Disrupting BTC Financialisation: Wallstreet's Plans for Bitcoin!
we have seen there has been a massive push in recent years for alternative investment options for bitcoin to be traded and invested in as a security. One suggestion that has made several court appearances is in recent years is the push for the first Crypto based ETF (Exchange Traded Fund). This usually allows investors to hedge other positions they are in, invest in bitcoin whilst being protected from the volatility. This will introduce many passive investors that wish to invest for the long term that is risk-averse, and we all know how passive investing creates distortions in the market for the active investors to take advantage of!
How does wall street fit into all this?
Wallstreet, are titans that enjoy playing by their own rules, though they have seen the massive amount of potential bitcoin has, they have not fully delved deep inside without ensuring they can be able to financialise it.
How does wall street plan to financialise Bitcoin?
wall street is craft and we must look at the two types of securities, and how they can be monetized based off their nature. Now wallstreet loves debt, that is one thing we must understand, now through their love of debt whenever they come into an asset they will fit into one of two categories:
- Equity-based asset: this is the type of asset that is owned by individuals and duplicates are very hard to make thus the leading and expansion of supply is near impossible, gold for example in its physical form is an equity-based asset.
- Debt-based asset: This is an asset that is replicable multiple times over, this is without really any restriction. as long as the promise is there and the game of confidence can be kept up the shared and the production of debt on a single item can be multiplied endlessly if it need be.
The Equity asset class is where bitcoin lies, which makes it hard for the asset to be monetized by the banks hence they will be involved as there are already universities that are investing portions of their endowments into Cryptocurrencies.
Learning from history:
The mortgage has been around since 1190, and a mortgage by itself was an equity-based asset, it was hard to replicate and there were only so many mortgages as there was only a finite amount of people able to purchase homes and so many homes. The first mortgage-backed security (MBS) was first issued in 1968, this being security that now was not really the physical asset itself but a claim check on multiple homes. How it worked was that thousands of mortgages were packed together and arranged into tranches, allows for the risky ones that are likely to default first to have a higher yield, and the highest quality paying lower premiums but have lower chances of default.
The MBS was a claim check to the payouts of mortgages, allowing for the barrier to owning a home to lower, one bank would issue out mortgages then proceed to package the mortgages into bundles only to loanthem to another investor for them to take on the risk, now these were sold at unprecedented rates which allowed for more MBS’s to be sold than there were mortgages as many alternative financial products rose in popularity. Now, this allowed the banks to loan the debt that was the mortgages to other investors as if they were legitimate money. This posed a systemic risk as this is a big reason why the derivatives markets are soo big and experts are unsure about its size as it can be from 600trillion to 1.2quadtrillion US dollars!!
The banks were not exchanging the actual ownership of the houses, but the claim check that entitled the new investing entity to own the debt Thus have the right to future payoffs, now this is all good and well whilst there are liquidity and expansion still has room to grow. But what if we reach a limit?
I will now give an example on how when abused this if I have a mortgage of $100,000 and it has been loaned out between 10 different banks, that now becomes an issue as my debt is being seen as good actual money in their eyes… An asset, so if i default on my debt, this once $100,000 has now wiped out $1,000,000! This is because each time it is being loaned out it is expected that the payouts are going to be on time, and completed! This is now done on a massive scale with high levels of leverage which lead to a global financial meltdown in 2008!
What does this mean? Will they create more bitcoin?
No, they will not mint anymore than 21million as that is impossible to do, and if it was to ever happen, we would see bitcoin potentially go to zero! But the way they will make more BTC is by taking Bitcoin off the blockchain and centralizing it! this will now allow for the issuance of receipts that people will see as legitimate as the physical asset. So now they are in debt by owning us the bitcoin as they store it, and that debt is now an asset to us!
We have seen the same with Gold as there are ETF’s that are physically backed but we just have claim checks and no delivery of the gold. They even have Synthetic ETF’s that are shown to not have any backing related to gold but other uncorrelated assets a lot of the time that will mimic the price movements of gold with cash being added or taken away. This, of course, is trusted by institutions!
The Bitcoin ETF has been denied thus far but can be one way that is being promoted as something positive but will also allow for the slow financialization of the crypto asset!
One thing we should remember is not everything that we see and hear being that is going to be good for us is true.
As always keep safe during COVID and please make sure you leave a clap and comment on any improvements that can be made for future improvement…Thanks in advance!