Konza Capital Newsletter #7
Bear Markets Make for Great Headlines
In the last week, the S&P 500 rallied another 1.5% and crypto stayed largely flat. With investors doing seemingly everything in their power to put a positive spin on global news, markets are maintaining surprising resilience in the face of major global macro concerns ranging from inflation to the Ukraine conflict to the growing prospects of an escalation in Taiwan.
With a week this eventful we will be forced to stay very high level so let’s begin with a key domestic headline with global implications.
Nancy Pelosi returned from her visit to Taiwan this week. Her visit marked the first to Taiwan by a U.S. official as high ranking as her since Newt Gingrich in 1997. China, chagrined by this visit, escalated their military exercises upon her departure with at least 11 missiles striking the seas north, south, and east of Taiwan on Thursday. Many would agree that tensions between the two superpowers have never been higher, with both the United States and China having vested interests in the fate of this island nation. For the United States, maintaing access to chip manufacturing in Taiwan is crucial to stay a global leader in technology innovation. According to Boston Consulting, 92% of the advanced production of semiconductors occurs in Taiwan, making U.S. interests inextricably tied to Taiwan’s until domestic fabrications ramp up and becomes globally competitive once again.
Moving over to our neighbor across the pond, the Bank of England raised their key interest rate by 50bps to 1.75% this week. With rates higher than they have been since 2008, we are already in uncommon territory. Even more extraordinarily however is the series of comments that the Bank of England made regarding the state of the economy.
The United Kingdom is likely to enter a recession by the end of the year.
Despite inflation already being at a 40 year high as of the June print which came in at 9.4%, officials anticipate inflation cresting 13% in the final three months of the year and remaining elevated through 2023.
The BOE wants to begin actively selling their government bonds to the tune of around 10 billion pounds a quarter upon a vote confirming this in September.
While those are clearly grim tidings, perhaps even more concerning is the level of transparency the BOE has provided regarding the state of the economy. If the fifth largest economy is anticipating that their inflation will ramp up another 4% by year end, it is not implausible that many other similarly sized neighbors will also continue to see signifcant increases, especially in Europe off the back of rising energy prices. In order for inflation to stabilize, Europe is likely to continue having to hike rates into an increasingly precarious position.
As for Bitcoin specific headlines, one in particular rises above the rest. BlackRock has announced that they are partnering with Coinbase to offer crypto trading to institutional investors through their Aladdin platform. A move of this magnitude will serve as the groundwork for further institutional adoption of the asset class and this further cements that crypto is not only here to stay, but that it is effectively jockeying for a position as its own asset class. This integration comes only four months after CEO Larry Fink expressed interest in providing their investors with ways to access digital assets. Historically, moves like this by BlackRock have served as a strong harbinger of things to come so it will be very interesting to see how much more groundwork is laid for institutional adoption as the bear portion of the cycle continues on. Between this and the increasing amount of legislation being deliberated, we are apt to see a fundementally different market when the next cycle begins.
In Other News
Travis Kling shared his July recap of major events in crypto. While many of the events were highlighted in previous newsletters, here are a couple that slipped through the cracks, but are worth mentioning:
Tether announces it will hold zero commercial paper by November 2022
Russia announces a ban on crypto payments
Facebook’s Libra spinout Aptos raises $150 million and already draws criticisms for being a bogus project
The Nomad bridge is exploited for $200 million. Once again hundreds of millions are lost due to an exploit on a cross chain bridging protocol. Bridges in crypto are the protocols that allow for the movement of assets across blockchains. A variety of creative implementations have been devised, but many have been taken advantage of by crafty attackers, proving yet again that the security of these protocols is still fraught with holes.
An ongoing attack takes millions of Solana based tokens out of thousands of users wallets in one of the more concerning exploits to date. Further investigations have revealed that this exploit is largely due to an error in the code used in many of the leadings software wallets.
Mining Metrics
Bitcoin Price: ~$22,900
Hashrate (amount of computing power used by the Bitcoin network): 201EH/s
Hashprice (expected value of 1 TH/s of mining power per day): ~$0.104
ASIC Prices (the computing machines used to mine BTC): $35.22/TH
Bitcoin capped off another quiet week with asset price, hashrate, and hashprice all staying relatively flat. June and July marked major months for balance sheet dumps by Bitcoin miners and we are now entering a position where Bitcoin miners will not be able to apply the same negative price pressure on the asset going forward.
It is likely that we will never again see a period of aggressive miner selling like we did in the last couple of months as Bitcoin miners have hopefully begun to understand that holding a less correlated mix of assets on their balance sheets is prudent. Konza sees holding Bitcoin on the balance sheet as a tactical decision, and not one that should be applied by default in all market environments. By approaching Bitcoin production through the lens of a commodity producer it becomes clear that the primary goal of a Bitcoin miner should not be to exclusively grow the balance sheet in the native asset. Instead, an operator should attempt to produce their asset at the lowest cost possible while keeping some dry powder available for expansion in times of market capitulation.
Riot Blockchain shared this week that they received $9.5 million in power credits in Texas by shutting off during the recent heatwaves. This shows that Bitcoin mining can maintain viability even in the summer months in certain regions as curtailment/downtime can also prove to be profitable. This additional profit center should not be overlooked by Bitcoin miners as 100% uptime for miners could actually provide a less attractive ROI than a mix of lower uptime with curtailment. It is important to try and assess what kind of value your mining operation could offer to the lcoal grid well before attempting to energize. Synergies like this should not be overlooked and can provide staying power for some operators relative to their peers.