The very fact that the crypto-sphere is hyped in today’s day and age shows that the world is increasingly going digital. Yet, the mainstream view is still predominantly associated with Bitcoin – the first and the most popular cryptocurrency. While it is benign to hold such a vantage point from a layman’s perspective, as an investor, it is an opinion that limits insight and practically drains the entire portfolio.
As many investors are starting to allocate funds to this asset class, this article could guide you through the fundamental knowledge about the crypto-world. However, bear in mind that the market is decentralized and highly volatile. Therefore, while the basic tenets would apply irrespective of the timeframe, some valuations could drastically differ over a period.
For real-time prices and market cap:
What is a Blockchain? And what exactly is Decentralised Finance?
A majority of investors are still confused about the difference between blockchain technology and decentralized finance. Both terms are interrelated but differ in the scope of application in the real world. Blockchain technology is a system that acts as a digital ledger to facilitate transactions distributed across a diverse network of computers. It is basically a system of digitally encrypting and recording information duplicated over an expansive network: making it impossible to hack, alter, or corrupt data while being processed or stored. The technology is extensively used in logistics services, allowing users to keep real-time track of their packages around the globe. The most widely known implementation of blockchain technology is in Crypto Financial Services.
Colloquially referred to as ‘DeFi,’ the sector of Decentralised Finance spreads across a complex array of digital products: from cryptocurrencies to NFTs. DeFi involves a skeleton of blockchain technology to operate a colossal network of shared ledgers. With no centralized authority to verify transactions and manage supply, this area of finance uses complex algorithms to distribute the verification and storage process among users themselves. Due to the surfeit number of operants, rigging the system is rendered almost impossible. Thus, making DeFi one of the pioneering shifts in traditional financial services of modern time.
Bitcoin is probably the best-known example of this vast field of decentralized finance and mass implementation of blockchain technology across countries.
What is Bitcoin? How does it differ from blockchain?
Arguably the most common misconception shared amid the new class of crypto-enthusiasts is that both blockchain and bitcoin are alike. As aforementioned, blockchain is the broader technology utilized by various industries. One such implementation in the finance industry (specifically the financial services industry) is Bitcoin: a digital token exchanged as a means of value over a system of shared ledgers called blocks. Created in the wake of the 2008 financial crisis by an anonymous entity – under the pseudonym ‘Satoshi Nakamoto’ -, the encrypted token acts as a pseudo-currency with a free-float valuation. Traded across a complex platform cohesively structured as a shared ledger system, the value of bitcoin is impossible (by default) to control and dictate.
Participants verifying the transactions – frequently known as ‘Miners’ – use sophisticated computer programs to solve intricate hash functions to add blocks of transactions to the bitcoin blockchain. In exchange, they earn a lump sum of 6.25 BTC. This mechanism of Proof of Work (PoW) is proven to be impenetrable to external influence due to this distributed functionality and vast amounts of energy required to solve functions and add blocks of transaction data. However, it is susceptible to speculation that ultimately fuels the volatility feared by investors. Many elicit a question then: is it worth the risk?
Is it actually risky to invest in Bitcoin? How to avoid that risk?
A fact is inherent to the word investment itself: the more the uncertainty, the more the reward. This quality is not specific to bitcoin but every risky asset in general. Take traditional investors, for instance. These investors – having a risk appetite – invest in Junk bonds: to gain higher than average returns in exchange for the unpredictable nature of a potential default. What makes Bitcoin so unique, however, is its on/off vacillation in the mainstream debate: making a takeoff in value as likely as a dip. When it first began trading in 2009, price swings were limited as the adoption was gradual, and the information was sparse during the early days. However, in recent years, both the adoption and information have skyrocketed. The bitcoin market capitalization breached the $2 trillion mark last year: making it the first non-corporate entity to hold such prohibitive valuation. Governments have started adopting the coin as an official means of value exchange. And even renowned Investment Banks and hedge funds are offering services in digital tokens.
