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bitcoin adoption

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52% of Institutional Investors Own Crypto

52% of institutional investors own crypto assets, according to Fidelity’s 2021 Digital Asset Study, a robust survey of 1,100 global institutions. 71% of Asian institutions in the sample have already allocated to crypto, 56% in Europe and only 33% in the US. The Dispatch is not surprised that US institutions’ adoption trails offshore peers because the regulatory discourse here has been rather adversarial. The SEC’s threat to sue Coinbase over a new product is a good example of high-profile signalling. This is a structural disadvantage for US pensioners and retirees who are represented by institutional investors. Additionally, the New Jersey action featured below is evidence of US regulators enforcing outdated laws that limit consumers’ choice and their ability to maintain purchasing power by investing in an emerging technology. Unfortunately, there is little media attention on the currently regulatory approach to digital assets and how it hinders real returns for consumers and retirement savings.   

The follow are Dispatch 30 discussion items on September 17th, 2021:

  • 52% of institutional investors own crypto
  • Solana blockchain network failure
  • Regulators target additional crypto interest account providers
  • Stablecoin regulations forthcoming
  • S&P 500 sees 54 record closes thus in 2021
  • Congress may pass wash sale rule for crypto assets
  • COIN SCHOOL – Taking a week off!

52% of global institutional investors own crypto assets according to Fidelity’s 2021 digital asset study

The 2021 Digital Asset Study by Fidelity Digital Assets showed a notable jump in institutional investor adoption of crypto assets. 52% of the 1,100 investors sampled have already invested in digital assets with Asian institutions leading the way with 77% adoption. 56% of European institutions have allocated with US institutions only 33% allocated. The Dispatch posits that many of the US institutions already allocated to crypto are family offices rather than more conservative pensions plans, which are the institutions facing the largest funding holes.

It’s a robust survey of 1,100 global institutions conducted by financial services survey firm Coalition Greenwich between December 2, 2020 and April 2, 2021.

Institutional Investors crypto asset purchase intent is higher still

What jumps out in future intentions is that 60% of US institutional investors hope to allocate to digital assets, which is nearly double the 33% who have allocated already.

The US money management market is the largest in the world. This BCG report on the global asset management industry estimates US investment funds at $49tn in 2020 with 53% in institutional mandates and the rest in retail/high net worth accounts. This probably does not capture family offices that often invest directly instead of using asset managers. The impact of 60% of US institutional investors allocating to crypto yields a back-of-the-envelope $7tn change in the pool investing in digital assets. One percent of that US$7tn potential change yields ~ US$70bn, which is a notable amount compared to the US$2tn value of the entire digital asset market today. It’s probably fair to assume that these institutions will only adopt the highest quality digital assets with the longest track record.

This Blockworks article provides a good summary of the survey. The well laid out and informative study can be downloaded directly from the Fidelity site.

Solana instability – another example of the inherently higher risk of Digital

The lead story in Dispatch 28 was the brief Ethereum chain fork a few weeks ago, which received scant attention. This week, we had high-flying layer-1 protocol Solana go offline for 17 hours. Luckily, we are in a bull market, and the Solana token only dropped 10% despite a pretty serious hiccup that stopped all services built on Solana. If blockchains are to become mainstream by gaining a substantial share of today’s centralized service, reliability will need to improve dramatically. When things go wrong in decentralized networks there is nobody there to help. You simply do not want networks to fail in the fashion that Solana did this week. You can read more about the issue on Coindesk and Bitcoin.com. The tweet below from Solana wallet Phantom, illustrates the seriousness, when you can’t access the funds in your wallet.

However, just like with the Ethereum fork, there has been limited detailed follow up on the hiccup by crypto media outlets. Eyeballs have moved elsewhere without a deeper evaluation of the implications of the stoppage. What does the issue say about the challenges of higher transaction throughput vs. network stability and centralization?

Regulatory scrutiny of crypto interest accounts expands

On September 17th, New Jersey’s securities regulator issued a cease and desist order against Celsius Network, as this Blockcrypto article explains. This follows NJ’s earlier action against Blockfi (see Dispatch 24) and the SEC’s Wells Notice against Coinbase’s Lend product (see Dispatch 29). This action highlights the urgent need to pass updated investment laws to bring them into the 21st century. Trying to fit securities law issued in 1933 or a 1946 Supreme Court Ruling (Howey Test) to new technologies like digital assets is a disservice to consumers.

