Contention’s market dead pool 2023, Part 2

Binance, commercial real estate set to crumble

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On Monday we identified our first two contestants in the 2023 market dead pool -- both Tesla and the rideshare/delivery app segment are looking a little pale. A full year of high interest rates may be too much for them to survive.

Now we look at two more players: crypto giant Binance and the commercial real estate market. Both have lessons to share about how financial conditions influence the shape of our markets and the distortions we’ve come to take for granted in the bubble era. 

Binance

On Monday we said that interest rates are the price of time, but they are also the price of risk. In theory, interest rates ought to track closely with average returns on capital, with government bonds and bank deposits offering slightly less yield for greater security. This would protect savers while encouraging productive investment and discouraging unnecessary risk except for those with the means to pay for it. 

In practice, rates reflect the political power of central banks and their constituents -- large investors. As profits from production get harder and harder to produce, central banks find themselves under pressure to push interest rates below any “natural” level. This means that credit exceeds productivity, with banks printing more money for less effort on the part of business. It also means that risk gets underpriced, and with safe returns zeroed out, more and more money pours into wilder and wilder schemes. 

Schemes like cryptocurrency, where the largest exchange of all, Binance, faces big consequences as rates keep rising. Started in 2017 by Canadian software developer Changpeng “CZ” Zhao, nobody actually knows where the company is headquartered. Its finances are just as opaque, with its last chief financial officer leaving in 2021 after not having access to all of the company’s books. The company put out a “proof of reserves” shortly after the FTX collapse in November, but the report left out crucial data and its “auditor” Mazars announced that it would no longer work with the crypto industry. Mazars said it could not stand behind how crypto companies were representing their work to the public.