Despite slipping by 40% from the record-high price of $69,000 in November, bitcoin is currently trading at a support threshold of $42,000 – still up by almost 500% since the end of 2019. So is it risky? Absolutely it is! Compared to other assets in the market, it is a riskier store of value: in contrast to the popular notion of crypto fanatics. However, when comparing risk-adjusted returns, bitcoin shows outperformance relative to other assets. For example, bitcoin’s risk-adjusted return since September 2020 has been more than twice the performance of the S&P 500 index. Over the same stretch, Treasury bonds have posted negative returns while commodities have fared far worse. The same trend holds true for multiple periods – whether the start of 2015 or the beginning of 2020 – where bitcoin has outright trounced the traditional investment streams.
However, the astronomical returns flowed to investors who stomached the churn of massive decline preceding the surge in value. Whether it was the crash of 2017 – when bitcoin tumbled by 80%. Or the slump of 2021 – when China’s mining crackdown led billions of dollars in liquidity squeeze to push the market to a halt.
In short, it is the scheme of time, temperament, and a thrill for greater risk that is keeping the bets alive. Therefore, for greater returns, a temporal loss should enjoin long positions instead of divestiture.
So what is the optimum strategy to invest in the crypto-sphere? And when should it be implemented?
The year 2021 was the most unstable year for the crypto-world. The Non-Fungible Tokens (NFTs) saw a sharp increase in popularity while a slew of cryptocurrencies lost more than half of their valuation before a skyrise. However, 2022 is about to change the dynamic to a greater extent. As the US fed prepares over its hawkish tilt with talks over bond taper and rate hikes, the valuation of cryptocurrencies – particularly bitcoin – is expected to plunge in the following months. According to Crypto gurus, the cryptocurrencies would remain under pressure as the fed reduces its liquidity injections. Further, as regulations get tightened by the SEC, the popularity could take a hit as well.
Thus, my advice is to wait out the year 2022 as bitcoin would probably end 2022 below the $20,000 mark. If, however, your investment is geared towards the broader world of cryptocurrencies in general, my advice would differ. My approach would be to include bitcoin but diversify your allocations. My advice would be to allocate weighted portions of your portfolio to similar tokens like Ethereum and Solana. While these tokens move in tandem with the price swings in bitcoin, their operation hasn’t reached such a meteoric level of scale in the investor community. Instead, their adoption has been limited compared to bitcoin. And therefore, they offer more upside in terms of growth without steep price swings. Ethereum, for instance, currently trades around $3,000 and generally deviates in a $500-$1000 window in the medium-run.
If you are looking for more ingrained diversification, I advise some allocation of funds in the metaverse: more closely tied to the revolutionary side of NFTs. Purchasable tokens like Sandbox (SAND) and Decentraland (MANA) would serve as a lucrative option in the portfolio. These NFTs are available on most crypto platforms and have offered steep returns over an extensive period of time. Moreover, alongside a motley of cryptocurrencies (weighted appropriately), these could also work as a hedge to bets in bitcoin because of high liquidity and profitability: making the portfolio optimum in terms of longer-term technical bets.
Ultimately, as an investor starting to invest in this strata of assets, you need to have a long-term approach, a stomach for risk over an extended period of time, and an astute eye for market regulations and announcements to derive appreciable gains. Remember, there is no magic or free lunch when investing. The offerings have innovated, the platforms got digitalized, but the basics are the same – patience and diversification.
Metaverse Leading the Gaming Revolution: Are NFTs Truly the Future of the Industry?
Some call it the new tech boom, while others are wary of long-term implications. Regardless, the metaverse is quickly shaping into a phenomenon straight out of a science fiction novel. A virtual world that allows you to create customizable avatars, design and stake ownership of digital assets, or simply conduct business in a fantastical space. There is hardly any limit to the extent of its utility. Metaverse is getting touted as a revolution in how we perceive the internet; call it Web 3.0, if you may. However, while the tech giants are all set to reap billions off this fledgling concept, not all stakeholders are on board. The Gaming Industry appears to be leading the defiance as the mainstream appeal of the metaverse dangles in uncertainty – much like the broader crypto market.
