One of the most iconic moments of the past week was when Keith Gill, also known as Reddit trader DeepF ** kingValue, testified before the House Financial Services Committee: ‘I’m not a cat. Everyone who enjoyed the video of the meeting in which a frustrated lawyer struggled with Zoom settings (who among us did not find Zoom uncomfortable?) Immediately knew what he was referring to, and some of us may or may not have mocked coffee not our keyboard.
It was not so much the power of memes that made his remark feel important, nor the humor that made us sit up straight. It was more the delivery of the deadlocked time, which looked at the screen and addressed some of the most powerful people in the world. For me, it put together a hard shift in attitudes toward authority. With the throwaway remark, Mr. Gill loyalty to his tribe rather than to the establishment, a sentiment we see playing out not only across social media but also in classrooms, culture, startups and even in the intimidating world of finance.
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The increase in value of ‘anti-establishment’ bitcoin, which broke $ 1 trillion this week, as well as of meme coins like Dogecoin, is to a large extent an extension of this. The lack of confidence in the judgment of the institution and the visible weakening of its influence make alternatives more viable.
It goes beyond individual crypto-assets. The congressional hearings highlighted the growing awareness of structural risks in our capital markets. This, together with recent trends in the industry, indicates a strong potential growth in an area of digital assets that we have not talked much about in this section: decentralized financing, or ‘DeFi’.
The concept is about so much more than a high return on investment, although there may be enough to take for those willing to take a high risk. It is about the emergence of a new kind of financial market, which is not created with a view to professional investors, but which ultimately benefits from their interest. This week it got a strong boost.
Under the hood
The GameStop drama arouses greater interest in plumbing in financial markets, something that very few have bothered with before. When we see how institutions trample on the retail investor, we have questions. Few congressional hearings have been as eager as this one followed, hoping to get answers and to see the beginning of change.
This is happening at the same time as an explosion of interest and development in DeFi applications.
The term “DeFi” refers to self-performing programs that perform the functions of centralized financial services such as lending, lending and trading, but in a decentralized, peer-to-peer manner (here is a more detailed background if you need it) . This week, Bloomberg reported that GameStop shares could not deliver about $ 359 million on January 28th. In the world of automated trading in cryptocurrencies, this could not happen. Industries also cannot be frozen, all merchants have equal priority and there is no authority that can change the rules or middleman who can prioritize some orders over others.
The concept began a few years ago in an experimental corner of the Ethereum ecosystem, with open-source ‘smart contracts’ used to execute trades, interest payments and collateral exchanges. Last year, ‘yield farming’ increased, referring to the leap from platform to platform in search of the highest yields. It sometimes reached triple digits, at a time when the official interest rate was almost zero.
The returns were significant, but so were the opportunities for things to go wrong. Many platforms are built on hasty written code, and last year we reported numerous bugs and losses that could not be used. However, mistakes are not unexpected at the beginning of a renewal, and the creativity and production was (and still is) astounding.
Given the high returns, it was only a matter of time before institutions began to take notice. In its Q3 2020 report, Genesis Trading (a subsidiary of DCG, also the parent of CoinDesk) reported that a large portion of its lending growth was to institutions that wanted to fund yield opportunities.
Fast forward a few months, and the ecosystem feels different.
The economic value of DeFi platforms has almost tripled since the beginning of the year to $ 41.9 billion at the time of writing. These platforms are typically powered by tokens that grant access and management rights – the total value of the 100 largest tokens per market capitalization currently stands at $ 83 trillion (yes, with a “t”), with more than $ 16 trillion in 24-hour trading volume. . The DeFi Pulse Index, which tracks 10 of the largest tokens by market capitalization, has risen more than 260% to date.
What’s more, Ethereum, the basic blockchain for most DeFi applications, has entered a new phase of development with the introduction of the first step in the migration to a more scalable and less energy intensive consensus system. This will solve the rising fees on Ethereum that threaten to suffocate part of the transaction volume. It also offers DeFi applications a viable platform from which to integrate with traditional finance one day.
Institutional ramps spread. Coinbase Custody has been offering institutional clients trading and custody services for DeFi tokens for some time and has listed four new DeFi tokens so far this year. BitGo facilitates the conversion of bitcoin into a DeFi-friendly sign. Trustology helps with digital preservation for its institutional clients to vet DeFi projects. But so far, access to the potential returns is largely limited to buying individual tokens. That is changing.
This week, cryptocurrency fund manager Bitwise launched a DeFi fund that tracks the weighted value of a basket of tokens. And some US-listed trusts may be on the way: over the past few weeks, Grayscale Investments, the largest fund manager in the industry (owned by DCG, also the parent of CoinDesk), has applied for investment trusts authorization based on signs for DeFi protocols such as return optimizer Yearn Finance, money market Aave and data oracle Chainlink. (Note that the submission of authorization does not indicate the intention to start, but the possibility is there.)
