Your Monthly Brief into the World of Digital Assets
THE FED
FINANCIAL INSTITUTIONS
- What if Mt.Gox 150,000 BTC repayment to its users is the next black swan event?
- Celsius files for a “reorganisation” bankruptcy
MINING
CRYPTO PROJECTS
REGULATORS
COMPANIES
The Fed
From our 29/7 Investor Newsletter:
The Fed hiked 75bps as expected, yet risk assets rallied in the aftermath led by Tech and Crypto as the stand out performers, with BTC up 16.8% and ETH up 57% (with The Merge buzz providing a strong tailwind) in the month of July. The market is trading on the basis that we have passed peak FED hawkishness and we can see this in the fall in US 10Y yields rallying and completing its head & shoulders technical pattern.
The risk-on rally is quite perplexing as the only reason that the rates are lower is that economic growth and conditions have deteriorated. The US entered a technical recession with a second quarter real GDP print of -0.9% YoY, fulfilling the recession definition of two consecutive quarters of negative GDP growth. Indeed, globally inflation still remains a persistent issue and we can see this with the latest European CPI numbers showing no sign of peaking. Euro-area inflation again accelerated to 8.9% in July. Persistent inflation and slowing growth = stagflation.
Bigger concern is that global central bankers seem hesitant to stop inflation in its tracks by hiking rates and keeping them as high as needed until inflation reverts to 2%.
However this level of monetary tightening globally (alongside the tightening caused by higher commodity prices) increases the probability of a hard landing and a more prolonged period of economic contraction.
This is bad news for unprofitable and negative cash flowing equities but also offers opportunities to tactically invest in specific stocks and crypto: The best defense against inflation is a high gross margin — the difference between revenues and cost of goods sold. These equities types have been outperforming all year and should continue to do so.
Financial institutions
What if Mt.Gox 150,000 BTC repayment to its users is the next black swan event?
In 2011, French developer Mark Karpelés bought Mt.Gox. At its peak, the exchange, based in Tokyo, was processing more than 70% of all BTC transactions. However, due to widespread mismanagement and lack of organisation nobody reacted to a series of hacks that started as early as Mt.Gox’s acquisition by Karpelés. June 2011, hackers acquired one of the exchange auditors’ computer and set BTC price at 1 cent. Despite tightened security measures hacks kept adding up. Beginning of 2014, 750,000 clients’ BTC and 100,000 BTC of Mt.Gox’s own reserve were missing. The exchange went bankrupt and Nobuaki Kobayashi became Mt.Gox trustee.
Post-bankruptcy 141,686 BTC were remaining in the exchange wallets. First, in 2018, Japanese officials accepted a petition aiming for a civil rehabilitation of the remaining funds. Completion kept being postponed. Eventually in February 2021, Nobuaki Kobayashi proposed its own rehabilitation plan, approved by 83% of creditors in October. Used to delays creditors were surprised following Kobayashi announcement beginning of July. He confirmed he was “preparing to make repayments” and clients are asked to choose currency of repayment. As the refund process becomes more tangible and creditors rejoice, market participants tremble. Mt.Gox users waited 8 years to be refunded. They are very likely to sell their recovered holdings. In reality, 150,000 BTC or $3.5 billion is a significant amount of selling pressure but the market can easily take the hit. Binance daily volumes are 3 times bigger and total Mt.Gox holdings only amount to 0.78% of total supply. What could really damage BTC price is FUD. Like in recent Black Swans such as Terra’s crash the real threat is overreaction from market participants rather than the event itself.
Celsius files for a “reorganisation” bankruptcy
All details about the whys of Celsius turmoil can be found in our June Newsletter. In a nutshell, regulators scrutiny, stETH and UST depeg forced Celsius to halt withdrawals to avoid a massive bank run.
In less than a month Celsius succeeded to honour its $820 million debt to its DeFi partners Maker, Compound and Aave. Such a large outflow of liquidity put Celsius in an even more unstable situation. Eventually, on the 14th of July, Celsius filed for Chapter 11 bankruptcy in the United States. Chapter 11 is a crucial nuance since as opposed to Chapter 7 Bankruptcy, the process doesn’t require Celsius to liquidate all its holdings to pay creditors and the organisation can continue its day-to-day operations. Bankruptcy filings show that Celsius still has a $4.7 billion liability made up of users’ deposit with total liabilities amounting to $5.5 billion. While there are notorious restructuring success after bankruptcy chapter 11 fillings such as General Motors and American Airlines, depositors fear that like Mt.Gox, Celsius will be unable to pay them back. Mt.Gox, once the biggest crypto exchange platform, went bankrupt in 2014 and never fully repaid the 750,000 BTC (4% of total supply) it had lost.
