TheChek News Flow

BT and Vodafone have unveiled large job cuts, but investors await evidence they can prosper

Britain’s two public telecoms giants are seeking to convince investors they are transforming into fresh beasts able to capitalise on the digital revolution in a way they have struggled to do over the past decade.

Philip Jansen, BT’s chief executive, told investors that “yes, it’s painful now” — referring to the company’s high expenditure on infrastructure upgrades and successive quarters of falling cash reserves. But, he argued, the former monopoly is now a “totally different company” that is “positioned for future growth and can take advantage of new opportunities”.

Earlier this month, BT and Vodafone, Britain’s second-largest telecoms operator, announced major restructuring plans, including about 60,000 job cuts across the two groups over the next few years.

BT said it would reduce its headcount by up to 42 per cent by the end of the decade as its fibre build draws to a close and thousands of jobs become automated, while Vodafone said it would slash roughly 12 per cent of its global workforce over the next three years by simplifying its operations.

“It’s not a happy ship at the moment,” said a branch manager of the Communication Workers Union, which represents employees at BT. “There’s a lot of discontent out there.”

Both made the job cuts announcements as they reported results that disappointed the market, most notably falling short on the most-prized metric by the City for telecoms stocks: free cash flow. Their results came off the back of successive quarters of high capital expenditure coupled with weak revenue and earnings growth, which has precipitated a 20 per cent slide in BT’s shares over the past two years, and a nearly 40 per cent drop in Vodafone’s.

“What can you give investors . . . that would reassure them that this isn’t classic telco spending more to prop up a sinking ship?” Goldman Sachs analyst Andrew Lee asked during BT’s investor call.

Over the same period of lacklustre growth, foreign private investors have swooped in to take stakes in these unloved British assets. United Arab Emirates telecoms and investment group e& has built a 14.6 per cent stake in Vodafone, alongside French telecoms tycoon Xavier Niel, and “cable cowboy” John Malone’s Liberty Global, who between them own more than a fifth of the company. Meanwhile, Franco-Israeli billionaire Patrick Drahi has upped his stake in BT to nearly a quarter.

Where institutional investors are still seeking short-term improvements to key metrics, these private equity-style investors come equipped with much longer time horizons for returns and strategic visions that go beyond annual dividends — even if some of their goals are shrouded in mystery.

“Given decades of evidence of value destruction, public markets are understandably quite cynical,” said Carl Murdock-Smith, an analyst at Berenberg. “When you’re doing large long-term infrastructure investments, it kind of raises the question: are public markets the right place for telecoms groups?”

To Goldman Sachs’ Lee, private investors in British telecoms groups are able to survey the landscape and see “monumental changes taking place”.

Among them, he pointed to regulators’ willingness to tolerate significant price rises for fixed and mobile contracts, tax breaks offered by the current Conservative government to facilitate huge investments in infrastructure, and what some see as an apparent softening in the stance on potential consolidation in the market.

One top-10 BT investor noted the FTSE 100 group “divides opinion”. “You’ve got the whole range from haters, to massive fans. [Drahi’s] a massive fan.”

“I do think there’s a reasonably good case for long-term value,” they said, pointing to the company’s huge investment in deployment of full fibre which should stand it in good stead to attract and retain customers, as well as make improved returns over the next decade. “When it’s all done and dusted it could be a good asset.”

Still, while all of these private investors are proving benign benefactors for now, their presence is no doubt a source of pressure. Drahi, Niel and Malone made names for themselves as ruthless businessmen, willing to slash and burn in their efforts to grow companies.

BT and Vodafone have sought to present a vision of their future incarnations as leaner businesses with much lower costs — a relatively attractive proposition to a range of investors.

Telecoms groups have historically spent a higher proportion of their operational expenditure on staff than almost all other major sectors, apart from technology and healthcare, according to analysis done by Goldman Sachs.

Where tech and healthcare companies’ staff costs are driven up by high salaries, telecoms groups tend to have more lower-paid staff in roles such as customer service, shop-floor sales and call centres, a good portion of whom are in jobs that could be automated, according to Lee.

Although BT’s big ticket announcement of up to 55,000 worker reductions by the end of the decade garnered a lot of attention, Jansen told investors the company had already been cutting about 5,000 jobs a year, partly through automation.

While BT and Vodafone were the only major European telecoms groups to announce major job cuts and restructuring this year, peers across the continent have made similar announcements in recent years, including Germany’s Deutsche Telekom in 2018 and Spain’s Telefónica in 2021.

