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Crypto Insights

The Bitcoin ETFs: An Instrument to be Reckoned With

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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.

The author is an active current affairs writer primarily analyzing the global affairs and their political, economic and social consequences. He also holds a Bachelor’s degree from Institute of Business Administration (IBA) Karachi, Pakistan.

Crypto Insights

The Subtle Dominance of Stablecoins: A Ruse of Stability

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Digital tokens are nothing new in 2022 as the crypto market continues to fold into the traditional financial sphere. The debate over environmental hazards, regulatory policies, and technical complexities defined yesteryears. But none of these aspects succeeded in putting a damper on the popularity of the crypto market. Sure the price of bitcoin has been in a pitfall since early November. But it is has maintained its mark regardless of the skepticism. Countries continue to adopt bitcoin as a means of exchange while the crypto offerings expand; venture from derivatives market to the real estate sector. I admit, it is a rollercoaster of information; it is hard to sieve relevance from all the FUD out there. Yet, while the mainstream focus remains fixated on the flag-bearer offerings like bitcoin and ether – the two leading crypto tokens – a section of crypto continues to thrive and circumvent the hype to an extent. Stablecoins – digital tokens pegged to other assets – continue to pace adoption: almost matching the frontrunners of the crypto market.

The acceptance of stablecoins has surged in recent years. These tokens are designed for stability and are usually pegged to stable assets – like the US dollar – to maintain value over time. Stablecoins are a sharp contrast to volatile offerings like bitcoin. Over the past few years, a motley of cryptocurrencies have morphed into mainstream markets: Dogecoin, Shiba Inu, and Solana (SOL) – to name a few. However, the inherent volatility has remained a notable drawback across the range. Perversely, stablecoins maintain their value by underpinning over a stack of safer assets – usually based in traditional financial markets. Today, dozens of stablecoins are in circulation with a combined market valuation of $154 billion. While some stablecoins peg to fiat units – like USD Coin (USDC) pegged to the US dollar – it is not a thumb rule. Many tokens get pegged to commodities, gold reserves, and bonds. The basic premise underscores a diverse mix of liquid assets reserved to offer digital coins circulated across blockchain networks. Some issuers even peg stablecoins to cryptocurrencies – conflating the safer and riskier crypto markets.

The outright utility of stablecoins is obvious: trade via crypto exchanges without risking a downturn in value. Moreover, stablecoins can bypass the traditional payments infrastructure while avoiding volatility in pricing. Thus, these offerings can (at least in theory) speed up cross-border transactions, eliminate transaction costs associated with traditional banks, and allow traders to divert transactions in the crypto world without the fear of volatility. All the utilities mirror the benefits of a Central Bank Digital Currency (CBDC); without the centralized system and regulatory oversight.

Stablecoins pegged to crypto-assets like bitcoin or ether are interestingly not volatile in the short run. To avoid compromising stability, the issuers maintain a collection of crypto assets that outweigh the circulation of their tokens. Think about a central bank holding reserves of gold to back its fiat notes in the money supply. Since last year, stablecoins have impressively edged out popular cryptocurrencies in cumulative value. Tether (USDT) – the most popular stablecoin – is now behind just bitcoin and ether with a market cap of $78.5 billion. More than 69 billion Tethers are currently in circulation: at least 48 billion issued in 2021. The USDC recently crossed the $44 billion market cap to claim the fifth spot in crypto rankings while replacing Solana. It is also noteworthy that even the sharp selloff in cryptocurrencies since November has done little to dent the appetite for stablecoins. According to data from CoinGecko, BitPay Inc – one of the largest crypto payments platforms – reported a downfall in payments via popular cryptocurrencies. The use of bitcoin dropped to 65% payments from 92% in 2020. However, the stablecoins accounted for 13% of the total payments processed – barely trailing 15% ether purchases.

The main element supporting such exponential acceptance is stability over volatility. While bitcoin and ether – alongside similar crypto tokens – are popular speculative assets, the store of value is a precarious aspect: considering the steep price swings in recent months. Conversely, stablecoins are relatively stabler in value; easier to use in cross-border payments such as remittances and freelance incentives. Investors predominantly want to hold onto the popular cryptocurrencies to gamble a price hike instead of spending. According to data from Glassnode Studio, there has been a steady transfer of bitcoins from short-term to long-term accounts – ‘Hodlers’ as referred to in the crypto lingo. These “staunch bitcoin believers” maintain a strong base of hodlers who are unlikely to sell their holdings – even during a selloff.

