Many people may not have heard of SHA-256, but I believe it to be one of the greatest American inventions of the 21st century.
Developed by the National Security Agency (NSA) in 2001, SHA-256 is a secure hashing algorithm that, among many other things, is used by your iPhone to encrypt data, including the unique facial characteristics that many of you use to unlock your phone.
It also makes Bitcoin encryption possible. I won’t bore you with the details—you can read more about the algorithm here—but SHA-256 has never been hacked or compromised, making Bitcoin one of the most secure protocols on earth.
This is precisely why Satoshi Nakamoto, Bitcoin’s pseudonymous inventor, chose to build the digital asset on top of it. Writing in 2010, Satoshi said that SHA-256 “can last several decades unless there’s some massive breakthrough attack.”
That’s good news, as Bitcoin is designed to be mined and held for decades to come—and beyond. The very last available bitcoin is expected to be produced sometime in the year 2140. As of this writing, close to 92% of every bitcoin that will ever exist has already been mined, meaning approximately 1.7 million are still up for grabs.
Setting the Record Straight
So why am I telling you all this? Mainly to set the record straight on Bitcoin.
First of all, Bitcoin is a U.S. invention, despite the Japanese-sounding pseudonym of its creator(s). This is important because some people believe it was designed specifically to destabilize the dollar or the traditional monetary system.
That couldn’t be further from the truth, though many advocates believe Bitcoin could one day replace fiat currency. Even the Bank of International Settlements (BIS), one of the most vocal critics of Bitcoin, has issued guidance for central banks to potentially hold digital assets as reserve currencies.
I’m sure you’ve noticed that there’s been a lot of negative press about “crypto” since at least last summer, first with the implosion of Terra/LUNA and the bankruptcies of crypto lending firms Celsius and Voyager Digital. Then, of course, came the massive fraud scandal involving Sam Bankman-Fried and his crypto exchange FTX. And this week, crypto bank Silvergate announced it would shut its doors.
Due to its association with crypto, Bitcoin’s price suffered as a result of these setbacks, even though it has nothing to do with the firms in crisis, and even though its proof-of-work (PoW) protocol makes it far more secure than proof-of-stake (PoS) coins such as the now-worthless LUNA.
Bitcoin is the only crypto asset to officially be considered a commodity, according to the U.S. Commodity Futures Trading Commission (CFTC), citing its PoW protocol. All other coins and tokens may very well be classified as securities.
Part of the Digital Transformation
Like face recognition, artificial intelligence (AI), mRNA vaccines and other modern technology, Bitcoin itself is neither “good” nor nefarious. Instead, it’s a key component of the ongoing, rapidly accelerating digital transformation.
I think the lightning-fast adoption of ChatGPT is proof of this hyper-acceleration. The AI chatbot, developed by OpenAI, may be the fastest-growing app of all time. Launched at the end of November 2022, it reached 100 million active users, in only two months, significantly beating other popular apps such as TikTok, Instagram and Pinterest. Last month, ChatGPT netted a staggering 1 billion visits to its website, according to Similarweb.
Take a look below. Spending on blockchain technology is expected to expand more than 65 times from 2021 to 2028, when it could hit $395 billion, according to one research firm. Due to its superior security properties, Bitcoin will be used to validate everything on these blockchains, which I believe will increase its value exponentially. As I often say, follow the money.
A Decentralized Asset Like Gold and Silver
Speaking of money, Bitcoin’s market cap now rivals that of Visa and Mastercard, which have millions of users and decades’ worth of name recognition. Bitcoin is decentralized, meaning it has no CEO, no board of directors and no marketing budget. And yet its total value is approximately in line with that of the two biggest credit card companies. When it was trading at $55,000 and $65,000, Bitcoin’s market cap completely eclipsed that of Visa and Mastercard.
As big as Bitcoin is, it’s nowhere close to the market value of gold and silver, two more decentralized assets. Gold’s total global value is currently a little over $12 trillion, roughly the size of five Apples, while silver’s is approximately $1 trillion, sitting right between Alphabet and Amazon at today’s prices.
To me, this bodes well for Bitcoin, whose market cap is around $433 billion right now. For the digital asset to have the same value as silver, each bitcoin would need to be priced at $60,000, which it’s achieved before and likely will do so again.
For it to have the same value as gold right now, Bitcoin would need to trade at an eye-popping $630,000.
Is that doable? Some people think so. Billionaire investor Tim Draper believes Bitcoin could hit $250,000 by the end of this year. Cathie Wood says it could go as high as $1.5 million in seven years.
