Cover photo

Balloons, Bubbles, and Flying Kicks

We've got 99 problems, but a Chinese balloon ain't one.

Either Chinese balloons or interest rates were the focus of markets last week. 

Investors have been telegraphing their buying intentions for weeks while waiting for good news from the U.S. Federal Open Market Committee (FOMC), which met on Tuesday and Wednesday. Fed Chairman Jerome Powell did not disappoint. As expected, the Fed raised rates by a tame 0.25%, signaling further moderation of their tightening bias. 

Even better, Powell followed it up with a press conference in which he did not employ admonishing rhetoric. 

He cautioned that: “…I don’t see us cutting rates this year…” such as the market is pricing. But he followed that comment up by saying: “If we do see inflation coming down much more quickly, that will play into our policy setting, of course.”

Financial markets loved it and responded with a rally. Stocks, bonds, and cryptocurrencies traded higher. The US dollar weakened versus major currencies, a sign of the delight macro traders took from the Fed’s actions. 

Alas, Friday brought the release of U.S. January employment data that put a damper on an otherwise sunny week. Non-farm payrolls increased by 517k––far higher than the consensus forecast of 185k. The good-news-is-bad-news reaction from the market sent bond prices lower, with the dollar taking a strengthening bias. 

But the response to such a strong number was muted. Perhaps traders were looking at the raw numbers, not adjusted for seasonality? 

As shown in the table below, the U.S. Bureau of Labor Statistics (BLS) adjusts the data for typical seasonal changes in employment, smoothing the series to add consistency. 

What this meant for the January release was that when the BLS said that the economy added 517k jobs, they actually meant it lost over 2.5m jobs. 

They made up over 3 million jobs. Sounds like a lot. 

Change in Non-Farm Payrolls | Source:  U.S. Bureau of Labor Statistics

Maybe the economy is not as strong as the headline number indicates, which would mean the return of the Fed’s easy-money honeypot! Nobody knows what exactly investors are watching, but a few months ago, such a strong number would have been expected to send markets lower.

Taking a Kicking

The markets are doing the kicking this time around!

Crypto markets remained buoyant this week despite the kicking they took from an icon of investing: Charlie Munger. The billionaire vice-chairman of Berkshire Hathaway took aim at crypto this week from his perch at the pinnacle of finance by penning an Op-Ed in the Wall Street Journal. It did not reflect well on him.

In a scant 389 words, he took aim at crypto but seemed to hit a scattershot variety of targets.

His first target was pre-mines and ICOs: 

“In some cases, a big block of cryptocurrency has been sold to a promoter for almost nothing, after which the public buys in at much higher prices…”  

Fair dinkum. But this also sounds an awful lot like a typical IPO sequence to me. 

Munger went on to aptly compare crypto to Mark Twain’s description that “a mine is a hole in the ground with a liar on top”–– as if there were no bad actors like Theranos, Madoff, and Enron in TradFi. 

He then describes crypto as gambling contracts before advocating their prohibition and admiring China’s wisdom in doing so. He continues by maligning the advent of the joint-stock corporation and praising England’s century-long ban on the structure after the South Sea Bubble. Somehow, he links the prosperity of the Industrial Revolution to it.

Unlike Mr. Munger, I do not expect to be remembered as one of the greatest business minds of all time. But crypto is complicated and it seems that he has not done his reading. Which is fine. However, if I was a 99-year-old billionaire I would not prioritize learning how blockchains work––much less write Op-Ed pieces about them). 

Ultimately, there is plenty to criticize in crypto and despite having such a broad target, he still missed the mark. When another TradFi talking head takes swings in the limelight, remember the fourth mantra of CZ Binance: Ignore FUD.

Not Through The Front Door

Like a fool in the rain.

Although there has been no ban, regulators have been effective in stunting growth in the crypto ecosystem. The latest is the Federal Reserve Board’s (FRB) denial of the application by Custodia Bank to become a member of the Federal Reserve System. 

