Are we there yet?
The popular new Solana NFT collection, Okay Bears, struck a chord with its “we are all going to be okay” mantra, comforting words in the face of a “bear” market. Consumers are feeling less than okay, though, as inflation eats into their disposable income. As GDP growth estimates get cut, bonds rally, and earnings are downgraded, the risk is that valuations continue to compress. In the crypto sphere we highlight the redemptions from stablecoins after the Terra debacle that warrant monitoring. On a more positive note, crypto’s censorship resistance qualities shone brightly. Both China and Nigeria have tried to ban either mining or transactions, with limited success. Finally, the move by Coinbase and Robinhood to allow clients access to DeFi/Web3 directly from their exchange wallets could unlock wider retail participation.
LESS IS NOT MORE
Just like in digital assets, it is the weakest links that break first and this week the evidence is that the most vulnerable consumers are starting to come under stress. Real disposable income and savings rate have peaked, with consumers tapping their credit cards. Moreover, earnings from Walmart and Target that missed by a wide margin indicate companies face cost pressures, labor shortages and higher inventory, which spooked the market’s growth outlook and helped bonds rally. Discretionary retail companies reporting next week will be enlightening
It was a surprise as someone who covered emerging markets, where companies are used to defending profitability in the face of low growth, high inflation and currency volatility to see a stalwart like Walmart surprise so negatively. They are known to have excellent inventory management, product mix and pricing capabilities so a miss from them is not reassuring.
HOUSING IS SOFTENING, IT SHOULD EVENTUALLY FEED THROUGH TO INFLATION
Hurting the low-end consumer is probably not what the Fed wants in an election year but real estate is an area they do want to bring back to earth, as it would reduce inflation, with prices up 35% since the start of the pandemic. Mortgage applications are falling and data this week showed housing starts declined 0.2% mom to an annualized 1.724 million units in April, after a revised -2.8% in March and below market forecasts of 1.765 million. House prices lead housing rental CPI components by 12-16 months and given their 33% weight in CPI it would contribute to sharply lower CPI by late 2023.
VALUATIONS STILL NOT DISTRESSED
First to fall were the high-flying tech names. The S&P 500 Tech sector’s forward P/E has collapsed by nearly 30% from its December peak but it’s still above its average post-GFC, though nowhere near the 2000 bubble. Global technology stocks have now come down to trade in line with global consumer staples at 20x earnings. However, now even more defensive consumer staples are struggling.
Less to go around: Inflation erodes consumer demand
Mortgage applications are falling as interest rates rise, yet supply is still high
Tech has given back its valuation premium but not yet at a discount (S&P 500 Tech forward P/E)
US equities don’t show signs of capitulation, with the put/call ratio below previous peaks
For the first time in weeks, digital assets were green (+28%) post the Terra turmoil, with a $1.3 trillion market cap at the time of writing and diverging from the slightly weaker S&P (-1.6%) and Nasdaq (-1.5%) while Treasuries gained as lower growth expectations are priced in.
Realized volatility in crypto had been trending down over time with institutional adoption but the current transition in economic policy has changed that, with BTC’s realized 30-day volatility spiking to 100% last week before falling back to 70%, a level commensurate with Tesla shares.
The fallout from the Terra implosion has been significant with aggregate stablecoin supplies declining by $8.4B over the last month, the largest in history. This reflects a net capital outflow from the space. Last week, $USDC expanded by $2.64B, whilst $DAI contracted by over 24%.
Stablecoin fallout: not a zero-sum game
Most recent data indicate $9 bn in outflows from Tether since May 11, 2022
12-month high in the BTC put to call ratio this week but like in equities, not near highs
CHINESE BTC MINING: CENSORSHIP RESISTANT
Proof that crackdowns on bitcoin are ineffective was revealed this week with new data on bitcoin mining showing the Chinese giant reawakening. A report published by the Cambridge Centre for Alternative Finance (CCAF) suggests that China has resurfaced as one of the world’s leading mining hubs, in second place behind the U.S. This has come as a surprise after the Chinese government crackdown led to a steep decline in activity in the country just last year. Since January of this year, activity in the region has been steadily expanding again.
