Inflation + Fed Update
The Federal Reserve will meet on June 15, where it is expected they will raise interest rates by half of a percentage point for a consecutive time.
Rate hikes historically are seen as a way to fight inflation, as May consumer prices rose 8.6% y/y. This number was slightly higher than expected, resulting in price declines across global markets.
As interest rates rise, this impacts equity and crypto markets – especially technology stocks, whose cash flows (hopefully) are generated in the future while spending today on growth – leading to a decline in price.
Average national prices rose to $5.004 on Saturday, according to AAA.
According to JPMorgan, average national gas prices could surge above $6 by August, marking another grim milestone for drivers across the country.
Recent polls have consistently shown record gas prices and high inflation are a major contributor to pessimism about the state of the economy as the U.S. heads to midterm elections in November.
I am a bit surprised that the government has elected to keep tariffs on Chinese imports in place – reducing tariffs would help to ease inflation and likely breathe some life into the markets as a welcome headline.
If the administration is unwilling to do that, China must be brought back to the table to find a way to negotiate a trade deal while offering some relief to consumers.
Economic Pressures
Two main factors are driving the surge in gas prices: the recovery from the pandemic (demand increase) and Russia’s invasion of Ukraine (sanction related supply shock).
Oil prices have gained even further recently on hopes China, the world’s largest energy consumer, would ease some of the restrictions and lockdowns imposed during a spike of Covid-19 cases, though the country went back on a state of alert this week.
As a result, Brent crude prices, the global benchmark for oil, are trading above $116.
President Biden has said fighting inflation is his top economic priority. Biden announced a plan in March to release up to 180 million barrels from the country’s emergency oil reserves, spread over six months.
The unprecedented drawdown in U.S. oil reserves is helping, according to analysts, but it hasn’t been enough to curb the price gains at the gas pump.
Furthermore, the government has called upon U.S. oil producers to ramp up oil production, but companies have faced constraints, including in securing materials and enough workers.
Oil companies are also under pressure from shareholders not to chase high oil prices given the industry’s history of boom-and-bust cycles.
Portfolio & Crypto Market Update
All risk assets are being hit hard after last week’s CPI inflation number was higher than expected.
Concerns over the stability of the Celsius Network, a crypto lending protocol, have further rattled DeFi markets.
We remain confident in our portfolio recommendations – holding a balance of cash reserves along with ANET, NVDA, OKTA, BITO in our equity portfolio, and ETH, ENS, and MATIC in our crypto pure play portfolio.
Equity Portfolio
| Ticker | Original Weight | Price | Price at Rec | Performance | Rating |
| Proshares Strategy Bitcoin ETF (BITO) | 2.50% | 14.34 | 25.93 | -44.70% | BUY A QUARTER |
| Arista Networks (ANET) | 2.50% | 92.05 | 105.00 | -12.33% | BUY A QUARTER |
| Nvidia (NVDA) | 2.50% | 156.47 | 188.20 | -16.86% | BUY A QUARTER |
| Okta Inc. (OKTA) | 2.50% | 81.66 | 95 | -14.04% | BUY A QUARTER |
| Concord Acquisition (CND) | — | 9.94 | — | — | WATCH |
| Galaxy Digital (GLXY.TO) | — | 5.71(CAD) | — | — | WATCH |
| Unity (U) | — | 34.38 | — | — | WATCH |
Crypto Portfolio
| Ticker | Original Weight | Price | Price at Rec | Performance | Rating |
| ETH | 15.0% | 1,228.69 | 3,444.22 | -64.33% | BUY A QUARTER |
| ENS | 2.50% | 8.09 | 10.22 | -20.84% | BUY A HALF |
| MATIC | 1.25% | 0.44 | 0.678 | -35.25% | BUY A QUARTER |
| APE | — | 3.46 | — | — | WATCH |
| SOL | — | 28.31 | — | — | WATCH |
| HNT | — | 8.34 | — | — | WATCH |
| STEPN | — | 0.59775 | — | — | WATCH |
We are positioned for the long term – and will continue to use price declines to build positions around these companies and other protocols that offer substantial long-term value to their users.
Ethereum (ETH)
Bitcoin (BTC)
is the best-performing asset of the decade. Ethereum (ETH) isn’t far behind. ETH just completed another successful test of their long-awaited network upgrade.
The two blockchains have very different use cases – with BTC positioned as a form of scarce, desirable, digital property that can be used as collateral, while ETH is building the platform layer to an ecosystem from which many decentralized web applications can be built.
Ethereum is currently undertaking the bold step to change how transactions are validated on their blockchain. ETH will no longer use energy intensive, proof-of-work “mining” where computers solve puzzles to earn native cryptocurrency and instead will implement a process known as “proof-of-stake” where participants agree to “stake” or keep a portion of their ETH assets locked like a deposit or down payment of sorts.
This adoption will cut energy usage on the Ethereum blockchain by 99% and usher in more willing investors and participants who favor better environmental standards. Moreover, this network upgrade will remove bottlenecks and improve scalability and security.
Stakeholders
| Users | Anyone who owns ETH and uses the network’s native cryptocurrency to transact |
| Developers | Active builders on Ethereum creating new projects (web apps, games, fintech) |
| Miners | Individuals or groups performing computations, competing to secure the blockchain and validate transactions in exchange for ETH |
| Stakers | Deposit ETH to activate validator software. As a validator, you are responsible for storing data, processing transactions, and adding new blocks to the blockchain |
Investors are eagerly watching the network transformation carefully to gain any insights into how it may impact valuation and price.
Historically, large events such as this one, including “Bitcoin halving” events, (where quantity of BTC released decreases thus increasing scarcity), have coincided with large moves to the upside in crypto prices.
Supply Table
| ETH produced per year today | 4,950,000 |
| ETH produced per year after the upgrade | 650,000 |
This Ethereum upgrade will remove miners and reduce billions of dollars of selling pressure from the market. ETH daily supply issuance will be cut dramatically, likely the equivalent of up to three “halving events.”
If you put this in perspective, Ethereum also has built a digital economy of dApps that BTC does not have. This likely amplifies the significance of the event, as network participants eagerly transact in Ether at a higher velocity than Bitcoin.
The entire cryptocurrency-based web3 ecosystem has become increasingly reliant on Ethereum as the leading layer one blockchain.
Demand Dynamics
What drives up cryptocurrency prices? Demand for blockspace on the blockchain.
Layer One blockchains like Ethereum sell blocks that are secured on chain. Demand for this resource comes from the potential utility or use cases (derived benefits) from using a particular blockchain network. Put simply, the value of what could be accomplished with each block.
Lucas Campbell outlines this process nicely in his Bankless article posted as a resource below. Let’s summarize these thoughts as follows:
- Blockchains must incentivize demand through improvements in what they can offer people in the world – this process induces an increase in transaction revenue
- Reduce security expenses
“Blocks become more valuable as the application layer becomes more vibrant because applications (think DeFi, NFTs) create economic opportunities inside blocks. Blockspace revenue is almost directly correlated to the number of valuable applications on the network and the opportunity they hold.”
Currently, Ethereum has over $15 million staked on their new network – Beacon Chain. This transformation is likely to be completed by the end of the summer as October marks an important upcoming Ethereum conference.
Conclusion
The impending merge for Ethereum will further improve the fundamental economics of the network by reducing supply growth, preventing congestion on the network, and returning incentives to long-term holders of Ethereum who commit to staking or locking their holdings. This will offer the opportunity to these holders to generate increased yield (between 4-7% APY) simply by remaining a long-term holder of ETH.