And few see promises about headcount reduction as the salvo for Britain’s two biggest telecoms groups, which face distinct, entrenched problems that have caused them to fare worse on public markets than most of their counterparts in mainland Europe.

The BT union representative pushed back against the argument that management needs to slash its workforce to improve returns, arguing that “with the explosion of broadband and the internet there is certainly enough money there to make good profits”.

BT, the former monopoly, is subject to strict and sometimes changing regulatory pressures. Its attempt to lower prices for wholesale broadband customers including Sky and TalkTalk was scrutinised and delayed by Ofcom, causing the share price to dip earlier this year.

Meanwhile, the Labour party has signalled that if it were to win the next election, it might seek to limit or even reverse above-inflation price rises implemented by the biggest operators during a cost of living crisis.

Both BT and Vodafone are operating in the UK, which has a highly competitive mobile market, comprising four players that compete intensely on price, and it is far from clear that the competition authority will allow a merger between two of these companies.

A lot of Vodafone’s problems — conceded by its new chief executive Margherita Della Valle — stem from two key difficulties. The first is that the business is complex, spanning various jurisdictions from the Democratic Republic of Congo to Romania. The second is that several of its most important markets — the UK, Spain and Italy — have four or more telecoms operators competing on price, making it very difficult to improve returns.

Della Valle is trying to finalise a deal to combine Vodafone’s UK business with CK Hutchison’s Three UK, although negotiations have been painstakingly slow. The group has also been vocal about ambitions to pursue deals in Spain and Italy.

Against this backdrop, the jury of analysts and investors remains out as to how transformational investments and cost-cutting at Vodafone and BT will be.

“Asking investors to bear with you while you invest is fine, if you have a record of creating value,” said Murdock-Smith of Berenberg. “In truth, it’s really hard to know what the long-term future is. Investors struggle to gain comfort with that.”

Technology platform will drastically speed up production of bespoke content for clients

WPP, one of the world’s largest advertising groups, has teamed up with chipmaker Nvidia to use generative artificial intelligence in the production of advertising at scale for its clients.

The new technology platform, which will be announced by Nvidia boss Jensen Huang in Taiwan on Monday, will allow WPP to use AI to create in minutes campaigns that would have previously taken weeks. 

The platform combines 3D imaging software that can be used to produce a fully accurate photo realistic image — of a car, for example — which can then be taken into a video or 2D advertising generated by the AI engine. 

In the case of a car, this could be placed in a desert, or rainy street, with the car adapting to its surroundings — glistening wet or reflecting glare — in processes that would have taken days using a traditional green screen or real-life filming. 

The speed of production means that advertising campaigns can be rapidly adapted for different markets or countries — putting the car into streets in Hong Kong or New York, for example — and will be able to create customised advertising for different digital channels such as YouTube or TikTok and their specific user groups.

Stephan Pretorius, chief technology officer for WPP, said that its clients were beginning to ask to use generative AI. “We are able to use generative AI to now personalise and . . . customise [advertising] to every environment in the world: you can create 10,000 versions within a couple of minutes.”

Many in the advertising industry are concerned that AI will replace their jobs given its ability to replicate familiar creative content. Advertising agencies are already using AI in media planning and buying.

WPP’s chief executive Mark Read said: “It’s much easier to identify the jobs that AI will disrupt than it is to identify the jobs that AI will create. We’ve applied AI a lot to our media business, but very little to the creative parts of our business.”

Read, who said the technology would be “fundamental” to WPP’s business, added that “clients are seeing ways of rapidly reducing the cost of production, to match the demands of new channels”.

The technology links up with Getty Images to ensure that copyright is also protected, addressing a big concern over the use of AI given the risk that it can “scrape” and use images unlawfully. 

WPP has been working on trials of this technology with Nvidia for several years. Rev Lebaredian, vice-president of Omniverse and simulation technology at Nvidia, whose stock price rocketed last week on the back of its AI technology, told the Financial Times that the time had come to use generative AI in advertising.

“We had the ChatGPT moment. Everybody has realised now how transformative AI will be — you’re seeing that in our stock price now. WPP understood this early on.”

Nvidia’s Huang said: “The world’s industries, including the $700bn digital advertising industry, are racing to realise the benefits of AI,” Huang said, adding that WPP would now be able to give brands “product experiences and compelling content at a level of realism and scale never possible before”.

