🐋 Today is about animals. The elephant in the room - recession?

We also talk about whales, the Trilemma and Render Token!

Good morning and welcome to the Whale Capital Newsletter!

This newsletter offers, in simple language, bytes on the development of blockchain technology and digital assets as a new financial asset. In today's issue we talk about:

  • Let's talk macro

  • 🎓 Whale Cripto Academy: The Blockchain Trilemma (Part 1: Decentralization)

  • 🔍 Did you know?: Crypto investors receive names of marine animals according to the size of their portfolios

  • 🔗 Use case: Supercomputers within everyone's reach. Render Token


But first, a review of the market


🗞️ Brief News

  • A Goldman Sachs report states that 32% of Family Offices are already investing in digital assets, and 12% plan to do so soon. LINK

  • The government of Liechtenstein plans to accept Bitcoin as payment for state services. LINK

  • PayPal revealed nearly $1 billion in cryptocurrencies on its balance sheet in an SEC filing. The company indicated it holds $943 million in customer assets in bitcoin (BTC), ether (ETH), bitcoin cash (BCH) and litecoin (LTC) on its balance sheet. LINK

  • Sam Altman of OpenAI is approaching $100 million in funding for Worldcoin, the crypto project that scans your iris to prove you're not a robot. LINK

  • On Monday night, Hong Kong's Securities and Futures Commission said it would allow retail investors to trade certain crypto assets starting next month on registered trading platforms. LINK

  • Robert F. Kennedy Jr.: "I believe in Bitcoin and I will make sure the right to own and use BTC is inviolable." LINK

  • Kennedy Jr. said that "cryptographic technologies are an important engine of innovation," and also said that the United States is hindering the industry and fostering "innovation elsewhere." LINK

Let's talk macro

In this issue of the newsletter, we will again examine the overall economic landscape. Despite the calm in the markets, we are facing key weeks that could change the direction of the economy and capital markets, including the crypto market.

Inflation and interest rates

Despite the fact that US inflation has been declining for 11 months and the rate is now the lowest in the last two years, members of the FED (US Federal Reserve) give contradictory messages about the possible rate cut. Last week, Chairman Powell said that due to stress in the banking sector, rate hikes may not be necessary, and Harker (President of the Philadelphia Fed) again implied the same a few days later. However, several members of his team have indicated that they are not there yet. Specifically, Kashkari, Bullard and Bostic have said that we should not think that they are going to stop raising rates in the short term, and that, looking at the strength of the US market, we should expect at least a couple more hikes.

With all this, analysts give more trust to Powell's words; thus, before knowing the employment data last week, 63% thought the Fed was going to stop the hikes. That optimism turned into 70% after the "good" news of the worsening employment, and stands now at a 76%.

Implied historical market probabilities for the next Fed rate measure (June 14). Source: CME FedWatch Toll

The US unemployment rate in May rose to 3.7%, compared to 3.4% in April and 3.6% estimated by analysts. That increase is a "positive" message for the markets, as it brings us even closer to the end of rate hikes, that markets have already begun to discount. We must not forget that the United States and FED set the current pace of the global market; Thus, until the FED stops raising rates, we will not see a rise in prices in risky assets like crypto.

But if inflation has been declining for 11 months already; why haven't rates stopped rising yet? The reason is that the decline has been very gradual and, despite the trend, inflation remains above 2%. The FED has several legal mandates, but two of the most important are maintaining inflation levels at around 2% and get as close as possible to full employment. However, despite the number of indicators that already show signs of a very likely and imminent recession, such as the Conference Board's leading indicator (see below), until those signs translate into job loss, the FED will have no reason to curb rate hikes.

As if that was not enough, in the midst of this rhetoric game, we have lived through the soap opera around the debt ceiling; had a bipartisan agreement not been reached, the US could have defaulted on its debt and sent unpredictable waves across the system. After keeping us on tenterhooks for weeks, Republicans and Democrats finally reached and approved an agreement last week, which frees us from all the unnecessary uncertainty.

Recession, are we going in or out?

The other buzzword. Recession. And it seems like saying it is like talking about the bogeyman, when from an investor's point of view, rate hikes should frighten us much more. But let's talk about it.

While in general terms, a recession is a period of widespread economic decline, the technical definition depends on each country. There are countries where it is marked by parameters such as GDP. This is the case, for example, of Germany, where after the last publication of GDP, which falls for the second consecutive quarter, it can already be said that they are in a technical recession. However, in the US it does not work that way. We keep talking about the US because in the current environment, it is the economy that sets the pace of the global market.

