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Tag: alternative investments

  • Corporate Actions – Dividend Arbitrage – Cumex “Cum-Ex” Transaction Litigation

    Corporate Actions are well defined by Investopedia. A corporate action is any activity that brings material change to an organization and impacts its stakeholders, including shareholders, both common and preferred, as well as bondholders. When a publicly traded company issues a corporate action, they are initiating a process that directly affects the securities issued by that company. Therefore, the board of directors is generally always involved, with shareholder involvement sometimes even required. In the event of a major takeover possibility, for example, shareholders may be required to submit a response giving their input. After researching, it seems the most common corporate actions can be condensed into dividends, stock splits, mergers, acquisitions, and spinoffs.

    According to Institutional investor, BNY Mellon has been the largest custodian in the world for the last 8 years. Given that fact, corporate actions can be of particular interest to them. Again, due to their custodianship business, one can imagine how a poorly executed or thought-out take-over, for example, could affect not only the entire company, but furthermore spread to other very large investment institutions, brokerages, hedge funds, etc. that would otherwise be solvent.

    What is Dividend Arbitrage?

    Options traders in the tri-party repo market would also be familiar with dividend arbitrage. Dividend arbitrage is an arbitrage strategy that may seem complex, but once you break it down it’s relatively straightforward. To understand this strategy, you first need to understand an ex-dividend date. Secondly, I would point out this strategy is typically exercised by options traders. The arbitrage occurs whereby, the options trader buys both the stock and the equivalent number of put options before ex-dividend, then waits to collect the dividend before exercising his put. Let’s look at a hypothetical example to understand that better.

    FinYork stock is trading at $90 per share and is paying a $2 dividend tomorrow. A put with a striking price of $100 is selling for $11. Here, an options trader can enter a risk-less dividend arbitrage by purchasing both the stock for $9000, as well as the put for $1100, for a grand total of $10,100.

    A second, seemingly more complicated way to engage in a dividend arbitrage occurs using “covered writes”. On the day before ex-dividend date, you can do a covered write by buying the dividend paying stock, then simultaneously writing an equivalent number of “deep in-the-money” call options on it. The call strike, price plus the premiums received, should be equal or greater than the current stock price. On ex-dividend date, assuming no “assignment” takes place, you will have qualified for the dividend. While the underlying stock price will have drop by the dividend amount, the written call options will also register the same drop, since “deep-in-the-money” options have a delta of nearly 1. Then, one can sell the underlying stock, buy back the short calls at no-loss and wait to collect the dividends.

    The risk in using this strategy is that of an “early assignment” taking place before the ex-dividend date. If assigned, one would not be able to qualify for the dividends.

    Litigation Against “Cum-Ex Transactions”; A Form of Dividend Arbitrage

    There have been a number of these lawsuits now, especially civil cases, largely in Europe from my research. However, I believe the litigation has now also spilled over into US courts. From my findings, litigation against “cum-ex transactions” originated in Germany. More specifically, in 2019, in Germany it was reported over 100 banks were being investigated for “cum-ex” or “Cumex” transactions involving ‘huge volumes’ leading up to 2012. A cum-ex transaction is a complex form of dividend arbitrage or dividend stripping.

    “For the purpose of dividend arbitrage, traders in alternative tax jurisdictions trade shares around dividend dates. Cum-ex trades specifically serve as a mechanism allowing both the buyer and seller of shares to recover capital gains tax (CGT) paid only once on dividend income. The transactions involve acquiring shares ‘cum dividend’ (including dividend right) just before a dividend is due, and then selling ‘ex dividend’ (without dividend right) after the dividend record date. The various steps are processed very quickly, making it difficult to identify the true owner of the shares, thus enabling multiple parties to claim tax credits or tax compensation payments for CGT paid only once. This process often involves the original owner of the shares, the bank or broker that sells them short, and the buyer who purchases them on dividend day. It has been common for the parties to split the proceeds of the tax refunds.”
    -Yorick M Ruland, International Bar Association

    As Yorick spells out, this form of dividend arbitrage requires the involvement of corrupt shareholders and brokers alike. Considering the processes complexity and the capabilities to catch perpetrators of these financial schemes alike, many go unaccounted for. That hasn’t stopped the ones who do get caught from facing both criminal and civil penalties.

  • What’s Next for Cryptocurrencies and Digital Assets, Post-2020s Recession

    The macroeconomic outlook for the cryptocurrency/digital asset market is definitely not looking good, at this time. There are a multitude of reasons. I think this is largely because Cryptocurrencies are considered “trendy” in financial services, however I’ve recently been asked for my take on specific Crypto’s (Bitcoin primarily) and what I’ve come to refer to as “Complex Crypto’s” (ETFs, other Exchange Traded Crypto Securities, Crypto IRA’s, etc.). Of course, at the center of this conversation is Cryptocurrency mining and trading. As most who follow this market even casually know, the two are intimately related.

    Standpoint on Cryptocurrency and Digital Assets Throughout the Recession

    Disclaimer: Pro-crypto enthusiasts will not be happy. This is how I’d put it, favorably. I see the cryptocurrency market, coming out of the recession – assuming it does – with entirely new technologies, marketing strategies, market dynamics, etc. To elaborate, let’s take what we can all agree to be true about the cryptocurrency fan base today, largely speaking. They’re a) not long-term strategists, b) very weak (or completely incoherent) when it comes to basic knowledge of financial markets and even more complex financial instruments, and c) the composition of cryptocurrency investors is not one you’d generally – or ever – consider “cash rich” compared to other investors (both individual and institutional).

