Weekly Reads - October 10, 2022
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Crypto exchanges are in a race to the bottom with market leader Binance eliminating fees on spot Bitcoin trading. Binance, the world largest crypto exchange, eliminated fees on spot bitcoin in a bid to protect their leading market share. Binance handled 58% of overall crypto derivatives trading volume and 16% of crypto spot volume in September which is more than the next eleven major exchanges combined. This aggressive strategy will lead to a material reduction in revenue from spot bitcoin trading putting pressure on the company to grow new users and grow revenue from other channels. We do not expect this to be the last major fee reduction in the space as crypto exchanges do not offer a sticky service with most crypto traders having multiple accounts across several exchanges. There are no switching costs for traders to change exchanges making the space ripe for further business model disruption, potentially leading to a price war as other exchanges follow Binance in slashing overall fees. For these exchanges it will be crucial to find alternative ways to monetize users such as creating marketplaces for NFTs, subscription models, and stable coins. These alternative channels are not guaranteed successes with NFTs already falling out of favor with NFT trading volume plunging 97% from a record high in January. With no recovery in sight for the crypto market many exchanges are unlikely to survive what seems to bean upcoming price war.
Starship, SpaceX’s latest venture, is attempting to create the first all-purpose space vehicle that is both reusable and refuellable. This is not new news, but the idea behind Starship is incredible when you consider the cost that comes with developing and launching spacecrafts. This is best seen by NASA’s Artemis project which has seen countless delays over the last few months and operates using traditional one-time use components. Unlike Starship, the Artemis project was not designed with reusability in mind and is reported to cost $2 billion per launch. Starship is a threat to incumbent aerospace contractors with SpaceX’s goal to reduce the cost to launch and the time to launch by reusing the same rockets over and over again. By reducing the cost to launch and time to launch, SpaceX can lower the cost for space tourism, increase the frequency of space travel, and reduce the overall long-term cost of operations in deep space. Incumbent aerospace contractors could see government contracts move over to SpaceX if Starship is able to reduce the financial burden of space travel. While many industry pundits remain skeptical of the Starship program, SpaceX has a robust track record in outperforming its competition. SpaceX has already beat its competition in transporting astronauts to the International Space Station and has launched twelve rockets that have reusable boosters. We are already seeing evidence that Starship is a credible project and will pose a major threat to incumbents’ ability to win future space contracts if the project proves to be successful. While it is entirely possible that incumbents could catch up to SpaceX it would require massive levels of capital investment in R&D, talent, and M&A. With SpaceX on the forefront of innovation and talent acquisition, incumbents are in an uphill fight to remain key players in the modern space race.
The Twitter takeover drama might be soon ending with Elon Musk deciding to go through with the acquisition, potentially setting up the banks funding the deal as the biggest losers. As in any large acquisition, banks would typically look to sell the debt to get it off their books, but investors might not be willing to take on riskier debt in a worsening macro environment. With rapid interest rate hikes around the world and fears of recession, debt investors might view any sale of Twitter debt as too risky. This could force banks to take massive losses on this debt and force them to pull back further from future leveraged financing deals. Elon Musk is expected to provide as much as $44 billion in funding by selling down his stake in Tesla with the major banks committed to provide $12.5 billion in financing. This debt package is comprised of $6.5 billion in leveraged loans, $3 billion in secured loans, and $3 billion in unsecured loans. This news follows in the footsteps of the Citrix leveraged buyout deal that resulted in a group of banks taking a $700 million loss on the sale of a $4.6 billion debt package. It is likely that these recent leveraged buyout deals will weigh heavily on bank earnings when the industry starts reporting quarterly earnings this upcoming week.