Consumer protection at the expense of consumer choice and return suppression is a terrible regulatory regime

Ironically, much of the regulatory action is done in the name of consumer protection. Yes, we need better consumer protection in crypto, but that does not include preventing consumers from earnings a real yield from their digital asset holdings. Banks, in contrast, provide near zero interest on your US$s despite inflation staying above 5%. The Dispatch has a fiduciary duty (laid out in another old law – The Investment Advisor Act of 1940) to maintain and grow clients’ purchasing power. Bank deposits and fixed income today destroy purchasing power, so our regulators and politicians aren’t protecting consumers by preventing access to assets that offer real yields (yields that are higher than inflation) and higher potential returns. Go ahead and provide the rules for crypto firms to operate in an environment that provides consumer protection, but don’t throw an old rule book to bury these new products and return streams. The centralized crypto interest accounts have thus far operated without consumer loss, to the Dispatch’s knowledge. Defi interest products have been exploited with permanent capital loss to investors, but Defi is hard to regulate.

More Stablecoin regulation coming?

Staying on the theme of rising regulatory action, this Bloomberg story says that new stablecoin regulations are possibly weeks away. The focus on maintaining good liquidity into stablecoins, illustrated in the paragraph below, is encouraging.

However, part of the story has more adversarial undertones as the picture below (highlights by The Dispatch) illustrate.

The Dispatch is in favor of more centralized stablecoin oversight. The reserves that ensure 1-to-1 stable peg between the stablecoin and the US$ should be more transparent than what’s available today. The regulation hopefully coincide with better access for crypto firms into the Federal Reserve payment system, so liquidity can flow reliably between the two markets. The flow of US$s into crypto markets is a bottleneck today and a source of risk because very few traditional banks service the crypto industry.

S&P has had 54 record closes in 2021

Traditional assets like stocks are also in full-on bull phase. We have yet to close out the 3rd quarter, but the S&P has already recorded 54 all-time high closes in 2021. The chart below puts that trend into historical context. This WSJ article provides more details including the chart below. `

Congress may pass a wash sale rule for crypto to obtain more tax revenue

Since crypto currencies have been categorized as property (not securities) by the IRS, wash sale rule applicable to securities like stocks and bonds, don’t impact digital assets. Investopedia explains what a wash sale is. Even though wash sale rule does not apply to property, Congress is looking to introduce a wash sale rule specifically for crypto. This Blockcrypto article provides more detail on our politician’s patchwork approach to regulation instead of passing more comprehensive regulations on this new technology. This Forbes article provides examples of wash sales in action. The Dispatch will be watching this space as it could further trip up digital asset investors’ tax obligations.

Stay safe, enjoy the waning days of summer 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.

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Social Security Insolvency is Looming

Dispatch #29 – 2021

September 10th, 2021

Looming Social Security insolvency, highlighted in the 2021 Trustees Report, is the lead story this week. The retirement Trust Fund (called old-age insurance) is set to run out in 2033 and the Medicare Trust Fund will be empty even earlier in 2026. How’s that for just around the corner! We barely hear a peep about either of these near insolvent programs, though, as our polarized political systems focus on spending more to stay/regain power. The glass half-full observation is that the numbers weren’t that much better in years past, they’ve just got slightly worse.

This multi-trillion dollar financial deficit will have to be tackled in our lifetime, and the most obvious outcome is to print more money to cover benefits. As a society we have shown no desire to raise taxes or cut spending, which is why the money-print option is most likely.

The Dispatch hopes readers think about the broader repercussions of how printing money to cover this funding gap will impact their other assets and cost of living. We analyze more below, but this subject is best discussed 1-on-1, as individual circumstances are different.  

Following are this week’s discussion subjects:

  • Social Security Insolvency: Trust Fund to run dry after 2033 and Medicare Fund after 2026!
  • NFTs and Metaverse: What’s the Metaverse?
  • SEC threatens to sue Coinbase, right after warning Uniswap
  • Sotheby’s Bored Ape auction clears at $24.4m!
  • COIN SCHOOL – $10m+ bitcoin transactions rise–> Institutional adoption?  

