5MF: TESLA SELLS 75% OF ITS BTC, ETHER UP 40%+, WHY DEMAND FOR CASH IS HIGH

The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.

Let’s see what’s going on this week:

  • Tesla Sells Bitcoin: What We Kn
  • Everyone Diving into Cash: Flashing Recession Signals
  • Europe: Potential Energy Crisis, ECB Rate Hike, Italy Collapse
  • Ether Up 40%+. Is a Rally Inevitable Ahead of ETH 2.0?
  • Uniswap Passes Self-Funding Proposal: What It Means

Tesla Sells Most of its BTC

  • Tesla Continues to HODL 100% of its Dogecoin (link)
  • Tesla Sells $936 Million worth of Bitcoin in the Second Quarter, Still Holds Dogecoin (link)

Bracing for Recession Means Something Has to Give

It is worth remembering that it was Elon Musk, managing Tesla, who pushed the brakes on Bitcoin’s bull run last May. Musk’s announcement that Tesla suspended Bitcoin payments until Bitcoin mining becomes sustainable triggered a -25% price drop throughout the following days.

Since then, the Bitcoin Mining Council reported Bitcoin’s greatest green makeover yet. Tuesday’s BMC report for Q2 2022 showed that Bitcoin mining uses 59.5% of renewable energy sources, a 6% increase from Q2 2021.

Image credit: Bitcoin Mining Council

Yet, it seems this is no longer a relevant issue. Tesla sold 75% of its Bitcoin holdings, revealed in Wednesday’s shareholder presentation. Was that $936 million worth of BTC sold at a loss? Yes and no.

Tesla CFO Zachary Kirkhorn said that 75% of BTC was sold at a realized gain, meaning it was sold at a price higher than it was originally purchased. However, he also said that, given Bitcoin’s price decline, the net balance results in a $106 million loss that offsets the sale. Now that the bulk of Tesla’s BTC holdings are gone, if Bitcoin rises again, it would have to go much higher for the remaining 25% of its original BTC purchase to make up for the loss thus far.

To put things into perspective, on March 31, 2021, Tesla’s Bitcoin holdings were worth $2.48 billion, making for a hefty $1.25 billion net profit, which was 83% of the initial $1.5 billion invested into BTC in January.

With that said, Elon Musk owes fiscal responsibility to Tesla shareholders first and foremost. China’s zero-covid policy resulted in a two-month shutdown of Shanghai’s Gigafactory. This resulted in Tesla’s first quarterly decline in two years, with its Q2 2022 report showing a -18% drop in deliveries compared to Q1.

Predictably, Tesla’s BTC selloff halted Bitcoin’s rally to $24k. Moving forward, Elon Musk is now framing the cryptocurrency issue as “a sideshow to a sideshow”. In that sideshow, DOGE remains relevant for buying merch in the Tesla store.

Musk himself has previously tweeted that he personally owns Bitcoin, Ethereum, and Dogecoin, and ‘won’t sell’ them. At this time, it is unknown if he’s still holding.

Cash Hoarding — Clear Recession Signal

  • US Mortgage Applications Slump in Face of 40-year High Inflation (link)
  • Fund Managers Holding Cash at Highest Allocation Since 2008 (link)

Technical or Mild, Recession Seems as if it’s Almost Here

Historical data clearly shows that a recession has a 100% success rate in taming inflation. This is then the baseline to use as a reference. Recession is the opposite of inflation, a cool down to a heated economy. Because it lowers economic activity across the board, it suppresses consumer demand, causing prices to go down as well.

Signs of that suppressed demand are already visible. Just two years ago, a 30-year mortgage rate in the US was 2.9%, while the median home price was $294k. Today, the 30-year mortgage rate is 5.71%, while the median home price sits at $416k.

Consequently, the demand for home mortgages has fallen to the lowest level in 22 years. A lack of labor is another demand suppression vector. Thursday’s Labor Department report shows that jobless claims spiked to 251,000 last week, the highest increase in eight months.

