothing,”
On the other hand, because Bitcoin has already attracted many investors, who is to say it cannot fold under ESG? The latest report by Daniel Batten of Geneious, suggests that Bitcoin miners could be used to catch up to 5.32% of global carbon emissions.
Moreover, due to advances in liquid cooling and computing, Bitcoin network’s consumption level already went down by 25% in Q1 2022. While Greenpeace may demand that Bitcoin undergoes the Ethereum-like treatment to turn into proof-of-stake, this is a bad idea.
By not relying on the kindness of founders and stakeholders, Bitcoin’s proof-of-work is the sole monetary network that is independent from stakeholder machinations. Is this why Legarde deems it as “worth nothing”? In the world of Klaus Schwab’s stakeholder capitalism that aims to deliver “you will own nothing and be happy”, it is indeed worth nothing — to them.
Tweets of the Week
S&P 500 worst starts to a year in first 100 days:
1. 1932: -36%
2. 1940: -26%
3. 1970: -22%
4. CURRENT: -17%
5. 1939: -13%
6. 1962: -13%
We are off to the 4th worst start to a year in history, but the $VIX is below 30.
$VIX says panic has yet to hit, imagine when it does.
The double crises of Russia’s invasion of Ukraine and China’s new pandemic lockdowns are jolting the world recovery by exacerbating inflation and hurting growth, according to new research from Bloomberg Economics
Consensus estimate of economists gathered by Bloomberg shows expectation that CPI eases back down to near 2% by end of 2023
Billionaire Bill Miller: “#Bitcoin is the only economic entity in the world where the supply is unaffected by the demand.” 👏
U.S. spring #wheat planting is advancing at the slowest pace in more than 20 years and was only 49% complete as of Sunday. Average for the date is 83%. Minnesota is only 11% planted vs 90% avg. North Dakota 27% vs 80% avg. Those two states grow two-thirds of the U.S. crop.
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