    We’re looking at a market with the majority of participants being short-term, stubborn and perhaps unqualified thinkers, with little to no savings to boot. Market dynamics aside, Bitcoin has been religiously dropping for quite a while now. If conceptually it doesn’t make sense and the numbers aren’t there, investors are in deep trouble.

    Fast forward a few months. The Fed continues their ongoing strategy of “deflating the inflation” with historically “aggressive” rate hikes. The participants in the market described above would generally be considered high in terms of price elasticity. Meaning, their sensitivity to pricing changes is above average. In prices rise, they are more likely to sell quicker than someone who is more price inelastic, perhaps because they have a larger savings (as an example). On average, the same cryptocurrency enthusiasts who decided to invest in a Crypto ITF are the ones who will be forced to sell off their digital asset portfolio the quickest.

    When the average cryptocurrency enthusiast starts to get more and more burdened by everyday essentials, their digital wallet’s intrinsic value will diminish rapidly. Are you willing to struggle to pay rent to hold onto Bitcoin at the price you bought it? If you’re already a short-term thinker, the answer is more or less common sense. No. Nor are you willing to sell your house to maintain a bullish position on Bitcoin (if you’ll be in one of the unfortunate groups that lose their job in the recession).

    The Cryptocurrency Enthusiasts with Never-ending Dedication

    Cryptocurrency enthusiasts will undoubtably disagree with the short-term thinking narrative, but it’s respectfully backwards. There’s no other asset in financial markets you’ve analyzed as a better bet for the long-term. Really? Not the S&P 500 Index? US Treasuries that have never defaulted? If you’re looking for enhanced potential for extravagant short-term returns, cryptocurrency is an area for you. But that’s a complete contradiction to the long-term value proposition. There is none.

    Their last standing argument: Blockchain Technology. This is debated in part, but the general consensus among the Crypto community appears to be along the lines of, “Blockchain technology is considered a commodity and regulated by the CFTC that we simply cannot live without as a society. Therefore, Bitcoin will survive and prosper through any recession, since we have propriety technology that will revolutionize the world” [I’m paraphrasing]. This technology is by no means universally accepted in traditional financial markets. Bill Murray’s Ethereum wallet was recently infamously hacked. This will no doubt bolster the SEC’s position against institutionalizing digital assets.

    It’s relied on even less so by traditional financial investors. Let’s not forget, the SEC is still unwilling to budge on a Bitcoin spot ETF with the number one concern being lack of technological innovation to eliminate jacking and market manipulation. If the SEC says it’s too dangerous, where do you think institutional investors will fall with the current macroeconomic trajectory? Why is Bill Murray’s Ethereum wallet suddenly the focus of all the daily financial newsletters?

    Near and Long-Term Cryptocurrency and Digital Assets Outlook

    In the near term (3-4 months), look for prices to continue dropping steadily. This goes across the board for all digital assets. In the long term (1.5-2+ years), that becomes a very complicated question when you dig into potential hypotheticals. Digital assets and cryptocurrencies are almost completely unregulated. There are no remotely serious regulatory requirements or disclosures of any information about holdings reports, portfolio allocation, investor reports, or any other typically standard financial accounting. That was part of the initial pitch: anonymity.

    Now, when purely digital asset portfolio managers like Grayscale want to get through to institutional investors, they start to create SEC approved Bitcoin Trusts, strategically push for Bitcoin spot ETFs, make it publicly known they own roughly 4% of all of Bitcoin, etc. That goes back to an original point. Bitcoin and cryptocurrencies may not get completely cratered like the dinosaurs did, but will we have thousands – or tens of thousands – of different cryptocurrencies, trading on infinite different platforms, with an unlimited amount of different marketed benefits? I don’t see it.

    Are Cryptocurrencies and Digital Assets Going to Crash from the Recession?

    To the more interesting question, can digital assets become the modern-day dinosaurs? It’s vaguely possible, but unlikely. This is where global politics, luck, and irrational/unconventional investor behavior tend to make the largest impacts. Let’s say Bitcoin drops below $5,000 and Grayscale, owning roughly 4%, assesses a further drop to $3,000 by next month. What does Grayscale do? Every financial product they sell is a digital asset and they’ve marketed Bitcoin as the obvious face. They get absolutely no protections from bankruptcy and neither do their investors. Yet, with the amount of Bitcoin they own, could they theoretically have backdoor discussions that would lead to the price of Bitcoin artificially being propped up? It’s a definite theoretical possibility.

    Again, we don’t know who Grayscale would be in the room and how much bargaining power they’d have. To the cryptocurrency enthusiasts who think it’s “cool” to invest in cryptocurrencies specifically because executives at traditional investment institutions are known for appeasing shareholders (in other words, doing their jobs) and “throwing investors under the bus”, well what do you think will happen to you? Will the CEO responsible for making those decisions that has the potential to change investors lives do the “ethical” thing because they don’t have shareholders to protect? I think the fair and impartial response is that remains to be seen. That’s the truth.

    Let’s face it: cryptocurrencies and digital assets are in for the fight for their existence. This is newfound territory for this comparatively new market. It will absolutely shed so much more light than we have today about investors true perspectives and feelings on digital assets. At the end of the day, in a world where quantitative data leads investment decisions, rather than personal belief and alleged loyalty, we’ll have to see what executives and cryptocurrency holders alike do on a broad scale.

    The Bottom Line and What to Do

    The “correct” decision – meaning the decision statistically likely to have the most favorable outcome – would be to reinvest your holdings elsewhere. The risk is way too big, while the reward is way too small or nonexistent. Of the at-risk assets on the chopping block, digital assets are first in line. There is no remotely likely scenario where cryptocurrency supporters get to say “I told you so” anytime soon.

