Securitize Capital Market Commentary — April 29th, 2022
Macro
We expect FOMC to deliver its second-rate hike of the cycle for a 50 basis points hike in its May meeting, and announce their balance sheet runoff plan starting in June. The FOMC statement will highlight the conviction for a full speed dive into quantitative tightening to combat inflationary pressure.
Vicious equity price action led us into the next phase of the bear market. The dual challenge of inflation and earnings stagnation pushed the S&P 500 real earning yield into negative territory. The S&P 500 is at an unprecedented level of negative yield (Exhibit 1) since the 1950s. A fundamental tenet of finance tells us that higher rates lead to lower valuations; this means that the equity market will continue to see price pressure in the short term.
Exhibit 1: S&P 500 Real Earnings Yield
Source: Bloomberg
Cryptoland
This weekend the creators of the Bored Ape Yacht Club raised $320mn from Metaverse real estate sales of ‘Otherdeeds’ in ‘Otherside,’ a forthcoming game from Yuga Labs. High demand for the NFT clogged the Ethereum network and sent gas fees skyrocketing as high as 2ETH, or about $5,700 for total gas fee consumption of $157mn.
Network scalability has been one of the key motivations for Ethereum’s migration from Proof of Work (PoW) to Proof of Stake (PoS). As of last weekend, over 12mn ether or $34bn has been staked on the Beacon Chain network; and the merger of the Beacon Chain into the Ethereum mainnet would complete the transition to ETH2 (https://etherscan.io/address/0x00000000219ab540356cbb839cbe05303d7705fa). The Merge neither directly improves scalability nor fixes the high gas fees of the Ethereum network, but it is a step towards scalability solutions post-Merge.
We expect that Ethereum’s dynamics will create a positive yield due to PoS mechanism. Especially after the Merge, ether’s rewards to miners will cease via ‘difficulty bomb’, reducing ETH’s issuance rate by about 90%; subsequently, ether will become a ‘deflationary’ rather than ‘inflationary’ asset. ETH2.0 total yield will be about 15%+ per annum (p.a.) comprised of block rewards (about 5% p.a.), transaction tips (about 5% p.a.), and maximal extractable value (about 6% p.a.). From the TradFi’s perspective, ether is a debt-free instrument with a sustainable payout and is analogous to a high-growth technology stock whose valuation is linked to use cases in DeFi, non-fungible tokens, gaming, Web3.0 and etc.
Exhibit 2: Ether/bitcoin Cross
Source: Bloomberg
The fundamentals of Ethereum have not been priced fully in the market. From technical perspective, ether/bitcoin cross is off the All-Time-High (ATH) in December last year, 0.074 vs 0.09 (Exhibit 2). Momentum has been stagnated.
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