1. Crypto Long & Short: What’s Going On With Tether?
Since the end of May, tether’s growth has gone completely flat.
This week, the crypto market again shrugged off bad press for one of its most critical service providers. The issuers of the stablecoin tether (USDT (+0.06%)) are reportedly in the sights of the U.S. Department of Justice for misleading banks about the nature of their business.
That’s not really news, and the market’s non-reaction to it was predictable. What’s interesting is something that’s been going on since the end of May: Tether’s growth has gone completely flat.
The chart here shows the supply of tether and USD coin (USDC (+0.1%)), the second-largest stablecoin by supply. Since the end of May, tether’s supply has been stuck at $64.3 billion. The two-month doldrums is remarkable for a currency that had tripled between Jan. 1 and May 31.
Tether has long been dogged by allegations that it’s not backed by real dollars — that its issuers are pumping up the price of cryptocurrencies using units of tether issued out of thin air. Obviously, traders either don’t believe that, or don’t care: Tether has largely kept its peg to the dollar, even if its financials may be dodgy.
Trading crypto implies a certain degree of comfort with risk. I guess nobody goes to the cashier’s window at the Bellagio and demands to see their audited balance statements, either.
Still, the question of tether’s solvency is one of systemic importance. Tether and other stablecoins act as money-market funds in crypto markets. Tether is used mostly in offshore venues like Binance. The difference between these offshore exchanges and a casino is that price discovery happens on these venues.
Tether could be part of a market-crash scenario, in which a sudden flood of discounted tether crashes the price of bitcoin (BTC, -5.15%) or other liquid crypto assets. It’s unlikely to have the kind of systemic impact that fell out from the run on Lehman Bros.’ money-market fund, the Reserve Primary Fund, in 2008. That event precipitated a run on all money-market funds.
Tether is different from stablecoins like USDC that are audited, and it goes beyond how one money-market fund differs from another. Even as its growth has slowed, and then stagnated, growth in USDC has continued, as the chart below shows.
That’s not due to some kind of flight from tether into the relative safety of a more regulated stablecoin, as tether’s maintenance of its $64.3 billion supply shows. It’s more likely the influx of new investors who can’t, or won’t, deal in tether or trade on offshore exchanges. This would include professionals and institutions, especially those that have fiduciary responsibility for investor funds.
That underscores the difference between tether and USDC: These aren’t two flavors of the same thing. One is audited for one-to-one backing, the other isn’t. As such, they are different kinds of products, used by different users in different places. It wouldn’t be smart to assume that a crisis of confidence among offshore traders using tether would spread to other stablecoins. In that light, tether may not be systemically important in the same way the Lehman Bros. money market fund was. But the risk of a tether crash is a systemic risk that underlies any investment in crypto assets.
2. German law allowing institutional funds to hold crypto comes into effect Aug. 2
As much as $415 billion worth of investments could flow into cryptocurrencies as new laws governing German Spezialfonds go into effect.
Beginning on August 2, 2021, German institutional funds will be able to hold up to 20% of their assets in cryptocurrencies, possibly setting the stage for wider mainstream acceptance of Bitcoin (BTC) and other crypto assets by the nation’s pension funds.
As Bloomberg reports, the new law alters fixed investment rules governing Spezialfonds, also known as special funds, which are only accessible to institutional investors such as pension funds and insurers. Spezialfonds currently manage about $2.1 trillion, or 1.8 trillion euros, worth of assets.
Tim Kreutzmann, who works for German investment fund association BVI, told Bloomberg that most funds will likely stay well below the 20% mark initially, explaining:
“On the one hand, institutional investors such as insurers have strict regulatory requirements for their investment strategies. And on the other hand, they must also want to invest in crypto.”
The new rule, which was passed in early July, represents an important evolution in how German lawmakers govern digital assets. Germany’s Federal Financial Supervisory Authority, better known as BaFin, continues to urge caution with respect to digital-asset investing. At the same time, the financial watchdog encourages blockchain innovation in the country.
Germany first embarked on a comprehensive blockchain strategy in 2019, promoting 44 adoption measures that are set to be realized by the end of 2021. The new approach to blockchain and crypto also introduced measures that would make it easier for investors to access digital investments.
The nation has also become a leading market for cryptocurrency exchange-traded products, or ETPs. As Cointelegraph reported, investment product issuer 21Shares has partnered with German brokerage comdirect to provide crypto-focused ETPs to nearly 3 million customers.
