From the rapid growth of crypto to the dramatic volatility of the asset class, governments around the world are responding through regulatory and legislative actions. Some jurisdictions have announced clear and accommodating frameworks in the hope to create the crypto hubs […]
“Where ignorance is bliss, ‘tis folly to be wise.”
— Thomas Gray on crypto
Thursday Midwit Mailbag
Q: Is the bear market over?
I’m not actually sure what marks the end of a bear market.
As with recessions, which are not officially over until the NBER tells you they’re over, we won’t know until well after the fact.
Bear markets start at the cycle high, so I guess they end at the cycle low? But you only know that the low is the low in hindsight.
I’m on record saying June 17 will prove to have been the low, so, as far as I’m concerned, the bear market is over.
And, I’d argue, the anecdotal evidence this week has been supportive of that view:
When Adam Neumann (of WeWork infamy) is able to land a $350 million investment from a16z, it doesn’t feel like we’re in a bear market.
There’s been a lot of commentary that private market valuations were the next bear market shoe to drop, but Neumann’s raise puts a $1 billion valuation on his new startup, Flow, which appears to be WeWork, but for residential real estate.
(I meant that to be dismissive, but now that I’ve typed it out, I’ll admit it’s a great elevator pitch. Where do I sign???)
And, if that’s not bull market enough for you, we learned yesterday that a 20-year old college student made $110 million trading Bed Bath and Beyond, taking his profit just in time to get back to USC for the first day of class.
WeWork? Meme stocks?
If this is a bear, I can’t wait to see the next bull.
Q: Any new rug pulls to report?
I’m sure there are, but I’d rather report an old one. Really old.
In reading up on the history of Wildcat Banking this week, I learned rug pulls go back at least as far as the early 19th century.
Bank regulation was a state-based affair at the time: Most states required banks to collateralize the private bank notes they issued with state debt — and some states, such as Michigan, allowed them to mark that debt at par ($100).
New banks in Michigan could therefore raise money from investors, buy state debt at, say, $90 and then sell $100 of bank notes to the public — the $10 difference was an immediate profit to the bankers.
Some of those “bankers” decided, having pocketed a $10 spread on a few millions dollars of notes, it wasn’t worth actually running the bank — or even opening the bank. They took the money and ran.
It was a textbook rug pull, exactly as they are executed in crypto today.
(As evidenced by every NFT project I’ve ever bought into.)
Q: What did you get wrong last week?
In quoting Kevin Zhou at the top of last week’s mailbag, I somehow managed to misspell his not-very-complicated name. Embarrassing. Fortunately, he’s too busy talking the ETH proof-of-work blockchain into existence to read this newsletter, so he doesn’t seem to have noticed. (Don’t tell him.)
I also got some complex math wrong: In pointing out that last month’s giant payrolls number was mostly a statistical fiction due to seasonal adjustments, I subtracted July from June, instead of June from July. That led me to claim that 386,000 of the 528,000 jobs reported was a guesstimate.
I was directionally correct, but mathematically wrong: As an eagle-eye reader spotted, the real payrolls guesstimate was 913,000.
The unadjusted data from the BLS showed July payrolls were 385,000 lower than in June. Which is a 913,000 differential from the headline report that the market got so excited about.
I’m printing this correction because it’s important you know: 1) the Fed is basing monetary policy on some highly approximated data and 2) I’m lousy at math.
(And names, too.)
Q: Wen Merge?
I think this is a trick question.
Anyone using crypto speak is well aware that the Merge is on track to occur on or around Sept. 15, depending on hash rate.
But I think the question is alluding to the concern around censorship following OFAC’s sanction of Tornado Cash, which had prompted some speculation that the Merge could be delayed until developers are certain that ETH proof-of-stake will be sufficiently censorship resistant.
I’m very much a mid-wit on these technical things: I know too much to be blissfully unaware of the risks but not enough to be able to really assess those risks.
And I think I have a lot of company: I doubt many people really understand the tech.
Which makes me think it will be a long, long wait for TradFi’s institutional money to find its way into crypto: Institutional investors generally don’t like investing in things they don’t understand — and, after this week, it feels like crypto is getting harder to understand, not easier.
Last week, I learned there will be at least one — and possibly many — forks of Ethereum proof-of-work, and this week I learned there’s a non-zero chance that censorship concerns could lead to a competing fork of the proof-of-stake chain, as well.
It’s all a lot to keep up with, and I suspect most of the TradFi asset managers who investigate crypto will do just enough work to know how much they don’t know — midwits — and stop there.
Q: What’s the over/under on ETH being deflationary/inflationary?
A low bar, sire, but ETH fees have spent most of this week in the single digits.
So, I’m guessing ETH will still be slightly inflationary immediately post Merge, which might disappoint some.
Q: Is the government going to shut down DeFi?
You might get that impression from crypto Twitter, which has been melting down in the wake of the OFAC sanctions on Tornado Cash.
But, I don’t think they’re looking to shut us down, no — not on purpose, at least.
The next big step toward regulating crypto, the upcoming Waters-McHenry bill, evidently matches the Lummis-Gillibrand bill in employing the term “payment stablecoins,” by which I think they mean stablecoins backed by fiat dollars held in a TradFi bank account.
If so, that is quite hopeful: It suggests we’ll have a small number of fully regulated, fiat-backed stablecoins the government is happy with. And the rest of DeFi can go nuts creating as many crypto-backed stablecoins as we can think up.
On the other hand, the OFAC sanctions were ham-handed enough that it also seems like the government could accidentally shut down DeFi before any deliberate regulations ever get passed.
I was not encouraged by a recent Politico report on the delayed Waters-McHenry bill:
Treasury sought changes that would require digital wallet providers to keep customer assets segregated — ensuring their preservation in the event of insolvency, according to one source familiar with the discussions.
To be clear, digital wallets do not hold assets — they hold private keys. And they certainly don’t hold pooled assets, so the idea of segregating them is nonsense.
Maybe the actual deliberations are better informed, but it’s more evidence the government has not yet achieved midwit status on crypto.
Which leaves us open to more accidental regulation by enforcement, like with OFAC.
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