In the US, recession periods are officially determined by the National Bureau of Economic Research (NBER), which although it defines a recession as two consecutive quarters of negative GDP growth, does not strictly fully, and may consider other economic indicators such as employment, industrial production and sales. The key here is that the NBER, in general terms, waits several months after the end of a recession to declare when it began and ended. On average, they have declared recessions 6 months after they had already ended. And depending on the causes, even longer. During the 90-91 recession, for example, it took them 21 months until a recession was called.

This is why we will hear the word recession even after we have already gone through it. We see it in the press; while large banks increasingly give the US a higher probability of entering an imminent recession, some major industry names say we are already entering one. I, personally, believe they are already going through it. Let me explain.

The US economy is already feeling it, there are signs of weakening employment and a sharp drop in bank deposits. But also, the Conference Board's leading indicator (blue line) clearly shows that the US market is already in a recession period. Every time indicator has crossed the 0 level it has coincided with crisis periods.

Conference Board Leading Indicator (2000-2023)

We wanted to see in more detail the market situation in past crisis periods. As you can see in the following graph, in all crises (marked in gray) that were accompanied by inflationary pressure (crises 3 to 7 in the graph), the market (S&P500) bottomed out shortly after the interest rate correction. Not only that, but the recession ended with the market already on the rise.

Review of recessions since 1957. (Whale Capital)

All this makes it clear that, we may not only be facing a recession, but that it is very likely already underway. However, it is difficult to establish whether the S&P500 has bottomed out, since despite being up >10% this year, that momentum comes from the artificial intelligence fever that the largest companies have caught (only the NYFANG is up >60%). When we analyze an equal-weighted index (which gives the same weight to all stocks in the market, large and small), the year-to-date return is practically 0%, which tells us that when all the AI fever passes, we could see further falls before hitting bottom.

In any case, a recession and job destruction will force the FED to pause or lower rates. As we have previously discussed and seen in the graph; a rate cut will translate into higher valuations of risky markets, and therefore rising equities prices, most likely before the end of the year.

How about in the crypto market? Will the same happen?

Thinking that the crypto market will respond the same way would be the same as thinking that the crypto market is efficient and is driven by the decisions of large professional investors. The reality is that we are not there yet but getting closer and closer. This market is still very speculative, leveraged and fragmented. There are more and more institutions getting in, but we are still in a sea with little water and full of little fishes, where the few whales generate big waves and the little fish move in frightened masses.

Should this be the case, it is possible that changes in rates, the exit from fixed income and the increase in risk capital from new institutional investors, might move the masses and awake the appetite of more retail investors. We have seen it in the past, in the face of large increases in crypto, thousands of retail investors who had never invested before jumped into this market. However, this time we are facing a recession that can affect all those retail investors, thus reducing the dynamics that we had witness in the past.

With all this, it is only a week left until the next FED meeting, where the definitive change in the market will be determined (or not). Undoubtedly, we have very interesting months ahead that we will continue to discuss.

🎓 Whale Crypto Academy: The Blockchain Trilemma

(Part 1: Decentralization)

In collaboration with José García Rosillo, Head of Research at Whale Capital

In today's issue we want to talk about a key aspect for the development of blockchain networks, and around which most of the industry's advances are focused. We refer to the already mentioned Blockchain Trilemma.

Before getting into the subject, let's briefly remember what a blockchain or blockchain network is; A blockchain is a computer network that, connected to each other via the Internet, communicate thanks to a common language or protocol (a computer program). Users connect to this network to access a ledger (database) that is unique, accessible to everyone and maintained up to date by some of them (validators). There are ledgers that only contain account addresses and balances, such as the Bitcoin network, and more sophisticated ones like Ethereum, where you can store programs or applications within those addresses.

Blockchain Network. (Whale Capital)

It is important to emphasize that blockchain technology is not a device or a program that we can identify in isolation. Blockchain technology is the combination of three disciplines; computer network, cryptography and game theory. And it is the correct combination of the three that gives rise to a blockchain network properly speaking. The fundamental properties that a blockchain must meet can be summarized in the following three key aspects:

  • Decentralization; a blockchain network must guarantee the independence of centralized entities. This means that a database controlled by a company or group of companies cannot be considered blockchain.

  • Security; the network must protect the integrity of transactions and digital assets on it. A network with a low level of cryptography in which access to accounts or modification of history can be compromised is not blockchain.

  • Scalability; its design must allow for efficient processing of transactions without significant congestion or delay.

Thus, we can say that the value of a blockchain is greater when it achieves an optimal balance between these properties. The problem comes when Vitalik Buterin, the co-creator of Ethereum, proposed a theory referring to the impossibility of these three properties occurring simultaneously, which he called the "Blockchain Trilemma". In order to understand why, we will explain each of these properties in the following newsletter’s issues. Today we will start with decentralization.