Rise in jobless claims signals layoffs and hiring freezes. Image credit: Irina Ivanova

Although a technical recession is yet to be determined by the U.S. Bureau of Economic Analysis (BEA), Bank of America is already forecasting a mild recession this year. BoA further projected the unemployment rate to hit 4.6% next year.

Fund managers are preparing accordingly. In fact, this is why we have seen double-digit market selloffs in the last couple of months. As they reduce stock allocation, they increase cash flows. Their cash holdings have increased to a 21-year high at 6.1% of AuM, while stocks hit the lowest level since the Great Recession of 2008.

Free cash flow is always important for publicly traded companies, as a tool for reinvesting, paying dividends to shareholders, and paying off debt. This trend already began in May, when it became clear that the Fed is serious in its quantitative tightening (QT).

Image credit: Bank of America

As we approach the cusp of recession instability, cash holdings are even more important to counter operational costs and have liquidity for unforeseen events. This is likely one of the main reasons why Tesla decided to sell a majority of its BTC holdings now.

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Quantitative Tightening Trouble for Europe

  • Europe’s Energy Crisis Majorly Responsible for Inflation at 8.6%, and it Could Get Worse (link)
  • European Central Bank Surprises Markets with Larger-than-expected Rate Hike, Its First in 11 Years (link)

Energy Crisis Doubles Down on Political and Economic Instability

Sanctions against Russia boomeranged deep into EU’s unity. The energy-dependent Europe is facing an energy crisis not seen since WWII. The CEO of Shell, Ben Van Beurden, at the Aurora conference in Oxford, warned that Europe is facing a “really tough winter”. He further warned of “significant escalation in energy prices” and likely rationing.

As an emergency measure, Germany is going to fire up 16 dormant coal & oil plants, setting back its green agenda. The energy crunch is causing friction between Europe’s South and North. After the EU Commission called for a 15% reduction in gas consumption to aid Germany — Greece, Spain, and Portugal rejected the proposal. Furthermore, Spanish Energy Minister took a swipe at Germany:

“Contrary to other countries, Spain hasn’t been living beyond its means in energy terms.”

The EU’s economic woes are further exacerbated by the European Central Bank (ECB), having increased its interest rate by 50 bps to curb inflation. For the first time since 2014, this puts the ECB rate out of the negative range to 0.00%. Yes, the EU’s indebtedness is so high, as debt to GDP ratio, that it took negative interest rates to stimulate the economy.

Image credit: Eurostat

Now that the ECB is following the Fed’s footsteps, the cost of borrowing is increasing. The latest ECB bank lending survey shows a moderate decline in loan demand, as banks tighten credit standards.

Image credit: ECB lending survey.

On top of all that, Italy’s government collapsed. Italy is just behind Greece in indebtedness, posing another risk for the eurozone. This makes the ECB’s balancing act that much more difficult.

So, how do you curb the EU’s inflation rate of 8.6%, while making sure that enterprises can borrow capital they can afford, to keep the economy churning? This certainly puts into context ECB President Lagarde’s previous statement that “[inflation] is projected to stay that way for some time to come,”.

Meaning, after the euro reset its value to the dollar, and for Italy to not become the next Greek debt crisis, the ECB has a very narrow space to operate within. If anything, further interest rate hikes pose a real risk of stagflation — high inflation and high unemployment.

To widen the EU’s window of action, something must give.

Ethereum’s Pivotal Moment Closer than Ever

  • Staked Ether’s Discount Dwindles to -2% as Date Revealed for Ethereum’s Merge (link)
  • Will Ethereum Merge Hopium Continue, or Is It a Bull Trap? (link)

Only the Macroscene Stands in Ethereum’s Rally Path

Blockchain technology has made “having a stake in the future” quantifiable and accessible like never before. At the forefront of this staking, which is offered by the second largest blockchain by market cap, Ethereum.

It is now seemingly settled that the old Ethereum PoW will dock with the new Ethereum PoS on September 19th. The new PoS, dubbed Beacon Chain, has over 410k validators who have staked over 13.8 billion ETH at ~4.2% APR.

Image credit: Beacon Chain staking pools.