A cryptic object, cloaked in the cosmos.

Invisible to the eye lies a powerful force at the center of a star metropolis.

The brilliant star cluster Messier 4, the closest such cluster to Earth at some 6,000 light-years away, contains hundreds of thousands of stars. It's a sight to see. Now, NASA has employed its legendary Hubble Space Telescope to reveal what is likely a black hole, some 800 times the mass of the sun, at the center of the star cluster.

"You can't do this kind of science without Hubble," Eduardo Vitral of the Space Telescope Science Institute, which operates the instrument's science missions, said in a statement(opens in a new tab).

This black hole is rare: It's not a small black hole, the type of rogue object that roves our galaxy (scientists estimate there are a whopping 100 million of these in our Milky Way galaxy alone). And it's not one of the monstrous "supermassive" black holes that lie at the center of galaxies — such as Sagittarius A* — weighing millions of times more than the sun (astronomers captured a rare picture of this giant Milky Way object). Rather, the new observation is a curious "intermediate mass" black hole, an oddity scientists have many questions about — like why might they be so rare?

Black holes contain unimaginable mass, with gravitational pulls so strong not even light can escape. How, then, did researchers reveal evidence of an unseeable object? They looked at Hubble's observations of Messier 4 from a 12-year period, watching how stars moved near the cluster's core, "like bees swarming around a hive," NASA explained.

The research, recently published in the Monthly Notices of the Royal Astronomical Society(opens in a new tab), determined the motions of stars were likely influenced by a powerful center of gravity. They couldn't realistically explain the stars' behavior from other forces, like dense stars near the core. The evidence points to a singular black hole, something relatively small amid the grander Messier 4.

"It's too tiny for us to be able to explain other than it being a single black hole," noted Vitral.

You can see the dance of stars around the core of the star cluster in the NASA video below, at 50 seconds in:

The case of the curious force at the center of Messier 4, however, is still ongoing. Though the evidence for a black hole is compelling, there's still a chance that other forces might be at play, like previously unknown star activity and physics.

Hubble will be watching.

The infrastructure is not ready for rapid growth, despite government promises

For the past few months, our new electric car has worked like a charm. One of the first BMW iX SUVs to hit the US market, it draws compliments from garage attendants and car buffs, and the rapid charger we installed in our garage easily powers it up for the daily commute.

Then we tried to take it on the road. A charging station black hole across much of the Midwest made that route impossible. Then, along the allegedly well-served highways between Boston, New York and Washington, we repeatedly encountered unresponsive touch screens, non-linking connectors and very slow charging. At one spot with eight stations, the first three we tried didn’t work.

Adding insult to injury, our BMW-funded two years of “free” charging vanished from the system halfway through the trip, forcing us to pay and seek recompense later. Online discussion groups are filled with similar tales, suggesting mine was not an isolated experience.

This may be teething pain: the number of EVs on US roads has septupled in 5 years to 3mn, and many of the 135,000 public charging stations are brand new. But it also raises questions about whether the focus on making and selling electric vehicles has led us to neglect the changes that will make people happy once they’ve got one.

The International Energy Agency predicts that one in five new cars sold this year will be EVs, up from one in 25 three years ago. Much of the growth is concentrated in China, which made an early bet on the technology and supported makers, buyers and charging providers with subsidies. EV adoption has been so rapid that foreign automakers failed to keep up, allowing local brands such as BYD to seize market share.

In the west, Norway’s experience is instructive. Battery EVs have jumped from 20 per cent of new cars to 80 per cent in less than five years, thanks to tax breaks. But the charging infrastructure has struggled to keep pace, despite ample government support, leading to long lines at highway charging stations on holiday weekends.

The US experience is likely to be even bumpier. The Biden administration has announced plans to have 500,000 public charging stations by 2030, but that’s a far cry from China, where 1.8mn are already up and running, and the government is aiming for 20mn by 2025.

America’s situation is complicated by the fact that Tesla, which has more than 60 per cent of EV market share, operates a proprietary charging network and until recently had refused to open it to other cars. But that is starting to change. Volkswagen, which operates the country’s largest network, Electrify America, has deliberately made it open access. And Ford announced a deal on Thursday that will give its vehicles access to 12,000 Tesla Superchargers.

Ford’s chief executive Jim Farley argues that adding chargers will reduce not only waiting times but also bring down the overall cost of EVs. That’s because customers will become more comfortable with cheaper, smaller batteries that go 200 miles, rather than the 400 that many manufacturers are striving for. “We should make the battery as small as possible,” he says.

