August 24th (What is value?

Greetings all,

It is Wednesday, August 24th, and the week is off to a hot start. Today's subject of choice is the nature of value and how we engage in the interrelated processes of value creation, exchange, discovery, and design. But first, here are today's headlines in Venture Capital and Private Equity:

Bankrupt crypto lending giant Celsius Network LLC spent than $40 million in cash on its startup mining operation in the first two weeks of its declared bankruptcy, Finance Chief Chris Ferraro said at a meeting with creditors on Friday. Celsius claimed the amount covered expenses including electric utility bills tied to its mining rigs, Mr. Ferraro said in response to questions from Shara Cornell of the Office of the U.S. Trustee, a Justice Department entity that regulates the bankruptcy courts. In a financial report released earlier this week, the company said it had about $129 million in cash earlier this week, down from the $170 million Chief Executive Alex Mashinsky disclosed when it filed for bankruptcy. Earlier this week, a lawyer representing Celsius said in bankruptcy court that the company estimates to run out of cash by October and was looking for loans and other capital to fund it in chapter 11. The company said it believes it is worth investing in its mining operations rather than selling the mining assets to derive cash for the estate, Mr. Ferraro said. “The saturation of rigs in the marketplace” means the value of those assets has declined, he said. But Celsius expects the mining operation to start yielding a return by January, he added. Mr. Mashinsky has said the company?expects to partly cover a $1.2 billion deficit?in its balance sheet with newly-minted bitcoin produced by the mining operation. Celsius has $5.5 billion in liabilities, of which approximately $4.7 billion is owed to its customers. The firm has projected that its mining operation will generate 10,118 bitcoins this year and 15,000 next year, and it plans to pay back customers, according to a court filing by Mr. Mashinsky. The filing showed the company generated 3,114 bitcoins last year. The company has already paid for 120,000 rigs, of which 49,000 are operational, Mr. Ferraro said on Friday. Celsius filed with the U.S. Securities and Exchange Commission in May to take the mining facility public. But bitcoin miners have been decimated by a bear market after a plunge in the bitcoin price?erased about $600 milliom?in market value from a peak in November. Miners who have historically hoarded bitcoin are swiftly selling their holdings to remain active. Publicly-traded miners sold about 14,600 bitcoins in June, almost four times as much as in May, according to data published Arcane Research. Some mining companies, such as?Stronghold Digital Mining?Inc.,?have opted to sell mining equipment in order to raise funds and pay off debts. Celsius, which was also hit by the collapsing crypto prices, filed for chapter 11 in mid-July.

Elsewhere, a crowdfunding campaign to help finance the acquisition of an Atlanta office complex raised $62 million from 700 investors, the highest dollar amount ever for a commercial real-estate purchase on the popular website CrowdStreet Inc. This fundraising for the Atlanta Financial Center might have brought in even more. But a number of investors who analysed the offering since the crowdfunding process began in May said they declined to participate after they saw that the buyer, Nightingale Properties LLC, initially failed to record some of its previous loss-making deals in offering documents that include the firm’s track record. Nightingale, a New York City-based real-estate firm, lost a Manhattan office building in 2021 to its lender, the firm said, after it could no longer make mortgage payments. It defaulted in 2012 on at least $25 million in loans related to a portfolio of retail properties in Tennessee, according to public foreclosure documents. In both these instances and two others, the offering on the CrowdStreet website listed N/A instead of an IRR, or an Internal Rate of Return. Two of these four deals with missing return rates were the firm’s worst-performing transactions, according to Nightingale. For Nightingale’s other real-estate purchases, the rate of return was clarified in the documents. Nightingale noted that the loss-making deals represented two out of the 36 properties included for that track record. The two poor performers had a negligible impact on its portfolio’s overall performance, the firm said, and only accredited investors could participate in these real-estate offerings. Accredited investors must meet certain income and net-worth guidelines and many do their own research. Some prospective investors said they were put off that Nightingale withheld that information. Evan Nison, who lives in New Jersey and runs a marketing firm, has participated in crowdfunding investments for about five years. In June, he put in an offer to help fund the Atlanta Financial Center. He said he changed his mind about a week later after his own research uncovered one of Nightingale’s previous losses that wasn’t disclosed in CrowdStreet’s online offering forms. “I started googling and noticed that there was at least one complete loss that wasn’t on their track record,” Mr. Nison said. A spokesman from CrowdStreet said that Nightingale’s disclosures were “inconsistent.” He said that CrowdStreet felt the excluded details weren’t essential, which is why the company felt no obligation to ask Nightingale to update the documents. Any missing information was made available to investors upon request and in a private investor memorandum. “The omissions are benign,” the spokesman said. “We believe this offering, and all offerings on CrowdStreet, provide a fair representation of the opportunities and risks involved in real-estate investing, including, in this case, a fair picture of [Nightingale’s] track record.” Will Hutton, Nightingale’s senior director of acquisitions, said the firm addressed the missing details on its track record “directly with the CrowdStreet investors who inquired about them,” including in a June webinar held on CrowdStreet to promote the transaction.

