June CPI is High, but it’s “out-of-date”
Another month, another hot print. Inflation data came out this week at a roaring 9.1% for June. Not only was this higher than consensus estimates, but this also marked the highest inflation print since November 1981. The Biden administration responded by saying that inflation is “unacceptably high, but also out-of-date”, citing that gas prices have come down nearly 40 cents since mid-June.
The most recent inflation figure now has markets considering a 100bps rate hike at the upcoming Fed meeting while simultaneously pricing in a dovish pivot in 2023. Legendary investor Bill Ackman weighed in on this in a recent Twitter thread, pointing out the potential misunderstanding of the markets in this approach:
He then went on to say that if we look back in time, the 70s/80s are the most similar time period in the US economy where demand was high and supply was hampered. His team thinks that the fed funds rate will remain high even if the current hikes trigger a recession in order to ensure that they do not cause a resurgence of inflation by easing too soon. Doing this when inflation pressures have not fully receded can cause even more grief and further lower the credibility of the Fed. If their analysis is correct, it is not unlikely that we will see crypto and broader markets remain depressed for at least another 12 months. Given that the tools used by the Fed are already rather dull, the core benefit of keeping the fed funds rate high even after inflation peaks is because many broad economic indicators such as unemployment are still holding strong and allow some more perceived wiggle room. This means that the Fed can hold down the gas pedal on higher rates longer than many anticipate in order to ensure high inflation is thoroughly stamped out.
In short, while it is impossible to predict what the Fed will do, it is important to at least consider this contrarian take. The markets have broadly assumed that an easier monetary environment is just around the corner but perhaps leaving a little room for doubt may be prudent to ensure that the bear case does not give the markets too much whiplash on the flip side.
In Other News
Continuing the story from last week, the Euro has now hit parity with the US dollar. What does that mean for you? Well, if you live in the United States, it means that travel to Europe hasn’t been this cheap in decades.
Right after paying down a debt to the tune of a couple hundred million, Celsius officially files for Chapter 11 bankruptcy, joining the likes of Voyager Digital and 3AC.
Multicoin Capital announces their third venture fund, this time raising $430 Million to invest across the entire gamut of crypto from early to late-stage companies.
In the city of Zhengzhou, hundreds of protestors seemingly secured a victory against four local banks that had frozen some accounts since April. The authorities appear to have relented and made plans to allow depositors to withdraw some assets starting this Friday.
Mining Metrics
Bitcoin Price: ~$20,700
Hashrate (amount of computing power used by the Bitcoin network): 206EH/s
Hashprice (expected value of 1 TH/s of mining power per day): ~$0.0897
ASIC Prices (the computing machines used to mine BTC): $41.17/TH
With hashrate staying flat for the last 3 months and bitcoin falling around 50% in the equivalent time frame, Bitcoin miner profitability has been tightly squeezed. At the start of 2022, many analysts predicted that hashrate would climb up to anywhere between 280 to 320 EH/s and after the first couple of months those projections seemed to hold water. Since then, the narrative has shifted, and if market conditions persist, it is possible that we will not exceed 230 EH/s by year-end.
JPMorgan analysts recently said that Bitcoin’s cost of production has dropped to $13k from $24k, and while our own internal analysis has corroborated this, we believe there is much more to consider outside of direct bitcoin mining costs. Many public miners have large debt burdens that must be serviced at exorbitant rates, thereby raising the true total cost to mine well above the $13k mark. Additionally, many market participants have payments they must make on outstanding ASIC deliveries. In order to achieve a true all-in $13k cost to mine an operator would need to have very little leverage and even fewer outstanding ASIC payments. Keep an eye out for many public miners seeing their revenues widely outpaced by expenses in this Q2 earnings cycle. However, even as margins compress for the industry the core underlying narrative still remains. If Bitcoin mining is being crunched at the margins, then only the producers with the most efficient operations will be able to persist through this bear market. For Konza, efficiency includes, but is not limited to the following:
Mining operations that optimize the performance and longevity of hardware
Tactical purchasing of hardware relative to market conditions
Disciplined use of leverage
In a market where just a few short months ago expansion at all costs was the name of the game, many miners will find that their business models did not pay enough heed to points 2 and 3. But like any other industry experiencing growing pains, the washouts that are likely to come are healthy and raise the bar for all the participants that are able to persist through the adversity.
Until next week,
Artem