Social Security insolvency: Trust fund to deplete by 2033 & Medicare fund by 2026!

The main retirement fund (Old-age and survivor insurance trust fund) will deplete after 2033, which is one year earlier than previous projections.  After that, payroll taxes will only cover 76% of schedule benefits according to the Trustees report. There’s also the Social Security Disability Insurance Trust Fund. This will deplete after 2057, which is a full 8 years earlier than previous projections. One bullet point of the report is shown below. The full 276 page report is here, but we recommend this summary of the Trustees report. This WSJ article provides a good synthesis as well.

The Hospital Insurance Trust Fund, which supports Medicare Part A, will deplete after 2026, the report states. After that, the fund will be able to cover 91% of scheduled benefits.

Knowing about Social Security insolvency, what do you do?

At the most conservative end, one can assume zero social security payments if retiring after 2034, plus having to pay for healthcare. Unfortunately, your future income will not suddenly rise just because these two Trust Funds are near empty. Therefore, lowering expenses is the only viable option to make up for lower or lack of retirement/health benefits.

At the other end, assume that the US will print its way out of this shortfall, just like the Covid response, and nominal payments will remain as promised. The Dispatch leans to the latter view as no sitting politician will be able to go back on promised retirement benefits. We have not shown a desire to cut spending/benefits or raise taxes as a society. Now that we have discovered the ability to print money to cover shortfalls, it’s hard to imagine politicians won’t embrace this approach. The NY Times headline below illustrates the narrative that downplays the grave financial condition by leaving out the year when insolvency is reached.

What does monetizing Social Security insolvency mean for other assets and cost of living?

The more important question to ponder is if the government monetizes social security liability (just a fancy term for printing money to make up the hole), what impact will that have on your other assets and cost of living? This is a complicated subject with multiple permutations, and one that requires a longer discussion. However, The Dispatch considers the potential range of outcomes when making client asset allocations.

This is also where digital assets may play a role with their exponential adoption-led growth. The network effect/adoption expansion has already led to exponential returns from leading digital assets. There have been plenty of flameout projects, which is rarely discussed due to our survivorship bias. Historic returns are no guarantee of future returns!

Digital Assets offer exponential adoption

However, we continue to see exponential adoption of decentralized services that have only been around for 2-3 years. For example, NFTs weren’t a thing 12 months ago, and now it’s likely that artists adopt this new use of blockchains. Decentralized Finance (Defi) was just emerging 12 months ago, and total value lock (TVL) in Defi has grown from $6bn a year ago to $164bn now. This is what exponential growth looks like. TVL is a measure of money deposited to earn an interest on your crypto holdings.

Source: Defi Llama on 11th September, 2021

Futhermore, expansionary Central Bank monetary policy should continue to drive adoption of scarce assets like bitcoin. In the traditional asset world, Apple shares are scarce assets too.

NFTs and the Metaverse. What the heck is the Metaverse?

Dispatch 28 highlighted the startling NFT price action recently. While we question the sustainability of prices near term, the Dispatch believes NFTs are here to stay. They provide creators – artists, musicians, athletes – a new channel to market and sell their craft. Plus, some NFTs offer status in a world where we spend increasing amounts of time in the digital world. Covid has accelerated that trend.

For a deeper, more philosophical dive into the digital world, it’s important to understand the Metaverse. The Metaverse is essentially the digital world we occupy, and it will have far-reaching socioeconomic consequences, not just Cryptopunks replacing Rolexes. This Bankless essay, The Metaverse Emerges, provides a solid exploration of the Metaverse as we can imagine it today. It takes time to absorb the subject if you aren’t someone deeply in the space. If you prefer, here’s a 30 minute Youtube reading of the article.

SEC threatens to sue Coinbase, right after Uniswap probe

The SEC has threatened to sue Coinbase if the company goes ahead with its Coinbase Lend product. Coinbase Lend would pay 4% interest on USDC stablecoin balances, like offering from Blockfi, Crypto.com, Celsius and others. Dispatch 24 highlighted the US States’ cease-and-desist orders on Blockfi, which are still pending as discussions progress between Blockfi at State Attorney Generals.