Shrinking batteries would also help solve another budding problem. If current patterns hold, converting just the US fleet to EVs would require three to four times more lithium than the entire world produces. “You need a 1,500 times scale-up in the mining, processing, manufacture and then what you do with it at the end,” says Keith Czinger, an early EV pioneer. “What is the impact of that on the environment?”

So far, EV charging providers have largely failed to address the problem that the process takes much longer than filling up with petrol. No one wants to get stuck in a dilapidated mall parking lot for 45 minutes, as I was last month.

History suggests that someone is going to make a bundle off this opportunity. South Dakota’s Wall Drug turned itself into a national tourist destination by offering free ice water to travellers to Mt Rushmore in the days before car air conditioning. The construction of the interstate highway system helped power the rapid spread of McDonald’s and its competitors, especially after they opened drive-through windows.

But the nascent charging industry has not so far failed to monetise the rising demand. Shares in EVGo and Chargepoint are down 80 per cent from their 2021 peaks, and Volta sold itself to Shell at a similar loss earlier this year.

The lack of infrastructure has real consequences. Concerns about charging helped drive a quarter of early US electric car buyers back to an internal combustion engine, a US government study found. And the share of Americans who say they are “very unlikely” to buy an EV is rising. If this is the wave of the future, there are choppy seas ahead.

Bitcoin and other tokens have rebounded while big companies and funds continue to plow capital into cryptocurrencies.

Rick Martin should probably be out of work. The 33-year-old entrepreneur co-founded a crypto start-up called Decaf in early 2022, diving into the industry just before a $3 trillion bubble burst, ushering in bankruptcies across the crypto world.

Today, he is still plugging away, among many others in crypto. At a “hacker house” event in Austin, Texas, Martin mingled with dozens of other enthusiasts, all talking excitedly about their apps. “This technology is superfast, supercheap, and I think it’s ready to replace financial infrastructure,” he said.

On the face of it, crypto should be on life support. Fourteen years since its launch, the technology remains an experimental oddity. Meanwhile, trillions of dollars have evaporated in frauds, bankruptcies, and token losses. And trading platforms, including Coinbase Global (ticker: COIN), hang by a regulatory thread as governments try to reel in the crypto casino.

Yet crypto is proving resilient. Led by a 60% rally in Bitcoin this year, the token market is back to where it was before FTX collapsed in November, worth an estimated $1.1 trillion. Shares of Coinbase are ahead 70% this year, while Bitcoin “miners” like Marathon Digital Holdings (MARA) have surged more than 150%. The Global X Blockchain exchange-traded fund (BKCH), a basket of crypto-related stocks, is up 90%.

Venture-capital funding has tightened, but some large investors are staying the course, helping to keep software developers in business. “We don’t in any way feel that the longer-term possibilities of the space are changed by the events of the past year,” says Arianna Simpson, a general partner at venture-capital firm Andreessen Horowitz, which has raised billions to invest in crypto. “We’re open for business.”

Yet there is no equivalent in recent history of a bubble inflating so quickly, bursting, and reviving again, all within a two year span. Junk bonds in the 1980s, tech stocks in the 1990s, subprime mortgages in the early 2000s—all took far longer to revive or fizzled as regulators clamped down.

“The entire market collapsed because of the exact problems the critics said would happen, and yet it’s hardly a blip on the radar,” says Mark Hays, a senior policy analyst for Americans for Financial Reform, a nonprofit that wants tighter financial regulations, including for crypto firms.

A mix of forces is keeping the enterprise alive. Some factors that caused the crash, including a surge in interest rates and high-profile bankruptcies like FTX, have receded. There is still profit in trading tokens, from Bitcoin to new joke coins like Pepe. Regulations, while tightening, have yet to shut down major trading operations or networks. And the technology still has fans, including investors, developers, and companies that fear missing out and see ways to make money off crypto in the future.

Chasing the Dream

While Bitcoin—worth roughly half the token market—grabs most of the attention, much of the development in crypto occurs on smaller blockchains. Networks such as Ethereum are meant to be a foundation for a new blockchain-based internet that could be used for trading, financial services, or apps. Competition also remains fierce to unseat Ethereum as the top app-based blockchain. (A blockchain is a decentralized ledger for recording transactions.)

