The Breakdown - Meta Loses a Quarter-Trillion Dollars in Market Cap, Dragging Crypto Metaverse Tokens With It

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.io, Arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, February 5th, and that means it's time for the weekly recap. Now, this week is going to be closer to a true weekly recap where I talk about a number of of different topics, although we will have some concentration in what happened in equities this week, believe it or not. But before we get into that, if you were enjoying the breakdown, go subscribe to it, give it five stars, leave a nice review, or if you want to get deeper into the conversation,

Starting point is 00:00:48 come join us on the Breakers Discord. You can find that link in the show notes or go to bit. com slash breakdown pod. Finally, a disclosure, as always, in addition to them being a sponsor, I also work with FTX. Now, let's start a lot of you. on the macro side of things. I've been talking all year about the relationship between crypto and the traditional markets, especially between Bitcoin, crypto, and stock prices. And in that vein, though, something very interesting happened this week. The context is it has been earnings season, and earning season can either shift or conform narratives. If things are pretty bad and then people see earnings come in lower than anticipated,

Starting point is 00:01:30 it really can reinforce that bare narrative. However, the opposite is also true, where if the perception is that things are bad but then earnings come in really well, it can flip the opposite. And in fact, this week we saw both things happen. But without a doubt, the biggest news is meta. Meta, i.e. Facebook, absolutely tanked this week. We are talking crypto-style pain as much as 26% down. This wiped hundreds of millions off the market cap, in fact, a quarter trillion dollars to be exact. And while a 26% move might be big but not crazy in crypto, it is absolutely not normal in equities. So the question, of course, is what was the reason? Well, Facebook has grown for basically 18 years straight. It has been a steady line up in terms of new users coming in. This

Starting point is 00:02:27 matters because as a social network, the whole idea is that it feeds on network effects, and it's more valuable the more people come in. This week, however, when Facebook reported earnings from last quarter, it reported that not only had the user base not grown, it had even shrunk in some markets. It also forecast less revenue growth than expected for the current quarter. Now, part of that is, of course, there are only so many people to expand to. Facebook already has a massive user base such that each marginal user is harder to acquire. However, there's also a content problem. Other newer networks I'm looking at you, TikTok, have content formats that are more in vogue now and better reflect what people are actually interested in. This leads to

Starting point is 00:03:11 forcing Facebook suite of products like Instagram Reels to basically imitate those things to compete. Facebook is also being forced to try all sorts of engagement hacks. For example, Instagram is now pushing content on people from users they don't follow, and Facebook is driving people to groups. Unlike in the past as well, Facebook can't just acquire its way out of this situation because of antitrust scrutiny. Nikita Beer, who was formerly on the new products team at Meta, had a really great little mini threat about this. He writes, Facebook's hands are tied. One, high Arpoo coastal users have churned. TikTok is eating their lunch. Two, they can't acquire because of antitrust scrutiny. Three, they can't build because founders don't want to be there.

Starting point is 00:03:54 Four, IDFA killed their ability to target ads. Five, the metaverse is 10 years out. RIP. Having said that, Zuck is the greatest operator in the world and I wouldn't bet against him in the long term. And for anyone cheering on Facebook's demise, you're also cheering on two things. One, China-owning American airwaves. Two, innovation stalling in social media for the foreseeable future. If the biggest buyer can't buy, no one is going to build. If that's okay with you, carry on. Now, there's a lot to debate that's way beyond the scope of this particular show. In particular, the idea that if Facebook's not buying startups, startups won't be built. However, I think the broader point, or rather the broader analysis of the challenges facing Facebook are right on.

Starting point is 00:04:38 Take all of this together, and it gives a much clearer picture of why meta is making such a big bet on the metaverse. In many ways, the Metaverse follows the historical pattern of human geographic expansion. When one territory is tapped, you move to the next one. That has been the story of our species for a very, very long time. Interestingly, Facebook's last best hope may be finding new worlds that we don't spend time in yet, but that we will. Nexo is a trusted and easy-to-use crypto platform, where you can buy cryptocurrencies at the touch of a button and start earning up to 18% annual interest that is paid out daily. They support all of the major assets on the market and even allow you to swap one asset for another or borrow cash against your crypto without selling it.