As you can see, Lido Finance is the main supplier of ETH staking, with a share of 31.4%. Lido also made it possible for anyone to stake any amount of ETH, circumventing the 32 ETH minimum requirement, thanks to its stETH derivative backed by ETH with a 1:1 ratio. During the crypto contagion, which bankrupted Celsius Network and 3AC, they had withdrawn $800 million worth of stETH, wobbling that ratio.

Now that ETH 2.0, The Merge, is within reach, the -6% stETH discount is once again aligning to the underlying asset — Ethere. With the contagion out of steam, ETH has gone up +41.8% during the last month, outperforming the bear market and leaving behind Bitcoin at a modest 12% rally.

BTC vs. ETH over 30 days. Image credit: Trading View

However, external factors could still foil that climb. According to a panel of 54 industry insiders, ETH could drop to $675 before the year ends. That largely depends on the market’s reaction to the Fed’s interest rate hikes, which is likely to be another 75 bps on July 27th.

A day later, the U.S. Bureau of Economic Analysis (BEA) is scheduled to release GDP growth estimates. If we see another negative percentage, recession speculation days will be over. Typically, recession places negative pressure on risk-on assets, which today, includes all digital assets.

Uniswap LPs Okay Self-Funding

  • Proposal To Turn On Uniswap ‘Fee Switch’ Gains Early Support (link)

Uniswap “Fee switch” Proposal Passes Initial Test

After so many CeFi platforms going bankrupt due to poor management and overleveraging, it’s time for a DeFi respite. Uniswap is the pioneer in this field, having spearheaded open-source, decentralized crypto exchanges through Automated Market Makers (AMMs).

AMMs work through users themselves, as they lock their digital assets into liquidity pools. They are incentivized because they generate yields when traders tap into those pools to swap cryptocurrencies. Over the last month, UNI (Uniswap’s native governance token) even outperformed Ethereum, at +53.78%.

Across three Ethereum sidechains — Polygon, Arbitrum and Optimism — Uniswap holds $174 million worth of assets in liquidity pools. The reason for the recent rise in UNI interest is the “fee switch” proposal.

As you may have seen from the GameStop short squeeze saga, market makers such as Citadel Securities gain money by processing vast volumes of trades. Uniswap’s fee switch would make the protocol itself earn money. For instance, the USDC/ETH pool would then become an income source.

One of many Uniswap’s giant liquidity pools that can churn on fees. Image credit: info.Uniswap.org

Thus far, users — liquidity providers (LPs) — receive 100% of fees from these pools. The fee switch would then make Uniswap closer to a regular company, turning the regulatory gaze of the SEC on itself. Nonetheless, the proposal received overwhelming support, with 3.5 million UNI tokens voted in favor and only 54 against.

There is another complication down the line. Because trading fees are denominated according to tokens in each pool, another voting would have to take place to figure out the end-token, whether it is a stablecoin or something else.

Regardless, this is the beginning of a big experiment that may establish both a regulatory standard and a DeFi income standard for hard-working developers.

Tweets of the Week

The SEC has listed nine crypto that it says are securities: AMP, RLY, DDX, XYO, RGT, LCX, POWR, DFX, KROM. They were mentioned in connection with alleged insider trading. Coinbase said 100% disagree with the decision to file these securities fraud charges.

@WuBlockchain

Good Morning from #Italy where Bank of Italy’s Target2 liabilities within ECB’s payments system have reached a record $641.82bn, almost 30% of Italian GDP. That’s on top of the debt-to-GDP ratio, which has risen to >150%. This gives any govt in Rome sufficient bargaining power w/EU

@Schuldensuehner

All of this happened in China this week. A thread 1/10

@SofiaHCBBG

Vitalik Buterin claims #Ethereum will be able to potentially process 100,000 transactions per second at the end of its roadmap.

@WatcherGuru

Pretty remarkable chart of #bitcoin and aggregate global negative yielding debt.

The liquidity sponge is leaking, as the global asset bubble bucket is draining. Makes sense.

$BTC keeps making higher lows.

@DylanLeClair_

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Five Minute Finance

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