I’ll refrain from making my own price prediction, but I will say that as the digital transformation advances, I expect Bitcoin’s price to advance alongside it.
Index Summary
- The major market indices finished up/down/mixed/flat this week. The Dow Jones Industrial Average gained/lost x%. The S&P 500 Stock Index rose/fell x%, while the Nasdaq Composite climbed/fell x%. The Russell 2000 small capitalization index gained/lost x% this week.
- The Hang Seng Composite gained/lost x% this week; while Taiwan was up/down x% and the KOSPI rose/fell x%.
- The 10-year Treasury bond yield rose/fell x basis points to x%.
Airlines and Shipping
Strengths
Weaknesses
- The worst performing airline stock for the week was xxxx, down xx.x%. Data from Cirium suggests that 22 Boeing 737s were delivered in February, compared with 35 deliveries recorded in January. This decline should not come as a surprise since last month, Boeing CFO Brian West announced at an investor event that he was expecting MAX deliveries to decline in February due to supply chain issues on the 737 line. However, year-to-date deliveries averaged a 29 monthly rate versus the 33-37 monthly delivery rate the company needs to reach its delivery target of 400-450 737s by 2023.
- Global air freight volume has been in a downcycle since March 2022, while the supply of cargo space has recovered to just 7% below the pre-pandemic level (as of December) on a rebound in passenger flights in the U.S. and Europe. With supply-demand thus softening, air freight rates were still high at the end of 2022, but falling increasingly fast.
- American Airlines has a limited orderbook today, and the airline forecasts just $5 billion of cumulative capex in 2023-2024. As a result, Treasurer Meghan Montana is only looking to finance about 12 737 MAX aircraft today. Instead, American is focused on its debt paydown goals of $15 billion in debt reduction by 2025, with a particular focus on 2025 maturities. Target liquidity today remains in the $10-12 billion range, and this could change over time based on the pace of the recovery.
Opportunities
- Based on current schedules, first quarter 2023 system capacity is showing a sequential improvement of 6.3% compared to fourth quarter 2022 capacity. However, second quarter 2023 system capacity shows the sequential improvement moderating.
- Generally, the rule of thumb is for every 1 million tons per year of U.S. LNG capacity, the shipping market needs an additional 2 to 2.5 new LNG ships assuming two-thirds of the volume move to Asia. Thus, the U.S. expansion should require about 88 new vessels by the time the three planned U.S. projects are complete in the next two years.
- Lufthansa remains interested in investing in TAP and is one of the favorites to enter the share capital of the Portuguese company. According to Bloomberg, cited by Negócios, during the presentation of annual results, Lufthansa assumed that the most interesting targets for mergers and acquisitions are TAP and the Italian ITA, formerly Alitalia. Lufthansa’s interest in TAP dates back to 2019, when the German company’s investment was almost complete. However, the process was suspended due to the Covid-19 pandemic.
Threats
- The Evercore ISI Airlines Survey ticked down from 71.3 to 68.8, as close-in domestic leisure demand has moderated, though it remains stronger than 2019. Business demand continues to recover. The international portion of the index remains at its all-time survey high of 92.5. Demand remains strong in 2023 and continues to be led by leisure, though business demand is gradually coming back. International demand is very healthy amid the easing of travel restrictions. Spring break demand looks strong, but not quite as strong as was seen in the fourth quarter holiday season.
- Carriers are managing shipping capacity by blanking sailings, which is supporting an environment of low rates, low utilization, and low reliability. This “wait and see” approach is consistent with a prisoners’ dilemma, as one carrier doesn’t want to cut capacity, helping balance the market at their own expense.
- The U.S. Justice Department (DOJ) filed an antitrust lawsuit seeking to block the JetBlue merger with Spirit Airlines, and separately, there are headlines that the Department of Transportation (DOT) will deny Spirit’s airline certificate transfer.
Luxury Goods and International Markets
Energy and Natural Resources
Bitcoin and Digital Assets
Strengths
- Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Kava, rising 13.03%.
- Voyager Digital won court approval to sell itself to Binance.US, the U.S. arm of the world’s biggest crypto exchange, after four days of contentious bankruptcy hearings. U.S. bankruptcy judge Michael Wiles said he would give Voyager permission to try to close the Binance.US sale and related payout plan which may give customers about 73% of what they are owed, writes Bloomberg.
- Cathie Wood’s Ark Invest continues to add Coinbase shares to its funds with another estimated $20.5 million purchases this week, Bloomberg reports. Shares in the crypto exchange closed down 7.8% on Thursday.