Starting point is 00:05:28 Nearly 3 million people in over 200 countries trust NexO with their digital assets. So whether you're just getting started or you're a seasoned pro, get the most of your crypto today with Nexo at nexo.i. Meet Arculus, the next generation cold storage wallet. Arculus secures your crypto using three-factor authentication, providing a sense. simpler, safer and smarter way to store, buy, swap, send, and receive crypto. Arculus is offline cold storage. Your private keys are encrypted on the Arculus keycard and are never online. Stay safe from hackers with no cords, no charging, no Bluetooth.

Starting point is 00:06:09 Just crypto security made simple. Buy now at getarculus.com. That's G-E-T-A-R-C-U-L-U-S.com. The breakdown is sponsored by F-T-X-U-S. FDXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S.

Starting point is 00:06:43 FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTCX app today and use referral code breakdown to support the show. The other dimension of this that's interesting as we've been talking about correlations is that Facebook's bad stock performance seems to be having an impact in the crypto metaverse as well. A coin desk headline says Metaverse tokens AXS sand plummet as Facebook reports $10 billion loss. A setback in the Metaverse strategy of the Facebook parent firm will directly impact the market perception of other metaverses, a developer said.

Starting point is 00:07:24 So basically, these tokens fell as much as 12% since Wednesday when that meta-earnings call happened. but you can attribute that exclusively to Facebook issues. Delphi Digital has also pointed out recently that there has been falling user activity on, for example, AXI Infinity, and that there's a sort of negatively reinforcing cycle around the game's native smooth love potion or SLP tokens. Quote, as SLP prices dip, players suffer as they cannot earn as much when compared to a few months back. At its peak, a player could have earned $35 a day on July 21st versus $1 today at current prices,

Starting point is 00:07:58 assuming 100 SLP a day. This has led many players to stop playing as the income has been reduced massively. So, lots going on in Metaverse land, but there was also overall a bit of a break in the pattern that we've been seeing over the last few months in that this week stocks are performing, well, like trash, while Bitcoin is kind of uncoupled. Dan Held hit with one of those perfect gotcha tweets saying, Bitcoin critics, but it's too volatile. Today, Amazon plus 14%, snap plus 54%, Facebook, minus 26%.

Starting point is 00:08:29 CMS Holdings Dan talked about the impacts for talent. I'll tell you what, if I were sitting at a fan company watching my stock-based compensation melt, I might dabble in a couple token job interviews just to get a taste. Ryan Shot Adams focused on privacy, saying Facebook blaming their historically bad quarter on Apple's new privacy measures. If people getting privacy ruins your business, maybe you're in the wrong business. However, before we take this non-correlated narrative too far, Lynn Alden points out that it's not exactly that simple.

Starting point is 00:08:57 Lynn writes, drops with meta, pops with Amazon, Bitcoin doing Bitcoin things. Now, stocks weren't the only macro news this week on the monetary policy front. The Bank of England is gearing their population up for some big challenges. The Bank of England raised rates another 50 basis points for the second meeting in a row. And the vote for this one was five to four, with the four dissenters actually wanting to raise rates by more. Ed Conway from Sky News tweeted, Bank of England says UK households must brace themselves for the biggest annual fall in their

Starting point is 00:09:30 standard of living since comparable records began three decades ago, as it raises interest rates to 0.5%, says inflation will pass 7%, and slashes GDP forecast. Andrew Bailey, the governor of the Bank of England, also made headlines with this comment. As the BBC put it, workers should not ask for big pay rises to try and stop prices rising out of control. Good luck on that. ECB, meanwhile, is keeping things flat rather than discussing raising rates. Now, one more over on the Fed. The Boston Fed and MIT have finally released their technical research around a CBDC.