    In reality, what you do is listen to the experts, at least in this case. No one’s saying you need to get your IRA, or any other investment vehicle out for that matter, but you can’t think of a more prudent investment given the economic climate you’re being explained? What about real estate? You have the benefit of a physical asset, upside to earn capital gains if market prices increase, and at the simplest level, housing is essential. Individuals will never not need housing. If the recession impact results in a catastrophic scenario, you have an asset with no real danger of going to zero.

    If you’re going to hunker down and stay invested in digital assets until the end, you can still diversify and reduce your exposure. There are Bitcoin futures ETFs, like the VanEck Bitcoin Strategy ETF we discussed last time. There is the SEC-backed Bitcoin Trust; Grayscale’s GBTC. You can invest in hard currencies that would offset your exposure to digital currencies.

    There’s a plethora of options of the astute investor, but the question in my mind continues to be, why? Why go through an agonizing recession, where you’ll make difficult financial choices just to maintain your current cryptocurrency holdings? Again, if you’re so over-the-top for Blockchain technology, it will be available for purchase at a lower price in the future. But the near future? No chances from the present. Bitcoin will continue to systematically drop daily until there is major turnaround. There’s no telling what that will look like yet.

    The Warren Buffett Philosophy

    Consider this quote from Warren Buffett and how it applies to this debate. Buffett is universally known as the most intelligent and disciplined value-based investor of our generation.

    “People should only [make investments] in companies that exhibit solid fundamentals, strong earnings power, and the potential for continued growth.”

    -Warren Buffett, Unpublished

    Does the cryptocurrency market currently a) exhibit solid fundamentals, b) has strong earnings power, or c) has a solid potential for future growth? The answer to all three is no. That’s likely why Buffet has always remained a staunch opponent to digital assets. Buffet’s average holdings are somewhere from 10-34 years. It’s more than fair to say he views investing as a marathon, not a race.

    Concisely, as all other major financial news agree, the cryptocurrency market is at a crucial testing point, at bare minimum. We know crypto products aren’t going to gain market value during a recession, for sure. However, the extent of the damages digital assets will take compared to other “at-risk” assets remains to be seen. Time, Forbes, CNBC, and Reuters all predicted major cryptocurrency market tumbles during the recession just this week. Again, a lot of it will depend on luck and how things play out, but there are actions you can take as an investor to mitigate your exposure to the bullish side of the crypto/digital asset market during a recession.

    I’ll end with one final argument against cryptocurrencies and digital assets. Ironically, this goes against Warren Buffett’s main investing principle (at least in part). I believe he’s said that during a recession, his investment philosophy changes, but I was unable to find that quote.

    “Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

    -Warren Buffett, Unpublished

    The Secret Behind Buffett’s Legacy: Some Deals are Simply too Risky

    Whether you agree with the risks to digital assets now or not, Buffett is spot on as usual. He has more famous quotes regarding investing in the stock market for the long-term, which is what he starts with. Buffett has held AXP (American Express) since 1964, KO (Coca-Cola) since 1988, and Wells Fargo (WFC) since 1989. Buffett’s outlook on the stock market is almost exclusively dependent on his analysis of that specific business. He’ll look at the financials in extensive detail, but he’ll also study the business model. How the company generates profits, what kinds of costs they incur. He’s the third richest person in the world off investments alone. Warren Buffett – rather than major investment banks or cash lenders – is known to have plenty of available cash during a recession or financial panic.

    Why? He hedges anywhere he’s far too overexposed and to boot, he has a knack for taking good bets on massively successful companies. In the context of cryptocurrency and digital assets, are they going to withstand all those arduous times? WWI & WWII, Vietnam, the Great Depression, over a dozen recessions and financial panics, oil shocks, a fly epidemic, and a political catastrophe? That wasn’t just an ego-trip; Buffett lived through those eras and more so, he prospered through them. Very few, if any, can say the same. Buffett stays away from a certain level of risk, period. No matter what the potential or hypothetical reward is, Buffett doesn’t execute the deal unless it’s met his standards.

    In Conclusion…

    With the way Blockchain was initially pitched, then repurposed, and gained little traction since is worrisome to me. The bottom line is cryptocurrency and digital assets have nowhere to go but down during an impactful recession. What you should do, in full sincerity, depends almost exclusively on your investing goals and available capital. In common, everyday situations – for example purchasing an overpriced digital currency – you should still mitigate your losses.

    You don’t want to be taking a bigger loss because you were too stubborn to take a much smaller one initially. I believe we’ll wind up seeing a lot of cryptocurrency investors in that boat. At what point will they be willing to toss it in and accept this investment just didn’t work out? Will they get to that point? Time will tell. What’s certain is the magnitude the recession’s impact will have on the cryptocurrencies and digital assets markets.

  • What’s Next for Cryptocurrencies and Digital Assets, Post-2020s Recession

    The macroeconomic outlook for the cryptocurrency/digital asset market is definitely not looking good, at this time. There are a multitude of reasons. I think this is largely because Cryptocurrencies are considered “trendy” in financial services, however I’ve recently been asked for my take on specific Crypto’s (Bitcoin primarily) and what I’ve come to refer to as “Complex Crypto’s” (ETFs, other Exchange Traded Crypto Securities, Crypto IRA’s, etc.). Of course, at the center of this conversation is Cryptocurrency mining and trading. As most who follow this market even casually know, the two are intimately related.