Weaknesses
- Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week was Stacks, down 30.44%.
- Silvergate shares dropped as much as 4.7% Monday morning after the bank closed its flagship crypto payments network and Moody’s cut its rating on the company. Silvergate shares plunged 60% last week after the company said it was evaluating its ability to remain viable and key partners cut ties with the firm, writes Bloomberg.
- Unease is spreading across the financial world as concerns about the stability of Silicon Valley Bank prompt prominent venture capitalists to advise startups to withdraw their money, Bloomberg explains. The turmoil followed a surprise announcement that it was issuing $2.25 billion of shares to bolster its capital position after a significant loss on its investment portfolio.
Opportunities
- Shares in numerous private crypto startups are currently being offered at sizable discounts on Birel.io, a platform that specializes in secondary market transactions. Those startups include Alchemy, Blockchai.com, Chainalysis, Kraken and more worth about $70 billion, writes Bloomberg.
- Gemini, the cryptocurrency exchange owned by the Winklevoss brothers, said its banking relationship with JPMorgan Chase remains intact, according to a Bloomberg report.
- FTX’s CEO is seeking to pay $4 million in employee retention bonuses to a select pool of key employees to stay with the company through its Chapter 11 proceedings, writes Bloomberg.
Threats
- The crypto world’s eyes will once again turn to Washington on Tuesday as oral arguments begin in Grayscale Investment’s lawsuit against the SEC. The drama centers on the $14.8 billion Grayscale Bitcoin Trust, ticker GBTC, which has for two years been trading at a steep discount to the cryptocurrency, writes Bloomberg.
- Bitcoin is having its worst week ever since November as an equity selloff, fear over higher interest rates, and an escalating U.S. regulatory crackdown on crypto combine to hurt investor sentiment, reports Bloomberg. Bitcoin fell as much 3.2% on Friday, breaking down $20,000 for first time since January.
- China-born crypto mogul Justin Sun sought to counter concerns about the strength of the Huobi exchange, one of the largest trading venues in digital assets, after a flash crash in the platform’s native token. The virtual coin halved in price at one point before paring losses, writes Bloomberg.
Gold Market
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Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of (12/30/22):
IAMGOLD Corporation
Newmont
Agnico Eagle Mines
Oceana Gold
Azul Airlines
Boeing
Deutsche Lufthansa
American Airlines
JetBlue Airways
Kering
Hermes
Prada
LVMH Moet Hennessey
Tesla
*The above-mentioned indices are not total returns. These returns reflect simple appreciation only and do not reflect dividend reinvestment.
The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. The Russell 2000 Index® is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000®, a widely recognized small-cap index.
The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed on Stock Exchange of Hong Kong, based on average market cap for the 12 months. The Taiwan Stock Exchange Index is a capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange. The Korea Stock Price Index is a capitalization-weighted index of all common shares and preferred shares on the Korean Stock Exchanges.
The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver. The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar. The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights are capped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks. The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The S&P/TSX Venture Composite Index is a broad market indicator for the Canadian venture capital market. The index is market capitalization weighted and, at its inception, included 531 companies. A quarterly revision process is used to remove companies that comprise less than 0.05% of the weight of the index, and add companies whose weight, when included, will be greater than 0.05% of the index.
The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500. The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500. The S&P 500 Financials Index is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period. The S&P 500 Industrials Index is a Materials Index is a capitalization-weighted index that tracks the companies in the industrial sector as a subset of the S&P 500. The S&P 500 Consumer Discretionary Index is a capitalization-weighted index that tracks the companies in the consumer discretionary sector as a subset of the S&P 500. The S&P 500 Information Technology Index is a capitalization-weighted index that tracks the companies in the information technology sector as a subset of the S&P 500. The S&P 500 Consumer Staples Index is a Materials Index is a capitalization-weighted index that tracks the companies in the consumer staples sector as a subset of the S&P 500. The S&P 500 Utilities Index is a capitalization-weighted index that tracks the companies in the utilities sector as a subset of the S&P 500. The S&P 500 Healthcare Index is a capitalization-weighted index that tracks the companies in the healthcare sector as a subset of the S&P 500. The S&P 500 Telecom Index is a Materials Index is a capitalization-weighted index that tracks the companies in the telecom sector as a subset of the S&P 500.
The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns. The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
The S&P Global Luxury Index is comprised of 80 of the largest publicly traded companies engaged in the production or distribution of luxury goods or the provision of luxury services that meet specific investibility requirements.
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