Further readings
· Three Arrows Capital Files for Bankruptcy in New York Tied to British Virgin Islands Proceeding (Read More)
· Binance Extends Zero Fee Bitcoin Trading Globally (Read More)
· FTX US Opens Stock Trading in All US States (Read More)
· Binance Fined $3.4M by Dutch Central Bank (Read More)
Mining
JKL Mining sponsored the Mining Disrupt conference — the world’s largest Bitcoin mining exposition taking place each year in Miami. In our Keynote we spoke about the value Bitcoin Mining brings to institutional investors and how it compares to some of the traditional assets.
Using a new framework named GRID, we identified 4 core attributes to Bitcoin mining institutional investors must know. First, mining is getting Greener by making electricity grids more efficient through load balancing. Mining is location agnostic, stable and has a continuous demand for energy that can be switched off and on at any time.
Second, bitcoin mining offers linear Return on investment (ROI). “Whatever amount the investor chooses to invest into miners, on average, they will still make their money back in 2 years. This is unconventional for traditional businesses that typically require a much larger capital expenditure and often have a flat ROI in the first years of operation.” — Lesia M.
Third, by investing in Bitcoin miners, institutional investors also get to Invest in the underlying BTC. On the one hand, investors have a stable, cash-flow generating investment and on the other hand they get exposure to the underlying asset. Finally, traditional investors will find comfort in the possibility to work out the present value of a BTC mining operation using the DCF model. As opposed to crypto projects’ obscure future potential, mining sites can be accurately valued by discounting future cash flows.
Further readings
· Texas miners power down amidst heat wave in Texas (Read More)
Crypto projects
Ethereum is up 60% in July ahead of the merge. The merge will mark Ethereum’s shift from a Proof of Work to a Proof of Stake consensus mechanism. It is considered bullish by market participants mainly because Ethereum will no longer be energy intensive. Developer Tim Beiko confirmed September 19th is a tentative date for completion. Ethereum’s mainnet tenth shadow fork went live on July 27th and the final tesnet merge named Goerli is planned on August 10th. With no major glitches reported the merge seems around the corner and traders are massively betting on its success.
For the first time in history, Ethereum flipped Bitcoin in term of open interest (OI). OI represents the number of outstanding derivatives contracts. In July, on Deribit, the biggest exchange platform for crypto derivatives, OI was multiplied by 2.6 to reach $6.9 billion and a put-call ratio of 0.26. On July 28th, Ethereum OI was 32% higher than Bitcoin OI. Also for the first time in history, Ethereum, boosted by traders looking to capitalise on the merge narrative, equalled Bitcoin in term of trading volume. While the merge is imminent, according to Ethereum co-founder, Vitalik Buterin, Ethereum is only 55% complete and “the Surge, the Verge, the Purge and the Splurge” are the following steps. The Surge will make Ethereum more scalable, the Verge will reduce node size, the Purge will aim to optimise validation process and the Splurge covers all extras work to be done.
Further readings
· Tether Fails to Calm Jittery Nerves as Short Sellers Circle (Read More)
Regulators
Further readings
· Argentines Seek Hedging in Crypto After Economy Minister Resigns (Read More)
· Coinbase exec charged for insider trading (Read More)
· FED hikes interest rates by another 75 basis point reaching between 2.25–2.5% (Read More)
· US Senators Push Bill to Make Small Crypto Transactions Tax-Free (Read More)
· Framework for International Engagement on Digital Assets (Read More)
· UK To Regulate Stablecoins as a Form of Payment Via New Bill (Read More)
· California Ends Ban on Bitcoin and Other Crypto Donations to Political Campaigns (Read More)
· European Central Bank surprises markets with larger-than-expected rate hike, its first in 11 years (Read More)
· UK inflation hits new 40-year high of 9.4% as cost-of-living crisis deepens (Read More)
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