OSL Trader View | Weekend Digest

Friday May 15, 2020

Put that shotgun away, let me get the bazooka

In the span of two months, the US Fed has consumed a significant portion of the pledged $4T in support funding - handing out payments to folks of all shapes and sizes, in every nook and cranny of the country. Is it enough? One can’t help but wonder why they bother setting a cap on the printing press in the first place. Does anyone actually think they will abide with the self-imposed limits? Actions thus far suggest not… 

Fed injections: 

  • $100B loans via Term Asset-Backed Securities Loan Facility (TALF) and the Paycheck Protection Program Liquidity Facility (PPPPLF). 
  • Non-recourse loans (read free money); 
  • $500B in Municipal Liquidity Facility (MLF) - for states, cities & counties, through the CARES Act relief and stimulus measure; and 
  • $454B for programs in case some loans fail, giving the central bank some political cover if/when these loans do default.


Even still, the Fed just never fails to surprise. From being the backstop to “fallen angel” bonds, they have stepped in to be the buyer of last resort for ETFs all the while adding $24M debt per minute. Seriously, why are Americans paying taxes? The immediate implication is the complete destruction of price discovery. Literally trillions are flowing through capital markets yet they still can’t one-up $BTC. 

Year to date, $BTC still reigns supreme. Strong it is, the power of HODLers. RenTech will certainly not be throwing in long $BTC positions nor will PTJ be throwing his entire $5.1B into bitcoin but I am sure their peers will not be simply perusing through these headlines idly. 

FOMOing into this $260B asset class can certainly be expected just as the Yale endowment fund cut the tape luring in the other endowments two years ago. Hedge funds started the year running $3.2T. Just 1% of that would tack on 37% to the entire market cap of the digital asset class. That would still be ⅕ the market cap of Amazon alone. Undervalued? You bet. 

Aspirational visions of ’banking the unbanked’ using crypto will become increasingly difficult with regulators being required to apply traditional banking principles to crypto in order to pass their next FATF evaluation.  While there are indeed a lot of outfits that are trying to be the go-to bank for crypto, getting a banking charter is one thing, getting the incumbent correspondent banks to take you seriously (let alone process a transaction for you) is an entirely different ball game. 

Arbitrary and unreasonable bank account closures are part of the game with the vulnerability of this part of the chain clearly exposed during the fastest drop in history this past March.  It does make you wonder how much pent up demand there is from players unable to get fiat into the asset class. Forget, for a second, about the misplaced comments Jamie Dimon made years back and just think what a bulge bracket providing fiat rails to the space could do. It’d be massive. 

While those happy with the current set up of a financial market will continue to detract, the rest of the world hopefully will see more efforts akin to that made by Gibraltar’s minister for digital and financial services. Instead of dilly dallying with indecision, they’ve come out and said if there are no laws in a jurisdiction, they will read the tape as crypto being legal.

Leaked screen captures of China’s DCEP has been a talking point for many as they increase coverage of the testnet as the open interest on CME continues to clear records.

And if it’s not the peers that serve as the tipping point for others, the honey will speak for itself. Silvergate reported +75% growth of the Silvergate Exchange Network with $BTC transaction volumes growing 118%. They like it so much in fact, they’ve started offering $BTC collateralized loans. 

The halving panned out as no one expected. $BTC shrugged off a 20% dip and is right back testing the $10K barrier. The miners however, had it spot on with their expectations of a 30% dip in hashrate.

It is undeniable that miners facing the halving earlier this week had a much bigger arsenal of hedging tools at their disposal via-a-vis their predecessors. Futures, options, credit lines (plenty creative) to ease the pain and let’s not forget we’re right at the cusp of the Chinese wet season meaning a lot of the ASICs are being plugged back in right about now. Consensus was for a 30~40% drop in hashrate post halving vs. 27% actual. There is a massive backlog in the hardware market and with heatsinks dropping like flies off the T17/S17s from Bitmain reportedly seeing failure rates north of 30%, growth in hashrate might actually come online much more slowly than we anticipate. 

News that caught our eye:

In the world of customized online content, I suspect most of our feeds are becoming increasingly biased towards crypto news and gossip, but we’re certainly seeing more mainstream news and an influx of  reverse inquiries seeking advice on how to participate in the sector. Partners at established law firms, equity traders, VCs, HNWs, your average merchant, the full monty. 

This added interest and more news like below certainly paints a welcoming picture -after the halvening non-event event - that the sector still has promising potential:

 

Have a safe and enjoyable weekend all, and remember...

 

May the trend be your friend!

 

OSL Trader View and Weekend Digest are contributed by Stefan Chu, SJ Oh, and Santiago Nazaretti

 


 

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