The Solana network illustrates both the promise and perils of crypto. Solana got its start in 2020, promising faster speeds and cheaper prices than Ethereum. Solana’s developers want it to be a home base for things like “smart contracts” to automate transactions and for nonfungible tokens, or NFTs, which could be used to tokenize art, media, and video. Solana’s token, SOL, surged to a $78 billion market value in 2021, similar to what stocks like Uber Technologies (UBER) and Shopify (SHOP) are worth today.

Yet Solana, like many tokens, never had the broad investor base of large-cap stocks, making it highly vulnerable to a crash when one of its biggest backers went bust. That person was Sam Bankman-Fried, the founder of FTX, who had invested so much in Solana that SOL and related tokens became known as “Sam Coins.” The broader crypto collapse had already sent the Solana token’s market value down to about $13 billion by early November, but when FTX collapsed later that month, the token crashed to $3.5 billion.

“It was like somebody tripped us when we were running at full speed,” says Solana co-founder Anatoly Yakovenko, 42, who was flying back from a conference in Portugal when his phone blew up with texts and tweets about Bankman-Fried seeking a bailout for FTX.

Today, Solana appears to be revving up again. The San Francisco–based company backing it recently opened an office in Manhattan, where it hosts events and gives a free workspace to coders. A record number of developers attended a virtual Solana “hackathon” in February to create apps and compete for seed funding. At the Austin hacker house in April, held in a converted Quonset hut warehouse, coders gave presentations near a gallery lined with digital art, while members of the Solana team showed off a $1,000 mobile phone designed with crypto in mind.

“I could let my breath out,” Yakovenko says. “We’re still strong.”

The Party Goes On, With Less Punch

Crypto is feeling a hangover from the days when celebrities like Jimmy Fallon and Madonna pitched Bored Ape NFTs. The Super Bowl ads touting crypto have vanished. FTX Arena, home of the Miami Heat basketball team, is now Kaseya Center. Attendance at a recent Bitcoin Miami conference was half that of prior years and it felt “less like a festival,” according to Needham analyst John Todaro.

The mood was sedate at the CoinDesk Consensus conference last month, held on two levels of the Austin Convention Center, down from three in 2022. But major companies still showed up. Executives from firms such as Alphabet (GOOGL) and Mastercard (MA) announced partnerships or spoke on panels. An executive for PayPal Holdings (PYPL) said the company’s Venmo app would let users send crypto to others and discussed uses like payments in online games.

The country’s largest bank, JPMorgan Chase (JPM), also showed up, with an executive talking about how companies could use crypto to verify customer identity. JPMorgan CEO Jamie Dimon has derided Bitcoin as a “pet rock,” but that hasn’t stopped the bank from using blockchain technology in a project called Onyx that enables “seamless data sharing between institutions.”

While the crypto crash has slowed projects, “people are not leaving,” says Diogo Mónica, president of Anchorage Digital, a crypto services firm.

Venture capital isn’t giving up, either. One of the biggest investors, Andreessen Horowitz, has raised $7.6 billion across four funds to invest in digital assets. In addition to taking equity stakes in developers, Andreessen and other VC firms often buy tokens from issuers before they’re offered to the broader market.

One reason venture capital likes crypto is that it can pay off quickly when a token goes live on an exchange or surges in market value. The financing model offers payouts potentially faster than traditional venture capital, which usually has to wait for a buyout or public stock offering for a fund to fully exit its position, keeping funds locked up for many more years.

Simpson declined to comment on the Andreessen funds’ performance but said the firm still has money to invest. As for the $32 billion collapse and fraud allegations at FTX, she says, “We didn’t cancel the financial industry because Bernie Madoff committed fraud.”

The potential for crypto to be a disruptive force remains alive, and some big companies see potential profits in it. Mastercard in April unveiled a service to make cross-border crypto transactions compliant with anti-money-laundering rules. T. Rowe Price Group (TROW), Wellington Management, WisdomTree (WT), and trading firm Cumberland are testing a blockchain that could eventually be used as an alternative platform for currencies and other financial products.

Fidelity Investments also sees revenue opportunities in crypto. The brokerage firm is pitching digital-asset accounts to 401(k) plan sponsors, offering Bitcoin for retirement savers, and pushing into token trading by building a retail brokerage for crypto that could compete against Coinbase.