New area
The return on DeFi assets may be high so far this year, but so are the risks. There’s a possibility of a technological glitch, or a hack – we’ve just reported on a few this month. There is a regulatory risk: the controversial FinCEN proposal proposed in December last year, which suggests that exchanges need information to receive addresses, dampens, will dampen DeFi innovation and make some features inaccessible. There is also a liquidity risk: even a small institutional order can distort the market, and it can be difficult to exit if necessary. What’s more, the high volatility of DeFi assets means the downside can be cruel.
Nevertheless, given the public support for the investigation into structural inefficiency and fragility in traditional capital markets, and the increase in DeFi activity and innovation, growth in mainstream interest is likely to accelerate.
It will be positive for those who are building the capital markets of tomorrow, and for those who are investing in these projects. So far this month, we have reported on three new venture funds aimed at DeFi ventures.
More institutional money flowing into the DeFi ecosystem, whether in the form of an allocation or venture capital, will increase liquidity and legitimacy. Institutional support will also guide the ecosystem through the acceptability of regulations and the gradual adaptation of current market infrastructure.
Smart money will hopefully understand the risks involved. But getting in early on a transformational innovation rewards the brave. And the current market infrastructure is getting ready to help.
CHAIN LINKS
The February survey of Bank of America among fund managers revealed that ‘long bitcoin’ slipped from the busiest trade to second position in January, behind ‘long tech’ and just before ‘short dollar’.
“We believe that the trend of transactions, bitcoin investments and blockchain-driven initiatives may increase in the coming years, as this bitcoin mania is not a fad in our opinion, but rather the beginning of a new era in digital currency. . ” – Wedbush Securities, in a research note.
‘Bitcoin could be the stimulus asset. Does not look like gold. ”- Jeffrey Gundlach, CEO of DoubleLine Capital
‘Having a little Bitcoin, which is simply a less stupid form of liquidity than cash, is adventurous enough for an S & P500 business … Bitcoin is almost as good as money. The key word is “almost”. ”- Elon Musk
“For now, the bitcoin boom can best be seen as a canary in the coal mine.” – An interesting approach to bitcoin’s boom by Rana Foroohar of the FT
The Ontario Securities Commission (OSC) has Develop Bitcoin ETF, which makes it the second place to list on the Toronto Stock Exchange. TAKE AWAY: US regulators, the pressure is on …
Elsewhere in ETFs, the Purpose of Bitcoin ETF (BTCC) started trading on the Toronto Stock Exchange on Thursday and amassed nearly $ 422 million AUM within two days. TAKE AWAY: This is a strong signal that there is question for this type of product.
Speaking of, ENJOYABLE, The spin-off company of Stone Ridge Asset Management, has filed a bitcoin ETF with the U.S. Securities and Exchange Commission (SEC). TAKE AWAY: This follows bitcoin ETF applications from VanEck and Valkyrie, indicating that fund managers feel more optimistic about the prospects for approval. It is especially important to mention Morgan Stanley as the initial authorized participant, adding a name of the blue slide to the process. As far as I know, the other two ETF registrations did not specify who their initial authorized participant would be.
Currency exchange Coinbase, which will be publicly traded over the next few months, is valued at $ 77 billion, based on trading the company’s private shares on a secondary market. TAKE AWAY: It’s higher than the CME group, ICE (parent of the NYSE), the London Stock Exchange … the list goes on, but you get my chance.
MicroStrategy, the business intelligence firm now better known for the 70,784 BTC on its balance sheet, plans to raise $ 1.05 billion through the issuance of convertible senior notes payable in 2027. Most of the proceeds, you reckon, are used to buy more bitcoin. TAKE AWAY: This makes MSTR the closest to a bitcoin ETF in the US market, while placing a level of corporate risk above bitcoin risk. This is another indication from the SEC to approve a bitcoin ETF soon. A reasonable question is: what will happen to the MSTR share price if that happens?
A survey conducted by Gartner this week showed that only 5% of business executives plan to invest in bitcoin as a corporate asset this year. TAKE AWAY: “Only” 5% ?? It seems a lot to me. According to Moody’s, non-financial corporate cash was $ 2.12 billion in mid-June. And the non-financial firms with the largest amount of cash on their balance sheets are Apple, Microsoft, Alphabet, Amazon and Facebook – technology firms that are more likely to be interested in BTC stocks than your ‘average’ firm.
A look at why the CME ETH futures matter for the market. TAKE AWAY: It is a way for a wider range of investors to take a wider range of positions. It is also an essential prerequisite for the development of a vibrant ETH options market, providing even more hedging and directional betting opportunities for investors of all types.