Thus, despite leverage liquidations since early November, bitcoin prices have been relatively range-bound. The crypto industry is shaping into a bifurcated market – mainstream cryptocurrencies (like bitcoin and ether) for speculative investments and stablecoins (like USDC and USDT) for means of transaction and general decentralized payments. As crypto companies and exchanges continue to expand, transactions are growing – popularising stablecoins in the process. Albeit variance in value avoided, is the risk entirely off the table. The regulators surely don’t think so!

The surge in usage of stablecoins has pestered lawmakers for months. According to regulators, growing acceptance is problematic – since large amounts of dollar-equivalent coins get regularly exchanged without any supervision of the US banking system. It opens a route to illicit financial transactions, fraud, and money laundering. Jerome Powell – Chairman of the Federal Reserve – recently addressed the US Congress, stating: “They [stablecoins] are like money (market) funds; they are like bank deposits growing incredibly fast but without appropriate regulation.” The front-running issue stems from the concerns around the 1-to-1 parity of stablecoins. In theory, issuers of stablecoins maintain reserves of safe assets to back their coin circulation. But in reality, however, these reserves are diverse in nature – sometimes riskier than initially implied. Tether, for instance, maintains its asset reserves in US dollars, T-bills, and corporate bonds. However, a Bloomberg investigation into Tether revealed that billions of dollars in reserves also include short-term loans to Chinese companies – activities money market funds avoid due to federal regulations. Tether further accumulates a part of its asset reserves via loans to crypto companies, backed by bitcoin as collateral. While Tether vows that majority of its commercial paper has high grades from reputed credit-ratings firms, most of these supposed “low-risk loans” were never marketed to customers when launching the USDT. Thus, a sharp fall in bitcoin prices (like the 45% drop in April 2021) or bankruptcy of a few such Chinese companies could risk a default on loans; a subsequent squeeze in liquidity and a market-wide panic could trigger a bank run. These risks got underlined when regulators asked for jurisdiction over the highly decentralized market of stablecoins – and the broader crypto industry.

Today, the growing market of lending stablecoins further complicates matters. In periods of high market volatility, investors use stablecoins as leverage to speculate on other assets – like bitcoin. Lenders could easily earn returns ranging from 10% to 19% from loans as participants collateralize their holdings to speculate. This borrow and lending market inadvertently links the speculative markets to the safest crypto offerings. For instance, lenders could easily condense their reserves to 95% (even 90%) worth circulation during bouts of bullish sentiments in the crypto market. Without any regulatory supervision, issuers like Tether could dilute their reserve holdings without any penalty: all while the market assumes a 100% backing. Now imagine if Tether – with $69 billion in assets – suddenly faces an abnormal uptick in withdrawals – customers willing to exchange for US dollar. Lack of reserves could quickly spark a liquidity crunch. Even an intimation of panic could push the markets into a financial collapse. Such an occurrence would transcend borders since stablecoins have heavily expanded into cross-border payments. Thus, a financial crisis could overwhelm the global economy – because markets dealing in billions of dollars in transactions are without regulatory guidance.

Hence, while stablecoins are stable relative to their notorious counterparts in the speculative crypto markets, the sharp criticism of regulators is justified. The lawmakers are pushing regulators – including the Federal Reserve, the Treasury Department, the SEC, and the CFTC – to police these stablecoin issuers in a manner synonymous to banks and money market funds. Alongside tight scrutiny and constant supervision, robust capital requirements are also debatable. Federal investigations are already underway to disclose the liquidity positions of Tether despite a slew of assurances. Ultimately, lawmakers – even regulators – perceive these stablecoins as offerings posing a systematic risk to broader financial stability. Such regulatory steps could gradually dilute these intrinsic shortcomings associated with stablecoins. However, the decentralized nature of these coins would be difficult to justify amid a raft of legislative rules.

