Ten31 Timestamp 788,789
Instability across traditional asset classes continued to dominate headlines this week, as questions about the health of the banking system loomed large following Monday morning’s takeout of First Republic Bank – whose stock had crashed over 80% the prior week – by JP Morgan. The failure of yet another huge financial institution left investors trying to determine which domino in the regional bank cascade would be next to fall. The answer to that question seemed to materialize on Wednesday when Pacific Western Bank announced it would be exploring strategic options including a sale (just hours after Fed Chairman Jerome Powell declared that the American banking system was “sound and resilient”). While Pacific Western and other regional bank stocks clawed back some losses on Friday, the reality of impaired bond portfolios and deposit flight makes any rally look – to use Powell’s favored phrase – transitory. The situation will only be complicated further by the impending debt ceiling standoff, with the latest update from the Treasury Department suggesting the US could reach technical default by June 1.
It was a busy news week on the bitcoin front as well. Most notably, the Kingdom of Bhutan – after just last week acknowledging the bitcoin position its sovereign wealth fund has held for several years – announced it would be ramping up its mining operations with a $500 million investment, showing sovereign bitcoin adoption continuing to increase at the edges. Meanwhile, bitcoin on-chain transaction fees spiked to highs not seen since July 2021 as a new standard for inscriptions reignited the Ordinals craze that first flared up several months ago, creating a near-term boon in incremental revenue for miners. This upward fee pressure has led to several blocks with total fees surpassing the block subsidy for the first time in many years. Whether this high-fee regime will quickly revert to the mean or outlast the US regional banking system remains to be seen.
Portfolio Company Spotlight
Hoseki is a platform allowing bitcoiner holders to express proof of ownership to legacy financial and legal institutions without selling or moving their bitcoin. Users can easily and selectively link on-chain addresses or custodial accounts to Hoseki’s interface and create credible ownership proofs similar to brokerage statements commonly requested by lenders and similar counterparties. This capability allows users to unlock bitcoin as a source of capital (e.g. to improve creditworthiness when applying for a loan) without incurring any risk to the underlying asset, addressing a major unmet need for bitcoin users. The platform also allows enterprises to dynamically monitor counterparty balances and to make their own credible public attestations.
Selected Portfolio News
Fedi raised a $17 million Series A round ahead of the release of its Alpha version:
Fold enabled instant withdrawals for bitcoin purchases through the app:
Upstream Data Founder and CEO Steve Barbour debated the sustainability of hydrocarbons as an energy source for bitcoin mining as part of the inaugural session of the Nakamoto Forum Debate Series.
Fold CEO Will Reeves discussed bitcoin rewards and merchant adoption with Natalie Brunnell.
Standard Bitcoin Founder and CEO Tom Masiero joined the Energizing Bitcoin podcast to discuss off-grid mining and Standard’s model.
StatMuse released their latest Muse Letter, highlighting strong activity over the past month.
Ten31 Managing Partner Jonathan Kirkwood wrote an essay diving into the relationship between bitcoin and FedNow.
The FOMC raised the target Federal Funds Rate by another 25bps on Wednesday, in line with market expectations. Fed Chairman Jerome Powell signaled the central bank might pause at the current target rate, which is now 5-5.25%, a 16 year high.
Amid ongoing turmoil in the banking sector and many deteriorating macro indicators, Senator Elizabeth Warren and various Congressmen publicly suggested once again that the (ostensibly independent) Fed should stop hiking rates.
With higher rates putting more pressure on asset valuations and incremental government funding, the Treasury Department raised its borrowing estimate for the second quarter by nearly $300 billion following poorer than expected tax receipts in April.
Dwindling reserves led Treasury Secretary Janet Yellen to tell Congress the US could default by June 1 without a debt ceiling increase.
The Treasury Department also announced plans for its first debt buyback program since 2000 to ease growing concerns about the liquidity of US government securities.
This week’s $50 billion auction of 4-week Treasury bills came in at a 5.84% yield, substantially higher than the same auction two weeks ago, on concerns around the June 1 debt default timeline.
Regional banks continued to wobble this week as yet another rate hike put even more pressure on already distressed bond portfolios and deposits continued to flee to larger banks and money market funds.
PacWest Bank’s stock tumbled nearly 60% on Thursday after the bank announced it was exploring strategic options including a sale. Western Alliance Bank was also tagged for nearly 50%, though both banks recovered some in Friday trading.
The ongoing pressure on the banking system led to a massive W/W increase in use of the Fed’s emergency lending facilities (when accounting for loans to facilitate JP Morgan’s takeover of First Republic).
Friday did deliver strong employment numbers for April, with the unemployment rate (a lagging indicator) declining to 3.4%; however, job openings once again fell sharply, implying softening labor demand and hiring plans.
Following the week’s various chaotic headlines, Fed Funds futures now imply multiple rate cuts by year-end.
The White House proposed a new 30% “climate change tax” on bitcoin mining.
Democratic Presidential candidate Robert F. Kennedy, Jr. wrote a lengthy Twitter thread defending bitcoin and criticizing CBDCs.
Various state officials also spoke out against CBDCs this week, as Florida Governor Ron DeSantis reiterated that the state will outlaw any CBDC passed by the federal government, while the North Carolina House of Representatives unanimously passed an anti-CBDC bill.
Argentina’s central bank banned payment platforms from offering clients the ability to purchase bitcoin.
The SEC erased what would have been its first formal definition of “digital asset” from a draft of a new set of rules for hedge fund disclosures.
The Kingdom of Bhutan – which last week acknowledged it had been mining and accumulating bitcoin for several years – announced a $500 million partnership to ramp up bitcoin mining in the country.
OpenSats, a foundation focused on supporting bitcoin and FOSS development, announced a $10 million donation from Jack Dorsey’s #startsmall philanthropic initiative. Half of the donation will be dedicated to advancing the Nostr ecosystem.
Several interesting proposals to help support the resilience of bitcoin and the lightning network were released this week, including LNMesh and a tool that broadcasts bitcoin transactions from Nostr relays.
A Stanford professor published an editorial for a prominent deforestation advocacy group to ring alarm bells about the impending credit crunch facing US banks.
A new class action lawsuit against Coinbase alleges the company illegally harvests face and fingerprint data from customers.
Ten31 / Unchained Institutional Investor Event @ Bitcoin 2023, May 17
This afternoon event in South Beach will feature panels and networking with founders and operators from many Ten31 portfolio companies. Please reach out if you would like to attend.
Bitcoin 2023, May 18-20
Nashville Ten31 Tribe event, June 14
Nashville Lightning Summit, July 13-14