Yesterday in Crypto - Issue #13

Read time: ~7 minutes

Here’s what you missed yesterday, 8/1/23.

Recent reports have emerged suggesting that Binance, one of the world's largest cryptocurrency exchanges, has been conducting substantial business operations in China, despite the country's stringent ban on cryptocurrencies. These allegations were initially published by The Wall Street Journal, which claimed that Binance users traded approximately $90 billion in cryptocurrency-related assets in China during a single month.

However, Binance has categorically denied these allegations, stating that its website is blocked in China and is not accessible to any China-based users. The exchange has also refuted claims that it has been maintaining a hidden presence in China, insisting that it has no operations in the country.

The Wall Street Journal's report was based on information from current and former Binance employees, as well as internal figures viewed by its reporters. The report suggested that Binance had continued to operate in China, despite the country's ban on cryptocurrencies, and had conducted billions of dollars worth of transactions monthly.

These allegations have sparked controversy and raised questions about Binance's compliance with regulatory frameworks. The exchange has previously faced scrutiny from regulators worldwide, with authorities in various countries questioning its operations and regulatory compliance.

Despite these allegations and the ongoing regulatory scrutiny, Binance continues to operate globally and remains one of the most prominent players in the cryptocurrency market. However, these recent allegations have underscored the need for greater transparency and regulatory compliance in the rapidly evolving cryptocurrency industry.

The race to launch Ethereum futures exchange-traded funds (ETFs) is intensifying, with six prominent asset managers, including Grayscale and VanEck, submitting applications to the U.S. Securities and Exchange Commission (SEC). The other contenders are Bitwise, Volatility Shares, ProShares, and Round Hill Capital.

Before we delve into the specifics of these applications, it's crucial to understand the difference between a futures ETF and a spot ETF. A futures ETF, as the name suggests, invests in futures contracts of an asset, in this case, Ethereum. Futures contracts are agreements to buy or sell the asset at a predetermined price at a specific future date. On the other hand, a spot ETF invests directly in the asset itself, meaning it would hold actual Ethereum in this case. The futures ETFs provide exposure to the price movements of Ethereum without the need to own the actual cryptocurrency, thereby bypassing the complexities of purchasing, storing, and safeguarding Ether. Futures ETF trading has no effect on the underlying price of the asset. Spot ETFs do.

Grayscale's application includes two proposed ETFs: the Grayscale Global Bitcoin Composite ETF and the Grayscale Ethereum Futures ETF. The latter will primarily invest in "front-month" Ether futures, which are contracts with the shortest time to maturity, traded on the Chicago Mercantile Exchange.

Volatility Shares also plans to list an Ether futures ETF, investing its assets in cash-settled contracts referencing ETH trading on the Chicago Mercantile Exchange. The fund will not invest directly in Ether.

VanEck's filing indicates that its investment strategy will look to invest in ETH futures contracts so that the value of ETH that the fund has exposure to is equal to 100% of the total assets of the fund.

ProShares, on the other hand, outlined their Short Ether Strategy ETF, which will invest in daily contracts that look to profit on losses of the S&P CME Ether Futures index. The ProShares fund would gain as much as the index loses on a given day, and vice versa.

These filings come amidst a wave of applications from various mainstream asset management firms looking to launch Bitcoin ETFs, including the world's largest asset manager, BlackRock. However, the SEC has yet to approve any ETF applications linked to Ethereum futures contracts, possibly due to concerns about Ether’s classification as well as liquidity levels

Fiat money, like the US Dollar, is a type of currency that isn't backed by a physical asset. Instead, its value comes from the trust we place in the government that issues it. Think of it like a promissory note from the government. When you have a $20 bill, it's not that the piece of paper is worth $20. It's that the US government promises to honor that note as being worth $20 in goods or services. However, because the government controls the supply of money, it can print more dollars when it needs to. This can lead to inflation, forcing you to spend more of your hard earned USD on the same goods and services, because each dollar is worth less.

On the other hand, hard money, like Bitcoin, has value that doesn't rely on a promise from a government. Bitcoin is a digital currency that's created, or "mined," by powerful computers solving complex problems. The key thing about Bitcoin is that there's a finite supply—only 21 million bitcoins will ever exist. This scarcity is part of what gives Bitcoin its value. It's a bit like gold, which has value because it's rare and difficult to extract from the earth.

The main difference between fiat money and hard money is in how their value is determined and who controls their supply. Fiat money's value is based on trust in the government, and the government can adjust its supply. Hard money like Bitcoin has value due to its scarcity and the effort required to mine it, and its supply is controlled by a pre-set algorithm, not a government.

Looking towards the future, the dynamics between fiat and hard money could evolve in interesting ways. As we've seen in recent years, trust in government-backed fiat currencies can fluctuate due to economic instability, political changes, or shifts in monetary policy. We saw a ridiculous amount of money printing during the pandemic - causing the value of world currencies to plummet.

This could potentially lead to a greater reliance on hard money, like Bitcoin, especially in countries experiencing hyperinflation or economic crisis. On the other hand, governments around the world are exploring the idea of digital currencies, or Central Bank Digital Currencies (CBDCs), which could blend aspects of both fiat and hard money. CBDCs will give governments total control, including the ability to limit your spending on certain goods and services.

“Jim, you contributed too much carbon to the world this month, so were limiting your purchases on gas and meat until further notice. Don’t worry, it’s for your own good!

Meanwhile, the future of Bitcoin and other cryptocurrencies hinges on factors like technological advancements, regulatory decisions, and their adoption by governments, corporations, retail, and treasuries. As these trends unfold, the balance between fiat and hard money will continue to shape the future of our global financial system.

Contrary to the bull run of 2021, the world as a whole seems fearful of crypto. Time for you to be greedy.

That’s all for today. We’ll see you on on tomorrow.

“I will tell you the secret to getting rich on Wall Street. You try to be greedy when others are fearful. And you try to be fearful when others are greedy.”

- Warren Buffett