Elsewhere, U.S. authorities on Tuesday arrested three men who allegedly organised a scheme to steal millions of dollars in cryptocurrency, conning U.S. banks and a major cryptocurrency exchange in the process. Esteban Cabrera Da Corte, Luis Hernandez Gonzalez, and Asdrubal Ramirez Meza were charged by the U.S. attorney’s office in Manhattan with a variety of offenses, including wire fraud and aggravated identity theft. The three men, residents of Miami, purchased more than $4 million in cryptocurrency by opening accounts with a leading cryptocurrency exchange using photos of fake U.S. passports and drivers’ licenses, according to an indictment filing. The accounts were linked to bank accounts controlled by the trio. After purchasing the cryptocurrency, the men quickly transferred it to crypto wallets outside of the exchange. They then reported this activity to the banks and said the purchases were unauthorized, prompting the banks to reimburse them. The banks involved ultimately transferred more than $4 million in fraudulent reversals. The cryptocurrency exchange, which wasn’t identified by prosecutors, lost more than $3.5 million worth of digital currency. The defendants withdrew the money they acquired from the scheme through wire transfers, cashiers’ checks and ATM withdrawals. By doing so, they defrauded the cryptocurrency exchange of both the cryptocurrency purchased, since it was transferred to external wallets, and the funds to purchase it, prosecutors said. The scheme transpired over several months in early 2020, according to the indictment. The men were apprehended partly as a result of the investigative work done by the Department of Homeland Security’s El Dorado Task Force, a program focused on prosecuting money laundering. The men will appear in U.S. District Court for the Southern District of Florida, the U.S. attorney’s office said.

Investors’ appetite for junk bonds is contracting ahead of a critical stretch for economic data and Fed policy, suspending a summertime rally that had elevated risky corporate debt. The slowdown is part of a?broader retreat from riskier assets?and indicates that traders continue to fear that?Federal Reserve rate increases?could eventually damage companies that have large debt portfolios. Tough talk from Fed officials is diminishing investors’ hopes that the central bank might soon relent from its aggressive stance?against rising prices. “Over the past week or so, there seems to be some questioning of the broader narrative that the Fed might be on pause come sometime in 2023,” said Chris Lee, a bond portfolio manager at Allspring Global Investments. Allspring has been championing junk bonds with higher credit ratings, Mr. Lee said, as well as those with shorter maturities, which are impacted less if the Fed raises rates. After declining for most of the summer, the premiums investors get when purchasing junk bonds are rising again, reflecting more perceived risk. Through Tuesday’s trading, junk bonds were offering a 4.54-percentage-point yield premium over U.S. government debt, up from 4.08 percentage points a week and a half ago, according to Bloomberg index data. That reversed a steady decline in these premiums since early July, when they peaked at nearly 6 percentage points. Average U.S. junk-bond yields,?which rise when prices decline, reached?nearly 9% in late June. That was before?hopes of a swift end to persistent inflation spurred a rally that took yields back down to 7.5% in mid-August. Now, though, investors are abandoning junk bonds yet again. They are preparing for four weeks they anticipate could bring growing pressure toward higher interest rates, culminating with the Fed’s next policy decision on Sept. 21. Many investors expect Fed Chairman?Jerome Powell?to use a speech in Jackson, Wyo., this Friday to reemphasize the Fed’s commitment to?exercising significant control over inflation. August labor-market data coming Sept. 2 and fresh inflation figures on Sept. 13 might also prompt higher rates if the readings are hotter than expected. In recent sessions, those worries have captured other corners of financial markets too. U.S. equities Monday and Tuesday suffered extended losses from late last week,?which was the S&P 500’s?first down week?since mid-July. Oil futures have sold off in August,?cryptocurrencies have lost value?and shorter-term Treasury notes continue to offer greater yields than longer-term government debt,?a classic recession warning sign. Despite an anxious undercurrent, some investors are bullish that junk bonds could prosper in a recessionary environment.

