21Shares Research Newsletter - Issue 85

Market Outlook - Bitcoin Consolidates Between $19-20K, U.S. Congresswoman Proposes Stablecoin Regulation, and More

After several weeks of peak euphoria as Bitcoin has climbed from a summer nestling within the $10K range to matching its all-time-highs of near-$20K over the last month, the asset appears to be settling down range bound between the $19K and $20K marks. This is undoubtedly a positive sign which points to the long-term sustainability of the current market as institutional, professional, and high-net-worth investors with longer time horizons continue to open their eyes to the investment opportunity of Bitcoin and the crypto asset market — especially from America.

Despite Bitcoin’s correlation with traditional capital markets increasing during certain periods of 2020, as of late during the current cycle Bitcoin’s correlation with the S&P500 is nearing zero. Bitcoin is once again providing itself as an uncorrelated asset with notable diversification benefits despite recent political and economic uncertainty.

It’s a sign of the times that despite the increased uncorrelated nature of Bitcoin and the cryptoasset market with traditional capital markets, investing in Bitcoin and Ethereum has continued to be the best way for an investor to outperform the wider market on a risk-adjusted basis. This trend will likely continue given how untapped the cryptoasset market still is. Investors and corporates like Microstrategy and Square have realized the benefits of adding Bitcoin to their balance sheet, there will likely be many more firms and funds that agree.

Weekly Returns

The performance of the top five cryptoassets is as follows: BTC (1.92%), ETH (0.61%), XRP (-0.75%), LTC (-2.04%), and BCH (-1.20%).

Monthly ETP Returns

The performance of our line of ETPs over the last 30 days is as follows: ABTC (27.7%), AETH (41%), ABCH (9.7%), AXRP (144.6%), ABNB (3%), AXTZ (8.7%), HODL (41%), ABBA (26.3%), KEYS (29.9%), and SBTC (-19.5%).

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Media Outlook

Yesterday, our President, Ophelia Synder, was invited to Money Show for the virtual ETF investing expo to discuss alternative ETFs such as the 21Shares product suite.

21Shares now holds more Bitcoin across our ETPs (4,867.18) than the leading fintech upstart Square Inc (4,709), which added $50 million worth of BTC to its balance sheet in early October this year. For more details, have a look at an index of various companies’ and funds’ Bitcoin holdings here.

News - Crypto's New Villain: Meet the Legal Scholar Behind the STABLE Act | Decrypt

What Happened?

Last Wednesday, December 2nd, Congresswoman Rashida Tlaib introduced a bill called the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act, co-sponsored by Representative Jesús “Chuy” García and Representative Stephen Lynch with the help of legal scholar, Rohan Grey. The bill aims at regulating stablecoin issuers and to some extent transaction facilitators, known as network nodes operating in the United States. If this bill becomes a law, stablecoin issuers such as Tether, the CENTRE consortium for USDC for example, will need to get a bank charter, receive approval by the Federal Reserve alongside ensuring that their deposits are FDIC insured.

Why Does It Matter?

Though the chances of this bill becoming a law are fairly low to non-existent as the 116th Congress comes to an end on January 3rd, 2021, the STABLE Act shook up the US-based crypto community claiming such an endeavor would stifle crypto adoption and financial inclusion. The predominant rationale behind the STABLE Act is to minimize systemic risk in times of crisis that could entail private money in the US monetary system such as cryptoassets pegged to the US dollars. In other words, the rise of DeFi services such as crypto lending, undoubtedly adds another layer of credit risks, which ultimately affects US-based systemically-important banks (SIBs) accepting US dollar-denominated deposits for stablecoins. The latest example of such risks is the Cred’s scandal, the crypto-enabled lending firm which was defrauded by its former chief capital officer, who ran off with approximately $3 million.

While the US monetary system benefits from the lender of last resort’s bailouts — the Federal Reserve, this is not the case for stablecoins heavily dependent on the well functioning and hegemony of the US monetary system. These cryptoassets are sometimes christened cryptodollars, analogous to eurodollars, which have no connection with the Euro or the Eurozone. The origin of eurodollars comes from the Marshall Plan signed by then US President Truman in 1948 to effectively support materially devastated European nations in rebuilding the continent in the aftermath of WWII. This financial aid led to a wide circulation of US dollars overseas because they were not supervised by US regulators nor covered by the FDIC insurance.

In contrast, cryptodollars such as USD Coin are backed by US dollars held in regulated financial institutions such as US national banks under the supervision of the US regulator, the Office of the Comptroller of the Currency (OCC). The core difference with eurodollars is the fact that they circulate on a blockchain and leverage the technology for execution, clearing, and settlement — and more than $25 billion worth of stablecoins is circulating mainly on the Ethereum blockchain.

The STABLE Act alongside the fact that G7 nations show strong support for stablecoins regulation, demonstrate the ingenuity and importance of Bitcoin as a standalone monetary system with its currency which doesn’t face any regulatory burden but can fuction alongside fiat currencies. Though this bill may not come to life under this Congress, at 21Shares we anticipate more regulatory actions for stablecoins in 2021.

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