    Standpoint on Cryptocurrency and Digital Assets Throughout the Recession

    Disclaimer: Pro-crypto enthusiasts will not be happy. This is how I’d put it, favorably. I see the cryptocurrency market, coming out of the recession – assuming it does – with entirely new technologies, marketing strategies, market dynamics, etc. To elaborate, let’s take what we can all agree to be true about the cryptocurrency fan base today, largely speaking. They’re a) not long-term strategists, b) very weak (or completely incoherent) when it comes to basic knowledge of financial markets and even more complex financial instruments, and c) the composition of cryptocurrency investors is not one you’d generally – or ever – consider “cash rich” compared to other investors (both individual and institutional).

    We’re looking at a market with the majority of participants being short-term, stubborn and perhaps unqualified thinkers, with little to no savings to boot. Market dynamics aside, Bitcoin has been religiously dropping for quite a while now. If conceptually it doesn’t make sense and the numbers aren’t there, investors are in deep trouble.

    Fast forward a few months. The Fed continues their ongoing strategy of “deflating the inflation” with historically “aggressive” rate hikes. The participants in the market described above would generally be considered high in terms of price elasticity. Meaning, their sensitivity to pricing changes is above average. In prices rise, they are more likely to sell quicker than someone who is more price inelastic, perhaps because they have a larger savings (as an example). On average, the same cryptocurrency enthusiasts who decided to invest in a Crypto ITF are the ones who will be forced to sell off their digital asset portfolio the quickest.

    When the average cryptocurrency enthusiast starts to get more and more burdened by everyday essentials, their digital wallet’s intrinsic value will diminish rapidly. Are you willing to struggle to pay rent to hold onto Bitcoin at the price you bought it? If you’re already a short-term thinker, the answer is more or less common sense. No. Nor are you willing to sell your house to maintain a bullish position on Bitcoin (if you’ll be in one of the unfortunate groups that lose their job in the recession).

    The Cryptocurrency Enthusiasts with Never-ending Dedication

    Cryptocurrency enthusiasts will undoubtably disagree with the short-term thinking narrative, but it’s respectfully backwards. There’s no other asset in financial markets you’ve analyzed as a better bet for the long-term. Really? Not the S&P 500 Index? US Treasuries that have never defaulted? If you’re looking for enhanced potential for extravagant short-term returns, cryptocurrency is an area for you. But that’s a complete contradiction to the long-term value proposition. There is none.

    Their last standing argument: Blockchain Technology. This is debated in part, but the general consensus among the Crypto community appears to be along the lines of, “Blockchain technology is considered a commodity and regulated by the CFTC that we simply cannot live without as a society. Therefore, Bitcoin will survive and prosper through any recession, since we have propriety technology that will revolutionize the world” [I’m paraphrasing]. This technology is by no means universally accepted in traditional financial markets. Bill Murray’s Ethereum wallet was recently infamously hacked. This will no doubt bolster the SEC’s position against institutionalizing digital assets.

    It’s relied on even less so by traditional financial investors. Let’s not forget, the SEC is still unwilling to budge on a Bitcoin spot ETF with the number one concern being lack of technological innovation to eliminate jacking and market manipulation. If the SEC says it’s too dangerous, where do you think institutional investors will fall with the current macroeconomic trajectory? Why is Bill Murray’s Ethereum wallet suddenly the focus of all the daily financial newsletters?

    Near and Long-Term Cryptocurrency and Digital Assets Outlook

    In the near term (3-4 months), look for prices to continue dropping steadily. This goes across the board for all digital assets. In the long term (1.5-2+ years), that becomes a very complicated question when you dig into potential hypotheticals. Digital assets and cryptocurrencies are almost completely unregulated. There are no remotely serious regulatory requirements or disclosures of any information about holdings reports, portfolio allocation, investor reports, or any other typically standard financial accounting. That was part of the initial pitch: anonymity.

    Now, when purely digital asset portfolio managers like Grayscale want to get through to institutional investors, they start to create SEC approved Bitcoin Trusts, strategically push for Bitcoin spot ETFs, make it publicly known they own roughly 4% of all of Bitcoin, etc. That goes back to an original point. Bitcoin and cryptocurrencies may not get completely cratered like the dinosaurs did, but will we have thousands – or tens of thousands – of different cryptocurrencies, trading on infinite different platforms, with an unlimited amount of different marketed benefits? I don’t see it.

    Are Cryptocurrencies and Digital Assets Going to Crash from the Recession?

    To the more interesting question, can digital assets become the modern-day dinosaurs? It’s vaguely possible, but unlikely. This is where global politics, luck, and irrational/unconventional investor behavior tend to make the largest impacts. Let’s say Bitcoin drops below $5,000 and Grayscale, owning roughly 4%, assesses a further drop to $3,000 by next month. What does Grayscale do? Every financial product they sell is a digital asset and they’ve marketed Bitcoin as the obvious face. They get absolutely no protections from bankruptcy and neither do their investors. Yet, with the amount of Bitcoin they own, could they theoretically have backdoor discussions that would lead to the price of Bitcoin artificially being propped up? It’s a definite theoretical possibility.

    Again, we don’t know who Grayscale would be in the room and how much bargaining power they’d have. To the cryptocurrency enthusiasts who think it’s “cool” to invest in cryptocurrencies specifically because executives at traditional investment institutions are known for appeasing shareholders (in other words, doing their jobs) and “throwing investors under the bus”, well what do you think will happen to you? Will the CEO responsible for making those decisions that has the potential to change investors lives do the “ethical” thing because they don’t have shareholders to protect? I think the fair and impartial response is that remains to be seen. That’s the truth.