It’s called the Inflation Reduction Act but President Biden and the law’s other supporters have lauded it as the “Emissions Reduction Act.” The law, which Mr. Biden?signed last week,?is intended to leave climate-warming greenhouse gases around 40% lower by 2030 from 2005 levels, mainly through subsidies that transition utilities and households to renewable electricity and electric vehicles. That is symbolically relevant, since it moves the U.S. closer to its international commitment, but it’s not the bill’s most significant clause. After all, the U.S. was already in progress to reduce emissions. The incremental reduction in emissions from the IRA is 6% to 10%, according to the research firm Rhodium Group, or 15%, according to Princeton University’s Zero Lab. This approximates to roughly 1% to 3% of projected global emissions in 2030: a nice start, but not enough to significantly impact temperature. Where the bill could be truly consequential is in stimulating the appetite for technology adoption that drives emissions lower beyond 2030. Recent history shows that climate policies such as taxes, subsidies, and mandates are most relevant for catalysing a virtuous cycle of higher demand that incentivises more innovation, learning-by-doing and economies of scale that reduce costs and further scale demand. “They’re a nudge: they kick-start a much larger process of innovation,” said?Jessika Trancik, who studies the cost and performance of energy systems at the Massachusetts Institute of Technology. In solar power, the results have been spectacular. Between 1980 and 2012, the cost of a photovoltaic module made from crystalline silicon fell 96%, according to a 2018 paper by Ms. Trancik and two co-authors. They attributed roughly 30 percentage points of this to public and private research and development, which among other things, led to more efficient modules and larger, thinner silicon wafers. Another 60 points came from “learning-by-doing”—improvements to the manufacturing process, such as less waste, that came with experience—and economies of scale: the average plant capacity grew roughly 200-fold. These advances were spurred by the promise of demand that government incentives made possible. For example, generous German payments for solar power spurred China’s massive investment in photovoltaic factory capacity. Similar, though less dramatic, dynamics have been at work in wind power and battery storage. They all hewed to “Wright’s Law,” named for the 1930s aeronautical engineer Theodore Wright, according to which each doubling of production is accompanied by a roughly constant percentage decline in cost, known as the learning rate. “Over the long term these learning rates appear to be the best way to predict the future cost of technology that we know of,” said Ramez Naam, an author and investor in early-stage green energy companies. One implication is that as a technology matures, production takes longer to double and so costs fall more slowly. In solar power, for instance, PV module factories are now so large and the manufacturing process so efficient that incremental improvements are much harder to come by. Sure enough, the cost of solar-generated power has fallen an average of 6% annually from 2018 through 2021, compared with 21% in the previous nine years, according to Lazard, an investment bank.

Finally, a brief discussion on the nature of value:

Economics is the most well-known value science, it inquires into wealth and income, of goods and services, their production, exchange, distribution and consumption, and of the problems involved with them. Economics has contributed to and benefitted from general theories of value. Yet difficulties with traditional theories and the powerful but insidious influence of "value-free" philosophies of science held by many physical scientists have motivated some economists to attempt make this value science value-free. Beginning by taking "wants," based on human desires, and then restricting "wants" to those satisfiable by economic means, economists focused on what satisfied those needs, that is, what is useful or has utility. Accumulation of data about quantities and kinds of production, consumption, distribution, and exchange of things having utility led to locating economic value primarily in "exchange value," something unmistakably quantitative. Finally, after huge increases in the role of money in exchange, some economists tried to identify economics as the science of price. Here the claimed basis is clearly quantitative, and any periphery connections with desires and satisfactions can be neglected. Price is often influenced by cornering markets, stock manipulation, inflation, central bank interest rate adjustment, political decisions, and other technical factors in economic systems. While taking these decisive factors increasingly into account, some economists became more negligent of the ultimate bases of the whole economic enterprise. "The economist is not concerned with ends as such" because "the economist is entirely neutral as between ends". This view is misguided. The reason for the error is the failure to establish axiology as a recognised and reliable science. Establishing axiology as a recognised science helps reestablish economics as a value science on a sound value basis. The more interdependent the peoples of the world become, the more complex our economic processes become, and the greater necessity for theoretical soundness, to have economics solidly grounded in reliable axiology. That concludes my discussion on the nature of values as such, I sincerely hope this article was stimulating and edifying intellectually for you all!

With gratitude,

Will