Ethereum Merge Reshapes Crypto Universe

You can also listen to our radio show at two pm Eastern Time on Bloomberg Radio or watch us on YouTube search Bloomberg Global News. Well you might have heard, you know, big headlines like Bitcoin's energy usage or cryptos energy usage uses more energy in a single year than the entire country of Argentina. One of the reasons is because the Ethereum blockchain uses something called proof of work, and now it is going to merge into something called

a proof of steak. If it's a little bit of jargon or perhaps a different language, really likely to be joined by a people who speak that language. Joe Weber is the editor of Bloomberg Business Week. He's with us in the Bloomberg interactive at Broker Studio. Follow him on Twitter at Joel Weber Show. We also got Olga Career with us. She's a crypto reporter for Bloomberg News. She has been covering the space for years and can explain exactly what is going on. She's joining us on the

phone from Portland, Oregon. Olga story is featured in the upcoming issue of Business Week magazine. You can read it now on the Bloomberg and at Bloomberg dot com slash business Week. Joeld emerge has been a long time coming. Why do we need to care about it? Will it come? It should come? It comes to be comes right, like we don't know. But the countdown clock there there, there is a countdown clock. Everybody's been very excited about this

for a really long time. UM. And one of the things that Olga points out here is really this foundational way that things are happen on on the Ethereum blockchain. And we're gonna talk about that because, um, I think it has some pretty big implications for for especially that energy consumption you mentioned. So this proof of stake ORGA, I want to talk to you about what what that really means, what it means for for miners um and why should uh, you know the norm is out there?

Care sure so, Uh, It's it's a huge change. It's this kind of a change has never been attempted in the blockchain world before. And what it does is essentially until now and for the next day or so, uh, miners basically very powerful computers are the ones ordering transactions on the ethere And blockchain. And then after that there will be a switch to proof of stake essentially stakes of coins will be used to do the same to order transactions. And of course what this means for miners

is that they will be out of the job. And miners have been looking around to see which other changes they could potentially move their equipment to or what other options they have. And for Ethereum, what this will mean is that um power consumption of the blockchain will drop by about which is really good news for investors and and developers who have been deterred from participating in the

Theoryum ecosystem because of its high energy consumption. You know, companies and investors who have s G requirements can now perhaps give Ethereum a second look. So good time to buy a mining rig on the cheap I guess the second. But what I'm fascinated with is the other innovation that this sort of unlocks, which is staking coins in return for your yield. You know, you lock up your ether uh in a staking protocol and you get, say, I don't know, three or four or five percent whatever the

yield is. Obviously, that makes ether look a lot more like a security than just a cryptocurrency like bitcoin. And I wonder, how are you thinking about the regulators. Is there the potential for a backlash from the Gary Gensler's,

the SEC chairman, and other regulators of the world. Absolutely, this is an issue that a lot of people are thinking about and worrying about because so about um, high up, high up executive at the SEC essentially said, you know, ethereum does not look like a security to us, and so that was the assumption to everybody ever since. But

now etherium is undergoing some very dramatic changes. You know, right now people are going to be essentially staking, putting in money to earn yield, and that brings ethereum just a little bit closer to um appearing to at least one point off about four that regulators look at to

determine if something is the security or not. There are also questions about does the theory and become more or less decentralized after this change, which is which also impacts whether it will be defined as a security or not. So there could be some uh, there could be some

moves from regulators on this front. And in fact, in August, coin Base UH, the US's biggest scripto exchange, UH, did disclose that the SEC has asked for some um information from it on it's taking services someone the other things. So uh, you know, this is definitely something that people are watching. Okay, so this has never happened before. It's going to happen. If it doesn't go well, can you just put it in reverse and back up and like

go back to the way it was before. Well, so, uh, there are some people who are sort of creating alternatives and then an alternative chain UH in hopes that the merge the SUFT software upgrade does not go well and then people will be like, wait a minute, we want to go back to the previous block chain. So um, there are people who are creating a copy of UH ethereum that will still use minors, but I think UM, the majority of the Ethereum community is going ahead with

