July 17, 2022 | Issue 24 HOW THE ECONOMY INSERTED ITSELF BETWEEN CRYPTO AND REAL ESTATE When the crypto market was growing and reaching new heights, excitement was in the air. Agents who had invested in crypto were spreading the word among their colleagues to pay attention to this new currency. As headlines about crypto dominated business news, a newer crypto product started stealing attention from cryptocurrencies – NFTs. Nonfungible tokens allowed creators of digital products to sell their work and not only be paid at the sale, but also to receive payment when it was subsequently resold. Some creative real estate agents and entrepreneurs used NFTs to sell homes. Homebuyers with significant crypto holdings sought ways to pay for a house with crypto. Others wanted to use their crypto as collateral for a loan. Meanwhile, the real estate market kept getting hotter. The demand for homes rose, driven in part by rock bottom mortgage rates. The inventory could not keep up and home prices broke records. As a listing agent, my favorite part of the transaction was calling my sellers and telling them about a much higher than expected offer I had received. I loved hearing their reaction. It was usually silence followed by disbelief, processing, elation, and then instructions to get the offer signed. Ah, those were fun times. Crypto and NFT folks and Realtors were loving life. The party music was blaring. And then the music stopped. The economy was overheated.
Supply chain shortages, the jump in oil prices because of the Russian invasion of Ukraine, and the high cost of real estate triggered rising prices and inflation. The Fed took steps to slow the economy by raising the Fed funds rates. Concern about the economy caused investors to move their money away from riskier assets. This included equities and the stock market fell. Bitcoin, the bellwether crypto for the industry, followed equities and it also fell in price. Several large crypto lenders who were undercollateralized could not withstand the price declines. They could no longer attract new depositors with high yields. This meant they had no funds to pay existing borrowers. (By the way, this is the definition of a Ponzi scheme.) This is where we are. What's ahead? The weak crypto companies will have to change their practices or they will fail. We then wait, patiently.
When the Fed starts easing up on their tightening (that means lowering their rates), equities and bitcoin will start coming back. Until then, just keep learning during this bear market so that you can start earning during the bull market. Reach out to me with your thoughts, questions, and requests to speak to your office. Have a productive week and stay crypto curious! Rich Hopen email@example.com | 908.917.7926 PS. You can find all CNR newsletters here. PSS. This newsletter is supported by home buyers and sellers in NJ who retain me as their real estate agent. If you know of anyone looking to buy or sell a home, please reach out to me.
CRYPTO NEWS ▸ Venture Capital Investment in Crypto Drops 26% First Half of 2022
Venture capitalists invested $9.3 billion in the first half of 2022 compared to $12.5 billion for January through June 2021. The decline is not unique to crypto as VC deals in the US dropped 22% according to GlobalData. According to The Block – "Typically, private funding in the blockchain sector is a lagging indicator of the sector’s health because of the time discrepancy between when deals are announced and when they are made public. This means that venture funding may continue to decline as economic factors like rising inflation and crypto’s recent liquidity crisis continue to shape the sector." An outlier is venture firm Andreesen Horwitz which created a new $4.5 billion fund focused on cryptocurrency and Web 3 companies. "We think we are now entering the golden era of Web 3," according to the company's statement.
▸ Bitcoin Miners in Texas Shut Down Operations When Electricity Demand Peaks Bitcoin miners in Texas have two types of arrangements for power with the Electricity Council of Texas. Some miners have a long-term purchasing power agreement (PPA) and others do not.
Miners with PPAs can sell pre-purchased electricity back to the grid at a profit. During high demand, the price of electricity rises. Miners without a PPA will shut down their rigs during peak demand. Unlike other industrial operations or data centers, bitcoin miners do not have to maintain constant operations.
▸ House Dems Release Data on Bitcoin Mining Electricity Usage Based on data received by seven large bitcoin miners, congressional Democrats said the miners use as much electricity as Houston. Houston uses 1,045 megawatts of power. The Congress members called for mandatory energy usage reporting.
▸ Crypto Lender Celsius Files Bankruptcy On July 13, 2022, crypto lender Celsius filed for chapter 11 bankruptcy in New York. This type of bankruptcy allows the business to continue to operate under a reorganization plan. Celsius was one of the largest crypto lenders and had managed $11.4 billion in assets and had 1.7 million customers. It attracted customers with a promise of returns as high as 18.6%. Celsius' promise of high yields and giving loans that were undercollateralized left it vulnerable when the crypto market took a nosedive. On June 12, it froze customers' assets. The bankruptcy documents claimed that Celsius has $4.34 billion in assets and $5.5 billion in liabilities. This is a $1.2 billion hole in its balance sheet.
CRYPTO CLASS – ETHEREUM'S MERGE Ethereum is a decentralized global software platform that has its own blockchain and cryptocurrency, ether (ETH). Like the Bitcoin blockchain, the Ethereum blockchain uses the proof-of-work protocol to validate transactions and to create new cryptocurrency. This proof-of-work protocol uses a lot of energy and subjects the crypto industry to criticism for being a major contributor to global warning. A less energy intensive alternative to proof-of-work is the proof-of-stake protocol. This will reduce the network’s energy use by 99.95%. (See Proof-of-Work and Proof-of-Stake) Ethereum has been working on transitioning to this protocol and it is scheduled to occur the week of September 19th. The migration to the new design is referred to as the merge.
INFLUENCERS - People to follow Michael Barr – @Michael_S_Barr Barr was confirmed by the Senate to the regulatory role of Fed Vice Chair for Supervision. His role will be central to oversight of Wall Street and will include how cryptocurrencies and stablecoins interact with traditional finance. Barr was formerly an advisor to crypto company Ripple and a Treasury Department official under the Obama administration.
RESOURCES – Books, websites, podcasts, interviews, articles Andreas Antonopoulos is one of the most articulate crypto experts I have watched. I just discovered his YouTube Channel and it's a great resource to learn the basics or to take a deep dive.
CRYPTO WORD – Gas Fees The ether that must be spent as a fee to execute a transaction or contract on the Ethereum network. OH, ONE MORE THING –
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