The WSJ covers the story well. Coinbase CEO Brian Armstrong called the SEC action “sketchy” in this Tweet thread. The action against Coinbase follows SEC launching an investigating of Uniswap Laps, the developer of Uniswap, the largest Decentralized exchange.

The issue at stake is whether Coinbase’s interest account is a security. If a crypto interest-bearing account offered by an exchange is a securities, then it needs to be registered with the SEC. The main problem is that our securities law was written in 1933! The definition of a security is very broad, as the American Bar Association website description shows below.

US regulations are in desperate need of updating to catch up with technology advances. There are several proposals floating in Congress to provide clarity on Digital Assets, specifically to lay out when a digital asset will be deemed a security. Until then American consumers will be shut out of the some of the wealth being created in the digital asset ecosystem.

The SEC action, in the guise of consumer protection, will remove Americans’ ability to earn a yield on their crypto holdings. US consumers are already ineligible to receive crypto token distributions by blockchain service companies. Just this week, dYdX, one of the fastest growing Defi services, distributed $100m worth of tokens to users, but US residents were ineligible because of SEC regulatory fears. How is the free distribution of tokens to community users a risk to consumer protection? Similarly, developers are likely to locate outside the US to avoid the uncertainty and threat of prosecution that Uniswap Labs may face. If you’d like to dive deeper into the issues, this is a blog post with a skeptical view of decentralized services.

Remember the Sotheby’s auction of Bored Ape NFTs?

Highlighted last week in Dispatch 28, the auction closed at $24.4m, well above the $12-18m Sotheby’s estimate. Only time will illustrate if this particular set of JPEGs were good value, fools gold or something in between. This Forbes article has more details.

COIN SCHOOL – Rising $10m+ transactions on the Bitcoin network

Does this point to institutional adoption?

This chart from Glassnode provides their interpretation of blockchain data, which shows a notable jump in transfers larger than $10m. The ratio has risen from ~10% of transfers in October 2020 to near 30% today. It’s fair to assume that a $10m plus movement of bitcoin value is mostly institutions and not individual whales trading more actively.

Bitcoin Relative Transfer Volume Breakdown by Size (entity adjusted, 30d moving avg)

Source: Glassnode

Stay safe, enjoy the waning days of summer 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.

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Bitcoin gets Musked & SEC staff letter on crypto

Dispatch #15 – 2021

May 14th, 2021

This week started with Bitcoin acting like a mature asset, correlating to the stock selloff. However, we were quickly reminded that Bitcoin is just a 12-year-old asset when Elon Musk’s tweet led to a sharp selloff. The top story, though, is a SEC staff comment that further solidifies the Dispatch’s view that a Bitcoin ETF approval is unlikely in the next few months. The letter, though, does lay the groundwork for the Gensler-SEC to work to fast track crypto regulatory clarity. The full list of items for discussion includes:  

  • SEC staff comment warns Bitcoin funds on compliance
  • Tesla will stop accepting Bitcoin for car purchases
  • Did someone “front-run” the Musk tweet?
  • UBS joins the Bitcoin party!
  • Bitcoin has a new Quarterback – Tom Brady
  • 1st Billion-dollar crypto deal: Galaxy Digital buys Bitgo
  • BITCOIN SCHOOL: Bitcoin miners are accumulating coins. What does that mean?

For a PDF version of Dispatch #15, please click here.

SEC comment warns of Bitcoin risks, but could clear up uncertainties long term

The staff comment begins with a warming to investors considering Bitcoin funds, but the main target is fund management firms. The comment reiterates the lack of regulation and investor protection that Commissioner Gensler voiced during his recent confirmation hearing.  This reset the Bitcoin agenda for a more informed and engaged Gensler-SEC, in the Dispatch’s view.

Much of the letter is directed at Mutual Funds and other investment vehicles that are investing in Bitcoin spot and futures markets today. These would be the funds that companies like Morgan Stanley are offering their clients. The SEC says it will be focusing of these funds’ compliance with the Investment Company Act of 1940.

A positive take away is that the SEC is accelerating the investigation of Bitcoin markets on deficiencies seen by the SEC. This will hopefully lead to quicker guidance from the SEC on ETF approval and custody rules. (They already had a comment period on this issue.) In the near term, the letter reinforces the Dispatch’s view that Bitcoin ETF approval is unlikely in June. However, if consumers have access to the $60bn physical gold ETF (ticker: GLD), it’s tough to argue that these same investors shouldn’t have access to a Bitcoin ETF. In April, Bitcoin traded more than $80 billion a day on average. In contrast, how liquid and transparent is the physical gold market? The full SEC comment is here. This Block Works article provides a good summary.

