This week in Crypto: July 1, 2022

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Well, hello everyone. It’s Friday, July 1. It’s time for this week in Crypto. I’m Dave Weisberger, CEO of Coin Routes. And let’s get to it.

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There basically are two huge stories that have been developing over the week. One is the ongoing credit implosion among lenders and the attempts to rescue some of the lenders. And the other was the SEC once again denying Bitcoin spot ETF applications. I can rant about the latter for a long time, but the fact of the matter is their rejections are at this point belong in the theater of the absurd. The argument is blah blah blah, manipulation, blah blah blah, risk, blah blah blah, no oversight except for the simple fact that they’ve already approved Bitcoin ETFs for using futures contracts as a basis.

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And those future contracts are 99.99% correlated to the same markets that they’re claiming are manipulated. In other words, there is literally no benefit towards approving a futures ETF rather than a spot ETF, from a manipulation point of view. If anything, it’s exactly the opposite. I had an email, actually a LinkedIn exchange, with a friend of mine from Solidus Labs, who make some very good points about the need for the industry to embrace more and more surveillance, to be able to make the trading of Bitcoin and other cryptos safer or at least free from obvious manipulation.

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And while I agree with him that that is the direction the industry should go, is going and moving that way its own, it doesn’t mean that the current state of the industry isn’t better than many approved ETFs. I’ve already explained why the futures ETFs in many cases and in many times explain why it’s inferior to a spot ETF. But the fact of the matter is that the CME futures which they’re based upon are not 24/7, meaning those markets that market is easier to manipulate. There also are triggers and other circuit breakers in those markets which potentially make it easier to trade against during significant volatility events, but the fact is that they are based on the same prices. The difference by a futures back ETF, though, is that there could be mismatches upon expiration. You’re taking what’s called basis risk, and that can be substantial. Not to mention the fact that spot ETFs generally outperform because of lower management fees. And the fact that you can hold the spot without any degradation due to basis means that you’re not taking those risks means that you’re getting a better overall return. Plus, in this particular case, there’s the actual issue with Grayscale, who, if they were able to make GBTC into an ETF, means that investors who are currently losing substantial amounts of money, because it trades at a discount, could get their money out flat to where bitcoin is now. Obviously, it could trigger some selling in bitcoin.

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There’s lots of things that could happen, but what is true is those investors are being harmed to the tune of billions of dollars and the SEC doesn’t care because they only care about power. And the reality is, the only reason to disprove a Bitcoin ETF is because it’s the only thing they can hold over, whether it be Congress who is deciding on the Loomis Gillibrand bill, or the rest of the industry in order to use it as a hammer to say, do this, because we want you to do this. The truth of the matter is, there is no viable reason. I checked this morning and just looked at on coin route software where the bid offer spread for several million dollars of Bitcoin would be, and actually this morning, what would be a full creation unit for most ETFs are trading at less than a 20 basis point spread for a couple million dollars of Bitcoin. Now, that compares to significantly wider spreads to the underlying of many equity baskets and certainly significantly more transparent and liquid than would be for any of the spot underlying precious metals or other commodity ETFs.

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So in short, we’re talking about a market that is arguably the most transparent on the planet because of the blockchain and because of free market data at depth from every exchange being denied when others are being approved. It also should go without saying that I’m pretty sure it was approved. There’s even a negative ETF, an inverse ETF approved based off of futures for Bitcoin. So the SEC is allowing that to random that speculation, but not allowing actual holders to hold BTC safely in their brokerage account. So that was news piece number one.

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News piece number two, the ongoing saga of the credit crunch in crypto. I can’t do nearly as good of a job in this as Arthur Hayes did in his most recent Medium post. I would heartily recommend people reading that he describes what’s going on, but the two salient points he made that do bear repeating are one, that the actual D5 protocols that involve lending which have very specific over collateralization, not under collateralization requirements, compound and Ave and Maker have all weathered this storm rather well. The protocols have functioned well and done so without any of the human mistakes that were made by lenders that we all know and people are talked about, and we’ve seen right now, FTX, according yesterday, supposedly is buying for $25 million, which is basically residual couch cushion change compared to the valuation of BlockFi from literally six months ago.

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In that particular case, we don’t know what the hole in the balance sheet is, we don’t know which of the ongoing businesses that will ultimately keep going. But the reality is the idea of centralized lending platforms which make mistakes and which allow uncollateralized loans to go out the door. I doubt FTX will take that approach. So my guess is there’ll be a serious refocus on the part of Blockfly, as part of FTX, but we will see. There’s been revolving credit lines given to Voyager and we still don’t have any information on other of the lenders of what’s going on.

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So the real question in the crypto market is how much leverage is still in the system in order to fuel downside moves. And it looks like from the last couple of days that we’re starting to get to the bottom. We saw $1,000 drop from Bitcoin from 20,000 down to 19,000 when the SEC rejected the ETFs. We then saw a rally and then we saw it slide right back to the same 19,000 and change level that it’s been at, which is only 5% different than it was when I talk about the markets last week. So it feels like either we’re waiting for the next shoe to drop in the global economy where officially the US is now in recession based on GDP figures, but the reality is the crypto markets are still trading along with risk.

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At some point when the leverage is out of the system, we will see. For now, I think it’s important for people to try to stay safe in the market, understand what’s going on and if your time horizons on the long term and I think it is an interesting time to be looking at some assets, others depending on lending, speculation and leverage, I don’t think we’re there yet and basically we’ll see what happens over the rest of the summer. That’s all the time for today. Stay safe. Have a happy July 4th everyone and we’ll see you again next time week.