this uh new block proof of state blockchain. It's been tested and retested for years. I mean, it's it's been expected to happen for years. The developers have been delaying in delaying because of this very extensive testing that they've performed. So they're hoping that the issues that do come up um after this upgrade will be relatively minor. And what

does this all mean for for bitcoin? And there's this thing called the flippening right, so some people believe that this puts Etherium more head to head in competition with bitcoin, which of course, um, you know, crypto fans have long called digital gold. With Etherium undergoing this transition, perhaps it's going to become more more attractive um for corporate treasuries and for hedge funds and for other investors that have

until now only I have only invested in bitcoins. So there is a potential for something that crypto fans called the flippenine, which is basically the Etherium market cap exceeding bitcoins. And this is you know, probably some time away from from it not happening anytime soon, auga, right, I A. And you know, not much buying happening when it comes to crypto today, Bitcoin down more than nine point two percent,

of theory Um down close to eight percent. Check out Olga's article in the new issue of Bloomberg Business Week magazine out later this week. Thanks to Joel Webber and Ogel Career from Bloomberg Business Week. You're listening to Bloomberg Radio. You're listening to Bloomberg Business Week with Carol Messer and Bloomberg Quick Takes. Tim Stinovic on Bloomberg Radio. Well, I might have spoke too soon, because Twitter shows now we're

only up seven tenths of one percent. But on a day where everything is down, it is notable that something is in the grain. The reason why Well shareholders approving a billionaire Elon Musk's proposed forty four billion dollar buyout. It paves the way for a trial next month to determine the disputed deal's fate. We've got Man deep Seeing right now. He's in the Bloomberg Interactive Broker studios. He's

senior tech industry analyst. Hey Man deep Um, you were joking that maybe this will mean that you know, this will all come to an end pretty soon, and I kind of like said, you know, not so fast, because they're still quite a bit left to have happened before there is some sort of resolution to this. What is it? Well, I mean, there could be another whistle blower. It could be, you know, anything from Twitter not handling their data properly, or they may have gotten breached which they may not

have reported. Look, I mean, we can come up with a lot of different scenarios, but at the end of the day, when when it comes to how the court is going to view it, it's very clear that you know, there will be a specific performance performance clause in the sense that if it goes to trial and must lose this, he has to buy the company. He just can't get away with paying the termination fee. And I think that's critical.

That is what will determine the odds of this closing, and that seemed to be increasing, uh, you know, with the shareholders finally approving the deal. Bendy, what's kind of the vibe check on this case? I mean it from what I read, it doesn't strike me as the judge just being very friendly to Musque's case. I mean, is there any sort of settlement possibility? Do you think some you know, between a complete forcing of him to take it over and and just throwing the case out. I mean,

what what where do you see this going? Yeah, it's very unlikely given how the company's uh, you know, has behaved in terms of dealing with Musk and uh, what they have said so far, it's very clear they want to force the deal to close, and the way the contract is structured, I think it really goes in their favor. And uh, the whole I think whistle blower thing has

created more noise. The judge hasn't really given it a lot of credence in terms of it influencing how this deal may fall apart, and uh, I I think that's still remains. So I I think the odds of the deal closing are fairly high, given we've seen an approval closing at what price. Maybe there is a concession here on the company's part. They may, uh if if they find, you know, their systems weren't perfect, you know, based on the whistle lower complaints, they may have to give a concession.

But we're talking about maybe a dollar or two of concession, not material really. Yeah, I mean the company right now is valued at thirty two billion dollars by the public markets, so you're actually saying that we could see Elon Musk being forced to pay more than forty billion dollars for this company. Absolutely, and uh bad deal for him. Just the only reason I say that is because I mean, look what's happened to the to these types of stocks

in the last few months. It has, But you know, I think when he signed the deal, he kind of knew that Twitter would take a while to you know, really turn around in terms of you know, coming up with a subscription model and all that. Why he changed his mind and why he doesn't want to, you know, buy the company anymore is beyond my wild We had buyers remorse, right, Yeah, Like when I was a kid, I saved up for that new pair of shoes, you know, go buy it, and then I you know like, oh,

I shouldn't have bought this. But the fundamentals are impaired now from where you know, he signed a contract and the employee morale is low. So a lot has changed for the worst, which is the reason why the company is so keen to close this deal because they know they can't find an alternative buyer. Well, I wanted to ask you about that. What is the outlook for Twitter's business itself. You know, I'm looking at their financials here.