Musk tweet says Tesla has stopped accepting Bitcoin for auto purchases

Part of the statement tweeted by Musk on behalf of Tesla is below. It further adds that Tesla will not sell any of the remaining Bitcoin from the $1.5bn February, 2021 purchase. Now who believes that the “world’s smartest person” didn’t know, or failed to consider, that the bitcoin network consumed lots of energy? The Dispatch would also not be surprised, if in the coming months, that Tesla announced it had sold all the Bitcoin. This sadly removes one of the only realistic monetary transaction uses for Bitcoin, but it’s good for Bitcoin to divorce itself from a highly volatile cheerleader like Musk. This WSJ article covers the story

Source: Twitter

The statement does highlight the environmental headwinds that Bitcoin faces, which could slow the pace of adoption. Would other large companies want to invest in Bitcoin give the potential environmental backlash? While there is growing use of renewable energy for bitcoin transaction processing/security, that’s not the dominant narrative in the debate around bitcoin network’s energy intensity. The Dispatch now sees the environmental narrative as the largest risk to wider bitcoin adoption (price) instead of regulatory risk.

Ironically, Elon Musk is pushing Doge Coin (see tweet below) even though Doge Coin also relies on the same energy intensive proof-of-work (PoW) algorithm as Bitcoin. The only reason Doge Coin doesn’t consume as much energy is that the network is small and is far less secure. Yet, none of the green energy advocate are likely to highlight this dichotomy.

Did someone “front-run” the Tesla Tweet?

The chart below shows Bitcoin inflows and outflows from exchanges. To sell Bitcoin you first must move coins into an exchange (this assumes sophisticated investors keep coins in cold storage custody and not on an exchange wallet). There was a sharp 10K coin inflow (red circle) into exchanges before the Tesla tweet. However, the debate over privileged information or front-running in Bitcoin markets is more nuanced because it is NOT a security like company shares or bonds. Bitcoin does not have financial reports, for example. We should be careful applying our securities law/lens/expectations to the Bitcoin market.

Source: Willy Woo via Twitter

Since the blockchain is visible to all, we already know the history of the 10K coins that were moved to the exchange prior to the tweet. Those 10K coins were previously moved on 2 Jan, 2021 as part of a 4 x 12K coin movement out of coinbase, according to this blockchain analyst.

Ultimately, was Musk’s tweet not like a short-seller fund like Muddy Waters releasing a bearish report or Warren Buffet purchasing stock before disclosing a position? Does the concept of privileged information hold in an asset that has ZERO traditional financial information? These are all the questions that society needs to answer. The SEC is highly likely to use the price action this week to buttress the argument for more regulatory oversight of crypto markets. The Dispatch sees some investor protection as helpful, to protect small investors from larger investors with market moving information. This is a subject to be debated more thoroughly, and the hope is that the SEC facilitates that debate.  

  • The short-term volatility should be of limited concern for investors that take a 5 year+ view on this volatile asset. The Dispatch encourages a long-term view.

UBS joins the Bitcoin party!

The headlines shown below tell the story! Another global bank joins embraces Bitcoin. UBS 2021….

…UBS back in 2018

Source: Bloomberg headline – 2021 & The Guardian  headline – 2018

Bitcoin has a new Quarterback – Tom Brady          

Tom Brady updated his Twitter profile picture to the laser eyes meme adopted by bitcoin fans.  

Source: Twitter

The Brady news is unlikely to impact near term fundamentals, but in our media obsessed society, it could further spread the adoption story. The tweet below from the pioneering NFL athlete in Bitcoin – Russel Okung – shows network effect of Tom Brady’s tweet.

As more high-profile personalities own Bitcoin, it lowers the “government will ban Bitcoin” regulatory risk scenario. These high-profile personalities have friends in high places.

However, as Bitcoin’s value grows it could impede central bank monetary policy effectiveness and the geopolitical power of US dollar. How politicians try to maintain the efficacy of fiat currency they are able to print today with limited constraints., is still an open question.