Some firms are trying to tokenize the safest type of mutual fund: the money-market fund. The Franklin OnChain U.S. Government Money Fund (FOBXX) looks like a standard money-market fund with $275 million in assets, a $1 net asset value, and a 4.8% yield. The twist: A tokenized version exists on blockchains called Stellar and Polygon, and investors can trade it 24/7 using “BENJI” tokens.

Blockchains “are almost like a new set of emerging markets, like digital frontier markets,” says Sandy Kaul, senior vice president at Franklin Resources (BEN). Maintaining records on the blockchain costs a fraction of the traditional method, and investors can see the daily accrual of interest on the blockchain, providing a level of transparency that Kaul says is unavailable in a traditional fund.

Operating in Legal Gray Zones

Unlike most industries, crypto operates like a tribe of global nomads. The technology is designed to thwart government oversight, and it’s often backed by loose “foundations” of coders operating across borders. Binance, the world’s largest exchange, says it doesn’t have a headquarters; a spokesperson says it’s taking a “multi-HQ approach like many global companies” and has regional hubs in Paris and Dubai. Tether, the firm backing the largest “stablecoin,” worth $83 billion, is based in the British Virgin Islands, but has at least one corporate entity in Hong Kong.

Pinning down the industry is tough, which is one reason why regulators have been flummoxed over how to police it on a global or national basis. The European Union recently passed some crypto rules. But in Washington, a mix of lobbying, agency turf wars, and paralysis in Congress has prevented comprehensive rules from taking shape.

Federal agencies like the Securities and Exchange Commission are trying to bring order; the SEC has filed more than 110 enforcement actions since 2017 and levied billions in fines. The enforcement threat has driven some crypto services, like the high-yield lending products offered by companies such as Celsius Network, almost completely out of the U.S.

The industry has long said it needs clarity from Congress, which made headway on bipartisan legislation in 2022. But the market crash, frauds, and high-profile bankruptcies hardened opposition to the industry. Some Democrats, concerned about the lack of consumer protections, are now urging Securities and Exchange Commission Chairman Gary Gensler to push harder. Both parties are working on their own legislation, though it appears unlikely that anything significant will advance near term.

Regulatory actions could still reshape the industry. Coinbase, for example, received a warning this year from the SEC that it may be sued for securities violations; the platform denies it has broken any laws. A case in federal court regarding the token Ripple could settle a longstanding debate over what types of tokens are securities; the answer may determine what tokens, aside from Bitcoin, can continue to be offered on Coinbase and other exchanges.

Regulators are also warning banks against taking on crypto-related business. Crypto executives say that finding even basic banking services is now a challenge, though Bank of New York Mellon (BK), Cross River Bank, and others still provide services to some firms.

Opaque Practices and Fake Trading

The crash hasn’t changed one of the most confounding aspects of crypto: It remains opaque. While most blockchains are public, recording every transaction for anyone to see, much trading happens “off chain” in centralized exchanges, which are relied upon to report accurate data. Price manipulation and fake trading, analysts say, are rampant.

Consider the apparent size of the market, worth $1.1 trillion, according to CoinMarketCap. The figure includes self-reported data from exchanges and token projects, says Doug Schwenk, CEO of Digital Asset Research, which sells its own data about crypto to institutional investors. It may include billions of dollars worth of tokens that don’t circulate—including Bitcoin, with estimates that between a fifth and a third of supply is sitting off the market in so-called stranded wallets.

“Most crypto exchanges have little incentive not to fudge the numbers,” Schwenk says. “It’s not a believable figure at all,” he adds, referring to the $1.1 trillion.

A spokesman for CoinMarketCap, which shares ownership with Binance, says the company has “long been aware that self-reported data can be problematic” but that there’s no other viable way to get the information. The spokesman says the company has processes and algorithms to verify the data and detect outliers.

Another problem: wash trades, where a trader buys and sells a token to create the illusion of volume. A National Bureau of Economic Research paper recently found that 70% of crypto transactions in unregulated exchanges are wash trades. Most of those types of trades were found on smaller platforms, while exchanges including Coinbase, with a license from New York’s financial regulator, had the fewest problems.

“There are exchanges that represent that they have billions of dollars in trading when really they have very little,” says Rich Rosenblum, president of market maker GSR.

Is Crypto Really the Future?

Underlying the tension between token boosters and critics is the industry’s ongoing search for a killer app that touches the lives of ordinary people. Bitcoin was supposed to play that role. But it is far too volatile for everyday transactions, and remains aspirational as a store of value compared with classics like gold or Treasuries.