3. Square’s Cash App Q2 Bitcoin Revenue Rose 200%; $45M Bitcoin Impairment Loss Taken
Cash App’s bitcoin gross profit rose to $55 million, Square said in its Q2 letter to shareholders.
Jack Dorsey’s Square said its Cash App service’s bitcoin (BTC, -5.16%) yearly revenue rose 200% to $2.72 billion from $875 million while bitcoin gross profit jumped to $55 million from $17 million.
Bitcoin revenue and gross profit benefitted from YoY increases the price of bitcoin and bitcoin activities, and growth in customer demand, Square said in its Q2 financial letter to shareholders, which was released Sunday evening.
Bitcoin revenue and gross profit declined from Q1, mainly due to relative price stability, which affected trading activity compared with prior quarters.
Future quarters may see fluctuation in bitcoin revenue and gross profit as a result of changes in customer demand or market price, the letter says.
During Q2 Square recognized an impairment loss of $45 million on the in bitcoin the company holds. Because bitcoin is accounted for as an indefinite-lived intangible asset, if the value of bitcoin falls below the carrying value, an impairment is required.
As of June 30, the fair value of the company’s bitcoin investment was $281 million, $127 million greater than the carrying value. The company purchased its bitcoin for $50 million in Q4, and $170 million in Q1.
Overall, the company posted Q2 adjusted EPS of 66c, adjusted EBITDA of $360 million and total revenue of $4.68 billion.
Separately, Square announced on Sunday that it agreed to buy Australian installment payment company Afterpay in an all-stock deal worth $29 billion based on Square’s closing price on Friday.
4. Bitcoin sellers in ‘disbelief’ or BTC price wouldn’t still be at $41K
A small number of old hands choose to cover all their bases as BTC/USD clinches a July close above $41,000.
Bitcoin (BTC) closed July above $41,000 in a “bullish engulfing” candle that dramatically upends its previous downtrend.
In a tweet on Aug. 1, investor and entrepreneur Alistair Milne joined many celebrating a classic return to form for BTC price action.
Bitcoin refuses to flip bearish
After seeing three straight monthly red candles in a row, BTC/USD held onto late gains to post a monthly close that few had anticipated.
Despite the dip to $29,000, bears failed to stay in the driving seat as July drew to a close as resistance levels fell and sentiment improved.
“Bullish engulfing on the monthly chart for Bitcoin,” Milne summarized.
A bullish engulfing pattern is a chart pattern that forms when a small red candle is followed by a large green candle, i.e. July, the body of which completely covers or engulfs the body of the previous candle (June).
The move up — and its staying power — have been so surprising that even seasoned hodlers appear confused about what to do next.
On-chain data shows that some long-term holders (LTHs) are in fact selling as BTC/USD rises, something that analyst Lex Moskovski believes corresponds to the “disbelief” stage of a classic market cycle.
Moskovski highlighted the long-term holder spent output profit ratio indicator (LTH-SOPR), which this weekend hit its lowest levels in 2021.
SOPR looks at the value of coins moved in a particular time period to get an impression of profitability of coins being sold. A downtrend towards the neutral 1 value, host Glassnode explains, suggests that profitability among the coins in question is low.
“Some long-term bitcoin holders are selling into this bounce with minimal profit as indicated by LTH-SOPR hitting this year’s low for two days straight,” Moskovski commented.
5. Fed’s Brainard Says US Can’t Not Have a CBDC in a World in Which Others Have Them
Closer to home, Brainard said without a digital dollar the proliferation of stablecoins could fragment the payment system.
Chief among the reasons the U.S. needs to have a digital dollar is that other countries are racing to issue their own central bank digital currencies (CBDC), Federal Reserve Governor Lael Brainard said on Friday, Reuters reported.
Speaking at the Aspen Institute Economic Strategy Group, Brainard said,”The dollar is very dominant in international payments, and if you have the other major jurisdictions in the world with a digital currency, a CBDC offering, and the U.S. doesn’t have one, I just, I can’t wrap my head around that,” according to the Reuters report.
Earlier this month, Fed Chair Jerome Powell told a House committee that a Fed report on CBDC would come in early September as the central bank decides on the merits of issuing a digital dollar. Meanwhile, China is in the testing stage of its own CBDC.
Closer to home, Brainard said the proliferation of stablecoins could fragment the payment system without a digital dollar, according to the report.
A digital dollar could also help people without bank accounts to get government aid such as pandemic relief payments, Reuters quoted the Fed governor as saying.
Separately, Brainard said she doesn’t see any signs that currently high inflation readings are pushing longer-term inflation expectations above the central bank’s 2 percent target.
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August 2, 2021