    Let’s face it: cryptocurrencies and digital assets are in for the fight for their existence. This is newfound territory for this comparatively new market. It will absolutely shed so much more light than we have today about investors true perspectives and feelings on digital assets. At the end of the day, in a world where quantitative data leads investment decisions, rather than personal belief and alleged loyalty, we’ll have to see what executives and cryptocurrency holders alike do on a broad scale.

    The Bottom Line and What to Do

    The “correct” decision – meaning the decision statistically likely to have the most favorable outcome – would be to reinvest your holdings elsewhere. The risk is way too big, while the reward is way too small or nonexistent. Of the at-risk assets on the chopping block, digital assets are first in line. There is no remotely likely scenario where cryptocurrency supporters get to say “I told you so” anytime soon.

    In reality, what you do is listen to the experts, at least in this case. No one’s saying you need to get your IRA, or any other investment vehicle out for that matter, but you can’t think of a more prudent investment given the economic climate you’re being explained? What about real estate? You have the benefit of a physical asset, upside to earn capital gains if market prices increase, and at the simplest level, housing is essential. Individuals will never not need housing. If the recession impact results in a catastrophic scenario, you have an asset with no real danger of going to zero.

    If you’re going to hunker down and stay invested in digital assets until the end, you can still diversify and reduce your exposure. There are Bitcoin futures ETFs, like the VanEck Bitcoin Strategy ETF we discussed last time. There is the SEC-backed Bitcoin Trust; Grayscale’s GBTC. You can invest in hard currencies that would offset your exposure to digital currencies.

    There’s a plethora of options of the astute investor, but the question in my mind continues to be, why? Why go through an agonizing recession, where you’ll make difficult financial choices just to maintain your current cryptocurrency holdings? Again, if you’re so over-the-top for Blockchain technology, it will be available for purchase at a lower price in the future. But the near future? No chances from the present. Bitcoin will continue to systematically drop daily until there is major turnaround. There’s no telling what that will look like yet.

    The Warren Buffett Philosophy

    Consider this quote from Warren Buffett and how it applies to this debate. Buffett is universally known as the most intelligent and disciplined value-based investor of our generation.

    “People should only [make investments] in companies that exhibit solid fundamentals, strong earnings power, and the potential for continued growth.”

    -Warren Buffett, Unpublished

    Does the cryptocurrency market currently a) exhibit solid fundamentals, b) has strong earnings power, or c) has a solid potential for future growth? The answer to all three is no. That’s likely why Buffet has always remained a staunch opponent to digital assets. Buffet’s average holdings are somewhere from 10-34 years. It’s more than fair to say he views investing as a marathon, not a race.

    Concisely, as all other major financial news agree, the cryptocurrency market is at a crucial testing point, at bare minimum. We know crypto products aren’t going to gain market value during a recession, for sure. However, the extent of the damages digital assets will take compared to other “at-risk” assets remains to be seen. Time, Forbes, CNBC, and Reuters all predicted major cryptocurrency market tumbles during the recession just this week. Again, a lot of it will depend on luck and how things play out, but there are actions you can take as an investor to mitigate your exposure to the bullish side of the crypto/digital asset market during a recession.

    I’ll end with one final argument against cryptocurrencies and digital assets. Ironically, this goes against Warren Buffett’s main investing principle (at least in part). I believe he’s said that during a recession, his investment philosophy changes, but I was unable to find that quote.

    “Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

    -Warren Buffett, Unpublished

    The Secret Behind Buffett’s Legacy: Some Deals are Simply too Risky

    Whether you agree with the risks to digital assets now or not, Buffett is spot on as usual. He has more famous quotes regarding investing in the stock market for the long-term, which is what he starts with. Buffett has held AXP (American Express) since 1964, KO (Coca-Cola) since 1988, and Wells Fargo (WFC) since 1989. Buffett’s outlook on the stock market is almost exclusively dependent on his analysis of that specific business. He’ll look at the financials in extensive detail, but he’ll also study the business model. How the company generates profits, what kinds of costs they incur. He’s the third richest person in the world off investments alone. Warren Buffett – rather than major investment banks or cash lenders – is known to have plenty of available cash during a recession or financial panic.

    Why? He hedges anywhere he’s far too overexposed and to boot, he has a knack for taking good bets on massively successful companies. In the context of cryptocurrency and digital assets, are they going to withstand all those arduous times? WWI & WWII, Vietnam, the Great Depression, over a dozen recessions and financial panics, oil shocks, a fly epidemic, and a political catastrophe? That wasn’t just an ego-trip; Buffett lived through those eras and more so, he prospered through them. Very few, if any, can say the same. Buffett stays away from a certain level of risk, period. No matter what the potential or hypothetical reward is, Buffett doesn’t execute the deal unless it’s met his standards.

    In Conclusion…

    With the way Blockchain was initially pitched, then repurposed, and gained little traction since is worrisome to me. The bottom line is cryptocurrency and digital assets have nowhere to go but down during an impactful recession. What you should do, in full sincerity, depends almost exclusively on your investing goals and available capital. In common, everyday situations – for example purchasing an overpriced digital currency – you should still mitigate your losses.

    You don’t want to be taking a bigger loss because you were too stubborn to take a much smaller one initially. I believe we’ll wind up seeing a lot of cryptocurrency investors in that boat. At what point will they be willing to toss it in and accept this investment just didn’t work out? Will they get to that point? Time will tell. What’s certain is the magnitude the recession’s impact will have on the cryptocurrencies and digital assets markets.