According to the center’s closely watched data, China now boasts 21.1% mining capacity followed by Kazakhstan (13.22%), Canada (6.48%) and Russia (4.66%). The US is on top with a 37.84% share of total hash rate activity. The Cambridge publication concludes that access to off-grid, geographically scattered and small-scale operations is how underground miners are circumventing the ban.
Hash rates are at all-time highs at 248 exahashes per second (1 EH=1 quintillion hashes), despite poor market prices. In the U.S., Georgia (31%), Texas (11%) and Kentucky (11%) lead the league tables, likely helped by lower-cost electricity, hosting capacity and friendly legislation.
MORE TRADFI BANKS AND EXCHANGES FOMO’ING INTO CRYPTO
Fearing being left behind, Nomura, Japan’s largest investment bank, is launching a new subsidiary focused on institutional client services for bitcoin and other cryptocurrencies, with the FT reporting 100 people for the new subsidiary. The bank began trading bitcoin derivatives just last week
In what constitutes a very different market to Japan, the Brazilian stock exchange B3 (Brasil, Bolsa, Balcão) will begin trading futures contracts for bitcoin and ethereum within the next three to six months but no details on how that would be done were provided. B3 noted that similarities between the equities market including trade, settlement and custody, are all issues that the exchange believes it can offer services for.
At the moment, there is access to 10 crypto ETF’s on the exchange, one of the first to provide it. B3 is also exploring opportunities to facilitate and standardize the operations of the 30 crypto exchanges in the country, by providing custody and settlement services.
NIGERIA: IF IT WALKS LIKE A DUCK AND TALKS LIKE A DUCK…ITS A SECURITY!
Nigeria is a country with high crypto adoption thanks to its young, digitally-savvy population, despite banks not being able to offer digital asset transactions since last year. Thus, peer to peer platforms are popular as residents have found ways to transact without the fiat onramp.
This week the government announced further regulation, with the country’s Securities and Exchange Commission determining that “a digital asset is a token that represents assets such as a debt or equity claim on the issuer, and thus by default is under the purview of the Securities and Exchange Commission of Nigeria.” This position is in contrast to the Central Bank’s decision to prohibit banks from operating in crypto.
The implications include players registering as Virtual Asset Providers, a certain level of capitalization at exchanges and transparency in fees, as well as a pre-approved list of coins that they can trade.
THE ANTI-DAVOS SUMMIT
On the heels of the G7 summit last week, El Salvador’s President Nayib Bukele announced that 32 central banks and 12 financial authorities from 44 countries were meeting on Monday, May 16 to discuss financial inclusion, the digital economy, banking the unbanked, and El Salvador’s Bitcoin adoption.
It is no coincidence that the attendees were mainly representatives from developing countries, many of which have suffered the consequences of high levels of corruption and economic instability. So far, only El Salvador and the Central African Republic, with its mathematician leader, have adopted bitcoin as legal tender, with Panama potentially next if a proposed bill passes. El Salvador is estimated to have registered $40mn in losses from its purchases but this did not dissuade the attendees from wanting to learn more.
PORTUGAL BACKPEDALS ON TAX HAVEN STATUS FOR CRYPTO
Portugal’s Finance Ministry said cryptocurrencies will be subject to taxation in the near future, according to comments in the nation's parliament on Friday, The new policy will include a capital gains tax, but like in many other jurisdictions, DeFi activities such as staking or yield farming remains less clear. Apparently, the tax haven status was due to a lack of regulation rather than a specific policy, with the current capital gain tax at 28%, and so brings the country more in lockstep with other countries.
ETHEREUM L2’S FOR CBDC’s
Norway’s central bank is to use an Ethereum Layer 2 solution, Nahmii, for its central bank digital currency (CBDC) pilot. All major Norwegian banks are expected to take part in the sandbox. The country has been studying the idea of a CBDC for years and has the world’s most cashless society, with less than 4% of the population using physical notes.