First billion-dollar deal in the crypto space

Canada listed Galaxy Digital announced on May 5th that it is buying institutional crypto custodian Bitgo for $1.2bn. These articles by The Block and WSJ have more details.

BITCOIN SCHOOL: Miner behavior & cycle-to-date performance look

Miners accumulating coins is positive

Miners have been accumulating coins, which is bullish because miner selling is the ONLY source of newly created bitcoin supply. The miner community globally gets 6.25 Bitcoin about every 10 mins, or 900 Bitcoin a day, for securing the network/transaction processing. The end of this section has a more detailed description of miners and why they sell.

Source: Glassnode

This is a longer-term chart of the above data, also from Glassnode.

Miner/mining basics: A miner is a computer (usually a collection of specialized computers) that secured the protocol & support transaction processing on the bitcoin blockchain. Miners’ revenue is the Bitcoin granted by the protocol for their computing power. As the amount of computing power (called hash power) securing the network rises, the security of the protocol/network increases.  

All miner costs are in USD or some other currency where they are located. By far the largest operating cost is electricity and power is sold in the local currency. As a result miners have to sell their Bitcoin to obtain local currency to pay the bills.

A look at the cycle-to-date performance across the years

With the recent soggy performance of Bitcoin, let’s look at how the current price action compares to the last two cycles: Bitcoin in this cycle is +197% since the halving, which is tracking just ahead of +182% at the same point in the 2017 cycle.

Source: Blockchain analyst via Twitter

The Dispatch if fully vaccinated and enjoying life returning to normal. Stay safe and do reach out if you have any questions or comments about the material in this Dispatch.

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.

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Fidelity Bitcoin pricing model

Dispatch #12 -2021

April 23rd, 2021

The leading story this week is the Bitcoin pricing model published by Fidelity’s Jurrien Timmer.  This study incorporates the exponential demand curve with the already well understood exponential supply decline. He uses the mobile phone adoption curve to model how the Bitcoin price may evolve over the long term. As the past week’s Bitcoin price weakness illustrates, the price over the short term can vary notably from any long-term prediction. The Dispatch also looks at the following stories:

  • The current Bitcoin price decline
  • The cycle is maturing
  • $14bn hedge fund – Brevan Howard – to invest in crypto currencies
  • Venmo enables crypto investments/purchases
  • Proctor & Gamble to raise prices
  • More crypto acceptance: Time Magazine & Jackson, TN

For a PDF of Dispatch #12 click here.

Bitcoin price theory from Fidelity’s Jurrien Timmer

Jurrien Timmer is Fidelity’s head of global macro research. He’s NOT a Bitcoin junkie, but as he says, started researching the asset in detail six months ago! I am copying his tweets below as they best convey his views. This is the most robust pricing model I’ve seen thus far. If you are on twitter, the full thread is here.

A few observations:

  • This is a long-term projection. Prices can deviate notably from model values both to the upside and downside, over shorter periods.
  • Mobile phone adoptionà one phone = one person. In the case of a monetary asset like Bitocin, one person could own any number of Bitcoin or a fraction of a Bitcoin.
  • A single institution could hold 10s of thousands of Bitcoin.
  • If Timmer’s model is accurate, it may show the lower bound rather than the upper bound of price range as institutional adoption increases.

The biggest issue with this model is that it uses blockchain wallets as “users”. This does not capture users that own Bitcoin via PayPal, Venmo, Robinhood or those that keep coins on an exchange wallet. The University of Cambridge Centre for Alternative Finance’s 2020 global crypto study puts the  number of true users at 101m (on page 12), which is likely a summer 2020 estimate. Jurrien’s model, in contrast, assumes 33m users, which is the number of wallets visible on the bitcoin blockchain.

Regardless, this analysis resonates closely as both the exponential demand increase (even if just on-chain addresses) and exponential supply decrease are brought together. Other models, such as the Stock-to-flow model that gets many Bitcoiners excited, only look at the supply dynamics without considering demand.  

The current Bitcoin selloff

The sharp selloff started last weekend and has been attributed to several items or a combination of these items. Whatever the exact reason, we had a historic futures long position liquidation this week as the liquidation chart below from The Block illustrates. This has unwound most of the excess positioning that took place ahead of the Coinbase IPO.

