Markets Retrace Monthly Gains & Europe Braces for Winter
Since I published the newsletter last Friday morning, equity markets and digital assets have fallen precipitously. The S&P 500 went from being up 1.5% month-to-date as of August 25 to concluding the month down 4%. Bitcoin sharply retraced as well, dropping 14% in the same time period.
The majority of this decline is attributable to the events that transpired in Jackson Hole last weekend, where Fed Chair Jerome Powell dashed the hopeful optimism the markets were clinging to in the previous weeks. A summary of some of his key talking points are listed below:
He spared the formalities with his speech, saying, “Price stability is the responsibility of the Federal Reserve and is the bedrock of our economy.”
He then went on to assert that reducing inflation will likely require a period of below-trend growth, with the markets clinging to the following statement - “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.” (thorough abandonment of the soft-landing narrative)
He also backed off of a comment from the past Fed meeting where they stated that they believed they had reached the longer run neutral rate and that this was not a place to stop or pause.
Lastly, he shared three lessons from historical periods that are guiding decision making today:
“central banks can and should take responsibility for delivering low and stable inflation.”
“the public's expectations about future inflation can play an important role in setting the path of inflation over time.”
And lastly, on taming inflation, “we must keep at it until the job is done.”
To conclude, his remarks quashed most hopes that we had already achieved max pain and, in many ways took away the hope of a soft landing with it. Markets are now deliberating whether the September rate hike will be 50 or 75bps and it is likely that a retest of last month’s highs will not occur until some more of the dust settles.
Continuing with our regular coverage of the struggles in Europe, the European Union is now considering some drastic measures to alleviate concerns over rising energy costs across the continent. These measures include:
Price caps
Reducing power demand
Windfall taxes on utility company profits
The EU executive arm is reportedly going to provide further details on their plan of action on September 14. Stay tuned for coverage on this announcement and first reactions on the cost-benefit analysis of their decision to intervene at this scale.
In Other News
A repayment date will soon be set for the long anticipated Mt. Gox hack that resulted in the loss of 850,000 BTC in 2014. Creditors have until September 15 to make a claim and repayment is expected to follow not far behind.
Regulatory concerns have caused Crypto.com to back out of a 5 year and $495 million sponsorship deal with the UEFA Champions League.
The Indonesian government is currently working to establish a crypto stock exchange by year-end to give safe access to consumers to the growing prevalence of digital assets in the country.
The California Assembly passed a controversial bill titled the Digital Financial Assets Law. It is being dubbed as the California equivalent of New York’s BitLicense. Should it be signed by Newsom it would implement, among other things, a temporary prohibition on California-licensed entities dealing with stable coins unless they were issued by a bank or licensed by the California Department of Financial Protection and Innovation.
Pakistan is being ravaged by the worst flooding in decades as rains since Mid-June have destroyed or damaged over 1 million homes and killed an estimated 1,100 people. Some regions of the country have received upwards of 5-6x their average rainfall.
Mining Metrics
Bitcoin Price: ~$20,300
Hashrate (amount of computing power used by the Bitcoin network): 225EH/s
Hashprice (expected value of 1 TH/s of mining power per day): ~$0.0823
ASIC Prices (the computing machines used to mine BTC): $34.29/TH
Miner margins are undergoing another round of compression this week. Notably, hashprice plummeted to just above $.08 as Bitcoin tested the $20k threshold. As hashrate in Texas has continued to come online, the time it takes for the network to distribute a Bitcoin block reward has fallen substantially. However, the biweekly difficulty adjustment has now set in and adjusted for the increase in network compute.
In short, the difficulty measure is a way for the network to ensure that block times remain around 10 minutes. As a greater amount of computing power has been dedicated to finding the blocks in the last couple weeks, the time to find a block has shrunk significantly. Every 2,016 blocks, or roughly every two weeks, the difficulty to find a block adjusts in response to the average time it took to find in the prior time period. This week difficulty adjusted upwards by over 9% for the first time since January of this year. The question now becomes how many of the major public miners with lofty energization hopes will come online in this market environment? Will additional capitulation occur if the top and bottom lines do not meaningfully improve going into Q4?
The challenges plaguing these operators are best highlighted by the events at Compass Mining as they opted to shutter two of their facilities in Georgia due to utility costs increasing by 50%. As energy costs continue to rise throughout the country, expect to see more of these instances cropping up in the next few months.
Until next time,
Artem