They had a drop in revenue in the second quarter, looks like another drop is expecting the third quarter drop in gross profit. Last quarter they're kind of in decline. I mean, is is this all part and parcel of just a sort of rudderless ship or what's coming on? You're right about the management and the board not doing a great job of, you know, the fundamental performance. But at the same time, Twitter as a platform that still has the engagement when you look at their daily active

user base, it's still intact. They always had a monetization problem and probably will take somebody more creative to really come up with a better model to monetize the time spent on Twitter. But look, I think the fundamentals are much poorer than they were back if they could monetize all the anger that that site it creates. I mean, the time, the time I spent on Twitter, like I should be And you know what, the ads I see are so irrelevant shocking to me that they haven't figured

it out. I mean, they should know what I do. And it's like, you know, I spend way too much time on that platform, and deep we love it when you join us, you know, for the sake of us, we hope you get to continue to keep covering this story because we love having you join us. Senior tech industry analyst for Bloomberg Intelligence, Man Deep saying, this is Bloomberg Business Week with Carol Messer and Bloomberg Quick Takes Tim Stinovich on Bloomberg Radio. Yeah, a lot of red

there on the screen. Of course, today's equity market reaction a response to what we saw when it came into those hotter than expect did inflation numbers that happening at eight thirty AM. Well, a few hours before that, about eight hours before that, John Authors from Bloomberg Opinion, a senior editor for Bloomberg Markets as well, I wrote a column that said markets need a less rosy view of inflation news. He wrote that there's no sign of a FED pivot or reason for Powell to make one until

it's clear how to get back to two percent. John Authors joins us right now from the Bloomberg Interactive Broker Studio, following him on Twitter at John Authors. John Um, like I said at the start of our show today, this was a really prescient column. You kind of called it uh, also kind of gutsy to do this on CPI Tuesday. What did you see that perhaps a lot of people missed here? Okay, um, I think first well, first of all, I did see quite a little of it's it's actually

worse than I was expecting. Because was I did buy into is the notion that we at least the peak was in even if we weren't going to decrease inflation and anything like the rate that people were hoping. If you if you looked at all the numbers other than oil, there were still reasons for concern that inflation was still growing. And the other critical point is that, particularly in this country, gas prices work almost contrary to the rest of the index.

So gas prices, because there's so little tax on gas in the this country, um in percentage terms, they vary far more than they do in other places. And obviously Americans love their cars, and it turns out that if gas price goes up, they just spend more on gas and drive the same amount and spend less on everything

else and vice versa. So basically what we had had in the last two months, which at least did help the headline number come down because gases in the headline was the effect the E couldn't of a tax cut.

It's as though we've had Vladimir Putin more or less gave us the eculdment of a up tax hike followed by a tax cut, and that meant there was always a great risk, which is what happened, that the underlying project products, that the things that were separate from oil would actually take off in a bigger way than we

were thinking. And boy did they ever. I mean, it was a very very bad number compared to not only what the market was expecting, but to be honest, I was barish about it, and it was worse than I was expecting. John, I'm gonna throw a bit of a curveball here, something that's not in your comment Calm today, but I have a feeling you'll you'll hit this curveball like crickets and making the Google or one of you was a David Ortiz type here, I have an Ortis

Jersey car. But I was talking earlier about the whole notion of value versus growth, and you know how lo and behold, we finally had this value out performance earlier in the year. Uh, many people tying it to this, you know, high inflation regime. Good for energy company, is good for banks, Harry Yields on and on and on it does. It looked like growth kind of made a comeback and it was back to the old normal where where growth was outperforming again. You know your touch stocks,

your your high growth companies like that? Does today put value back in front for a while? Do you think of growth yet? Not a momentum? The last time I checked, I did look at the ft W. Those listings at home Factors that work ft W go on the terminal was a really good way of seeing how the different factors are moving. The one that was the strongest for today was momentum, which is simply because the momentum has generally been against the fangs, and the fangs have really

sold off very bloodily, very impressively today. Um yes, I do think it probably helps value at the margin. What people really didn't want to be holding value forward be stagflation. I think the chances of stagflation as supposed to a recession that comes after the FED has really had to bludgeon bloodgend us all into into the out of our resistance in a matter of you know, many more months.

