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| Exploring the transformation of value in the digital age By Michael J. Casey, Chief Content Officer Oct. 22, 2021 If you were forwarded this newsletter and would like to receive it, sign up here. Sponsored by
A digital asset management industry that has been arguing for eight years that there’s massive pent-up demand among the traditional-investing general public for a bitcoin-backed exchange-traded fund, finally got to prove its thesis this week.
The U.S. Securities and Exchange Commission’s go-ahead for the ProShares Bitcoin Strategy ETF unleashed more than a $1 billion of inflows in less than two days, surpassing that milestone faster than any other ETF in history. But as this column argues, those investors, who seem to prefer exposure to bitcoin via traditional brokerage accounts, are taking a huge hit in doing so, relative to the exposure they could get if they’d simply done what they could always have done and bought bitcoin directly.
Nonetheless, this was an historic week for crypto, not least because the ETF announcement drove the spot bitcoin price through its all-time high. It was a fitting moment for us to celebrate the 50th episode of the “Money Reimagined” podcast, for which we interviewed serial entrepreneur, investor and long-time crypto figure Balaji Srinivasan in a wide-ranging “OG edition” discussion about how this technology will change society.
Have a listen after reading the newsletter.
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A Bum Deal for Investors Rachel Sun/CoinDesk The Securities and Exchange Commission (SEC) greenlighting a futures-based exchange-traded fund for bitcoin has been a boon to holders of the cryptocurrency this week, with bitcoin hitting all-time highs just shy of $67,000 on news of the ETF’s clearance. But let’s be clear: It’s a horrible deal for investors in the fund itself.
Due to a common phenomenon in futures markets known as contango, the manager of the newly listed ProShares Bitcoin Strategy ETF looks likely to incur such significant costs that investors will earn a dramatically lower return than if they’d invested directly in bitcoin. The loss is so large it makes any concerns the SEC had about volatile, inconsistent reference prices for spot-market bitcoin ETFs seem trivial.
In choosing the futures road to an ETF rather than approving a spot market-backed fund, the SEC seems to have chosen the easiest route from a regulator’s standpoint, given that the underlying contracts – the CME Group’s bitcoin futures – are themselves regulated by the Commodity Futures Trading Commission (CFTC).
If it had instead blessed one of the many spot market-backed ETF proposals submitted over the past eight years, it would have needed to approve the prices quoted by exchanges whose bitcoin listings aren’t regulated by either the SEC or the CFTC. Nevermind there are now sophisticated, trustworthy indexes – such as CoinDesk Indexes’ XBX index for bitcoin – that would serve that role perfectly well. It seems the SEC just couldn’t get beyond the global, unregulated world of bitcoin exchanges and the prices they produce. So it punted to a futures solution.
Continue reading this column here.
–Michael J. Casey
Off the Charts El Salvador’s Dip-Buying Payoff When El Salvador announced four separate bitcoin purchases totalling 700 BTC over two weeks in September, it looked like terrible timing because it coincided with a steep drop in the price of the leading cryptocurrency.
I was among more than a few arguing it could send a negative message to Salvadorans, who were already skeptical of their government's all-in commitment to bitcoin as legal tender. I was more concerned about how locals would view the depletion of the government's bitcoin handout, which had initially been worth $30 per citizen. Many are so poor that each dollar is hugely valuable, so I saw the signal of a falling price as a motive for many to cash out before this thing they didn’t understand evaporated.
I was less concerned about the government’s finances, as I figured bitcoin would bounce back. However, the International Monetary Fund, the World Bank and ratings agencies such as Fitch, came out very publicly and said the government’s strategy would create a variety of new risks for El Salvador’s economy.
A month later, President Nayib Bukele, the undisputed face of El Salvador's bitcoin strategy, is looking like a genius – for now, at least. Just look at the chart showing the likely timing of the four bitcoin purchases.
By my back-of-the-envelope calculation, which uses as the time of purchase the half-hour window before each of Bukele’s tweets between Sept. 6 and Sept. 20 bragging about the purchases, the government invested a total of $35.5 million in bitcoin. As of Friday morning in New York, its stake is now worth $44.3 million.
Not bad. Few governments can ever claim a 25% increase in their reserves in just one month.
But does this mean others should follow suit and throw their lot in with bitcoin? Let’s save that for another day.
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The Conversation Shame On You Illustration: Rachel Sun/CoinDesk I often wonder whether this section of the newsletter should be called the “conversation.” The discourse on Crypto Twitter is frequently characterized by ad hominem attacks and self-interested distortions. It feels like we should just call it “Who’s Shaming Who?”
This week’s selection certainly feels like that. But in this case, it’s not Crypto Twitter tribes behaving like self-interested mobs, it’s a non-crypto mob of technology-engaged people who took issue with a sober, well-argued piece by a couple of internet freedom activists discussing the need for crypto to improve its lobbying game.
It started with Electronic Frontier Foundation (EFF), whose official account retweeted the column in The Defiant by Holmes Wilson and Connor Spelliscy. The problem, from the mob’s perspective, is that the EFF is a respected institution, perceived to be battling for the little guy, and crypto does not represent that guy. (This critique seemed to ignore the frequent, mostly uncriticized statements the EFF has made in favor of crypto-friendly regulation.)
Very quickly, critics emerged who claimed to be fans of the EFF, voicing their concern about its support for crypto.
Someone else, lumping all crypto into the ”right-wing” category, saw it as the EFF being duped by exploitative crypto boys. With an earnest attempt to meet the mob halfway, Holmes Wilson offered respectful, measured retorts to many of the criticisms. Sadly, the mob continued to resort to innuendo to discredit the authors. But Wilson kept his calm, suggesting critics look not at what crypto currently is but what it is moving towards, and that no solution to anything is perfect.
Relevant Reads Policy Week The SEC may have approved the first U.S. Bitcoin ETF this week, but many other regulatory issues remain up in the air for crypto.
Washington DC is currently debating what to do about the burgeoning stablecoin market, and there’s a lot of discussion underway about DeFi, CBDCs, ransomware, and a range of other issues. Even NFTs may come under greater regulatory scrutiny soon.
CoinDesk took a comprehensive look at this regulatory picture with “Crypto 2022: Policy Week” this week. Here are some highlights: Freelance D.C. writer Rob Garver looked at how the crypto industry is muscling up on lobbying and advocacy as it prepares to fight its corner.Nik De visited the capital and reported back on the debate about stablecoin policy. Will Gottsegen showed why regulators might take a strict view of NFT fractionalization. David Z. Morris reported on DeFi and speculated on how a Gary Gensler-led SEC might crack down on the sector. Dan Kuhn spoke to Rep. Tom Emmer (R-Minn.), who wants the U.S. to adopt stablecoins rather than its own digital currency. And researchers Edward Oosterbaan and George Kaloudis documented all the countries that already have BTC ETFs.
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