Blockchain Bites: Will Bitcoin See ‘Reflexive’ Buys After Tesla?

Sound bites

Nic Carter argued that comparing bitcoin’s energy consumption to Visa’s is missing the forest for the trees. Bitcoin isn’t just a payments network, but a self-contained monetary system that proposes its own unit of account, he argued live on CoinDesk TV.

“First Mover” is a rundown of the top global market, business and regulatory news stories impacting digital assets. Catch it every weekday at 9 a.m. ET.

Three trends

1. Tesla’s $1.5 billion bitcoin gambit could have a long tail. Bitcoin saw record single-day dollar growth after news broke Tesla replaced a fraction of its U.S. dollar treasury with the cryptocurrency. Bitcoin rose more than $8,000, setting a new ceiling above $48,000 early today. The rally has made bitcoin, with an estimated $834.2 billion market cap, more valuable than all but seven of the world’s publicly traded companies.

• An affirmation of bitcoin’s prospect as an inflation hedge from a Fortune 500 company could drive “reflexive” investments from other large corporations. “‘Reflexivity’ is a theory that a positive feedback loop between expectations and economic fundamentals can yield a substantial price rally,” CoinDesk’s Omkar Godbole reports. 
• GSR trader John Kramer said the market is now pricing in the likelihood that other heavyweights will allocate to bitcoin. Indeed, calls on bitcoin’s future price have seen increased volume in the $56,000 to $72,000 range, Matthew Dibb, co-founder and COO of Stack Funds, said. 

But it’s not just bitcoin. Ether, the native currency of the Ethereum blockchain, also set a record high of $1,824.59 in early Tuesday trading, pushing its market capitalization above $200 billion. 

• Yesterday, Chicago Mercantile Exchange’s (CME) much anticipated ETH futures went live. Nearly 400 contracts were traded. CME is often equated with institutional involvement. 
• Godbole notes ether’s pump could also be driven by supply issues on exchanges. Liquidity has dried up as investors continue to take direct custody of their coins or move them to high-yield DeFi tools. The trend picked up pace in recent months, with the amount of ETH held on exchanges declining 8% in the past 4.5 weeks alone.
• A rise in ether’s price is typically adjoined by increased “gas” fees, the price paid to applications on the decentralized network. CoinDesk’s Muyao Shen reports that alternative application-focused blockchains Cardano and Polkadot are benefiting from Ethereum’s rising costs – with their native assets ADA and DOT, respectively, becoming the fourth- and fifth-most valued crypto assets.

2. Legacy banks are taking note of the cryptocurrency industry. An investment analyst added New York-based Signature Bank to JPMorgan’s “focus list,” a list of recommended investable products, saying the blockchain-friendly bank is “positioned to ride the crypto wave.”

• Meanwhile, SCB 10X, Siam Commercial Bank’s venture capital arm, said it has launched a new $50 million fund to invest in blockchain startups with an eye for DeFi. SCB 10X previously invested in Ripple and BlockFi. Separately, Singapore-based Spartan Group also announced a $50 million venture fund directed at DeFi.
• On the crypto-native front, the market maker Apifiny announced plans to go public by the end of 2021.
• Elsewhere, Binance-backed, not-yet-launched DeFi platform Xend Finance is gaining buzz due to its ambitious goal of bringing high-interest savings opportunities to Africa. The platform will allow credit unions and cooperatives to earn interest on deposits by converting them to stablecoins.

3. Open systems are politically neutral, a point that could raise eyebrows. According to a United Nations reckoning, North Korea funded its wartime footing – including its nuclear and ballistic missile programs – through cryptocurrency hacks. 

• A report sent to U.N. Security Council members on Monday said North Korea-linked criminals took in $316.4 million worth of cryptocurrencies by attacking financial institutions and cryptocurrency exchanges between November 2019 and the same month a year later. The nation is said to be laundering these stolen funds through over-the-counter brokers in China to acquire fiat currencies such as the U.S. dollar.
• The Financial Action Task Force (FATF) has drafted rules that could prevent money laundering and terrorist financing, most notably the so-called “Travel Rule,” which bumps up reporting requirements for exchange and wallet providers. BitMEX, the crypto derivatives exchange, recently published a framework of best practices on storing this information. 

At stake

What to do with all this cash?
Tesla investing in bitcoin is a sea-change moment for the cryptocurrency industry. After the much-hyped auto company disclosed its $1.5 billion bitcoin buy, the obvious (and unknowable) question became “who’s next?”

Indeed, U.S. corporations are sitting on a vast trove of cash. According to Moody’s Investors Service, nonfinancial firms had a stockpile of $2.1 trillion in U.S. dollars last June. While companies could pay down debt, invest in U.S. Treasury bonds or even go on an M&A spree, there’s a certain logic to keeping a war chest:

“Obviously, cash provides excellent insurance in times of escalating uncertainty. It insulates firms from risk in the financial markets, ensuring the ability to fund critical projects and compete strategically in their product market,” Kristine W. Hankins and Mitchell Petersen, finance professors at the University of Kentucky and Kellogg School of Management, respectively, wrote in the Harvard Business Review.

Crypto-heads, including former acting chief of the OCC Brian Brooks, would deny some of these claims, especially amid a period of intense monetary expansion Just yesterday, Brooks said bitcoin could be a more stable source of value. He noted the U.S. money supply increased 25% in 2020.

Even if you’re not an inflation-doomer, this pace of money creation certainly raises questions about what to do with all this corporate cash. It was a question the Royal Bank of Canada implicitly raised yesterday, when weighing in on the Tesla phenomenon.

According to analysts at Canada’s largest bank’s brokerage division, Apple should consider the crypto. With a $2.3 trillion market capitalization, Apple is among the world’s most valuable firms. It is also sitting on close to $200 billion in cash.

RBC analysts said a natural move would be for the company to spin up its own crypto exchange. The firm already provides payment and digital wallet services, has a trusted reputation and a research department that could crack long-standing know-your-customer (KYC) challenges.

Plus, the analysts estimate, a crypto exchange could bring in $40 billion a year. (That’s estimated from extrapolating from Square’s bitcoin revenues, and an assumption about 15% of Apple’s existing 1.5 billion install base would play around with the new feature.)

“If Apple went down this path the U.S.A. would likely acquire the most crypto assets from a global perspective,” the analysts wrote.

Indeed, increased competition among crypto exchanges might be welcome. Yesterday, a surge in users following the Tesla news caused interruptions among some of the most prominent exchanges.

While the crypto infrastructure has improved notably since the last bull market – with large entities able to be counterparties to billion-dollar bitcoin trades without any significant market disruption, as Castle Island Ventures partner Nic Carter noted on CoinDesk TV this morning – there’s still work to be done.

Commenting on the exchange outages yesterday, eToro Managing Director Guy Hirsch said fiat to crypto trades introduce liquidity and settlement risks between banks and exchanges.

The risks are less severe for “pure” crypto to crypto exchanges, Hirsch noted.

Maybe there’s a lesson there for companies sitting on dollar stockpiles?

Quick bites

• Binance drops its defamation suit against Forbes. (CoinDesk)
• Decrypt enters Web 3.0 with an IPFS build. (Decrypt)
• Nik De breaks down what’s new and old in the latest global crypto crackdowns. (CoinDesk Newsletters)
• An easy-to-digest explanation of the ERC-20 token standard. (CoinDesk)
• ETH futures premium. (Trustnodes)
• Blockfolio has apologized after racist posts were distributed over its cryptocurrency portfolio and news app. (CoinDesk)
• Ten common scams in the crypto world in 2021. (DeFi.cx)

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