Decentralization of blockchain networks

Decentralization is a fundamental concept in the context of crypto assets. It refers to the distribution of control in a network, as opposed to a centralized structure where a single entity or a small group of entities have absolute control.

In the context of crypto, decentralization implies that the network does not depend on a central authority, such as a bank or financial institution, to validate and record transactions in its ledger. Instead, transactions are verified and recorded by multiple nodes or computers connected to the network, which operate collaboratively and without the need for mutual trust. They are called validators.

When designing how a blockchain network works, the developers of the project must consider several key aspects to ensure that decentralization is optimal:

  • Nodes: They are the validators. These participate in the verification and validation of transactions to update the database. Each node has a copy of the ledger that must be unique. To do this, a method of communication between them must be established to reach consensus.

  • Governance: Important decisions about the development of the protocol must be made by the community, avoiding a central entity being able to make unilateral decisions that affect all users.

  • Resistance to censorship and manipulation: The validation system must ensure that malicious validators cannot block or reverse transactions.

  • Transparency and auditability: Anyone should be able to access the information on the blockchain, as it is a public and verifiable record. This facilitates independent auditing of transactions and fosters confidence in the system.

The advantages of decentralization are already evident, and we have seen it with decentralization companies like Uber, Airbnb or eBay that sought to democratize prices. Blockchain is the second derivative of this concept; in these networks they not only eliminate intermediaries to reduce costs, but unlike Uber and Airbnb, where you guide yourself by the ratings of other users, their design allows you to transact with other people directly without the need to trust anyone. This leads to greater efficiency compared to traditional systems.

However, these advantages are not "free" for the network. Building a truly decentralized network implies having many nodes that must communicate continuously to ensure that everyone maintains the same copy of the ledger. If we have a network with few transactions, it is easy to do it quickly, however, as the number of transactions increases, coordination becomes much more difficult and it can take longer to reach a consensus. And here comes the famous Trilemma.

Faced with this situation, some networks prefer to reduce the number of validators (make the network less decentralized) to reduce the number of communications, and thus maintain speed, while others prefer to maintain a high number of nodes in favor of decentralization but take longer to validate transactions.

In summary, decentralization in cryptocurrencies is a key principle that seeks to redistribute control in a network equitably among multiple participants, but when maximized can greatly increase transaction validation time, reducing network scalability. 

We will continue talking about this in the next issue. Don't miss it!

🔍 Did you know that…?

Did you know that crypto investors receive different names of marine animals according to the size of their portfolios?

It is an analogy where the cryptocurrency market is compared to an ocean, and investors of different sizes are known as animals with different degrees of power and influence. So according to their number of bitcoins, or their equivalent in dollars (assuming 1BTC~$25,000);

  • 🐋 Humpback: >5,000 BTC ~$(>125M)

  • 🐳 Whale: 1,000 - 5,000 BTC ~$(25M - 125M)

  • 🦈 Shark: 500-1,000 BTC ~$(12.5M - 25M)

  • 🐬 Dolphin: 100 - 500 BTC ~$(2.5M - 12.5M)

  • 🐟 Fish: 50 - 100 BTC ~$(1.25M - 2.5M)

  • 🐙 Octopus: 10 - 50 BTC ~$(250k - 1.25M)

  • 🦀 Crab: 1 - 10 BTC ~$(25k - 250k)

  • 🦐 Shrimp: 0.01 - 1 BTC ~$(250 - 25,000)

  • 🦠 Plankton: <0.01 BTC ~$(<250)

These terms are already common in crypto forums, where especially the whales are closely followed. Whales can significantly influence market prices. They tend to be institutions, venture capital firms, exchanges, blockchain companies or specialized individuals, especially early investors or miners. But do they really have so much power over the market?

The great advantage of blockchain is that it allows us to see all the addresses in the ledger, and not only know the balances, but we can also track and have active alarms in case of possible movements. For the case of Bitcoin, for example, we know that according to individual addresses (without combining addresses that may belong to the same investor), the distribution of the total balance according to the size of the investor is approximately as follows;

Distribution of balances and accounts in the Bitcoin network (Whale Capital. June 2023)

If we look at humpback whales (accounts with more than $125M), there are about 1,000 addresses that have around $150B under control. This is almost a third of the entire market. While small accounts (plankton) account for 75% of addresses with balances, they only accumulate 0.2% of the total bitcoin balance.

So yes, currently the market has a large accumulation of capital in the hands of a few whales, however, more and more institutions and large investors are entering the sector. Doing a historical analysis of the number of Bitcoin accounts with more than 10,000BTC in balance (about $250M at the current price), we see that in 2010 there were only 24, while today there are 117 major Bitcoin investors. Although approximately a third of these addresses belong to exchange platforms, and therefore theoretically these are bitcoins from retail investors, it gives a good idea of the progress of the market.