  • Grayscale Investments, LLC Presents: Grayscale Bitcoin Trust (GBTC), Bitcoin’s First Spot ETF?

    Amongst the latest “hot topics” in the Financial Technology (FinTech) space is a cryptocurrency product aimed at changing the receptiveness of the international investment community to cryptocurrencies. Grayscale Investments, LLC has created the GBTC (Grayscale Bitcoin Trust), in an attempt to make a cryptocurrency product more marketable to institutional investors, pension funds, and other more traditional investment vehicles. Whether this approach will work in the long-term seems to be very hotly contested at the moment, for a number of reasons.

    The Grayscale Bitcoin Trust (GBTC)

    Surprisingly – though maybe not to many in the crypto community – Grayscale largely markets the GBTC for its “robust security and storage”. You would think that as an asset manager, even a crypto asset manager, Grayscale would be more excited about presenting numbers that investors are typically hungry for. However, they lead by offering the following:

    “Grayscale Bitcoin Trust’s assets are stored in offline or “cold” storage with Coinbase Custody Trust Company, LLC, as Custodian. The Custodian is a fiduciary under § 100 of the New York Banking Law and a qualified custodian for purposes of Rule 206(4)-2(d)(6) under the Investment Advisers Act of 1940, as amended.”

    Grayscale Investments, LLC (2022)

    Additional benefits, advertised by Grayscale, to purchase the GBTC include tax-advantaged account eligibility, “titled, auditable ownership [of a crypto asset] through a traditional investment vehicle”, publicly quoted price (OTCQX®: GBTC), and support from a network of trusted providers (this is where they let you know they have hired global financial services legal tycoon Davis Polk & Wardwell LLP). Why is that relevant?

    The SEC’s Ruling on Grayscale’s Bitcoin Spot ETF

    At the top of Grayscale’s website, you’ll see a banner with a hyperlink stating, “We’ve received a decision in our application to convert GBTC to an ETF”. That’s the real storyline here. It’s not the GBTC, it’s the fact that the SEC has disallowed Grayscale to convert the GBTC into a Bitcoin spot ETF. The concise version of the SEC’s 86-page decision can be captured in the following paragraph:

    “This order disapproves the proposed rule change, as modified by Amendment No. 1. The Commission concludes that NYSE Arca has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of Exchange Act Section 6(b)(5), which requires, in relevant part, that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices’ and ‘to protect investors and the public interest.’’’

    SEC, Release No. 34-95180; File No. SR-NYSEArca-2021-90 (July 22, 2022)

    Grayscale immediately responded by hiring former U.S. Solicitor General, Donald B. Verrilli, Jr. – best known for arguing President Obama’s ACA (Affordable Care Act) successfully before the US Supreme Court – who filed an appeal of the SEC’s ruling. Grayscale says they had no choice but to escalate the matter, given the “SEC’s arbitrary and capricious actions and discriminatory treatment of issuers”. The appeal seems to be almost exclusively relying on the argument that the SEC has allowed multiple Bitcoin futures ETFs into the marketplace. Furthermore, since their treatment of futures and spots of derivatives is generally similar, they are unjustly denying investors access to a new marketplace: Bitcoin spot ETFs. GBTC has the potential to become the first Bitcoin spot ETF to be approved by the SEC.

    A High-Level Look at GBTC’s Financials

    Below you can see some basic financials on GBTC from Grayscale’s website. They include the CUSIP (389637109), where we’ll use Bloomberg to investigate GBTC’s high-level financials.

    Source: Grayscale Investments, LLC (August 2022)

    The “Key Statistics” from Bloomberg for CUSIP 389637109 as of Tuesday August 9th, 2022 (GBTC US) are below.

    Source: Bloomberg L.P. (August 2022)

    Looking at the YTD, 1-year, 3-year, and 5-year average returns, in the context of converting this Bitcoin asset to a spot ETF, is the SEC wrong when they say Grayscale is breaking an SEC rule that “requires, in relevant part, that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices’ and ‘to protect investors and the public interest’”? In other words, is introducing a Bitcoin spot ETF into the marketplace more dangerous than a Bitcoin futures ETF?

    Bitcoin Futures ETFs vs. Bitcoin Spot ETFs

    While we’re not opining on a question that’s currently an open legal issue, perhaps understanding the difference would help. A spot Bitcoin ETF brings many (almost all) of the benefits of a futures ETF. Some include investing in Bitcoin without using an exchange, paying less in fees than on a crypto exchange, and streamlining the overall process (Moeller, Cointelegraph). However, a spot ETF invests in Bitcoin on the spot.

    With a Bitcoin spot ETF, you invest in Bitcoin at its spot price, meaning buyers will be holding Bitcoin within their portfolio. In practice, it’d be very much like buying a stock. Crypto enthusiasts view a spot ETF as a more legitimate method of investment, therefore Bitcoin would become more legitimized with a SEC-approved Bitcoin spot ETF product.

    Futures are defined as “derivative financial contracts that obligate parties to buy or sell an asset at a predetermined future date and price” (Investopedia, 2022). So, what’s the key difference? With a Bitcoin spot ETF, you have immediate ownership of Bitcoin. When you purchase a Bitcoin futures ETF, you’re effectively just betting on the market, depending on if you choose to take a long or short position. But purchasing a Bitcoin futures ETF by no means entails immediate ownership of Bitcoin as an asset. If you’re going to purchase a SEC-approved Bitcoin spot ETF in the future, as one does not exist today, it’s critical to understand you’ll immediately add Bitcoin to your asset portfolio.

