Jan 20

12 min read

5MF (WEEK 3): TALK OF FTX RESTART, BTC NET UNREALIZED PROFIT, HAS S&P PEAKED?

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:

Beware the WhateverTX
Is an FTX Restart a Real Possibility?
Bitcoin Enters Green Unrealized Net Profit Zone
Analysts Say the S&P 500 Has Peaked
Just In: Genesis Files Chapter 11 Bankruptcy

After F-TX, Here Comes G-TX?

3AC Founders to Launch Crypto Bankruptcy Claims Exchange GTX (link)
CoinFLEX Sheds Some Light on GTX Project After Facing User Backlash (link)

Did Crypto Just Go… Full Crypto?

The internet has been having a big laugh at the expense of a new crypto project — GTX.

Still in its infancy, the platform-in-progress is supposed to be not just an FTX-like exchange, but a marketplace for trading claims.

Here’s a brief recap detailing some of last year’s biggest crypto bankruptcy hits that GTX wants to tap into:

Three Arrows Capital (3AC) — the $10B hedge fund that helped drag the crypto market into a downward spiral since June.
Celsius Network — a crypto lender that held $4.2B for 600k accounts at the time of its bankruptcy filing in July.
BlockFi — another crypto lender that halted user withdrawals. According to BlockFi’s latest financial statement, BlockFi’s exposure to an FTX loan wiped out $800 million from the platform.
Genesis Trading — yet another crypto lender that went bust. It was exposed to both FTX and 3AC, and today declared bankruptcy, as it owes $900M to 340k customers.

Unfortunately, the list goes on and on, as there is no shortage of crypto bankruptcies, with FTX as the biggest blow.

And all of this leads to the main GTX pitch: buying and selling bankruptcy claims in addition to regular crypto trading. Not much in the “call to fame” department for the crypto space, is it?

According to the pitch deck, “GTX” is seeking $25 million investor inflows to get started.

But this is where things get interesting.

The co-founders of the pitched GTX are none other than well known players deep in the crypto entrails, Kyle Davies and Su Zhu. Thanks to their (mis)management of 3AC, the hedge fund defaulted on its $2.4B loan from Genesis Trading.

3AC also defaulted on a $665M loan to crypto broker Voyager Digital, which you guessed…went bankrupt as well.

3AC filed for bankruptcy in July 2022, reportedly owing $3.5B to various creditors.

On the other co-founder side, CoinFLEX exchange also suffered last year when it suspended withdrawals in June. It turns out, CoinFLEX management allowed Bitcoin Cash (BCH) enthusiast, Roger Ver, to balloon his debt position. At $47 million, Roger failed to make a margin call, leaving CoinFLEX in a bind.

Typically, an exchange would auto-liquidate such a position, but CoinFLEX acted on Ver’s promise to fill up his account that never materialized. In the end, CoinFLEX flexed an arbitration claim against Ver in Hong Kong, worth $84 million.

With the focus to trade bankruptcy claims, alongside the background of founders with such a history, the reaction to GTX has been predictable.

Image credit: Twitter

Some are expecting a periodic launch of new TXs that build upon each other.

Image credit: Twitter

As the super-predictable backlash unfolded, CoinFLEX clarified on Monday they will not use ‘GTX’, as it is just a placeholder name. But the project is still going ahead with a Series B round which aims to raise $25M.

If successful, they do not only intend to attract crypto trading volume, and inject crypto creditors with liquidity, but also support equities and bonds.

SBF Still Claims FTX US is Solvent, as Ray Explores Possibility of FTX Restart

Inside Sam Bankman-Fried’s Substack Defense (link)
Debtors Identify $5.5B But Confirm Major Shortfalls Affecting FTX and FTX US (link)

FTX.com Could Restart? Huh?

Most lawyers tell their clients to remain silent so as to not potentially feed prosecutors.

Sam Bankman-Fried seems confident enough to go against the grain. Since he was released from the Bahamian jail, SBF has resumed both his Twitter and Substack activity.

Last week, SBF summarized his “FTX Pre-Mortem Overview”, claiming that it was Alameda’s fault for insufficiently securing a hedge against market exposure. He didn’t address everything — such as the reported ‘secret’ $65B backdoor credit line from FTX to Alameda to funnel user funds, without their permission.

SBF also didn’t touch the other fraud charges that his top lieutenants, Caroline Ellison and Gary Wang, already plead guilty to. This Thursday, in addition to previous charges, the SEC charged SBF directly for “orchestrating a scheme to defraud equity investors in FTX”.

But what SBF did note is that FTX US (not FTX international) had over $350M in net cash, implying that the exchange was and is solvent.

On Wednesday, a day before the new SEC charges, SBF submitted a “detailed” spreadsheet to that effect. Displayed in what has been referred to as 8th-grade Excel form, his submission led to much ridicule.

