September may be looked back at in the months to come as the most significant month for markets in years, if not decades. CPI exceeded expectations at 8.3% year over year; household wealth is falling while hourly earnings are falling well-short of inflation; the Fed hiked 75bps with no expectations of cuts well into 2024 with the UN now begging them to pause; the UK had to rush to introduce a NEW bond buying program to help avoid pension implosions; Russia annexed territories in Ukraine and escalated commentary around use of nuclear weapons; Nord Stream 1 and 2 pipelines, critical energy infrastructure, was sabotaged in international waters with finger pointing at the highest levels of governments; the list goes on and on. Amidst all this, Bitcoin was down just -2.75%, and there was no place to hide across all markets except for the US Dollar, with the S&P 500 down 9.3%, the Nasdaq Composite down 10.7%, bellwether names like AAPL down 12%, and even Municipal Bonds down 3.1% in the month. Ironically, the crypto stablecoin market is almost entirely US Dollar based, and therefore likely helped ex-US residents save during the month as global currencies imploded vs. the dollar.
September was a tale of two halves for Crypto markets. For the first two weeks of the month, crypto rallied in anticipation of the Ethereum “Merge” on 9/15. Sparing the technical details, the “Merge” signified a shift in how transactions on the Ethereum blockchain are validated and added to the ledger, moving from an energy-intensive Proof-of-Work (PoW) method Bitcoin uses today to a Proof-of-Stake model. The new energy use studies “imply that people consumed 45 times more energy watching Gangnam Style [on YouTube] in 2019 than proof-of-stake Ethereum uses in a year.”
As expectations for a successful merge grew, the price of Ethereum’s native token, ETH, rallied to a high of $1,780 on September 11 (+15% from the start of month), with the rest of the market following a similar ascent. Following this local high, ETH and crypto assets broadly sold off due to a combination of macro and crypto-specific factors. On September 13, we received a hot CPI report while markets broadly were positioned for a cooling. That day equity markets dropped 3-4%, and crypto assets fell 5%+. On September 15, the Merge went off without a hitch—a remarkable feat considering it was done without a centralized tech team or CEO. Between 2-4am ET, we and millions of others around the world watched this successful transition go live. Compared to any software or system update we or likely anyone reading this has experienced in their professional careers, it was essentially a non-event (a good thing)…
Immediately following the Merge, ETH price ramped higher briefly before selling off likely due to heavy derivatives positions unwinding, and perhaps a healthy dose of “sell the news” which is common theme in this market. The final two weeks markets grinded lower, as macro headwinds hit all risk assets. On September 21, the FOMC delivered another 75bps rate hike accompanied by expectations for additional hikes in the coming months. Last week GBP and UK bonds sold off significantly, creating stress amongst pension funds with levered long duration positioning, and ultimately the Bank of England intervened to prevent a meltdown in British government bonds. There were other negative macro data points that could be discussed, but in short, sentiment globally moved to historic lows by the end of the month.
Amidst the chaos, early stage projects with impressive growth were thrown in next to unprofitable meme stocks, offering attractive valuations well-worth withstanding the monthly mark-to-market volatility numbers of a new asset class that trades 24/7/365. Additionally, we hold optimism for ETH following the Merge. A successful Merge presents many attributes that are positive from a fundamental investment perspective. However, as highlighted above, the immediate result was a sell-off in ETH driven by non-fundamental factors. We believe the fundamental investment thesis for ETH has never been stronger, which we touch more on below.
As has been the case for most of the year, the next few months present multiple opportunities and risks on both the macro and crypto fronts. From a macro perspective, actions taken recently by the Bank of England, Bank of Japan, and comments from Fed Governors suggest that Central Banks are now reassessing if further actions to lower inflation put financial stability at risk. Additionally, sentiment now sits at all-time-lows, which should mean most of the risks are “priced-in”, and extremely low sentiment historically has represented a bottom for risk assets. However, we are also watching the unwinding of unprecedented monetary and fiscal stimulus combined with heightened geopolitical tensions, so caution is warranted. This leaves us positioned defensively, but with enough exposure to idiosyncratic upside and plenty of dry powder to act quickly if opportunities present themselves. Specifically, we are closely monitoring a few key areas of interest noted below.
Ethereum’s Merge Implications: there have been many changes to the Ethereum network, but from a fundamental investment perspective, there are two main benefits the successful merge provides for ETH:
· Anyone globally can become or contribute to a validator by “Staking” ETH tokens as collateral, making further decentralization possible, while also making ETH a yield-bearing asset as staked ETH tokens earn the networks transaction fees.
· Pre-Merge, new ETH was issued to miners as rewards for validating transactions (inflationary). Under Proof-of-Stake, these inflationary rewards are almost entirely eliminated, removing millions of dollars of daily sell pressure as net issuance is down 90%+, A portion of ETH used for transactions will now be “burned” or destroyed, turning ETH into a potentially deflationary asset (track here).
MEV – “Maximal Extractable Value” refers to the value created by new players in the Proof-of-Stake model introduced to Ethereum with the Merge. This is a highly technical topic, but it boils down to various parties fighting to properly find and order transactions to extract the maximum transaction fees for validators in excess of the standard block reward and gas fees. Given the level of activity on the Ethereum network and other Proof of Stake chains, the revenue potential for these new players is quite large.
Cosmos Ecosystem – Development within the Cosmos blockchain ecosystem continues to thrive, and developers and even Ethereum-native projects are shifting focus to the Cosmos architecture (see traditional ETF/Mutual Fund manager VanEck on why they are bullish on Cosmos here). Last week’s Cosmos conference introduced major overhauls to a new chain security model, a path towards reducing inflation, and Circle announcing their plan to issue their own Cosmos-native USDC stablecoin. Both the main Cosmos Hub (ticker: ATOM) and specific ecosystem projects show a lot of promise.
Bitcoin – it is hard to not focus on BTC in the face of increasingly questionable central bank pathways. With major developed nations’ currencies off significantly relative to the US Dollar, BTC’s recent stability is something to watch should central banks and government continue to falter. Over the past week we have seen GBP- and EUR-denominated Bitcoin purchase volumes spike, consistent with BTC’s history of finding a local bid in the face of currency devaluations or other risks to centralized stability. This trend goes back to 2012 during the Cypriot Banking Crisis and continued with rapidly devalued currencies in countries such as Venezuela, Turkey, Zimbabwe, and others. In early 2018, North Korea began missile testing that caused BTC prices in South Korea to spike meaningfully above price elsewhere (“Kimchi Premium”). In 2021 when Canada froze bank accounts of citizens associated with protest, again there was a local bid for BTC. We would argue that BTC price appreciation from 2020 through 2021 was the result of extraordinarily monetary stimulus that devalued currencies rather than the goods inflation hedge narrative that is discussed more often. Like recent policy shifts in the UK, it is our view that Fed action to devalue USD, either by purchasing non-USD debt or other actions would be the next catalyst for BTC price.
Amidst the chaos, don’t fall into the pit, but climb the ladder.
Please do not hesitate to reach out with questions, comments, or feedback!
Sincerely,
Motus Capital Management
Past performance is not indicative of future results. This communication does not constitute an offer to sell or solicitation of an offer to buy the Interests in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation in such jurisdiction. This communication is being provided solely as a high-level overview and is not intended to be relied on for the terms of any offering.
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