The Houston Firefighters’ Pension Fund announced crypto investment last week to become the first US institution to disclose an allocation to digital assets. While there has been speculation of institutional investor participation, the $25m investment in bitcoin and ether by the $5.5bn asset fund, is the first official announcement. Could this event lead to the typically conservative and publicity-reticent institutional investors feeling more comfortable allocating to digital assets and disclosing prior investments in the asset class? A Public Pension Fund investing in crypto de-risks the asset class.
Corporate tax contribution as a percentage of overall federal tax collection is at multi-decade lows, yet a single Democratic Senator sank a higher corporate tax rate hike. The party is now scrambling after a dangerous wealth tax. It’s dangerous because history shows that taxes mostly expand in scope. The risk is, today it’s 700 billionaires, tomorrow it’s millionaires and decades later, your kids are taxed on their unrealized home values.
The full list of discussion subjects of The Dispatch #35, completed on October 29th, 2021 follows.
- First US pension fund announced crypto investment
- Corporates pay lowest share of Federal taxes – Beware of wealth tax
- Coinbase, FTX and a16z released digital asset policy papers
- Bitcoin and energy make magazine covers
- Blackrock Investment Institute on inflation and growth
- Another Defi protocol exploited for $130m
- Crypto lobbying soared in 3Q to $2.2m
- COIN SCHOOL: Bitcoin market update – long-term holders aren’t selling
First Pension Fund announced crypto investment
The $5.5bn Houston Firefighter’s pension plan announced a $25m investment in bitcoin and ether. There’s been widespread speculation that many US institutions have allocated to bitcoin, but this was the first official announcement of a direct investment. This announcement could mark an inflection point where the normally conservative and publicity-shy pension institutions become more comfortable allocating to digital assets. Institutions may also feel embolden to disclose prior digital asset investments taking Houston Firefighters’ lead. This is another de-risking event of the “US will ban bitcoin/crypto” narrative.
Wealth tax proposed despite historic low corporate tax contributions
As the Biden administration is discovering, it’s tough to raise taxes even when the corporate share of Federal taxes is near a record low. Despite knowing that corporates are paying far less of the tax burden today, Senator Krysten Sinema opposed a tax hike. Because of her decision, the party is now pushing for a wealth tax on unrealized gains.
Source: Tax Policy Center
We should tread carefully when it comes to novel taxing mechanisms. Today, it’s just 700 billionaires, tomorrow it’s a bunch more millionaires and a few decades on, our children are taxes on unrealized home values. Furthermore, taxing unrealized gains could have significant unintended consequences on capital allocation (aka investing). Sure, it won’t be a big deal if only 700 individuals were impacted, but the risk is that this wealth tax, once implemented, will only expand. The history of states imposing taxes (started by Wisconsin in 1911) and rising state tax rates over time point to the wealth tax net widening beyond just 700 billionaires.
Coinbase, FTX & a16z each publish detailed policy documents
With the digital asset space facing a regulatory vacuum, these three prominent firms published policy documents this month to guide discussion and debate. Coinbase and FTX are crypto exchanges. A16z is a venture capital firm, formerly known as Andreesen Horowitz. These policy thoughts are worth reading to expand your knowledge and understanding of both the decentralized blockchain ecosystem and the regulatory landscape.
Crypto exchanges seek single regulator and new rules for digital assets
The TLDR is that the two brokerages push a new regulatory framework for digital assets because our current rules, written in the 1930s, just don’t work for software-based assets. For example, a centralized crypto exchange combines the role of exchange, brokerage and custodian in the traditional asset world. They also call for digital assets to be overseen by a single regulator.
Coinbase’s proposal is available on their blog and they encourage comments on the proposal via Github. A few tweets from founder Brian Armstrong provide some color. Armstrong also provides a summary of the proposal in a WSJ op-ed.
Source: Via Twitter
The FTX blog post is far more granular compared to Coinbase’s expansive big-picture thinking. However, the notable overlap is the call for a single regulator and to start offering regulatory guidance now vs doing nothing.
A16z (formerly Andreesen Horowitz) takes on Web 3.0, which includes digital assets but goes beyond. They too worry about patchwork regulation and push for a national strategy to harness Web 3.0’s greater efficiency and innovation vs. our current Web 2.0 architecture. A16z’s suggests cross-agency cooperation (somewhat at odds with the crypto brokers call for a single regulator). However, the venture firm’s views align with the exchanges’ when it says “forcing all digital assets into a regulatory framework designed to cover investments in centralized enterprises such as corporations does not work and could frustrate innovative solutions…”
Source: a16z
The a16z document is longer at nearly 25 pages of content, and it provides excellent schematics (one shown above) that illustrate how Web3.0 compares to past architecture. It is an excellent document to understand the evolving Metaverse.
