Today is March 4, 2021, and the current price of Bitcoin is $49,760.
Our first headline is an update to a previous story of the SEC’s lawsuit against Ripple regarding illegal sales of their XRP token. For those unaware, in December, the SEC sued Ripple as well as its CEO Brad Garlinghouse and Executive Chairman Chris Larsen. The SEC claimed that Ripple Labs Inc., Garlinghouse, and Larsen illegally sold XRP in an unregistered Security Offering – raising over $1.3B. However, Garlinghouse then raised a great point regarding the lack of regulatory clarity and that, during the sales of XRP, they had not done anything wrong or at least not knowingly. Due to the lack of clarity surrounding cryptocurrencies, not all of them can be blanketed as a security. As such, during the sales of XRP, Ripple claims they did not sell XRP knowing it was constituted as a security – something that SEC has yet to prove. Garlinghouse said, “We’ve moved from lack of regulatory clarity to regulatory chaos in the U.S. This is why regulation by enforcement is such bad public policy. With the new administration, we expect #DCEA to be reintroduced - common-sense legislation providing clarity to the entire industry.” As a brief overview, the DCEA that Garlinghouse mentions is the Digital Commodity Exchange Act. This Act classifies cryptocurrencies as a commodity, putting the industry under the oversight and regulation of the CFTC which manages commodities as opposed to the SEC. SEC Commissioner, Hester Pierce, aka Crypto Mom, has said “That’s why I have called for more clarity, because I actually think it can be difficult to determine whether something fits within the security bucket or not, and we could do more to provide some guideposts for what that would be.” Essentially, what both Garlinghouse and Pierce are saying is that we need better clarity surrounding cryptocurrencies and that this type of enforcement does not help provide that clarity. Additionally, Larsen’s lawyers have hit back against the SEC claiming that the SEC cannot prove that XRP was so clearly a security that Larsen must have known that the sales were illegal. Larsen’s lawyers have also alleged that the SEC’s claim for monetary relief is past the statute of limitations, reading “Because the SEC has alleged that the sales of XRP over a multi-year period constituted only one offer … the statute of limitations began to run in 2013 and expired in 2018.” While these legal battles are going on, Ripple is piloting a private ledger for central bank digital currencies also referred to as CBDCs. This private ledger will be run by the same blockchain technology as Ripple’s XRP Ledger. This is important to note because it means that the ledger can then be used for both payments and issuing digital currencies itself. According to Ripple, "The core technology behind this new CBDC Private Ledger has been running for more than 8 years without incident and with billions of dollars of value transacted every day." As China’s Digital Yuan gets closer to launching, Ripple claims that around 80% of central banks are looking to launch CBDCs. As previously mentioned in one of this week’s podcasts, PayPal is acquiring crypto-custody firm Curve to be able to deal in cryptocurrencies directly. PayPal has noted that they plan on becoming a CBDC distributor, which will greatly expand the reach and transactions of CBDCs around the world.
The next major headline comes from Goldman Sachs. This morning, the Wall St. firm said that investors may be betting that the Federal Reserve will move to unwind last year’s monetary stimulus. This would offer relief to Bitcoin Investors as many have used Bitcoin as a hedge against inflation of the dollar caused by mass printing of trillions of dollars. According to Goldman Sachs, “The earliest the Fed will start talking about the tapering of bond purchases is late 2021, with any discussion of interest rate hikes only coming a year after that.” As futures contracts have been used to bet on Federal Reserve funds, the futures pricing implies that the first interest rate hike could come as soon as 2022 and more in 2023. This is in opposition to the 2024 time-frame that was recently implied. In response to these potential rate hikes, Goldman Sachs says that this could be rather aggressive as the Federal Reserve has not even started tapering its ongoing bond purchases of $120 billion per month as a form of monetary easing. It is also important to note that tapering these purchases or rate hikes could reduce Bitcoin’s appeal to investors as an inflation hedge, which may lead to sell-offs as and when the investors feel the Federal Reserve will move into action. Also, there is a correlation between the crypto-markets and bonds. As Bitcoin and cryptocurrencies fell last week, U.S. Treasury bond yields rose. This can be seen as an indicator of market pricing in expectation of Federal Reserve tightening.
The last major story is that a recent JP Morgan survey found that 78% of institutional investors do not plan on investing in cryptocurrencies. The survey was conducted across 3,400 institutional investors. While 22% of the investors said that they would likely invest in cryptocurrency, 58% said that they believe cryptocurrencies are here to stay. Additionally, 7% said that they believe cryptocurrencies will become one of the most important assets. However, the one statistic that was truly disheartening to see was that 98% believed that cryptocurrency fraud is either somewhat or very much prevalent. Personally, I see two main takeaways from this survey. First, despite the many institutions that have entered the market recently, purchasing massive amounts of Bitcoin, many investors seem to be holding out from entering the market despite believing that the industry is here to stay. Second, the idea that cryptocurrency fraud is running rampant in the industry is too believable despite being statistically untrue. As I mentioned in yesterday’s podcast, only 0.34% of transaction volume in 2020 was caused by illicit activity, and there are companies that can track transactions and follow funds across blockchains, further reducing and stopping illegal activities. So, while the investors surveyed believe the industry is here to stay, why are they still not entering the market? There are many reasons this could be, but I believe it boils down to three key factors. First, the lack of regulatory guidance here in the U.S. surrounding cryptocurrencies. As I have preached many times in the past, I truly believe that regulatory guidance is desperately needed for the industry to truly be able to move forward. Second, the lack of high-level analytics for investors to utilize in order to create well-educated and sophisticated investment strategies. While the mantras of investors in the industry have been "HODL" (hold on for dear life) and "buy the dip," traditional investors are used to utilizing sophisticated tools to determine their buy, sell, and hold positions. While there are tools on the market, there are none akin to Bloomberg Terminal which is used throughout the traditional investment world. I truly believe this is something required for move investors to enter the market as they will then be able to come up with better investment strategies. Which is exactly what my company is developing. Lastly, and perhaps what is scaring away potential investors the most, is the lack of liquidity and high levels of volatility. While Bitcoin and cryptocurrency investors are used to massive price swings of 10-15%, this is something that traditional investors rightfully shy away from. When the price goes from $58,000 to $45,000 in two days, many people would panic, but this is a norm in the cryptocurrency industry. While I personally believe Bitcoin will continue to rise as $50,000 has become the new norm, I can understand why many traditional investors would hesitate to enter the market. Some semblance of stability is needed for more investors to enter the market.
I believe that, over time, as more mechanisms are introduced into the market such as ETFs, futures, options, credit cards, and more, and especially regulation, improving the levels of liquidity in the market will also come. Improved liquidity reduces the risks, which will allow more investors into the market.
We have seen the industry continue to evolve, and 2021 has seen explosive growth in both cryptocurrency prices and firms entering the market. As this continues, many issues in the industry will continue to be weeded out and more investors will, in turn, enter the industry. I believe the three problems I mentioned, which are the lack of regulatory guidance, the lack of sophisticated analytical tools, and the high levels of volatility, will all be solved sooner rather than later. I really do like that the majority of investors believe the industry is here to stay, and I believe that number will only increase with time.