According to a research firm, the metaverse marketspace – including games, gadgets, and online services – cumulated over $49 billion in 2020. Further, it is growing at a rapid pace of 40% annually. Clearly, this ‘evolution of the internet’ has attracted the magnates from various walks of the tech industry. Notably, the Gaming Industry is leaning towards the metaverse to offer users a distinctive virtual experience. The concept, however, is not new – just a little unorthodox. For decades, gamers have experienced platforms that serve as virtual reality hosting customizable avatars. Users have interacted in the digital setting, traded collectibles, and even developed arsenals of simulated treasures in the gaming world. Today, this innovative step is a leap towards Blockchain – a decentralized mechanism to interact and trade in a virtual setting. Understandably, the value of items fixed in a traditional format could now vary in a blockchain.
Ubisoft – a French video game publisher – recently announced its foray into Non-Fungible Tokens (NFTs) – digital assets designed to track the proof of authenticity and ownership – through its blockchain platform called ‘Quartz’. An experimental additional to their popular game “Ghost Recon Breakpoint,” the platform offers players collectible virtual items – like helmets, clothing items, accessories – in the form of NFTs. According to a spokesperson of Ubisoft, this move allows users to collect and trade digital assets on the Blockchain. A similar venture was announced by GSC, a Ukrainian game developer, allowing crypto-based assets to customize in-game characters. While these moves are a transformative step towards the ultimate incorporation of blockchain technology, they have met widespread resistance from the gaming community. The anger stems from a widely shared belief that the gaming companies are now moving to NFTs to ‘squeeze profits’ from their games instead of improving the gameplay. “It is so obviously being done for profit, instead of just creating a beautiful game,” said an enraged gamer protesting on Reddit. Companies like Square Enix and a dozen more are planning a similar move towards NFTs in near-term. However, the industry is unarguably divided.
Major players in the tech industry are leading the road to the metaverse. A spotlight event is the attention-grabbing decision to rebrand Facebook as ‘Meta’. While market leaders like Apple and Google are honing their own devices to jump the bandwagon, not all players are on board. Notable entities have taken a decisive front against metaverse – especially in the gaming industry. For instance, Phil Spencer – Microsoft Xbox Chief – termed the efforts to bring NFTs to the gaming world as “exploitative”. For many executives, the issue is not just the ‘grab-cash’ model of this new transition. Instead, the fear of regulation weighs heavily against the metaverse to expand into mainstream reality. While micro-transactions have an implicit cap on the value exchange between the users, a move to NFTs opens the door to a broader platform for commerce and – inadvertently at least – speculation. Thus, regulatory forces would soon catch up with this tech boom: changing the gaming industry into a regulated exchange-like platform in the long term. “Rushing into offering NFTs without fully evaluating it could lead to serious damage,” said George Jijiashvili, principal analyst at Omdia.
Gaming studios like Ubisoft and GSC are relentlessly getting pushed to abandon their aspirations of a crypto revolution in the gaming industry. While for these studios, NFTs are a “premium (yet optional) addition” to allow gamers to earn by selling unique digital assets, the users are convinced that it’s nothing but a Ponzi scheme. Nonetheless, it is patent that even the industry is in two minds. And despite a conceptual revolution, NFTs are still in an embryonic stage: presumably inflated – via speculation – beyond their actual value. Hence, while a move towards metaverse might be the ultimate future of the tech industry – like the internet in the 90s -, the backlash is currently forcing the companies to backtrack for now. And bidding profitability against innovation – I think the choice is clear!
The Crypto Regulation: Obscure Classification Flusters Regulators as Crypto Expands into Derivatives Markets
Crypto regulation has long been a topic of debate in policymaking circles. As the white-hot market continues to soar in popularity and adaptation throughout the world, lawmakers in the United States are scouring common ground to comprehend the complex jargon and mechanism of the crypto sphere. Potential policies should be scrupulous yet inviting for the digital revolution to fully unravel in this modern financial reality. And with the rapid expansion of cryptocurrencies in the notoriously arcane derivatives market, lawmakers are expediting efforts to harness the outpacing development with a proper framework before another financial crisis overwhelms the economy. The question at the forefront is a dilemma: how to categorize the crypto offerings in a traditional sense?
