April 14, 2022

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Happy Thursday to you. Can you guess what the US Series I inflation-linked bonds will be yielding starting in May? a. 5.5%, b. 7.1%, c. 9.6%. Follow the wave 🌊 below for the answer and to learn more.

The finance topics for today are 🤓:

Blockchain bridges are key to the crypto ecosystem. What the heck are they?
Short-termism: A valid concern or not?
3 questions we're asking amidst another student loan extension

CRYPTO

Blockchain Bridges Are Key To The Crypto Ecosystem. What The Heck Are They?

You’ve probably heard of DeFi by now. Short for decentralized finance, DeFi aims to make lending, borrowing and trading possible without intermediaries. But it turns out that it’s only possible to build DeFi projects on blockchains that are smart contract-compatible like Ethereum and Solana (smart contracts allow deals to self-execute when certain conditions are met).

So, say you were a savvy borrower who held Bitcoin—the #1 crypto by market cap—and you want to be able to use it as collateral in Ethereum-based DeFi lending platforms to earn some passive income. How would you do that?

Well, that’s where blockchain bridges come in

Blockchain bridges allow you to port your assets from one blockchain to another. Simply put, they exist to connect different blockchains, allowing for ease of transfer of information and tokens between them.
Just like you would probably become unintelligible to most if you started mixing Spanish and Mandarin in your speech, your Bitcoin needs some translation work first. It needs to be “wrapped” in an Ethereum-based token that is pegged to the value of Bitcoin.
It’s a lot like checking in your coat at a show. You give your coat in exchange for a ticket and you get it back once you return your ticket. You expect the people taking care of your coat to keep it safe for you, right?
Just as someone may be able to sneak in and steal your coat, it turns out that these blockchain bridges can also be under attack. And recently, they seem to have become an attractive place for hackers to exploit security oversights and steal funds.
For example, the Ronin bridge recently informed its community that hackers compromised $540 million worth of Ethereum and stablecoin USDC. Types of vulnerabilities range from social to technical.

The big picture

Bridges are crucial to crypto’s future because many argue that it should be multi-chain to accommodate many types of needs and a fluid experience for users.

And if you ever choose to approach these bridges as investments, it’s well worth doing your research (DYOR). Look up how long they have been around as well as whether and by whom their code has been audited.

MARKETS & INVESTING

Short-Termism: A Valid Concern or Not?

What’s the right philosophy for running the modern world and its economies? This is the epitome of almost all political and economic questions we ever ask and debate, and yet we know it’s unlikely we’ll ever find the perfect answer.

One of the most consistently controversial points within the systems in place now has been short-termism, this idea that the supposedly short-sighted, profit-driven nature of businesses has potentially negative ramifications on individuals and the world at large.

So is it valid or nah?

Although it might not be trending like interest rates, inflation, and war, short-termism has always been a backdrop of sorts to almost all ongoing events in the market, and has become even more debated recently. Are the fears around it valid though?

The complaint that short-termism subtly nudges businesses to invest less into long-term ventures, research and development is a big one, with the overarching idea being that near-term profits matter more to executives. The data shows otherwise though, because R&D expenditures in the private sector as a share of GDP reached new highs in 2020.
What about buybacks? In some instances, engaging in share buybacks can definitely be questionable for businesses that can’t afford it, potentially hurting employees and the company’s long-term potential for growth. In reality though, many noteworthy buybacks are done by businesses who are swimming in cash at times when interest rates are low, and allocating a little to their shareholders usually doesn’t hurt.
As for executives' opinions, they might be the worst looking data point on the matter. A very popular study did find that about 78% of executives were willing to take on longer-term costs or give up economic value just to maintain earnings in the short run. This is especially true when executives have to make hasty and chaotic decisions to live up to their quarterly predictions. All-in-all, this is the most contentious point.

Zooming out: Although short-termism naysayers have compelling arguments, the WSJ reported that after going through 60 additional research studies on the topic, the implications of short-termism amount to nothing more than a small problem for companies.

MANAGING STUDENT DEBT

3 Questions We're Asking Amidst Another Student Loan Extension

If we’re being honest, many of us probably foresaw the student loans moratorium getting yet another extension (now through August 31). In fact, a study done in March showed that 68% of respondents believed the pause would get extended, and a whopping 55% indicated they thought their loans could be forgiven altogether.

Student loans trail only mortgages in terms of their debt dominance. They’re the second-largest category of debt held in the US. When we freeze the repayments and interest accrual on one of the largest debts in the country that also has the unique feature of being mostly federally owned debt, you’re inevitably going to create an existential crisis of sorts for borrowers.

🚫 So now, we have questions, like what if we just canceled it altogether? This is probably the biggest question of all, and a polarizing one, too. Many studies and models seem to show tons of positive changes on the personal level, like lifting millions out of poverty. But there are also some risks on the macro scale, such as higher inflation and interest rates.
📈 How many more extensions? Critics argue that this moratorium will energize the democratic base before the midterm elections but will stop immediately after. Some Democratic leaders are calling for cancellation altogether while Biden is deferring the decision to Congress for now. While the White House has not ruled out cancellation, it has often argued that extensions were mostly meant to mitigate post-pandemic defaults.
🤔 What bigger issues does this expose? Despite our progress, student loans and the unaffordable cost of college for most are quite obviously an issue. The answer to what exactly we could and should change here probably depends on the backdrop of the day. One thing is for sure, young people are made to feel that crushing college debt is normal, but is it really?

🔖 Here's a related lesson on this topic:

Student Loan Fundamentals

Debt Management

7 mins

🔥 TODAY'S MOVERS & SHAKERS

U.S. Bancorp (+4.5%), an American bank holding company, beat the street's earnings and revenue estimates; Goldman Sachs (-0.6%) and Morgan Stanley (+1%) after beating revenue and profit estimates. Goldman, like other brokers, profit from greater uncertainty and volatility
Twitter (-0.4%) after Elon Musk offers to buy the social media firm for $54.20 a share or about $43 billion. He says that's his best and final offer and if not accepted, he would need to "reconsider" his position as a shareholder
Nike (+4.5%) as JP Morgan maintains an overweight rating and a $164 price target on the stock thanks to strong global sales momentum
Bitcoin (BTC) -8% in the last 1 week to $39,939.87
Ethereum (ETH) -6% in the last 1 week to $3,013.07

This commentary is as of 9:30 am PDT.

🌊 BY THE WAY

Answer: It's 9.6%. Rate changes on these bonds occur every 6 months, and the recent update is based on the latest inflation rate calculation tied to March’s consumer-price index. Get updated with these key points you should know.
🍎 Will Apple build its own blockchain? (TechCrunch)
💰 ICYMI. Pay off your student loan or await forgiveness? (Finny)
🤔 You just might be more productive if you work less (Fast Company)
Finny lesson of the day: With all this talk about blockchain bridges and DeFi, what about Web3?

Web3 Basics

5 mins

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