If you’d like more details, this Glassnode article looks at the price drop in more details. This blog post has a similar conclusion and uses some Glassnode data. In addition, Dispatch #10 addressed how sharp pullbacks are a normal part of bull markets. An updated chart of that  displayed in Dispatch #10, which includes the current pullback, is available at ecoinometrics.

But, this cycle is maturing

It is worth noting that there are signs we are well into a price cycle and that there is some “irrational exuberance”. The rise of many of the Alt coins like Dogecoin, which has neither scarcity like Bitcoin nor utility like Ether, is one example. The Dogecoin price was up 329% (was +700% a few days ago!)  month-to-date on Friday the 23rd. In addition, the Bitcoin HODL wave chart also shows a rise in the percentage of recently moved (purchased) coins, as you can see from the rising red/orange shaded areas. It’s not at a worrying level, but has risen.

Source: Glassnode and a live chart is available at Unchained Capital

Brevan Howard ($14bn hedge fund) to invest in crypto currencies

Brevan, which is a household name in the world of institutional money management, investing in digital assets is another sign of the asset class maturing. They will invest up to 1.5% of their $5.6bn main fund and launch a new fund to invest in digital assets. This Business Insider article has more details.

Venmo allow crypto purchases

Venmo users can buy as little as $1 of Bitcoin, Ethereum, Litecoin and Bitcoin Cash as of this week. This brings Venmo’s70m US-based users to digital assets, but this announcement shouldn’t be a surprise because parent PayPal is already offering crypto access. While this should continue to expand the network effect of crypto ownership, Venmo users won’t have access to the bitcoin network and will need to use Venmo to transfer value. More detail in this CNN article.

Proctor & Gamble to raise prices

P&G is following Kimberly-Clarke with a plan to raise prices later this year. In a relatively consolidated retail industry, it’s unlikely that these price hikes will be reversed soon. This is a datapoint to keep in mind as the inflation vs. deflation debate rages. This WSJ article digs further into the announcement.

Crypto Acceptance corner!

  • Time Magazine is accepting payment in crypto currencies. They are partnering with Crypto.com to enable these payments. More details on this company release.
  • Mayor of Jackson, TN announces plan to allow Bitcoin use within the city and possibly paying employees in Bitcoin. TheStreet.com covers the story.

The mayor’s tweet pushes an equality angle to the adoption.

As always, please reach out if you’d like to discuss any of the points in the 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.

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Crypto taxes, Turkey bans crypto, Bitcoin acceptance, used auto price, vaccines & re-opening, diversifing beyond Bitcoin

Dispatch #11 -2021

April 16th, 2021

Let’s start with crypto taxes as it is traditional tax week. For 2020, IRS Form-1040 specifically asks if you had crypto transactions, illustrating the IRS’ growing focus on digital assets. You are expected to track the cost basis of your coins and report capital gains accurately. Other items discussed in this week’s Dispatch include:

  • Turkey bans crypto transactions
  • “Pay me in Bitcoin” – CNBC’s Jim Cramer
  • Mortgage originator to accept Bitcoin/crypto
  • Headlines juxtapose large banks’ Bitcoin embrace now vs. prior dismissal
  • Used auto prices hit a peak, but subprime auto delinquencies jump
  • Vaccine penetration & re-opening: Data from Israel is encouraging
  • Bitcoin School: Should you diversify your digital assets beyond Bitcoin?  

For a PDF version of Dispatch 11 click here

Crypto taxes

Source: https://www.irs.gov/pub/irs-pdf/f1040.pdf

The IRS is clearly paying attention to crypto assets and one can claim that this focus further legitimizes the asset class. On the enforcement side, the IRS is seeking client records from exchanges as this article  highlights.

Crypto taxes are a relatively new subject, and there aren’t too many subject matter experts. For example, The CFA Institute recently shared this Yahoo Money  video of an EY tax expert. Typically, the CFA institute has its own material, but not on crypto taxes. Regardless, this six minute video is well worth a watch, as the EY expert touches on the basics and some recent IRS actions on crypto assets.

  • You are expected to keep track of your coins’ cost basis even though exchanges/custodians/wallets are unable to because blockchains are decentralized.
  • For active traders, this Benzinga article has a list of firms that track crypto portfolios to monitor your cost basis. I don’t recommend these services for long-term investors.