The Bitcoin ETFs were all the rave when the Commodity Futures Trading Commission (CFTC) – the regulator of the derivatives markets – flashed the green light to the bitcoin futures to start trading in 2017. Yet, a debate sparked in terms of the broader classification of the crypto market. Would you define cryptocurrencies (tokens like Bitcoin and Ether) as securities or commodities? NFTs are digital products. By that definition, cryptocurrencies ought to be too. However, securities are passive investments in an enterprise with the expectation of returns (US Securities Act of 1933). Commodities are goods/services that entail a future delivery contingent on a contract (US Commodity Exchange Act of 1936). Neither of these definitions fully contemplate the concept of cryptocurrencies or NFTs. Lawmakers, regulators, and even investors are thus at the crossroads over this matter. An important decision is at stake over appropriate classification: whether the US Securities and Exchange Commission (SEC) regulates these tokens or should the CFTC take the helm.
According to a rare bipartisan stance, both the Democrat and the Republican representatives lean towards the class of commodities, calling on the derivatives regulator to reign in controlling cryptocurrencies. In a recent letter to the Chairman of the CFTC, the bipartisan members on both the Senate and House Agriculture Committees have called on the ‘critical role’ of the derivatives watchdog in regulating these digital assets. Noteworthy Senators like Debbie Stabenow and John Boozman wrote: “It is imperative that customers stay protected from fraud and abuse and that these markets are fair and transparent.”
Reflecting a similar sentiment, Rostin Behnam – Chairman of the CFTC – stated that his powers are mostly limited to overseeing derivatives. The Agriculture Committees of the Congress oversee the CFTC regulating much of the expansive $610 trillion worth of the global derivatives market. Yet, he pointed out that with explosive growth in digital tokens, Congress ought to do more than merely direct the CFTC. It should also ensure that the CFTC has the tools and jurisdiction to function at its fullest potential. During his confirmation hearing before the Senate Agriculture Committee, Behnam stated: “We’ve been one of the few cops on the beat of limited statutory authority related to anti-fraud and anti-manipulation.” He also expressed his firm opinion to lawmakers regarding the “expansion of the authority of the CFTC.”
The jurisdiction, however, is contended by the SEC: claiming that the virtual currencies are securities; thus should fall in the purview of the SEC. The highlight of this supposed clash over regulatory authority is Gary Gensler – Chairman of the SEC. He has garnered attention for his stringent views rivaling the CFTC’s friendlier approach towards the crypto sphere. While Gensler classifies bitcoin as a commodity, he has confusingly refused to address the classification of Ether either as a commodity or a security. Nonetheless, the time is elapsing as players like Coinbase are rapidly expanding into the derivatives market, further blurring the line between traditional and virtual markets in the process. Until now, many of the US exchanges were skeptical from moving into the derivatives market due to regulatory uncertainty. Their global counterparts like Binance dabbled in leverage without the regulatory oversight feared by the US exchanges. However, more and more are now expanding into the fast-growing market. Meanwhile, the White House is weighing an executive order to draft a blueprint for regulating the market across the government. All while the broader classification is still questionable.
Whether to catalog digital tokens as commodities or securities, this debate is futile for institutions like Coinbase and FTX. These crypto exchanges lay the groundwork in diverse markets while operating the spot market. While the regulators are scrambling to define new digital phenomenons, these exchanges are preparing to dominate the bearish trends via diversification. And while the government is still envisioning tighter frameworks, these exchanges are hedging against the volatility that brings infamy to cryptocurrencies. The lawmakers should understand that while their fears of fraud and manipulation are justified, collaboration with these exchanges might actually solve this dilemma. The head of Coinbase Institutional, Brett Tajpual, hinted at such a notion: “We want to work with the regulators to make sure everything is in position to launch as early as we can.” He was talking about the recent acquisition of FairX, a CFTC-regulated crypto futures exchange.