Starting point is 00:10:08 They're calling it Project Hamilton, and here are a couple headlines and highlights. The Washington Post says researchers say they designed a system that can settle a vast majority of payments in less than two seconds, handles more than 1.7 million transactions per second, and operates around the clock with no service outages in the case of a disruption of its network. Nick Carter writes, I will never not savor the fact that the Boston Fed employed Bitcoin core devs via the MIT DCI to build its CBDC proof of concept. Bitcoin appears 42 times in the white paper. Finally, Breaking Live had an actual pretty good tweet summary of this saying, summing up what the Boston Fed said about this. The first version of potential CBDC code does

Starting point is 00:10:46 not include intermediaries, fees, or identities other than public keys, but the design allows for the addition of these roles and other features in the future. A variety of models for intermediaries, and data storage can be supported by design. Although technological experimentation helps to enrich policymakers' views on CBDC, the U.S. is not committed to issuing a CBDC. The vast majority of transactions were completed in less than two seconds. Research generated a codebase capable of handling 1.7 million transactions per second. Users would be able to store their own funds without sharing personally identifying user data

Starting point is 00:11:16 in the transaction processors core. Phase two study will also look at balancing privacy and compliance, technical responsibilities for intermediaries and resistance to attacks. The next stage of research will focus on critical issues such as security, auditability and programmability. Distributed ledger design might cause performance bottlenecks and necessitate the use of a central transaction processor to retain transaction history. Despite incorporating ideas from blockchain technology, it discovered that a distributed ledger architecture was unnecessary and had drawbacks. So, important to keep in mind that nothing about this research says that a Fed has committed to a digital

Starting point is 00:11:50 dollar. This is just the first phase of understanding for them what it would be like if they did. Lastly, on this week's weekly recap, I wanted to briefly mention Wormhole. This is the second largest DeFi hack to date behind the Polly Network, which had totaled about $611 million worth of lost value. The total amount in this hack was more than 120k-Eth worth over $320 million. In question was a bridge, which is a protocol where users put crypto assets in to receive equivalent assets to use on a different blockchain. In the case of wormhole, users put in Eth to get wrapped Eth usable in the Salana ecosystem. This method creates a large stash of tokens within the smart contract held as collateral for the wrapped assets.

Starting point is 00:12:31 The hacker found a way to mint-wrapped ETH on Solana without depositing ETH into the bridge, which let them withdraw the collateral ETH held in the bridge protocol. The big issue with wrapped assets is that they're designed to be interoperable, so although Wormhole represented only 20% of the ETH on Solana, the exploit threatened the value of pretty much all the wrapped ETH held on the network, which could have caused a bankrun-style rush to withdraw ETH and crippled the collateral system across Solana Defi apps. Now, that's not what happened, and part of why it wasn't what happened is that Jump Crypto stepped in to make the network whole.

Starting point is 00:13:03 Jump tweeted, Jump Crypto believes in a multi-chain future and that wormhole crypto is essential infrastructure. That's why we replaced 120,000 eth to make community members whole and support wormhole now as it continues to develop. Kyle Samani of Multicoin wrote, Jump is covering because they believe in the future of crypto and in what they're building. Nomad wrote, yesterday I learned that crypto doesn't know who Jump trading is. Jump is in the top five of biggest, most well-capitalized trading firms in the world. They have easily 40 people dedicated to crypto. Last year, they started funding incubator projects built by employees. The wormhole, Python network, and Sertus 1, plus many more. They bailed out wormhole yesterday, probably

Starting point is 00:13:39 without flinching. There remains a lot to unpack here, but it seems like something that we won't have heard the last on, especially as the government digs in to defy this year. I want to say thanks again to my sponsors, nexus.io, Arculus, and FTX. And thanks to you guys for listening. I hope that wherever you are, you are having a great weekend. And until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Meta Loses a Quarter-Trillion Dollars in Market Cap, Dragging Crypto Metaverse Tokens With It

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.