This is NOT tax advice, so please consult a qualified tax lawyer/CPA for advice.

Turkey Bans crypto currency transactions

This WSJ headline, “Bitcoin payments to be banned in Turkey after confidence drops in Lira” sums up the condition in the country. Bitcoin did drop about 4% on the news, and expect countries with poor financial management to continue to restrict usage.

Bitcoin acceptance is growing

a) Salary in Bitcoin: Nothing further needs to be added to the tweet below.

Source: Twitter

I did hear Cramer live on TV and he was clear that he’ll take his salary denominated in Bitcoin (not denominated in US$ and converted to Bitcoin). I know Cramer is full of hot air, but he does have a powerful platform to transmit his view.

b) Mortgage company to accept Bitcoin as payment.

The Home Loan Expert LLC became the first US mortgage originator to accept Bitcoin as a verified asset and for down payments, as this release from the company explains.

This is a continuation of the Dispatch #10 discussion of the progress on Bitcoin acceptance for large ticket items. To give banks credit, they are no longer reporting clients with crypto to the Financial Crimes unit, as this 2018 story from the UK highlights.

As I conduct my own house search, I continue to discover first hand how digital assets assessed. My two observations to date:

  • I asked both my mortgage broker and real estate broker how underwriters treat crypto assets. Both say they have not been asked that question by a client previously. It’s a single data point but chalk up another point that we are early in the adoption curve.
  • I spoke to the mortgage lending department of a local bank. They require crypto assets to be liquidated and placed in US$ deposits to be considered one’s assets.

Decentralized blockchains do pose difficulties for underwriters. For example, I could well have borrowed the Bitcoin/crypto in my wallet from a parent, and the banks have limited means to verify. I will continue to report on this subject and my key advice is to keep good records of your transactions.

Banks’ changing opinions on Bitcoin 

The tweet below covers material I’ve flagged in earlier Dispatches (#9 – Morgan Stanley &  #7 – JPM & Citi), but I like seeing the contrast in print!

car prices hit record high despite rising delinquencies

Source: Manheim Auctions/Bianco Research via twitter

Source: Forbes article via Twitter

It’s unusual to see this divergence in two data points that are closely linked. Subprime borrowers mainly purchased used autos, so it’s interesting that used auto prices haven’t soften.

Perhaps falling new vehicle inventory due to a chip shortage (see WSJ article) is adding to the price move. Regardless, it’s fair to assume that used car price rise is a transitory effect.

Covid vaccine efficacy & re-opening: Israel is an encouraging leader

There is still a lot of debate over vaccines, virus variants and how quickly life should return to normal. I was delighted to see this chart that shows remarkably low daily new covid cases in Israel as vaccine penetration rose ­— this despite earlier worries about re-opening too quickly as this article in February highlights. The latest news is encouraging if you’d like life to return to normal.

Source: FundStrat, Johns Hopkins, via Twitter

Should you diversify you digital assets beyond Bitcoin?

I get asked this question frequently. It’s a longer discussion which also depends on the client profile. But I’ll leave you with a few snippets below that provide some context on the longer term performance. Most crypto currencies are likely to lose value vs. Bitcoin, and with more than 8K coins are in circulation, it is very hard to pick the handful of winners.

Source: https://twitter.com/jimmysong/status/1381797745292369922

Note: Jimmy Song is what’s known as a bitcoin Maximillialist (someone who believes other assets are far inferior to Bitcoin).

Picking the 4-year performance might be cherry picking the most supportive data. The following reply to Jimmy Song asserts that Ethereum (ETH) has done better than Bitcoin over different time frames.

Source: https://twitter.com/ViktorBunin/status/1381808196990476289

Let’s take the two sets of numbers at face value. I will only point out that there are thousands of new coins that have been created since Ethereum was launched, and few of them have come close to matching the performance of Bitcoin through a price cycle. Most haven’t seen a full cycle, which makes the analysis irrelevant. The key message is that it is hard to find the next Ethereum! Blockchains have winner-takes-all network effects, so unlike retail shopping and Amazon, I doubt we’ll get multiple large (market cap.) blockchains offering the same utility.

Stay safe 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.