Bitcoin and high energy price make magazine covers
The Dispatch takes magazine cover stories on assets or companies as a sign of greater mainstream acceptance of an asset or investment thesis. This is a metric that we follow.
Source: The Economist and Barron’s
Our digital asset view is based on exponential adoption-led growth. We could well see short term peaks, which the Barron’s cover may signify, but the long-term adoption growth appears intact. In energy, counter-cycle moves are likely, but the magazine cover is more than offset by the news that Exxon may abandon many projects. Both bitcoin and energy provide multi-year themes: bitcoin offer exponential adoption growth and energy offers sharply curtained investments that tightens supply and demand. See Dispatch #32 for more on why rise in energy price will be sustained. See the COIN SCHOOL section for a few charts on the current bitcoin supply and demand picture.
Blackrock investment institute on inflation and growth
We highlight Blackrock’s thinking as the Investment Institute brings serious analytical and experience fire power. Jean Bovin, the head, was once deputy governor of the Bank of Canada. The recent post asks if we are headed to 1970s style stagflation, and the answer is no but risks are rising. The rise is due to the possibility of markets or policy makers overreacting to inflation, Blackrock believes. The Dispatch leans towards sustained high energy prices whereas Blackrock expects supply to rise with higher prices. The Exxon news highlighted above suggests that higher prices inducing supply might not work in the future. The one area of agreement is the preference for inflation protected securities over regular government debt. The biggest surprise is that Blackrock mentions nothing of the potential surge in shelter inflation in this post. These classically trained and housed economists appear to agree with the transitory narrative.
Another Defi exploit leads to $130m loss at Cream protocol
Cream is a Defi lending protocol that was a target of a flash attack. A flash attack exploits vulnerabilities in the software code to trick/trigger release of funds to the attacker. Flash attacks require highly complex software instructions carried out by software and cryptography experts. This particular attack involved 68 different assets and cost 9 ETH (~$37,000) to execute, according to Coindesk. There is little recourse besides publicly shaming the culprit and tracking stolen tokens, which are visible on public blockchains. This is the third exploit of the Cream protocol in 2021. According to the REKT database nearly $1.8bn has been exploited out of Defi thus far in 2021.
As we’ve said before, be highly selective about Defi projects. The more established projects and pool have been battle tested for longer. Even then, the passage of time does not fully eliminate a software exploit because a new coding genius might concoct a technique to exploit the protocol. This is not investment advice.
Crypto lobbying soars in 3Q21 to $2.2m
The industry spent $2.2m in the 3rd quarter, with many digital asset firms hiring lobbyists for the first time, according to this Politico story.
What’s clear is that the industry, which is currently highly profitable, woke up to regulatory risks during the infrastructure bill debate. Coinbase led the way, spending $625K internally, a 680% sequential increase, and another $170K via external lobbyists. With most other industries lobbying aggressively, the crypto industry remained, until recently, without allies in DC. That’s changing as this young industry has started protecting its turf through lobbying. As a long-time emerging markets watcher, The Dispatch is frequently reminded that what’s called lobbying in the US is called corruption in many other parts of the world!
COIN SCHOOL – bitcoin market activity update
Bitcoin futures open interest rises and CME gains share
With two bitcoin futures ETFs entering the market in the past 10 days, the CME share of total bitcoin futures open interest has climbed to just over 20% as of October 25th. See the red shade in the chart below.
Source: The Block
However, neither futures volumes nor spot volumes have approached the levels seen in the late stages of the 1H21 rally.
Future Volume by month
Source: The Block
Daily spot Exchange Volume (The Block legitimate index)
Source: The Block
The volume data shows that retail activity hasn’t returned to prior peak. This is not a surprise as other tokens have taken share of overall crypto asset trading activity, as the chart below of daily activity on Coinbase shows. Cardano, Solana and Shiba trading gained share in October.
Source: Coinmetrics
Lack of retail excitement could well dampen volatility, which naturally means less aggressive price moves in both directions.
Long term holders are not selling, unlike the 1Q21 rally
The Dispatch focuses on the long-term supply and demand, and as the lead story illustrates, large institutions are allocating into bitcoin. On-chain data shows that unlike during the May price rally, long-term holders (coins held for longer than 6 months) are not selling into the current rally. This trend has been supportive of prices in the past.
Source: Coinmetrics
Stay safe, enjoy the fall colors and do reach out if you have any questions or comments about the material in this Dispatch.
Asi
Important Disclosures
| This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results. |