Insights, news and analysis for the professional investor |
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Bitcoin (BTC) - $21,232.48 |
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Prices as of 7/8/22 @ 2:05 p.m. UTC Was this newsletter forwarded to you? Sign up here. |
Welcome to Crypto Long & Short! The last time I wrote about a stablecoin, it failed spectacularly. So when a colleague of mine suggested I write about MakerDAO’s proposal to invest in U.S. Treasurys to back its collateralized stablecoin DAI, I was reminded of the power I wield. I’m completely joking, by the way. I don’t take myself that seriously. But while we are on the topic of spectacular failure, we should talk about spectacular failure. Just two weeks ago, this newsletter suggested that opaque, intertwined platforms with excessive leverage were a danger to crypto investors. That was in the shadows of the hedge fund Three Arrows Capital’s (3AC) insolvency, but now Celsius and Voyager (two retail-focused yield-generating platforms) have put together restructuring plans. Which is what you do when you’re screwed. Voyager even declared Chapter 11 bankruptcy – the “good kind of bankruptcy” for the record (if there’s such a thing) – proving that crypto is hellbent on playing out the mistakes of traditional finance at hyperspeed. What’s more, Blockchain.com also stands to lose $270 million from lending to 3AC. Oh, and there are a handful of other not-so-great crypto things happening right now which we’ll get into, but it’s all going to (somehow) be fine. That (and maybe more …) below. – George Kaloudis |
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The economy is looking not so good The yield curve inverted this week (see chart below). The yield curve inverting is often treated as a warning indicator for a recession. So that isn’t great on the surface. |
10-Year Treasury Yield excess of 2-Year Treasury Yield (TradingView) OK, but what does that mean? In plain English, the U.S. federal government sells bonds, or Treasurys, to investors like you to fund all the stuff they do. Those Treasurys, in turn, pay you an interest rate or yield over a period of time. At the end of that period of time, the original amount is returned to the investor. If Treasurys sound like loans, that’s because they are. The amount investors would expect to make on these Treasurys is higher the longer the loan is. That makes sense. Your money is locked up longer, so in exchange for that risk you get more yield. So then if you plotted the length of the loan on the x-axis against yield, you’d get a logarithmic-looking growth curve. |
Normal yield curve (Julie Bang/Investopedia) Except when the yield curve inverts – which is what happened. Now, 10-year Treasury yields are lower than 2-year Treasury yields. Theoretically, this means investors expect longer term rates to decline. Practically, this means banks – which depend on lending at rates in excess of the “risk-free rate” (typically the 10-year Treasury yield) to make money – will lend less. And this will lead to a slowdown in economic activity. Such is life in a debt-based monetary system. Also, a 75 basis point (bps) increase to interest rates in July is basically a foregone conclusion at this point. (For more on what that means, check out the more detailed piece I wrote two months ago). According to the Federal Open Market Committee (FOMC) June meeting minutes, almost all FOMC members were in favor of a 75 bps hike. Federal Reserve Chair Jerome Powell told us that a 75 bps hike was an “unusually large one.” Two months in a row would seem quite usual, but that’s just me. All eyes on July 27. The miners are struggling We touched on how mining companies might soon capitulate by selling some of their balance sheet bitcoins to fund operations as they struggle, given 2022 price performance mentioned in last week’s newsletter. And just like that one of the largest miners, Core Scientific (CORZ), announced that it sold over 7,000 BTC in June. CORZ hasn’t performed well in 2022, so it’s unsurprising that they had to dip into the treasury a bit. |