Crypto backers say they need time and resources to develop apps and services on blockchains. Skeptics say the software is inherently flawed, partly because its decentralized nature exposes it to more security and compliance risks than traditional networks.

The criticism isn’t stopping the industry from powering on. A project called Helium aims to develop a wireless network based on hot spots that people run out of their homes. Another project, called Hivemapper, wants to create a crowdsourced version of Google Maps. Both projects run on the Solana network and reward people in tokens.

Some governments are still courting crypto. Prime Minister Philip Davis of the Bahamas—the home base of FTX—still crisscrosses the world pitching the island nation as a haven for digital-asset firms. He has said the country would even welcome back FTX, should it revive under a bankruptcy reorganization.

“In all environments of regulated activity, you have significant failures,” Bahamian Attorney General Ryan Pinder says, comparing the FTX bankruptcy to the more recent U.S. bank crashes. “It’s unfortunate, but it isn’t an indictment on what we believe is to the betterment of the country.”

Former FTX US President Brett Harrison, who quit the firm weeks before it failed, recently raised funds for his own trading platform called Architect. Customers liked FTX’s interface, he says, though he thinks the brand is tarnished. If FTX manages a revival, he adds, “it would probably help to rename it.”

Like any new technology, crypto is likely to continue attracting investors, entrepreneurs, and dreamers. Bitcoin may not be useful for much beyond trading, but it’s proving that it can survive a crash and recover. Ethereum has bounced back on bets that it will ultimately be an improvement over today’s internet and financial networks—a dream that is keeping other blockchains afloat with cash and development.

“There are vested interests in keeping this narrative of the utility of crypto alive,” says American University law professor Hilary Allen, an industry critic. “Keeping the demand story up is the only play left.”

Veteran leader has secured about 53 per cent of vote so far to head rival Kemal Kılıçdaroğlu

Turkey’s president Recep Tayyip Erdoğan was leading rival Kemal Kılıçdaroğlu in Sunday’s pivotal run-off election, according to early returns published by state media, placing him on course to extend his rule into a third decade.

Erdoğan had secured about 53 per cent of the vote, compared with 48 per cent for Kılıçdaroğlu, according to calculations by the state Anadolu News agency, which said that more than 90 per cent of ballot boxes had been opened. The independent news agency Anka gave Erdoğan a slimmer lead at 51 per cent.

Sunday’s second-round vote was billed by both Erdoğan and Kılıçdaroğlu as a referendum on Turkey’s future, exactly a century after the republic was founded by Mustafa Kemal Atatürk.

The opposition has warned that five more years of Erdoğan would send Turkey irreversibly down a path where democracy and human rights were steadily eroded, while the veteran president accused his opponents of aligning with terrorists and the west at Turkey’s expense. 

Erdoğan emphasised family values, the battle against terrorism and Turkey’s increasing role on the world stage in a series of fiery campaign rallies that helped to galvanise support among conservative, pious voters. Backing from Erdoğan’s base in Turkey’s Anatolian heartland helped the president defy expectations in the first round of elections on May 14, in which he beat Kılıçdaroğlu by a larger-than-expected margin. 

The 69-year-old president’s parliamentary bloc, a coalition that includes his Justice and Development party and the Nationalist Movement party also exceeded expectations in the first round, holding on to its majority in the legislative branch.

Kılıçdaroğlu had vowed to revive the economy by reversing many of Erdoğan’s policies, while also bringing the country back to a parliamentary democracy from the executive presidency system that was put in place after a referendum in 2017.

After an unexpectedly weak performance in the first-round election on May 14, the 74-year-old switched from a campaign promising “spring will come”, to harsher nationalist rhetoric. 

But Kılıçdaroğlu was dealt a blow when Sinan Oğan, the nationalist powerbroker who finished third in the first round of elections, recently threw his support behind Erdoğan, calling on his voters to back the incumbent.

International election observers said the first round of elections were broadly free, but they also noted that the campaigns had been far from fair. Erdoğan leaned heavily on state resources, providing giveaways such as free gas and 10GB of internet for students. He also boosted pay for public sector workers and increased the minimum wage.

The country’s government-affiliated media has provided wall-to-wall coverage of a string of Erdoğan events, including the opening of a Black Sea gas processing facility and the inauguration of a warship.

If Erdoğan does manage to secure victory, giving him another five-year term as president, the focus is expected to shift rapidly to the country’s $900bn economy.