Custodia is a Wyoming-chartered special purpose depository institution headed by Caitlin Long, a Harvard-trained lawyer. The goal of Custodia is to provide the digital asset industry with onshore, regulated, compliant access to the Federal Reserve system. 

Despite holding fiat currency deposits 100% in reserve as required by Wyoming law, and having a digital asset custody framework under which customers retain title, the FRB in a short press release denied the application citing “…heightened risks associated with its proposed crypto activities…."  

Disappointed after a 2-year battle, Custodia CEO Caitlin Long in a short statement vowed to fight on through its lawsuit against the Kansas City Fed. 

Long the Banks?

Investors in Silvergate Capital Corp. were again riding the tiger this week as its share price whipsawed on successive waves of news. The San Diego, CA-based bank is an important service provider for an array of institutional players in the crypto ecosystem. 

Kicking the week off was a disclosure by BlackRock in an SEC filing that it had increased its stake in Silvergate to 7.2%. This was closely followed by a similar filing by State Street that it had raised its stake to 9.32%. 

It cannot be a bad thing when an asset manager with $10 trillion under management, and a custodian bank holding $300 trillion start buying a stock. And the share price dutifully spiked over 50%. (It remains 80% below its highs).

The whipsaw came when Bloomberg reported that Silvergate was under investigation by the DOJ over its connection to bankrupt crypto exchange FTX and its associated hedge fund Alameda Research. While the stock still finished the week up 40%, it is still more than 85% off its highs and trading with the volatility of a cryptocurrency.

Tokenize This

BlackRock and State Street are buying Silvergate shares. Check. Who is buying CEL tokens?

Shoba Pillay, the court-appointed examiner in the Chapter 11 bankruptcy filing of defunct crypto firm Celsius, submitted her final report on Tuesday. Among the crazy revelations in the report was the fact that in the teeth of the 2021 bull market, when most firms in crypto were clocking record profits, Celsius was hobbled with billion-dollar losses. 

Since I have not made it through all 689 pages of the report, I do not know how CEO Alex Mashinsky managed to do that. 

What is nearly as puzzling is the price of CEL, the token of the Celsius platform that entitles the holder to absolutely nothing. According to Etherscan, there are 692,753,441.4971 CEL tokens.  

Multiplying that by the current market price of $0.62 yields a market capitalization of more than $426 million. No utility, no claim on assets, no equity in a company that is anyway bankrupt, just pure Alex Coin. Wow. 

Past the Wild West Days?

Maybe I am missing something. FTT, the original Sam Coin of FTX, with properties as worthless as CEL, is trading with a market cap of $650 million. Bonkers.

Silvergate is under pressure. It posted a Q4 loss of $1 billion for its equity investors who, at the bottom of the capital stack, have the last claim on any asset should the bank fail.  But at least there is a business case to be made. It has weathered withdrawals of over 2/3 of its deposits while remaining solvent. The firm is considered critical infrastructure in crypto markets.  

I wouldn’t bet the farm on it (and this blog is never investment advice), but there is a legitimate value proposition.  

For that, Silvergate is priced with a market cap of $597 million – a mere 40% more than the CEL air token. 

A car certainly has more intrinsic value than a CEL token.  And if California is successful, cars will soon be tokenized on-chain. 

According to a press release by the California Department of Motor Vehicles and Oxhead Alpha, a firm focused on integrations with the Tezos blockchain, the state is moving forward with a proof-of-concept to tokenize automobile titles with NFTs. 

The plan is being managed by Ajay Gupta Chief Digital Transformation Officer for the California DMV who is pushing to have a “shadow ledger” deployed on the Tezos blockchain within three months.  

The goal is to leverage blockchain technology to have a more efficient and secure transfer of vehicle ownership. There is a great saying: As California goes, so goes the nation. 

Honda Accords on OpenSea? Lambos?  Let’s do this thing! Andiamo!

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