I think stagflation looks less likely simply because the stag isn't happening, and that is why the flation is worse. That adds up to value continues to be a better deal than we thought, and growth continues to be a worse deal than we thought. John, we only have ten seconds left here. What does this all mean for the Fed? And you know seventy five verses one at the next meeting and beyond I would still better on. The critical thing is how much they're going to cut by the

end of next year. Okay, that's what we'll keep an eye on. We have a little ways to go before we get there. Big thank you to John Authur, Senior editor for Bloomberg Markets, also a Bloomberg opinion columnist with us in the Bloomberg Interactive Broker Studio. Check out his story on Bloomberg dot com and on the terminal. You're listening to Bloomberg Business Week with Roll Messer and Bloomberg

Quick Takes. Tim Stinovic on Bloomberg Radio. Mike, you were looking at the sins function on the Bloomberg terminal, Uh, getting us some data about when the last time we saw drops like this in the market. What are you saying, yeah, it's it's pretty brutal. That is actually on a closing basis, you know, going from closing level to closing level. Uh, that's the worst drop since June of remember when the

pandemic was still locking us all down. Even worse for the NASTAC one d though closing basis, biggest drop since March. And I had forgotten how bad that day was, to be honest, twelve percent drop NASTAC one hundred that day. What a crazy time it was. But uh, here we are having, you know, five and a half percent dropping the deck one hundred, worst day since Hey, let's bring in carrol'sch life. She's deputy chief investment officer at a

bemo family office. Really pleased to have her this afternoon, joining us on the phone from Minneapolis. Carol, how are you? Oh great? Really? But are you? Are you really great? Uh? Well, it's a beautiful fault day here and we're getting lots of pretty sunset things to all the smoke in the sky. Right. Other than that, yeah, the market day is not such a nice day. Okay, we'll help us make sense of this.

I mean, obviously the equity traders got a little ahead of themselves when it came to thinking that the inflation numbers would come in softer that didn't end up happening.

What are you looking at today? Yeah, I think it's interesting because we've been saying all along, you know, we're range bound data dependent through the summer, there's little to really do a compelling uh push to the top side or the downside necessarily, And keep in mind we had migrated back towards the top of the channel and so coming back like this, And honestly this comes from the perspective. I know that the down days are scary, but I watched seven happened that was in a day, and the

year still closed up, so pertive. Well, I think a piece of this is too, is that the market desperately to figure out a bullish tone and they've been fighting the FED all year, and the FED has been unequivocal saying we're gonna you know, they communicated pretty clearly that it's the three quarters of basis point rise. And I think this number took everybody by surprise. But the data has been really sloppy month to month, and there are

signs of slowing in some pockets. There's it's going to be tough to slow things like wages and rents because that takes time to work through the system. So the data sloppy, and markets and investors hate sloppy and hate unknown. Carol, I keep thinking about, well, what could sort of break us out of this range that you describe um, which I think is a great point to make. It's a

very wide range, but certainly arranged range battle market. And I keep thinking, well, earning the season is coming up in a few weeks, and it seems like so many people we talked to our skeptical of the earnings estimates out there. They believe that they need to come down to account for sort of the data image being done, the profit margins from inflation. So I'm wonder how you're thinking about that. Is that the third quarter the earning season where companies really sort of hit us over the

head with some bad news. Yeah, I think you could see a lot. You know, people will be listening very very carefully to the earnings announcements. They won't be watching the numbers as much because numbers are are a picture, a snapshot of what's already happened. So they're going to be listening really carefully for what are the inventories, like, they'll be watching all the consumer goods companies for that, what's their pricing power alike? You know, are their supply

chain issues, are their labor issues? What are they doing with their labor. They're going to be listening to all those indications. And you know, it's too bad markets when they get volatile like this. People tend to look only at the short term because the intermediate to longer term.