Image credit: Twitter

In regards to FTX.com, the solvency sum could even be bigger, at $5.5B. FTX Trading Ltd. and its affiliated debtors (dubbed “FTX Debtors”) released their findings on Tuesday, having accounted for recovered assets:

$1.7 billion in cash
$3.5 billion in liquid cryptocurrencies
$300 million in securities

Still, one should not rush to celebrate as Ray noted that “based on current estimates of the amount of digital assets associated with the FTX.com and FTX US exchanges…there is a substantial shortfall of digital assets at both exchanges,”

The $5.5B figure for FTX.com doesn’t include illiquid cryptocurrencies, such as the FTT token or other SBF-tainted tokens that have since collapsed — SRM, MAPS, OXY and FIDA.

But does that mean that SBF was right?

Remember what he said to VOX:

“you know what was maybe my biggest single f***up?”

“the one thing *everyone* told me to do”

“Everything would be ~70% fixed right now if I hadn’t”

“Chapter 11”

“If I hadn’t done that, withdrawals would be opening up in a month with customers fully whole”

John Ray, acting as FTX’s bankruptcy executive, is now exploring the possibility of reopening FTX.com. Ray said that he has formed a task force to possibly restart the exchange.

“There are stakeholders we’re working with who’ve identified what they see is a viable business,”

If that materializes, FTX customers have a higher chance of regaining some of their holdings. But at this point — who knows. The ‘exploration’ remains at an early stage.

In terms of users recovering funds, all VC firms invested in FTX would likely be first in line, ahead of regular FTX customers.

Though on December 27, four plaintiffs filed a class action lawsuit against FTX, representing around one million of the exchange’s customers, to gain priority recovery rights. This has yet to be ruled on.

In the meantime, SBF continues to play the role of a far-seeing, honest-mistake guy.

Image credit: Twitter

Bitcoin Returns to Net Unrealized Profit: Explained

Bitcoin’s Correlation to Equities Drops to One-Year Low (link)

Gauging Bitcoin’s Moves Going Forward

ICYMI: Bitcoin has seen notable upward price movement over the last few weeks:

Since January 6th, Bitcoin has been climbing consecutively for over 12 days. Image credit: Trading View

Outperforming the S&P 500 by a wide margin, this also means that Bitcoin’s correlation to equities dropped to a 1-year low.

Crypto had a bad year with all the bankruptcies, but things weren’t much better in the stock market. Nasdaq ended 2022 at a -33% loss, wiping out $4.6 trillion from just the top 10 tech stocks.

That’s over four times the current total crypto market cap.

With the positive CPI drop this month, the stock market has been infused with optimism, as Nasdaq 100 and S&P 500 both went up +6% and +4.5% year-to-date. Does that mean that Bitcoin is now unchained?

The truth is, nobody knows. At the end of the line, the Bitcoin network is largely a signal-receiving platform.

Truly unscrambling the signals is probably impossible. But there are some distinct patterns to consider:

In the early Bitcoin days, there was practically zero correlation between Bitcoin and equities. This only came later when Bitcoin gained traction among more traditional investors. In other words, Bitcoin became perceived as a growth/tech stock — a risk-on asset with the potential for high returns.
Bitcoin’s correlation to the dollar strength index (DXY) is far more pronounced, however, in an inverse way. As the dollar strengthens, Bitcoin’s price tends to decrease, and vice-versa. That’s because Bitcoin has been touted as a hedge against currency devaluation.

Now that both DXY is softening and the stocks are up, Bitcoin has a chance to break from the months-long stagnation.

Now, Bitcoin has returned to a net unrealized profit.

As of January 2023, Bitcoin is back in the green zone at ~$19,700 cost basis of the average holder. Image credit: Glassnode

What does that mean exactly?

Let’s say that you bought 1 BTC for $10,000. If you had then sold it for $20,000, you would’ve made a $10,000 realized profit.

But, if you bought 1 BTC for $10,000 without selling it, and its current price is $20,000, you would have $10,000 as unrealized profit.

Given that unrealized Bitcoin net profit/loss gained positive ground, the market price of Bitcoin is now higher than the average cost at which the holders have bought their bitcoins.

It is then a question of the historical ratio between the bulls (realized profit) and bears (realized loss). According to Glassnode data, bulls tend to peak at 7x more profit than loss, while bears tend to bottom at 2x-3x more loss than profit.

When the BTC price goes up, it is historically far more likely for holders to keep holding than it is for holders to sell when the BTC price goes down. Image credit: Glassnode

Nonetheless, it is impossible to know if market signals or other events will interfere with that potential. The Federal Reserve might tighten the liquidity spigot further with more interest rate hikes beyond the expected 25 bps in February.

