Copper’s Weekly Dispatch – 20 October 2021

Analysing what went right, and what went wrong, in this week’s Crypto Weekly Dispatch

Copper

Copper’s weekly newsletter has been revamped and redesigned to provide an even more in-depth look at crypto markets.

Before we dive into the top stories making waves in the wider crypto market, there’s been a ton of activity here at Copper. A number of you may have read about our recent appointment of former UK chancellor, Philip Hammond, as a Senior Adviser.

On Monday, Lord Hammond appeared on CNBC’s Squawk Box to share his thoughts on the enormous potential of blockchain technology for the UK’s economic growth post-Brexit. He also touched on Copper’s role in enabling the growth of the institutional crypto market. If you missed it, you can catch the interview here.

Get used to seeing more of Copper on your TV screens. Our new TV commercial will be airing worldwide as soon as next week, so keep your eyes peeled.

Beneath the top headlines

ProShares Bitcoin strategy ETF made its trading debut. Who stands to benefit? Will big money actually pile into the asset class as a result?

The ProShares bitcoin futures ETF made its debut yesterday on the NYSE under the ticker ‘BITO’, marking a watershed moment for the digital asset space.

The landmark approval demonstrates that US regulators are more accepting of Bitcoin as an asset class. It’ll also likely legitimise cryptoassets in the eyes of many investors. But what remains questionable is whether the approval of a bitcoin futures ETF will materially increase adoption.

The ETF’s trading volume amassed over $1bn on its first day of trading, seeing immense interest from retail investors. On the back of the ETF debut, the price of bitcoin hit a new all time high today above $65.7k.

As it’s now been widely discussed, a bitcoin futures ETF is actually a pretty shoddy way for investors to get exposure to the asset. Futures create an artificial supply that dilutes Bitcoin’s price performance and leads to contango, making the ETF more costly for investors. A recent Twitter thread by Eaglebrook Advisors’ Joe Orsino uses the USO ETF (a futures-based ETF on crude oil) as an example to illustrate how futures ETF prices can diverge from spot.

We can’t realistically expect most of the retail market to be familiar with contango, meaning the initial hype surrounding this ETF may fade pretty quickly once these investors get hit with premiums and other fees that prevent them from getting true price exposure.

As a futures-based product, ProShares Bitcoin Strategy ETF will naturally generate ample opportunities for hedge funds for arbitrage. However, given that only those actively arbitraging the premium/discount to spot will stand to benefit from it, we remain skeptical that the product will continue to attract significant volumes in the long haul.

Some market participants may misconstrue this as lack of demand for bitcoin itself. The reality is simply that there are better ways out there of getting Bitcoin exposure.

One day after a16z released its policy agenda for crypto technologies, Coinbase advocated for a new regulator for digital asset markets. Will these efforts have the intended impact?

Coinbase and a16z (Andreessen Horowitz), two key players in the industry, last week came forward with proposed plans for regulating the digital assets in the US.

The proposal put forth by a16z urges policymakers to create a strategy for web3 technologies and determine appropriate regulations based on the risk of different types of products. It also pushes for DAOs to be given similar legal rights to those of a standard incorporated entity.

Coinbase, which is likely still in the bad books of the SEC following Armstrong’s public call-out of Gensler, makes the case for establishing a separate agency to oversee the activities of ‘marketplaces for digital assets,’ or MDAs. The report says that a new regulator would help to avoid ‘fragmented and inconsistent regulatory oversight.’

Whether the SEC and CFTC are best positioned to regulate digital assets in the US is currently a matter of intense debate. On social media, Coinbase’s proposal to institute a new regulator for the industry has garnered some support.

Our take? With the market now worth over $2.5 trillion, crypto certainly needs regulatory oversight. But we aren’t entirely convinced that a brand new regulator would be the industry’s saviour. A little more open dialogue and education with existing regulators may well be the key to resolving confusion and protecting the sector from ill-informed regulation.

CFTC fines Tether and Bitfinex $42.5m over USDT backing. What’s required to debunk one of the longest-running bearish narratives concerning Tether?

On Friday, Tether and Bitfinex were fined $42.5m by the CFTC. According to a CFTC news release, Tether’s stablecoin was only fully backed by reserves one-quarter of the time between 2016 and 2018. The release also stated that Tether mixed reserve funds with corporate money and maintained reserves in non-cash items.

Tether is of course vital to the liquidity and functionality of the entire crypto market. Many argue that its collapse would be disastrous for crypto exchanges, OTC desks, and also for the broader crypto markets.

It’ll be interesting to see what comes next out of a closed-door meeting tomorrow between members of the Financial Stability Oversight Council (FSOC) on the President’s Working Group’s pending white paper on stablecoins.

Some market commentators are predicting that US regulators will push for stablecoins to either be classed MMMFs (money market mutual funds) or issued by banks.

We personally hope that regulators mandate stablecoin issuers to disclose all their assets, including commercial paper holdings, to the general public. It’s only once the market gets full visibility into the pools of assets backing stablecoins that we can finally close the ‘Tether bear’ chapter and put it behind us.

Roundup of other key developments

INSTITUTIONAL

REGULATORY

COMPANY

CBDCs

WEB3/NFTs/METAVERSE

What to watch out for this week

Wednesday 20 October

-Copper team to attend HedgeWeek Americas Awards at The University Club of New York to collect the ‘Best Digital Asset Custodian’ award.

-Tesla is set to announce its third quarter 2021 financial results after the markets close. As usual, a conference call and Q&A with the company’s management is scheduled after the results.

Thursday 21 October

-a16z crypto team to meet with senior White House officials, regulatory agencies, and Congress to discuss its web3 policy agenda.

-Financial Stability Oversight Council (FSOC) will convene for an update on the President’s Working Group’s stablecoin whitepaper.

Friday 22 October

-Valkyrie Bitcoin Strategy ETF is expected to start trading under the ticker ‘BTFD’ (Buy The F*cking Dip) on the NYSE, on or before Friday.

Sunday 24 October

-The Copper team will head to to Las Vegas for Money 20/20 USA. From 24 Oct – 27 Oct, you can find us at booth 4009 at the conference. A key highlight of the event is of course the infamous Money 20/20 pool party, which this year is being held on the 25th, and that we’re delighted to be sponsoring. The first 50 people to scan in at our private cabanas will receive an exclusive Copper pool party pack to see you through the rest of your stay in Vegas! On the 26th, we’re hosting an exclusive party after the summit at Starlight on 66, the strip’s newest lounge towering over the neon views of Las Vegas. Read more.

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