Tim’s Tech Tidbits #6

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Coinmonks

5 min readMar 1, 2022

Hi friends,

It has been a surreal week. As I am writing this newsletter this evening, I feel incredibly blessed to be able to do so in the comfort of my home, without any worry about my personal freedom or safety. It’s a heartbreaking reminder that despite living in modern times, war is still in humanity’s toolkit for dispute resolution — despite being a very blunt and primitive method.

My heart goes out to anyone who is affected by the Russia-Ukraine situation. Regardless of our nationalities, ethnicities, or cultures, we are all humans first. In war, there are no winners. Only survivors. Whichever side may call itself the victor, it is ultimately humanity that loses.

I am no expert in geopolitics or wars, so will refrain from speculating on how the situation will unfold, any subsequent ramifications, and how things will shake out at the end. What I am comfortable doing is sharing some of my thoughts and observations on how macro-volatility continues to play out in the markets.

Today’s topics

The cost of war and its implications for the world
Contextualizing the war through the public markets lens
Gold versus Bitcoin — which is the real safe haven?

The cost of war and its implications for the world

In the prior newsletter, we talked about the capital rotation from high growth tech stocks into more cyclical sectors, such as commodities and energy, in a high inflation rate environment. This appears to be exacerbated by the Russia-Ukraine situation. According to JPM research, oil prices surged more than 8%, breaking above the $100 per barrel level for the first time since 2014, while natural gas prices in Europe jumped more than 30%
Businesses and consumers have already been under the strain of surging electricity bills, which has been compounded by supply disruptions and increased demand globally. An escalating situation between Russia and Ukraine will create further uncertainties and volatility in global energy supply chains. Higher energy prices also affect every type of consumer good, in the form of higher transport, packaging, manufacturing and processing costs
Inflation is therefore likely to remain elevated than originally forecasted, which may result in the Fed taking more drastic actions to curb inflation. With the next FOMC meeting just two weeks away, we should expect to get more concrete guidance on the magnitude and frequency of the rate hikes. The markets have already priced in at least five rate hikes this year, though there may be a case to be made for more and/or quicker rate hikes if the situation worsens

Contextualizing the war through the public markets lens

Even before the news of war, global IPO markets have been challenging, to say the least. In Hong Kong, proceeds raised in the first two months of 2022 were down 87% compared to a year ago. Globally, the total proceeds raised was $2.3 billion, down over 90% and far below the $24.8 billion raised in the same period last year. Investors have been shunning IPOs on concerns of higher inflation rates and the current geopolitical situation has made conditions even worse
Many issuers have chosen to postpone their IPOs until market conditions improve. Shein has reportedly postponed their IPO plans for the second time, and even Akanda, the only firm expected to list its shares this week, also postponed its offering. Despite continued demand from investors for high-quality businesses with solid track records, issuers looking to raise in the current climate may have little choice but to raise at lower valuations or trim their raise. In fact, all six IPOs in Hong Kong this year were priced at the low end of the indicative ranges, according to Refinitiv
IPO markets could return by 2Q this year, depending on whether investors receive necessary clarity from the Fed next month and how the Russian-Ukraine situation pans out. It would also provide issuers an opportunity to see how public company peers have fared during the first quarter this year and the markets’ reaction. As the pipeline of companies waiting to go public remains healthy, the stock market will be able to find its footing once market volatility settles

Gold versus Bitcoin — which is the real safe haven?

First, it was concerns over higher inflation rates. Now, the war in Ukraine have sent shockwaves across financial markets. There has been a “flight from risk” towards assets that are considered safe havens. Equities and crypto are down while gold and fiat currencies have rallied. Crypto natives have been touting bitcoin as “digital gold” and a better inflation hedge than traditional gold, so why do trading patterns suggest otherwise? I am a numbers guy and firmly believe that the numbers never lie. That said, over the years, I’ve also come to the realization that finance / investing is both a science and an art, and framing the numbers in the right context allows for a better understanding of the reasons behind the data
To understand the opportunity in any asset, we can look at its product fit and overall addressable market. Product fit: A store of value can be judged based on the following characteristics — durability, portability, divisibility, uniformity, limited supply and acceptability. If you look at the fundamentals of bitcoin, it has the potential to rival, if not exceed, gold as a store of value. Addressable market: Most people focus on how large the addressable market will be. Yes, the absolute size of the addressable market is important, but it is also critical to have a differentiated view on how the addressable market can evolve before it becomes consensus. People tend to underestimate the addressable market because they fail to notice changes happening right under their noses. Bitcoin is becoming a more recognizable asset class than gold for the up and coming generation and it is becoming more important in an increasingly digital world. Regardless of what the data shows, it is only a matter of time before the consensus shifts accordingly
So why are we faced with such conflicting data? My best guess is that a greater portion of investors in bitcoin today are “traditional” investors seeking higher returns in riskier assets such as crypto. However these types of investors tend to bring trading habits from the stock markets and are more speculative than fundamental in nature. There are also several algorithmic traders whose algorithms only look at historical data and trades based on numbers (i.e. algorithms see historical correlations between bitcoin and the stock market and will act accordingly). There is a constant tug of war between these investors that do not have a fundamental view on bitcoin vs. long term holders who believe in bitcoin

If you like to discuss any of the themes, trends or topics further, please feel free to reach out. I would also love to get any thoughts and suggestions on the above.

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Tim’s Tech Tidbits #6

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Written by Timothy Leow