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Crypto Insights

The First Crypto Mortgage: Bitcoin Continues to Rapidly Expand Across the US Markets

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It seems like yesterday that the Bitcoin Futures got approval by a US regulator. The subsequent bitcoin ETFs were the talk of the town in 2021 – and they didn’t disappoint (at least initially). While the move to the derivatives market got equally hailed as dreaded, the ongoing diversification in the crypto industry amid a price stagnation appeals as a natural course for the market. Another touted shift was the expansion in the real estate market, though the starting point appeared dismal. For instance, United Wholesale Mortgage – the second-largest US mortgage lender – announced a move to crypto payments last August. However, despite a resounding response from customers, the company just scrapped the idea shortly afterward. The regulatory uncertainty alongside market volatility – the two main culprits. Regardless, the tide is moving in favor again as the first bitcoin mortgage offering was announced on Tuesday: confirming that while the regulators are lagging in drafting a framework, there is no lag in this crypto revolution.

Milo – a real estate fintech company – announced the launch of the world’s first crypto mortgage: enabling borrowers to leverage their bitcoin holdings to buy real estate in the United States. It is the first time that a brand new asset class (if you can even call it) is intermingling with arguably the most established investment avenues in the US. Josip Rupera – CEO of Milo – stated that customers could obtain bitcoin-backed loans by using their bitcoin holdings as collateral for purchasing a property. Traditionally, the clients had to sell their crypto stack for a down payment. In contrast, Milo now allows US citizens and foreigners to qualify for a US-based mortgage based on their BTC holdings. The company attested that the crypto mortgage would be available early this year: owing to “a large waitlist” for the offering – underscoring the appetite for a crypto-backed mortgage in investors.

Milo (a licensed lender since 2018) also specializes in crypto loans and other traditional mortgage assets. While the specifics are unclear, Rupera clued to a similar mechanism as a crypto loan to be exacted over the crypto mortgages. As per his statement: “Milo’s clients will be able to pledge their bitcoin to purchase property and finally qualify for a low-interest rate 30-year crypto mortgage.” The company clarified earlier that ‘no dollar down payments’ would be required to finance the mortgage: making the procedure faster and efficient. However, an obvious question pops up again: what about the sharp movements in the price of bitcoin acting as collateral?

A mortgage is based on the collateral. Once the bitcoin slips in value, so would the collateral. This problem sounds eerily familiar! The financial crisis in 2008 stemmed from the real estate market as the bursting housing bubble plummeted the home prices vis-à-vis the value of the collateral for the mortgages that subsequently went under. However, the financial market has since come a long way – and so have the mechanisms in place. Similar to other crypto loans, the crypto-mortgage would be launched with a margin-call component. For instance, a purchase of property worth $1 million would require the borrower to pledge – through a third-party custodian – at least $1 million worth of bitcoin. Milo would then underwrite the customer, evaluate the property, validate other aspects of creditworthiness, and ultimately facilitate a successful transaction. If, however, the crypto drops in value, the borrower would be subject to the deficit amount. Milo would allow the borrower to pay in fiat currency or pledge more crypto to adjust the margin account to its minimum maintenance margin i.e. $1 million. The mortgage rate adjustments would follow the same process. Today, the margin-call component is common in traditional mortgages, and Milo currently serves crypto loans – based on a similar transaction mechanism – to applicants from at least 63 countries around the globe. However, the evaluation procedure is still not explicitly defined, making the process tricky – given foreign applicants with no US-based credit history could also apply. Thus, the offering still requires clarification from a regulatory vantage point.

Nonetheless, this bold step marks a much-awaited move of crypto to the mortgage market – an ironic conflation of the riskiest and the safest (arguably) asset classes. According to Rupera, the idea of a crypto mortgage was in work since last year. The goal was to allow crypto holders to bypass the complex hassle with traditional banks and lenders, which barely consider crypto as an asset class. Instead, the company aimed to offer an alternative route to buy real estate without the opportunity cost of selling bitcoin that may eventually skydive in value. This “groundbreaking” offering – as one bitcoin hodler termed it – not only secures the bitcoin holders from losing their holdings but also protects them from inadvertent consequences like taxes on capital gains and complicated paperwork. Ultimately, the risk is inherent; that doesn’t seem to deter the broader market. Instead, innovators are expanding into diverse markets to spread the risk of volatility. Whether those markets dilute the crypto risk or the risk seeps into those markets – only time will tell. In the meantime, Milo estimates that the crypto mortgage market could be worth tens of billions of dollars soon. To put things into a wider perspective, the investors would be able to hold their bitcoin stacks (‘diamond hands’ as they call it) while paying off their mortgages. What better way to have your pie and eat it too!

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Metaverse Leading the Gaming Revolution: Are NFTs Truly the Future of the Industry?

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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!

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