DeFi / NFTs / Metaverse
COMING DOWN TO TERRA
The Luna Foundation Guard (LFG), which held Terra’s bitcoin reserves, designed to help keep the dollar peg of the algorithmic stablecoin, released a statement documenting how it sold almost all of its reserves of 80k BTC. The UST and LUNA tokens that are left as well as 303 BTC will be used to compensate investors with the smallest investors first in line. The foundation also refuted claims that it bailed out ‘whales’ and that there was a lack of transparency in the process.
IS DEFI GOING MAINSTREAM? ROBINHOOD, COINBASE AND SPOTIFY TO ALLOW ACCESS TO WEB3
In Defi, the lack of a user-friendly experience has always been seen as a hurdle to wider adoption but that may be changing. Trading app Robinhood (HOOD) announced plans to roll out a new crypto wallet for customers who want to access DeFi, by year-end at the Permissionless conference in Palm Beach. This will be separate from their crypto wallet that allows users to move coins to and from their Robinhood accounts. The new Web3 wallet will allow customers to lend, stake, yield farm and buy NFTs, thus competing with Metamask and Coinbase’s integrated offering.
Coinbase’s new features for its wallet aim to streamline the process of custody and access to DeFi for the average user. Customers will be able to buy crypto with fiat and transfer them to their wallet of choice in one step. There will also be KYC verification without revealing specific user details.
The exchange is also rolling out a self-custodial dApp wallet based on multi-party computation (MPC), a cryptographic technique for secure private key management used in institutional-grade solutions from Fireblocks and Qredo. Users will be able to interact with DeFi apps without first needing to withdraw crypto from their Coinbase account to a self-custody wallet. The Coinbase wallet is also gearing up to support all blockchains compatible with the Ethereum Virtual Machine (EVM), as well as select others, such as Solana.
Self-custody takes on increased importance given a recent SEC proposal that exchanges account for client coins on their balance sheets as assets and liabilities, potentially making them accessible to creditors in the event of default.
After months of speculation, Spotify is also jumping on the bandwagon and launching a pilot for artists to promote their NFTs on their platform, without facilitating buying and selling directly but rather redirecting users to an external marketplace.
CREDIT AGENCIES ARE MUSCLING INTO DEFI
Institutions are just as interested in accessing Defi while minimizing the risks, which were put in stark relief with the unravelling of the Terra ecosystem. The major credit agencies are eyeing this opportunity, with S&P unveiling a DeFi strategy group to help build the company’s decentralized market framework for investors. The agency recently gave a junk bond, B- rating to Compound’s Treasury offering. A competitor, Moody’s, started hiring crypto analysts last year. There are also crypto native companies addressing the market that perhaps have better experience with the ecosystem but less connections with traditional financial institutions.
BEARS, WE ARE ALL GOING TO BE OKAY
Interest in NFTs continues to confound the naysayers, with the latest hit on Solana, welcome news after the spate of outages the blockchain has endured lately. The Okay Bears NFT collection, launched on Solana on April 26th has become one of the most traded on OpenSea, even surpassing Bored Ape Yacht Club and Azuki at one point. Their success can be partly attributed to a more low-key attitude among the crypto community during this bear market, pun intended.
The 10,000 bears were listed originally for 1.5 SOL or $150 on the day they were minted. Today they are worth 250 SOL. The concept is one of acceptance and good vibes, community engagement and corporate social responsibility encompassed in the term WAGBO, “we are all going to be okay”.
There is a studio where users can connect and get priority access, a park where they can congregate via a Discord channel, as well as a gallery for the collection and a boutique for real-life merchandise. Magic Eden and OpenSea are the two most popular marketplaces to buy Okay Bears NFT using the Solana-based Phantom wallet.
NFT sales are still above 2021 levels
Okay Bears make it into the top collections, a boost for Solana
Until next week!
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