Hey Influence Traders,
We’ve had an active week so far …
The End of Infamy
The poster child for bad behavior on WallStreet, Bernie Madoff, has died at the age of 82 in Federal Prison.
Madoff infamously ran a $17.5 billion Ponzi scheme that bilked Florida retirees along with Steven Spielberg and Kevin Bacon, among other luminaries, out of billions of dollars.
But in 2008 his scheme came crashing down, like all Ponzi schemes do, and he was sentenced to 150-years in prison.
A buddy of mine bought some of his artwork and, allegedly, his toilet seat at an estate auction:
Yes, I took that picture!
That same friend famously said: “Ponzi schemes work great … until they don’t.”
Kind of reminds you of other institutions:
Coinbase Is Trading
Coinbase (Ticker: COIN) went live yesterday with a valuation of over $105 billion.
Not bad for a company that one year ago was valued at just $7 billion.
The leading cryptocurrency exchange in the U.S. went public through a direct company listing as opposed to a traditional IPO.
The buildup to this listing gave a boost to Bitcoin (Ticker: BTC) and other cryptos.
The DC Connection
What do Power Movers in Washington have to do with digital assets?
The Biden Administration has built an experienced crypto team.
And this week the U.S. Senate voted 53-45 to approve President Biden’s nomination of Gary Gensler to chair the U.S. Securities and Exchange Commission (SEC).
The SEC now has a Democratic majority and will aggressively pursue policy related to climate disclosures and new financial technologies.
Gensler had previously served as the chair of the U.S. Commodity Futures Trading Commission (CFTC) during the Obama administration.
He oversaw the regulation of derivatives after the 2008 financial crisis. Since then, he has been a lecturer at MIT on blockchain.
As SEC Chair, he’ll get to shape regulations around the cryptocurrency industry –and he intends to do so.
At his confirmation hearing, Gensler, “Bitcoin and other cryptocurrencies have brought new thinking to payments and financial inclusion, but they’ve also raised new issues of investor protection that we still need to attend to.”
China recently announced its intent to launch a digital yuan, and the Biden administration has taken notice
While Chinese officials have publicly stated that the purpose of the digital yuan is to replace banknotes and coins, to reduce the incentive to use cryptocurrencies and to complement current private-sector run electronic payments system, China has indicated that its long-game is to topple the dollar as the world’s dominant reserve currency.
China’s currency currently makes up little more than 2% of global foreign exchange reserves compared with nearly 60% for the U.S. dollar.
Officials at the Treasury, State Department, Pentagon and National Security Council are all studying the implications. A recent report from the U.S. Director of National Intelligence said the extent of the threat of any foreign digital currency to the dollar’s centrality in the global financial system “will depend on the regulatory rules that are established.”
And members of Congress have asked Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen in hearings about issuing a digital U.S. dollar.
Powell has stated that the U.S. does not need to be the first to issue a digital currency, but that “we need to get it right” when we do, and that questions of whether adopting such a currency have a public benefit have not been answered.
Yellen has likewise signaled interest in researching the viability of a digital dollar, believing that a digital version of the dollar could help address hurdles to financial inclusion in the U.S. among low-income households.
The View From K Street
The prevailing theme in D.C. appears to be that BTC is an asset, not a currency, which would indicate that the U.S. will allow it to exist alongside the dollar.
Some in D.C. do not share Gensler’s enthusiasm. Fed chairman Powell has stated that crypto assets are more for speculation than for payments.
And Yellen has been critical of BTC, calling it a payment system for criminals.
But that view was recently contested by an unlikely source – a former acting director of the Central Intelligence Agency.
Michael Morell, a 33-year CIA veteran, published a study that concluded that:
- The broad generalizations about the use of bitcoin in illicit finance are significantly overstated.
- Blockchain analysis is a highly effective crime fighting and intelligence gathering tool.
Morell also cautioned Yellen and other politicians, writing that, “We need to make sure that the conventional wisdom that is wrong about the illicit use of Bitcoin doesn’t hold us back from pushing forward the technological changes that are going to allow us to keep pace with China.”
BTC Is Going Mainstream
BTC keeps hitting new highs and shows signs of continuing.
Its market value is now roughly $1.1 trillion, which exceeds the monetary base of the British Pound Sterling!
Some might argue that BTC is at a peak … but history disagrees.
When BTC peaks, holders historically start depositing BTC to exchanges to sell …
For example, inflows from addresses to exchanges hit all-time highs in January 2018. But this past week, inflows hit an all-time low, which indicates that people are holding onto, not selling, BTC.
And the growth in the asset class is attracting institutional attention:
- Goldman Sachs restarted its digital currency trading desk.
- Bank of New York Mellon announced it would offer cryptocurrency custody services to clients.
- Tesla has gone all in.
- Citigroup recently opined that BTC “may be optimally positioned to become the preferred currency for global trade.”
- Morgan Stanley Wealth Management’s Chief Investment Officer reported that cryptocurrencies are reaching the threshold of becoming an investable asset class, similar to how gold markets emerged 45 years ago.
Even the IRS is taking notice, which means the taxman cometh. The IRS views cryptos as property, which means that cryptos are subject to capital gains taxes.
The IRS wants its piece of this massive market, and to help facilitate reporting the agency recently moved the “yes/no” question about whether a taxpayer has been involved in any digital currency transactions to Page 1 of Form 1040.
That question was previously buried in the tax form under Schedule 1, where it could be easily missed.
Moreover, BTC has a great risk reward profile compared to other assets:
The Blockchain and K Street are causing ripples.
BTC is not going away and will continue to become more mainstream. As that happens, the limited supply of available BTC will further drive value.
Cutting Through the Noise for You.