Securitize Capital Market Commentary — May 17th, 2022
Macro
Volatile markets across risky asset complexes are too rich for long-vol positions, as illustrated by G10 FX volatility pricing outside of the central bank guidance. Gold and the USD can be positively correlated, acting as safe havens against a backdrop of geopolitical risk during the current Ukraine-Russia conflict. We can expect gold prices to pull back and become more volatile in the near term due to several factors: 1) the Fed’s recent hawkish commentary has boosted the value of the greenback relative to other currencies while weighing on non-yielding assets such as gold; 2) as we enter a full bear market cycle, gold acts as an ATM for investors who need to meet margin calls and deleverage risk; and 3) the eventual de-escalation of the Ukraine-Russia conflict reduces gold’s geopolitical risk premium. Recession risk is real. During the double recessions of 2008–2009, a three-month gold 25-delta risk reversal showed strong interest in longs, whereas pandemic-led 2020 recession reflected liquidity shock (Exhibit 1). We continue to argue for a defensive position in cash, as hedges remain rich and volatile.
Exhibit 1: Gold 3-month Gold 25-delta Risk Reversal
Source: Bloomberg as of May 15, 2022.
Cryptoland
Spot
The market witnessed the unravelling of Anchor-UST-LUNA Ponzi last week, and the spillover led to the largest wealth destruction in the history of crypto markets. In her address last Thursday, U.S. Secretary of the Treasury Janet Yellen said that Terra’s tumble shows the dangers of stablecoins and called for new regulations, adding that Treasury was working on a full report about the issue.
On May 12th in one of its darkest moments, BTC dipped down to $25,340 before it stabilized at approximately $30,000 nearly 12-hours later. Given muted RSI and high historical volatility, BTC will test $27,000 again in a choppy market (Exhibit 2). As a result, public miners experienced punishing trading sessions last week and mining equipment was selling at a deep discount. If BTC stays at the current price level of $30,000 or lower for a prolonged period, we can expect that new miners of the recent bull cycle will show signs of distress. Our full cycle retracement price target for BTC is $14,000.
Exhibit 2: Bitcoin Weekly and Monthly Realized Volatility
Source: Bloomberg as of May 15, 2022
Options
As suspected volatility picked up, implied volatility rallied across the curve, but the front-end has been intense with both BTC and ETH touching 200%. The 25-delta BTC adn ETH risk reversals have widened by 50 points as the traders look for protection.
Spotlight: Helium (HNT)
When Helium was founded in 2013, Shawn Fanning, Amir Haleem, and Sean Carey had conceptualized the Internet of Things (IoT) to be a network of physical objects that were embedded with sensors, software, and other technologies. IoT extracts data from sensors in the real world and can be connected to anything from smartphones to garage doors.
Helium’s goal was to create a peer-to-peer IoT network that anyone would have access to. In 2016, Amir created a coin that could be mined with Helium Hotspot devices; and in 2019 the first helium miner was born. Helium Crypto Token (HNT) is earned when Hotspots provide and validate wireless coverage and transfer device data over the network. These devices incentivize people to join Helium’s decentralized network and provide low-power network coverage for billions of devices while earning a HNT cryptocurrency. Helium recently raised $110 million in investments from cryptocurrency venture capital heavyweights like Andreessen Horowitz.
Helium runs on a proof of coverage system, ensuring that all Hotspots are indeed where they claim to be. This validation happens through other Hotspots witnessing wireless coverage. There are 5 rewards that a miner can receive: 1) sending encrypted messages from one miner to groups of miners around the globe; 2) witnessing other miners’ performance; 3) monitoring and reporting proof-of-coverage activity of other Hotspots; 4) distributing data from devices on the network; and 5) participating in is a consensus group.
Currently proof of coverage rewards account for most HNTs, but as usage and utility increase, that is subject to change. The Helium Map breaks the globe into hexes and shows the amount and the location of miners in each hex. All miners within the same hex are required to split the reward, therefore making it not profitable to place several miners in close proximity to each other.
There are 11 third-party suppliers for these miners. Due to the current global semiconductor chip shortage with 1 million units on backorder, HNT is deflationary and experiences halflings, which decrease the overall supply of HNT. Yet DigitalCoin forecasts a target price of $83.54 per HNT by 2025 (Exhibit 3).
Exhibit 3: Helium Token Price Forecast
Source: https://digitalcoinprice.com/forecast/helium
Helium 5G will be Helium’s second major wireless network. With more than 800,000 Hotspots, Helium has secured key partners in the sector to help with distribution and expansion. Helium.com reports, “As DISH deploys our own smart 5G network across the country, we seek partners who are innovative regardless of whether or not they are one of the largest technology providers in the world, or a startup with a disruptive idea.”
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