As things currently stand, 75% of economists don’t think the Fed can achieve a “soft” landing as far as recession goes in 2023. A “hard” landing would be followed by a financial crisis and high unemployment. This would be bad for both stocks and digital assets.

However, if the Fed ends up cutting rates this year, as expected by 51% of economists, the narrative of Bitcoin’s role as a hedge against currency devaluation is likely to resurface in popularity.

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S&P 500 Index at the Top of its Valuation

Tech’s Slump Camouflages a Rally Sweeping Across Most of S&P 500 (link)

Tech Stocks Pull SPX In the Bear Woods

The stock market is not the same as it was even just a decade ago.

Nearly everyone equates it with the S&P 500 benchmark. And for a good reason — as SPX represents 500 large-cap stocks, the most well-established and regarded companies in the US.

However, it has undergone an important shift in the last decade.

Tech stocks have gained 16.8% of S&P 500 value weight.

Image credit: Financial Times

This muddies the waters between growth and value stocks. While investors expect growth stocks to grow at a faster rate than the market average, value stocks are considered to be undervalued relative to their earnings.

Traditionally, the S&P 500 has been a blend of both.

The relatively new dynamic comes from tech growth stocks. They are considered even more volatile than regular growth stocks because they rely on high earnings potential and tech innovation.

With their current weight on the S&P 500, they are bringing the whole index down:

S&P 500 still remains in a bear market, down -17% from its record high on January 3, 2022.
Three-quarters of the S&P 500’s stocks have experienced a strong rally in January, up by +20% from their 52-week lows.
Dragging the S&P 500 down is the poor performance of a handful of tech stocks with large market caps: Apple (-18.62%), Amazon (-42.22%), Tesla (-63.65), Microsoft (-25.23%), and Meta Platforms (-59%).

In short, these Big 5 are responsible for the majority of the S&P 500 losses during the last 12 months. Definitely something to think about when perceiving S&P 500 as the bellwether for the overall health of the US stock market.

According to Citigroup analysts, the S&P 500 index is now at valuation levels that make it unlikely to appreciate further given the present macro-conditions.

That’s because SPX’ trailing price-to-earnings (P/E) ratio is at 18.2x, close to the upper range of fair value (18.5x).

Price-to-earnings (P/E) measures how much investors are willing to pay for each dollar earned by the company. Of course, for this ratio to increase again, one factor to consider is the accessibility to cheap capital — which for now, continues to dry up with the Fed’s ongoing rate hiking cycle.

Just In: Genesis Files for Chapter 11 Bankruptcy

Genesis Files for Bankruptcy With More than $3.4B Owed to Creditors (link)

Contagion Ripples Continue

On November 16, 2022, Digital Currency Group’s (DCG) Genesis Global Capital shut down customer withdrawals.

Image credit: Twitter

Genesis owes the users of Gemini’s Earn program a reported $900 million, which resulted in a public back-and-forth between Gemini-cofounder Tyler Winklevoss and DCG CEO Barry Silbert.

Today, the situation has some clarity. To little surprise, Genesis has now officially filed for bankruptcy.

It was widely reported earlier this week that the DCG subsidiary was nearing bankruptcy — and it was officially announced just before midnight on Thursday.

The legal entities involved include Genesis Global Holdco LLC along with lending subsidiaries Genesis Global Capital LLC and Genesis Asia Pacific Pte. Ltd.

Other Genesis subsidiaries such as Genesis Global Trading did not file for bankruptcy and are continuing trading operations.

Genesis claims to have over $150 million cash on hand to facilitate the restructuring process.

Gemini co-founder Cameron Winklevoss sees the filing as a good first step to recover user funds, but suggests Gemini will be taking further action:

Image credit: Twitter

Tweets of the Week

The stock market likely to decline sharply over the following weeks…
Earnings declines and recession are not priced in, the bond market has got the memo but the “efficient” stock market is still celebrating peak inflation whilst totally ignoring the deteriorating macro.

@saxena_puru

Blackrock is the world’s largest asset manager with $10 trillion in AUM.
Blackrock CEO Larry Fink:
“I believe the next generation for markets… for securities, will be tokenization of securities.”
(Video)

@thetokenist

TVL is THE most powerful leading indicator of the crypto market. Period.
If TVL is outperforming the price then we are in a bull market.
If TVL is underperforming the price then we are in a bear market.
Simple. Logical. Supply and Demand. We are still in a bear market.

@PendulumFlow

Homebuyers are canceling purchases at levels that exceed what we saw in 2008. The housing market is in deep trouble.

@Mayhem4Markets

Yields on 10-year Treasuries are now nearly 100 basis points below the recent high in October, falling to 3.36% today. While this is in response to softer-than-expected PPI and retail sales data, it’s also being fueled by a short squeeze among hedge funds.

@lisaabramowicz1