CORZ stock price year-to-date (TradingView) All said, while miner capitulation is viewed as the beginnings of a “death spiral to zero” (since miners are supposed to be the last line of defense), that isn’t happening in reality. Core Scientific CEO Mike Levitt assured investors the company is focused on executing its plans and the sale was just an exercise in maintaining a healthy balance sheet. And to its credit, CORZ didn’t have to disclose that it sold anything given its earnings call isn’t until August. If anything, we should applaud the transparency. The crypto lenders are not having a good time Lastly, leverage continues to hurt everyone. The Luna collapse led to the Three Arrows Capital insolvency, and now we are facing a crypto lender crisis. BlockFi received a structured bailout from FTX with what seems to be $215 million in earn-out, Celsius halted operations and then announced some restructuring plans, and Voyager did the same-same-but-different by declaring bankruptcy. On top of that, it came out on Friday that Blockchain.com might lose $270 million from lending to Three Arrows Capital. It’s tough sledding out there. The news is still unfolding with all these lenders. In general, this is all “not good,” but it does feel like the worst is behind us. FTX and its ever-altruistic CEO Sam Bankman-Fried is emerging as crypto’s savior as his or his firm’s name has popped up in all discussions around companies who are failing in the embers of the Three Arrows insolvency. The actual interesting takeaway So in general, all these things – an inverted yield curve, higher interest rates, miner capitulation and multiple crypto lender bankruptcies – are not good. What is going to be most interesting here is seeing what happens to bitcoin and crypto during these hard times. Not only is life tough in the crypto world, but macro markers are signaling a recession. And although it was birthed out of a recession, bitcoin has never lived through one. It will, at the very least, get interesting. Thankfully (or unthankfully) things are happening quicker than I’m used to (I used to work in finance/tradfi). The interesting thing is seeing what bitcoin will do in the times of hard macro times - which is the root of this all. Amid all of this, here’s bitcoin last week. |
CoinDesk Bitcoin Price Index (CoinDesk Indices) So I guess it’s going to be fine? I don’t know. |
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Hut 8 added 5,800 bitcoin mining rigs. - TAKEAWAY: The Canadian crypto miner has added 5,800 mining rigs to its fleet and remains committed to its HODL strategy of not selling any of their mined bitcoin to cover operating costs. Hut 8 CEO Jamie Leverton said, “We are confident that our HODL strategy, coupled with the uncorrelated recurring revenue from our high performance computing business, will allow us to continue to successfully navigate the current market.” The company mined 328 BTC in June, increasing its holdings to 7,406 BTC. Read more here.
Crypto lender Voyager Digital filed for bankruptcy. - TAKEAWAY: On July 5, Voyager Digital filed for Chapter 11 bankruptcy protections in the U.S Southern District Court of New York. Voyager CEO Stephen Ehrlich said, “This comprehensive reorganization is the best way to protect assets on the platform and maximize value for all stakeholders, including customers.’ Voyager is estimated to have more than 100,000 creditors and somewhere between $1 billion and $10 billion in assets. Read more here.
Three executives have left JPMorgan to join crypto firms. - TAKEAWAY: Former managing director at JPMorgan Eric Wragge has joined Algorand blockchain project as head of business development and capital markets; Former head of ideation and digitization at JPMorgan Puja Samuel has joined Digital Currency Group (CoinDesk’s parent company) as head of corporate development; and former JPMorgan banker Samir Shah has become chief operating officer at cryptocurrency-focused investment firm Pantera Capital. The recent moves highlight the trend of people leaving TradFi for Web3 despite a looming crypto winter. Read more here.
Celsius paid off its Maker loan. - TAKEAWAY: The crypto lender that halted withdrawals and downsized its staff reclaimed $440 million of its collateral on July 7 after fully paying back its loan on Maker. Celsius’ repayment released 21,962 wrapped bitcoins that were posted as collateral. The recent move is a big liquidity boost as the freed-up collateral “can be sold on centralized exchanges or via over-the-counter to meet creditor demands and customer withdrawals,” said Fundstrat analyst Walter Tend. Read more here.
Genesis confirmed exposure to Three Arrows Capital. - TAKEAWAY: On July 6, Genesis Global Trading CEO Michael Moro said Three Arrows Capital was the large counterparty that failed to meet a large margin call in June, forcing liquidation of the related collateral. Digital Currency Group, parent company to both CoinDesk and Genesis, is not only helping Genesis isolate risk but is also assuming certain liabilities of Genesis related to Three Arrows Capital. Read more here.
– Sage D. Young |
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