Hi Mr. Brown, with the recent bullish run on Bitcoin and other cryptocurrencies, any chance you will be doing research into buying opportunities in that space? I followed all your work with this with your former company and definitely want to keep crypto as a building block of my portfolio. — Edson G.
Hello Edson, I’m glad you wrote in with this question, as it’s something that I’ve been thinking about a lot. It has been a very interesting year for the industry.
To your point, if we take a look at the price action of bitcoin year to date, it paints a very bullish picture.
Bitcoin has rallied about 150% this year.
Ether is up about 83% year to date.
And in general, most of the high-quality blockchain projects have seen their corresponding cryptocurrencies rise significantly this year.
And many of the low quality projects have collapsed. There has been a bit of a cleansing of the digital asset market.
What’s exciting is that this has all happened despite the antagonistic regulatory environment, especially in the U.S. market.
The current U.S. administration has taken an aggressive stance against digital assets, and not just limited to cryptocurrencies. It has been the worst environment the industry has experienced since its inception.
Despite this, great progress continues to be made, the most representative of which is SEC approval for a spot bitcoin ETF.
A spot bitcoin ETF has been years in the making, but it’s likely an approval is just around the corner. The expectation is that a handful of applications for a spot bitcoin ETF will be approved on or before January 10, 2024.
But wait, some of us might be wondering: Hasn’t a bitcoin ETF already been approved?
Bitcoin futures ETFs have already been approved, yes. Long-time readers may recall that these ETFs contain contracts based on expectations about the future price of bitcoin. Bitcoin futures ETFs do not, in fact, hold any bitcoin.
And there are bitcoin “trusts” that are available to investors… but they are not open to all investors. These trusts are only available to accredited investors, and the majority of investors are not accredited.
Spot bitcoin ETFs, on the other hand, hold actual bitcoin and there are no accreditation requirements.
These ETFs will give investors and institutional funds the ability to gain exposure to bitcoin (and other digital assets) in the same way they buy stocks or any other ETF. No digital wallets are required to buy shares in an ETF — any normal brokerage account will work.
Naturally, approval of a spot bitcoin ETF would be bullish for bitcoin, and a positive development for the industry.
And with a spot bitcoin ETF approval, a spot ether ETF won’t be far behind.
With that said, the cryptocurrency markets feel very hot right now — overvalued. I believe that there will be a meaningful correction in the months ahead.
As for your specific question: Yes, I do hope/plan to publish research on blockchain projects and their respective digital assets/cryptocurrencies.
Blockchain technology — and anything related to the next generation of the internet — is an incredibly exciting area of high tech, and a key growth area in terms of investment opportunities.
One area that I am paying close attention to is the regulatory environment. Despite the positive progress towards a spot bitcoin ETF, the regulatory environment has worsened over the last two years…
The Securities Exchange Commission (SEC) has been engaged in a multi-year battle with some of the best-in-class companies in the industry like Ripple Labs and Coinbase.
These companies consistently and proactively engaged the SEC and policymakers, asking for clarity and presenting proposals for updated regulations concerning digital assets.
Rather than engage and collaborate, the SEC took antagonistic stances against the two “blue chip” blockchain companies.
The SEC has been engaged in a multi-year suit against Ripple concerning the issue of whether or not Ripple engaged in the sales of securities…
Ripple has been steadfast in defending itself and largely prevailed in the hearings.
The claims against the two senior executives have been dropped in the most recent court decision, and the SEC continues to push for its pound of flesh for “damages” regarding institutional sales of Ripple’s digital asset — XRP.
Coinbase also became a target of the SEC in 2021 due to a program that it offered called Lend.
Lend enabled normal investors to “lend” their U.S. dollar-based stable coins in exchange for an attractive interest rate.
This program was very similar to a money market fund, or a U.S. Treasury fund. And it was a great program for all investors who wanted to earn some interest on funds they held in digital U.S. dollars (U.S. dollar stablecoins).
But the SEC and the U.S. government didn’t like that. They positioned this kind of lending as a securities offering.
The logic went further, claiming that only registered securities dealers can be engaged in this kind of lending program.
Coinbase quickly discontinued its lending program, to the detriment of normal investors, in order to comply with the SEC’s direction.
But the trouble didn’t stop there…
This June, the SEC filed suit against Coinbase for operating as an unregistered securities exchange.
The Coinbase case is equally important as the Ripple case. It speaks to the entire industry.
And the question that the industry has been proactively trying to address — with the SEC, CFTC, and U.S. government — concerns which regulatory agency is actually responsible for regulating cryptocurrencies. And more specifically, what new regulations need to be put in place for these new kinds of digital assets.
The outcomes of both cases will directly impact the entire industry. And they are forcing the issue of the U.S. government’s complacency in providing clear regulations around digital assets.
Regulating by enforcement is not a reasonable approach by the U.S. government. This kind of stance stifles innovation and has already driven billions of dollars of investment offshore.
Regulating by establishing a regulatory framework with clear rules is what the industry has been asking for and proposing for many years. That’s quite a reasonable position to take.
I’ve long maintained that there is a larger “strategy” at play here by the U.S. government…
This regulatory antagonism is a tactic to slow the overall industry down. The U.S. government needs to buy more time in order to get its own plans for a digital U.S. dollar — a central bank digital currency (CBDC) — in place, in order to carve out its “control” of any U.S. dollar-denominated assets.
Once the U.S. government has established its key infrastructure and its “desired” partnerships with existing financial institutions, I believe it will finally step up and provide new regulations for the industry.
With all that said, the SEC has done some good work dealing with some bad actors.
Earlier this year, for example, the Department of Justice sued Binance Holdings LTD, owner of Binance which is the largest cryptocurrency exchange in the world. They settled last month with Binance agreeing to pay $4.3 billion…
Other bad actors in the industry have also been “addressed,” like Do Kwon of Terra (LUNA), arrested in March 2023 and charged by the SEC with “orchestrating a multibillion-dollar crypto asset securities fraud,” in which he allegedly manipulated the price of the TerraUSD stablecoin.
And of course, there is the notorious Sam Bankman-Fried (SBF) of FTX and his nonsense “effective altruism,” which was one of the largest frauds in history.
The case of SBF was particularly embarrassing for the U.S. government, as he was given direct access to SEC head Gary Gensler and even met with the Federal Reserve Chair Jerome Powell. SBF was a massive donor to the Democratic Party, which clearly resulted in benefits for FTX.
And there are many others.
The other area that is important for us to watch are developments around central bank digital currencies (CBDCs).
On this front, November 1st was a big day for the European Union, as it decided to move forward with a preparation phase (which is expected to last two years) focused on the distribution of a digital Euro.
Central banks around the world have had a heavy hand in slowing down progress in cryptocurrencies and digital assets...
As I mentioned earlier, they are using this time to design their digital currencies, build and test their digital infrastructure, and carve out their designed role with regards to digital currencies…
And they’re doing this before providing a clear framework in which the rest of the industry can “play.”
I’d like to see a clear path towards a healthier regulatory environment regarding blockchain technologies, cryptocurrencies, and other digital assets, which would be a fantastic development for investors interested in growth assets.
I don’t have a specific timeline yet, Edson, as I’m busy building my own digital infrastructure. But if you continue to read Outer Limits, you’ll be the first to know.