The lira this week hit a record low, breaching 20 against the US dollar, as investors fretted over Erdoğan’s unconventional economic policies, which have included sharp rate cuts despite acute inflation.

A fall in Turkey’s foreign currency reserves, which has accelerated in recent weeks, has amplified the sense of concern among both international and local analysts.

Erdoğan said this week that the country’s economy, financial system and banks remained “sound”, adding that unidentified Gulf states had provided funding to relieve the pressures.

One measure shows large-cap stocks beating smaller companies by widest margin in 25 years

Shares of large companies are racing past their smaller counterparts again.

The Russell 1000 index of large companies has gained 9.2% this year, beating the 0.7% advance of the small cap concentrated Russell 2000. That is the widest outperformance since 1997, when looking at years in which the Russell 1000 has been in positive territory through May 26, Dow Jones Market Data show.

The gains in the large-cap index have been driven largely by a handful of big technology stocks. Among the biggest winners are Facebook parent Meta Platforms and graphics chip maker Nvidia, which have both more than doubled in 2023. Tesla has added 57%, and Apple has climbed 35%.

The small-cap index has been pressured in part by big declines in regional-bank stocks. Valley National Bancorp VLY 1.19%increase; green up pointing triangle has fallen 32%, while Independent Bank (Massachusetts) has dropped 46%. Elsewhere, the academic learning platform Chegg CHGG -1.29%decrease; red down pointing triangle, which warned that ChatGPT is eating into its growth, has declined 64%, and the oil-and-gas-drilling company Helmerich & Payne has fallen 34%.

Anxieties over the debt ceiling, a potential recession and lingering inflation have encouraged investors to turn to a trade that has worked for much of the past decade: large-cap tech stocks. Some investors, though, are wary that the stock market’s rally is too narrow underneath the surface, leading to doubts about its sustainability if one or more of the market’s behemoths were to falter.

“Trees don’t grow to the sky. It’s hard to imagine how they grow from here,” George Patterson, chief investment officer at PGIM Quantitative Solutions, said of large-cap tech stocks. “Yes, they have a lot of cash, but what do you do with it is the question.”

Apple and Microsoft continue to dominate the major stock indexes. Their combined weighting in the Russell 1000 has risen to about 13%, the highest level on record, according to Strategas Securities data going back to 1995.

In the coming holiday-shortened trading week ahead, investors are looking to Friday’s jobs report to gauge the health of the economy. On Wednesday, they will parse the Federal Reserve’s latest compilation of economic anecdotes from around the country, known as the beige book.

Tech stocks emerged as haven play during the March banking crisis, with investors betting that the collapse of three regional banks would force the Fed to pause its bid to raise interest rates. Lower rates boost the appeal of growth companies, such as tech stocks, which have the potential to generate windfall profits many years in the future.

Investors say the healthy balance sheets of many tech companies leave them better equipped to withstand any downturn in the economy. They worry the same generally can’t be said for small-caps, which often fall in the economically sensitive sectors, such as energy, materials and financials. Those companies are facing more pressure as regional banks tighten their lending standards.

Bigger companies “have no problem raising capital in an environment like this, but when you get a smaller company, they’re going to struggle,” said Jack Ablin, chief investment officer and founding partner at Cresset Capital. Within the large-cap space, Ablin said he is focusing on quality companies with high dividends.

Other investors also appear to be favoring large-caps of late. Investors poured more than $2.6 billion into U.S. stocks on a net basis during the week ended May 19, the largest net inflow since October, Bank of America global research data show. About $2.2 billion of that sum went to large-caps, while small-caps logged net outflows of $42 million.

Adam Hetts, global head of portfolio construction and strategy at Janus Henderson Investors, suggests that investors have small-caps and large-caps in their portfolios because the former are often first to rally in the early stages of an economic recovery. He points to the period after the 2008 financial crisis, when small-caps initially outperformed large-caps.

Plus, small-caps look less expensive than other corners of the market. The Russell 2000 is trading at 12.8 times expected earnings over the next 12 months, below its historical average of 15.8, based on FTSE Russell data going back to 1979, when the index was created.

In comparison, the Russell 1000 trades at about 18 times earnings, above its historical average of 15.8. Meta’s multiple is about 20, while Tesla’s and Nvidia’s are both around 47.

“That’s where you’d see the biggest bounce, as we work through the bottom of a potential recession or bear market into a recovery environment,” Hetts said of small-caps.