Behnam also admitted that while the CFTC controls the $2.7 billion worth digital asset market, a strong collaboration with the SEC would be beneficial in regulating an industry of such colossal size and appeal to retail and institutional investors alike. The crypto expansion would continue to entice some, disenchant others. The right approach is collaborative engagement. Not just amongst regulators but on a broader scale, including these crypto exchanges and maybe even retail traders. The crypto sphere is still perplexing to lawmakers, these crypto visionaries might be the right tool for the regulators to maneuver through the complexities without hindering the financial revolution that is afoot.
The Bitcoin ETFs: An Instrument to be Reckoned With
The tumbling bitcoin is hardly a piece of news anymore; the peaks and troughs are almost inherent to digital currencies. With tightening regulations and growing institutional skepticism, the bitcoin ETF was a revolutionary offering. Pent-up demand was awaiting an alternative passage to gain bitcoin exposure without actually owning one. Yet, two months down the line, it seems barely any different from the sharp movements in the broader crypto market itself. The question stands: what would be the ultimate ingress of cryptocurrencies in the mainstream world of investment funds.
The ProShares Bitcoin Strategy Exchange-Traded Fund – listed under the ticker ‘BITO’ – was launched as the most successful publicly-traded fund for any issuer on the New York Stock Exchange (NYSE). Exhibiting a prohibitive turnover of over $1 billion (plus an additional $1 billion in assets) in merely two days of trading, BITO was a dream debut for a fund solely based on pre-seed investments. While bitcoin continually vacillated in valuation, the BITO ETF clearly underscored the blooming demand for bitcoin exposure in the market of risk-averse institutional investors. It was the perfect bypass for investors looking to emulate movements in bitcoin without direct exposure to the volatile market of cryptocurrencies. However, two months forward, the BITO ETF has registered another record: from the most lucrative debut ever to the worst-performing ETF.
In two months, the fund has dropped by 30%: making it one of the ten worst performers with respect to returns after a public listing. Over the same timeline, even bitcoin has lost roughly 34% in value. While the analysts still believe that this roadblock isn’t necessarily a pitfall to the long-term transition of digital currencies to the world of investment funds, the year 2022 doesn’t really exude optimism either.
Since the start of this year, bitcoin is roughly down by 10% despite broader acclaim from investment banks and even multiple governments around the globe. Falling in tandem, BITO ETF is down nearly 9% this week alone. To gauge the slipping popularity from its apex, in the past two weeks of this year, BITO ETF has failed to report net inflows for any single day. According to Athanasios Psarofagis, an ETF analyst for Bloomberg Intelligence, the timing is unfortunate, yet not unforgiving. He stated: “You can see some other ETFs had a rough start out of the gate but can still raise assets.” Thus, the prime aspect is timing. As the Federal Reserve gears to taper bond purchases and hike interest rates, the broader plunge in cryptocurrencies is driving the worsening performance of the ETFs. While the fund is based on bitcoin futures contracts – a bitcoin derivative instrument traded on the Chicago Mercantile Exchange (CME) – the negative movement in the cryptocurrency itself is dictating the downfall in the futures: ultimately pushing the ETF into regression.
All is not gloomy for the world of Crypto finance. Recently, a renowned US-listed ETF – named WisdomTree Managed Futures Strategy Fund (WTMF) – allocated an estimated 1.5% of the mandated 5% of its assets to bitcoin futures. The firm reasoned that bitcoin’s ‘potential for absolute returns’ and ‘a unique role of a diversifier to traditional asset classes’ makes it an attractive asset. Their website added: “Our objective is to provide investors with this exposure [Bitcoin futures] in a risk-controlled manner via a systematic long-flat trend-following strategy that reacts quickly to changing market conditions.”
Ultimately, while the performance of ETFs is disappointing and regulatory frameworks are still restricting funds from directly linking to bitcoin instead of the futures, roadblocks have clearly not dented the growing desire for bitcoin exposure. And, in my opinion, this lack of correlation and unsusceptible swing in valuation would make a fundamental proposition for other institutional investors to follow suit in the forthcoming years: gradually shaping a digital revolution in the world of investment funds.
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