    GBTC’s Primary Differentiator: Security

    That seems to circle back to Grayscale’s initial pitch of the GBTC having “robust security and storage”. The SEC appears to be making less of a comment on the GBTC than they are about Bitcoin in general. A Bitcoin spot ETF can only be rejected for the reasons given by the SEC if they felt that Bitcoin was too susceptible to “fraudulent and manipulative acts”. Through strategic marketing, Grayscale is looking to differentiate their potential Bitcoin spot ETF product as completely secure. Furthermore, they’ve had the longest and most hopeful petition to the SEC for a Bitcoin spot ETF, with initial efforts dating back to 2016 (Moeller, Cointelegraph). Over six years later, Grayscale remains just as committed to convert the GBTC to Bitcoin’s first SEC-approved spot ETF. Whether or not they’ll be successful is still very much an open question. It’s worth noting that Grayscale’s Bitcoin Trust (GBTC) is the world’s only SEC-approved, publicly traded “Bitcoin Trust”. A “Bitcoin Trust” can be very closely compared to a private-placement trust. It trades just like a stock over the counter. That existing confidence, along with potential first-mover market advantage, would certainly give Grayscale a huge reason to seek to overturn the SEC’s latest official ruling.

    For reference, if you want to investigate a few of the best-known Bitcoin futures ETFs, they include ProShares BITO Bitcoin futures ETF, Valkyrie Bitcoin Strategy ETF, and VanEck Bitcoin Strategy ETF. The ProShares BITO Bitcoin futures ETF currently holds around $1B in investments (Moeller, Cointelegraph). For a look closer at information and BITO’s financials, they’re listed on the New York Stock Exchange (NYSE: Arca). For additional information on Grayscale Investments or the GBTC, their website can be found here.

  • Grayscale Investments, LLC Presents: Grayscale Bitcoin Trust (GBTC), Bitcoin’s First Spot ETF?

    Amongst the latest “hot topics” in the Financial Technology (FinTech) space is a cryptocurrency product aimed at changing the receptiveness of the international investment community to cryptocurrencies. Grayscale Investments, LLC has created the GBTC (Grayscale Bitcoin Trust), in an attempt to make a cryptocurrency product more marketable to institutional investors, pension funds, and other more traditional investment vehicles. Whether this approach will work in the long-term seems to be very hotly contested at the moment, for a number of reasons.

    The Grayscale Bitcoin Trust (GBTC)

    Surprisingly – though maybe not to many in the crypto community – Grayscale largely markets the GBTC for its “robust security and storage”. You would think that as an asset manager, even a crypto asset manager, Grayscale would be more excited about presenting numbers that investors are typically hungry for. However, they lead by offering the following:

    “Grayscale Bitcoin Trust’s assets are stored in offline or “cold” storage with Coinbase Custody Trust Company, LLC, as Custodian. The Custodian is a fiduciary under § 100 of the New York Banking Law and a qualified custodian for purposes of Rule 206(4)-2(d)(6) under the Investment Advisers Act of 1940, as amended.”

    Grayscale Investments, LLC (2022)

    Additional benefits, advertised by Grayscale, to purchase the GBTC include tax-advantaged account eligibility, “titled, auditable ownership [of a crypto asset] through a traditional investment vehicle”, publicly quoted price (OTCQX®: GBTC), and support from a network of trusted providers (this is where they let you know they have hired global financial services legal tycoon Davis Polk & Wardwell LLP). Why is that relevant?

    The SEC’s Ruling on Grayscale’s Bitcoin Spot ETF

    At the top of Grayscale’s website, you’ll see a banner with a hyperlink stating, “We’ve received a decision in our application to convert GBTC to an ETF”. That’s the real storyline here. It’s not the GBTC, it’s the fact that the SEC has disallowed Grayscale to convert the GBTC into a Bitcoin spot ETF. The concise version of the SEC’s 86-page decision can be captured in the following paragraph:

    “This order disapproves the proposed rule change, as modified by Amendment No. 1. The Commission concludes that NYSE Arca has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of Exchange Act Section 6(b)(5), which requires, in relevant part, that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices’ and ‘to protect investors and the public interest.’’’

    SEC, Release No. 34-95180; File No. SR-NYSEArca-2021-90 (July 22, 2022)

    Grayscale immediately responded by hiring former U.S. Solicitor General, Donald B. Verrilli, Jr. – best known for arguing President Obama’s ACA (Affordable Care Act) successfully before the US Supreme Court – who filed an appeal of the SEC’s ruling. Grayscale says they had no choice but to escalate the matter, given the “SEC’s arbitrary and capricious actions and discriminatory treatment of issuers”. The appeal seems to be almost exclusively relying on the argument that the SEC has allowed multiple Bitcoin futures ETFs into the marketplace. Furthermore, since their treatment of futures and spots of derivatives is generally similar, they are unjustly denying investors access to a new marketplace: Bitcoin spot ETFs. GBTC has the potential to become the first Bitcoin spot ETF to be approved by the SEC.

    A High-Level Look at GBTC’s Financials

    Below you can see some basic financials on GBTC from Grayscale’s website. They include the CUSIP (389637109), where we’ll use Bloomberg to investigate GBTC’s high-level financials.

    Source: Grayscale Investments, LLC (August 2022)

    The “Key Statistics” from Bloomberg for CUSIP 389637109 as of Tuesday August 9th, 2022 (GBTC US) are below.