Number of Bitcoin accounts with >10K bitcoins on balance

Origin of the metaphor

This terminology dates back to the early days of bitcoin, but in reality, it comes from early 20th century financial markets. The first written reference to this metaphor was in 1923, when Forbes magazine published an article titled "Business Pirates and How They Operate" describing major speculators of the time, such as Jesse Livermore, referring to them as "whales" and "sharks".

The terminology became popular to describe large and small investors in any financial market. Over time, more specific categories emerged, such as calling small individual investors "minnows" or "guppies". The aquatic metaphor conveys how investors of different sizes interact in the same ocean of the market but have different degrees of power and influence. The terminology quickly took hold in the crypto space and has now become omnipresent in crypto jargon. Some of the early references include posts on BitcoinTalk in 2013, articles on "bitcoin sharks" and the Winklevoss twins referred to as "bitcoin whales".

Whale Capital is a dolphin, but surely you can guess what we want to become 😉 And you? What is your ocean animal?

🔗 Use case: Supercomputers within everyone's reach. Render Token

Written by José García Rosillo, Head of Research at Whale Capital

In previous editions (Spanish version) we have talked about the advantages offered by a decentralized network that uses blockchain technology to store documents in the cloud (Filecoin), or video processing power (Livepeer). All this in a safer and less expensive way than centralized Google Cloud or Amazon Web Services.

In this issue we will present Render Network, founded in 2017 by OTOY, a technology company specializing in real-time graphics software and visual effects on computers.


Render Network

Rendering is the process by which realistic images or videos are generated from a three-dimensional digital model. Since its initial development, it has revolutionized multiple industries; It allows generating images of future buildings and products from a plan, in addition to 3D animated films and ultra-realistic video games. However, rendering is not within everyone's reach. To carry out professional projects it is necessary to have a very powerful machine, a high-end CPU, a lot of RAM, a specific graphics card (GPU) and a large storage capacity disk.

Render Network is a decentralized network for render processing, composed of distributed GPUs. GPUs are Graphics Processing Units incorporated in all computers manufactured today. This allows anyone with a modern GPU to contribute to the network with their rendering power in exchange for tokens. The network works with the RNDR token, which is used to pay for rendering processing services.

To use Render Network, users who want to "rent" the network's GPUs must first create an account and deposit RNDR tokens. Once registered, they can submit rendering jobs. The network assigns the job to a GPU contributor or node with the power to complete the job. Finally, the node operator will process the job and return it to the user, obtaining a commission in return.

Here are some of the benefits of using Render Network:

  • Efficiency: Rendering on the Render network is more efficient than traditional rendering methods because it allows users to pool their resources, making the process faster and at a cost between 50% and 70% lower.

  • Security: It is safer than traditional rendering methods because user data is secure and protected by encrypted blockchain technology.

  • Scalability: Render Network is scalable, which means it can handle a large number of rendering requests. This makes it ideal for companies and organizations that need to render large amounts of graphics. It is currently estimated that there are 100,000 GPUs connected, and this figure continues to grow. To put this in perspective, it is equal to the number of GPUs currently used by the 500 most important supercomputers in the world, enough to power some of the most demanding applications in the world, such as high-end video games, film production or training an artificial intelligence model like ChatPGT in a matter of days.

During the past month Render tokens has surged in popularity due to the speculation around the announcement at the WWDC conference of Apple's Vision Pro. The crypto community speculated that these glasses could require Render technology to render images, since Octane X, a GPU rendering feature owned by OTOY, Inc., as been available in Mac App Store since 2022. During Apple keynote event on Monday, the company did not mentioned Render, however they did featured Octane X, which increased the speculation around a future partnership between these companies soon.

Render Network is still in its early stages of development, but has the potential to revolutionize the way rendering jobs are processed. It is a tool that can be used for 3D animations, visual effects, medical images, product design and architecture, among others. These jobs require millions of square meters of processing centers, which is a problem and Render Network presents itself as a solution, so widespread adoption is likely to be seen in the coming years.


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See you in the next issue!

Whale Capital is the digital consultant of the fund Global Digital Asset Fund (GDAF), a professional vehicle established for investment in digital assets. GDAF is an alternative fund (NAIF) only available for Professional and Qualified Investors under the criteria of the European ESMA regulation. If you want to request more information you can do so through the following link.

DISCLAIMER: Nothing written here should be considered financial advice. This Newsletter is strictly educational in nature and is not investment advice or a solicitation to buy or sell assets or to make financial decisions. Please be careful and do your own research (DYOR).