Best Twitter threads of the day – May 2nd

1/
A longer essay coming soon on my take. This $JPM / $FRC deal means the US regulators decided to nationalise the banking system. pic.twitter.com/BNfzSweoQS

— Arthur Hayes (@CryptoHayes) May 1, 2023

2/
The 8 TBTF banks are effectively nationalised bc they have a govt gtee on their entire deposit base. They will not be allowed to fail regardless of decisions they make. Socialised losses, privatised gains, it's a great deal but…

— Arthur Hayes (@CryptoHayes) May 1, 2023

3/
When called upon the 8 TBTF banks must absorb their shitty cousins who couldn't handle the rough and tumble free market. The prodigal childrens' equity holders will get a 0 first, but the depositors will find a new home in a safe TBTF bank.

— Arthur Hayes (@CryptoHayes) May 1, 2023

4/
The govt will provide rule exemptions and mate's rates on loans like how the OCC waived deposit concentration limits, and FDIC loaned $50bn to $JPM to get them to do the deal. But a deal will go done.

— Arthur Hayes (@CryptoHayes) May 1, 2023

5/
The whole point is for the federal govt to claim it isn't bailing out a failed bank but a private company is. It's a bit of left hand, right hand, but those are the politics of the day. Just look at how China allocates losses as a blueprint for the US.

— Arthur Hayes (@CryptoHayes) May 1, 2023

6/
As long as inflation remains high, and the politics surrounding banking, credit, and debt are toxic, there will be more contorted solutions to try to confuse you as to who bears the loss.

— Arthur Hayes (@CryptoHayes) May 1, 2023

7/
If you aren't one of the 8 TBTF banks you are fucked as long as inflation is sticky at these high levels and possibly rising. Today I will choose a bank with large CRE exposure and 50% to 75% OTM puts that expire before June 1.

— Arthur Hayes (@CryptoHayes) May 1, 2023

8/
Due to the US debt ceiling debacle, no banks can get "bailed out" by the govt. This is the perfect point of political paralysis to capitalise on another probably several non-TBTF banks getting deaded by the FDIC.

— Arthur Hayes (@CryptoHayes) May 1, 2023

Nakamoto Portfolio Theory
—————————–
Bitcoin Valuation based on Fixed Income

Inspired by @fossGregfoss's work, we'll explore how to estimate the value of Bitcoin using credit default swaps (CDS) as fiat insurance.

You know… "for the kids".
1/n pic.twitter.com/y2qYCocK3T

— Alpha Zeta (@alphaazeta) May 1, 2023

In line with our other research pieces, this one comes with a web app so you can also run the numbers.
In this one you can change pretty much all assumptions (numbers in blue can be edited) including CDS levels, debt levels and other assumptions.https://t.co/9YfmQ6b6Hp

2/n pic.twitter.com/SM8tEEes8d

— Alpha Zeta (@alphaazeta) May 1, 2023

Just like in our previous pieces, the idea is to give a framework to understand potential scenarios. Although I keep referring to them as models, these are frameworks. We provide some initial assumptions and you can create your own.

3/n pic.twitter.com/sEoFy36bd3

— Alpha Zeta (@alphaazeta) May 1, 2023

First, what is a CDS?
A Credit Default Swap (CDS) is a financial derivative that acts as insurance against the risk of a borrower defaulting on a loan. The buyer of the CDS pays a premium to the seller, who agrees to pay the face value of the loan if the borrower defaults.

4/n

— Alpha Zeta (@alphaazeta) May 1, 2023

CDS can be used to estimate the probability of default by analyzing the CDS spread, which reflects the annual amount the buyer must pay the seller. A wider spread indicates a higher perceived risk of default. #itsjustmath
5/n pic.twitter.com/udSzzNH4yH

— Alpha Zeta (@alphaazeta) May 1, 2023

Now, if we know the probability of a country defaulting, we can use that to calculate an insurance premium.
For example, if you drive a $10,000 car and you know that the probability of totaling that car is 1% / yr , you would be willing to pay $100 / yr in insurance.

6/n

— Alpha Zeta (@alphaazeta) May 1, 2023

It works the same way here. If these countries default, their debt is "gone"… So we estimate the total value of this dollar premium by multiplying each country's probability of default by its debt plus unfunded liabilities,
estimated by OpenAI's GPT-4 (verify).

7/n

— Alpha Zeta (@alphaazeta) May 1, 2023

Part 3.5 of @FossGregfoss paper provides an explanation of how to use CDS to value bitcoin. We made major adjustments that are listed at the app. Some are approximations. But the goal, again, is not to get to an exact price but rather understand potential outcomes.

8/n

— Alpha Zeta (@alphaazeta) May 1, 2023

Not surprising, the US is by far the one to watch. We got an estimate for US unfunded liabilities at 157tri (social security, medicaid, …). Outside of the US the estimates are hard to find (I doubt China is only 500bi)

9/n pic.twitter.com/WtWgEi9EkJ

— Alpha Zeta (@alphaazeta) May 1, 2023

Now, these probabilities only price for a scenario of a HARD default. One where debt is just not paid.
But remember, many of these countries have large debts in their own currency. And you know what that means… brrrrrr…

10/n pic.twitter.com/fk1sE5xQ36

— Alpha Zeta (@alphaazeta) May 1, 2023

Money printer equals soft default by inflation. A highly probable scenario not priced here. There's no default and yet, fiat dies a slow death (or not so slow).

11/n pic.twitter.com/Cbho4TT1Jb

— Alpha Zeta (@alphaazeta) May 1, 2023

In summary, this bitcoin Valuation model based on Default Probabilities (CDS) serves as a framework to understand potential outcomes and impacts on Bitcoin's valuation. Shoutout to @fossGregfoss for inspiring this analysis!#LearnMath #forthekids

[EOT]

— Alpha Zeta (@alphaazeta) May 1, 2023

1/ With the skyrocketing price of $PEPE, 3 SmartMoneys have sold part of $PEPE and made a profit of more than 1M USD!

These guys became millionaires in 2 weeks with $PEPE! 🤩 pic.twitter.com/z62r6dc4oE

— Lookonchain (@lookonchain) May 1, 2023

2/ SmartMoney: https://t.co/EAVNTO7V22

This guy bought 5.42T $PEPE with 1 $ETH($2,100), then sold 3.42T $PEPE for 929 $ETH($1.77M).

And still holds 2T $PEPE($2.37M).

Selling all $PEPE at the current price will make a profit of ~4.14M! pic.twitter.com/hGA6clzOmm

— Lookonchain (@lookonchain) May 1, 2023

3/ dimethyltryptamine.eth

This guy bought 5.9T $PEPE with 0.125 $ETH($251), then sold 2T $PEPE for 560 $ETH($1.06M).

And still holds 3.9T $PEPE($2.37M).

Selling all $PEPE at the current price will make a profit of ~5.67M!https://t.co/tn1YWvldAi pic.twitter.com/P86qVIybco

— Lookonchain (@lookonchain) May 1, 2023

4/ SmartMoney:https://t.co/e4AcyT2m3p

This guy bought 4.22T $PEPE with 2.3 $ETH($$4,822), then sold 3.22T $PEPE for 670 $ETH($1.3M).

And still holds 1T $PEPE($1.18M).

Selling all $PEPE at the current price will make a profit of ~2.47M! pic.twitter.com/2pX3COa2Aj

— Lookonchain (@lookonchain) May 1, 2023