New Bitcoin ETP Just Launched That Generates Yield

To investors,

The finance industry is built on capital appreciation and yield. Investors scour the world to find assets that will go up in price or assets that will give them income. That is what it all boils down to when investing.

Each investor has a different view on which strategy to pursue. Warren Buffett is famous for avoiding assets that don’t produce cash-flow. Other investors seek capital appreciation over anything else.

But what if an asset could be highly asymmetric, while also producing an attractive yield? This would be the holy grail of financial assets.

Over the years, investors have tried to put bitcoin in this bucket. Various companies have come and gone that offered yield on your bitcoin. At times, the yield was very high and quite tempting.

Unfortunately, these yield-oriented bitcoin offerings required you to give up your private keys, which meant that you no longer had control of your assets. Someone else held your keys and you had to trust them to give the bitcoin back when you wanted. As we saw with different companies in 2022, this was a painful lesson for many people including myself.

But rehypothecation is how traditional finance works for yield-generation. It just goes against the point of bitcoin as an asset that was designed to be held via self-custody.

So how can the pursuit of yield be solved for bitcoin holders?

There is a new experiment called Core DAO that is taking parts of bitcoin and ethereum to create a new hybrid technology solution. I won’t bore you with the technical details, but you can read those here if you would like.

What you need to know is that the Core team has created a way for individual bitcoin holders to generate yield on their bitcoin without surrendering their private keys. The way this is done is via the timelock feature on the bitcoin blockchain. Most people don’t know this, but every bitcoin transaction has the option to create a timelock or not for the bitcoin that is being sent. Majority of people don’t use the functionality because they want immediate access to the bitcoin.

In the case of Core though, users are essentially using the timelock function to have the opportunity to generate yield. The minimum amount of time is one week and there is no maximum amount of time.

While bitcoin is being timelocked, Core is working with bitcoin miners to recycle hash from transactions to secure the new hybrid tech. As of this week, approximately 50% of bitcoin’s total hashrate is participating in Core’s system.

Now this system is quite technical and it can be hard to understand exactly how to participate. I am fairly well versed in these technologies, yet find using the more technical products difficult at times. So it would make sense for financial organizations to figure out ways to offer exposure to various strategies in a familiar interface that makes it easier for investors to allocate capital.

That is where DeFi Technologies and Valour Asset Management comes in. As I wrote previously, I am a shareholder and believe the company is drastically undervalued. Their strategy is to find unique assets or strategies that they can offer in an ETP format.

Yesterday, Valour announced the world’s first ETP that allows investors to earn yield on bitcoin. It is called the Yield Bearing BTC ETP. This is being accomplished via the Core technology. Valour/DeFi Technologies are going to contribute approximately $200 million to the fund and investors will be able to start buying the ETP shortly.

I find this development fascinating because it attempts to solve a very difficult problem — hold the private keys to an asymmetric asset, while simultaneously earning yield.

The problem is so hard that most people are not willing to experiment with potential solutions. But if the problem is solved, then there is billions of dollars that will be allocated to bitcoin from yield-seeking investors. Remember, the debt market is significantly larger than the equity market for a reason.

Before I let you go, I want to emphasize that I consider Core and the use case they are pursuing as an experiment. It appears to be an experiment that is working well, but it is important to exercise caution when doing anything with your bitcoin. Whenever I want to try something new, or participate in an experiment, I am only usually willing to do it with a very small percentage of my portfolio.

With that said, we need as much experimentation as we can get. We need to solve problems. We need to build new financial infrastructure. It appears we are making progress. But there is still plenty of work to do.

Hope you all have a great day. I’ll talk to everyone tomorrow.

-Anthony Pompliano

Chris Dixon is the Founder & Managing Partner at a16z crypto, and the author of “Read Write Own: Building the Next Era of the Internet.”

In this conversation, we talk about the original promise of the internet, what went wrong, lack of control from companies in the digital world, how blockchains and crypto can change that, bitcoin, ethereum, how crypto will interest with artificial intelligence, regulation, and more.

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