When you look at the US economy relative to the global economy, there's a lot of potential strength underneath to prevent us from really tailing off deeply, because it's been a long time since we've had a FED tightening cycle where you actually had the quantity of fiscal stimulus coming in behind it that we do by all of the spending packages, and we're spending on interesting industries in terms of green energy and infrastructure, and who knows, maybe a

lot of those European manufacturing companies will decide that it's cheaper to put a manufacturing plant up here in the US because they're closer to reliable energy sources right right, And we saw that Intel announcement in Ohio, maybe a sign of things to come. Carol I know that you, and and really a lot of investors who look at the market both bottoms up and tops down. UH like to keep at least one eye on credit markets, especially in a in a rising rate environment like this. What

are you seeing there in the credit markets? There are there any alarm bells going off? I don't think there's alarm bells yet, But it's interesting watching that companies recently, you know, you've had not necessarily record corporate debt issue. It's but a lot of corporate debt issuance, and a lot of people would have figured g rates are up. Companies aren't going to want to issue debt, but they are because I think some of these companies think rates

are going higher. And it's interesting because business. If the pandemic taught business anything, it's that you need to maximize your cash utilization, the cash on the balance sheet. You need to be really careful about what you're doing. So we're watching them closely. You know, they've been volatile. The yield curve has been kinky, if you will, and lumpy because it's not necessarily inverted on the whole curve, but

it's inverted in spots. So the yield curve doesn't even know what to make out of the data that we're getting. Not that's kind of kinky him. Hey watch it, hey, Carol nice I like that. Hey, Carol, talk to us a little bit about you know what you're doing with asset allocation right now? I mean, really, the question I have is, is today buying opportunity? If you're long this market, if you're if you're in it for the long haul. I think you know, it's interesting because we've been pretty

cautious all year. We've been balanced, but we've been we've had a somewhat underweight to more recently neutral weight in fixed income, and we've migrated towards core fixed income because you can get paid to sit in some pretty interesting short to intermediate term fixed income opportunities. But we're also we've been slightly neutral to overweight US equities. Mid caps have done pretty well in here, and we do think intermediate longer term. If you've got that viewpoint, it's an

interesting standpoint. You don't want to be out of the markets, but I don't think i'd necessarily jump in with both feet because you still have some valuations. You've got earning seasons right around the corner, so there could be you're

essentially saying there could be further to fall potentially. We just think you're range bound and you're not necessarily at the bottom end of that of that range that we don't think things are going to fall dramatically and not necessarily, you know, go into a big, serious bear market or recession, and the Fed has a good shot at sticking as soft right, it's um sticking a soft landing, if you will, although you know, the inflation numbers would argue otherwise, but

inflation numbers too are trailing for a lot of cases. Let's talk a little bit about um, you know, other data that we could get this week. I like the idea that you've described. The data is kind of a lumpy and not really clear. Is the data that we're going to get later this week PPI tomorrow, retail sales Thursday, University of Michigan sentiment on Friday? Is that going to tell us a different story? Could have potentially changed the

narrative here. It could a little bit, especially the sentiment survey, because consumer sentiment tends to be tied pretty closely to what what we're all paying for gas and so, and gas prices are down that's helping a lot of individuals. Now, food is up, rent is up. They may say, you know the rate of increase in rent is falling, but still you know lots of individuals where they're being slammed with really high rent increases and they're trying to figure

out changing up their house and situation. But you're seeing cooling there. You're seeing cooling at the fringes. In other places. You're also seeing some straightening out of supply chains, which is helping all along the path there. You know, rails are moving, the courts are moving, and so you could change the narrative. I mean this today is really a disappointment about um, the narrative that people were hopeful that the Fed wouldn't They keep saying the Fed is not

going to have to raise as much as the Fed things. Well, yeah, the narrative certainly shifted today. Hey, Carol, we gotta run Klsch Life Deputy chief investment officer at a Bemo Family office on the phone from Minneapolis. Really appreciate you taking the time this afternoon. Thanks for listening to Bloomberg Business Week.

Download the podcast on iTunes, m Cloud or Bloomberg dot com and you can also listen to our radio show at two pm Eastern on Bloomberg Radio, or watch us on YouTube search Bloomberg Global News