    Source: Bloomberg L.P. (August 2022)

    Looking at the YTD, 1-year, 3-year, and 5-year average returns, in the context of converting this Bitcoin asset to a spot ETF, is the SEC wrong when they say Grayscale is breaking an SEC rule that “requires, in relevant part, that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices’ and ‘to protect investors and the public interest’”? In other words, is introducing a Bitcoin spot ETF into the marketplace more dangerous than a Bitcoin futures ETF?

    Bitcoin Futures ETFs vs. Bitcoin Spot ETFs

    While we’re not opining on a question that’s currently an open legal issue, perhaps understanding the difference would help. A spot Bitcoin ETF brings many (almost all) of the benefits of a futures ETF. Some include investing in Bitcoin without using an exchange, paying less in fees than on a crypto exchange, and streamlining the overall process (Moeller, Cointelegraph). However, a spot ETF invests in Bitcoin on the spot.

    With a Bitcoin spot ETF, you invest in Bitcoin at its spot price, meaning buyers will be holding Bitcoin within their portfolio. In practice, it’d be very much like buying a stock. Crypto enthusiasts view a spot ETF as a more legitimate method of investment, therefore Bitcoin would become more legitimized with a SEC-approved Bitcoin spot ETF product.

    Futures are defined as “derivative financial contracts that obligate parties to buy or sell an asset at a predetermined future date and price” (Investopedia, 2022). So, what’s the key difference? With a Bitcoin spot ETF, you have immediate ownership of Bitcoin. When you purchase a Bitcoin futures ETF, you’re effectively just betting on the market, depending on if you choose to take a long or short position. But purchasing a Bitcoin futures ETF by no means entails immediate ownership of Bitcoin as an asset. If you’re going to purchase a SEC-approved Bitcoin spot ETF in the future, as one does not exist today, it’s critical to understand you’ll immediately add Bitcoin to your asset portfolio.

    GBTC’s Primary Differentiator: Security

    That seems to circle back to Grayscale’s initial pitch of the GBTC having “robust security and storage”. The SEC appears to be making less of a comment on the GBTC than they are about Bitcoin in general. A Bitcoin spot ETF can only be rejected for the reasons given by the SEC if they felt that Bitcoin was too susceptible to “fraudulent and manipulative acts”. Through strategic marketing, Grayscale is looking to differentiate their potential Bitcoin spot ETF product as completely secure. Furthermore, they’ve had the longest and most hopeful petition to the SEC for a Bitcoin spot ETF, with initial efforts dating back to 2016 (Moeller, Cointelegraph). Over six years later, Grayscale remains just as committed to convert the GBTC to Bitcoin’s first SEC-approved spot ETF. Whether or not they’ll be successful is still very much an open question. It’s worth noting that Grayscale’s Bitcoin Trust (GBTC) is the world’s only SEC-approved, publicly traded “Bitcoin Trust”. A “Bitcoin Trust” can be very closely compared to a private-placement trust. It trades just like a stock over the counter. That existing confidence, along with potential first-mover market advantage, would certainly give Grayscale a huge reason to seek to overturn the SEC’s latest official ruling.

    For reference, if you want to investigate a few of the best-known Bitcoin futures ETFs, they include ProShares BITO Bitcoin futures ETF, Valkyrie Bitcoin Strategy ETF, and VanEck Bitcoin Strategy ETF. The ProShares BITO Bitcoin futures ETF currently holds around $1B in investments (Moeller, Cointelegraph). For a look closer at information and BITO’s financials, they’re listed on the New York Stock Exchange (NYSE: Arca). For additional information on Grayscale Investments or the GBTC, their website can be found here.

  • The Three Different Property Categories in Real Estate Investing

    One of the more common myths about real estate investing is that for the average investor, it’s largely lopsided in the way potential investors view their options in the real estate market. While real estate is the world’s largest asset class, most novice investors, who make up the majority of the real estate investing class, largely favor investing in the residential real estate segment. In other words, they do not fully appreciate multiple real estate investment categories.

    “One of the questions that generally first arises is: Exactly what sorts of property can be invested in? Is real estate investment just about flipping houses?”

    – Topouzis & Associates, P.C., 2022

    No, it’s not. Real estate investment is about a lot more than merely “flipping houses”. Real estate investment, in today’s day and age, is about portfolio diversification, hedging risk, purchasing REITs, leasing several adjoined units and becoming the Airbnb property manager, etc. There are plenty of ways real estate investors can earn a positive ROI outside of “buying low, selling high”. Historically and still commonly today, real estate investing has been segregated into three primary categories.

    1. Residential Real Estate

    Flipping houses is undoubtedly considered to be under the residential real estate umbrella. However, there is far more to it than that. Other types of property included in this category are condos, townhouses, and free-standing homes (Topouzis & Associates, P.C., 2022). Fundamentally, this is where people want to live, rather than work. Here’s an undoubtably interesting fact for real estate investors. If you have a rental property extend beyond four units in size – which causes it to be considered apartments – at which point the property becomes classified as Commercial Real Estate (CRE).

    2. Commercial Real Estate (CRE)

    In essence, this is the type of property where businesses are located. These locations are generally in large metropolitan areas, or places where potential customers can frequent. Commercial Real Estate (CRE), up until COVID at bare minimum, has seen a rapid acceleration of investment. Furthermore, multifamily residential units that have 4 plus units are considered in the CRE sub-sector of real estate investing. When you factor in alternative, more complex ways investors get into the CRE market (PropTech, REIGs, REITs, etc.), you’ll notice there is a tremendous amount of room to make a profit.

    3. Industrial Real Estate

    This class of real estate can be described as the kind of property where industrial “behind the scenes” elements of business get done. These locations are usually not “open” to customers in the conventional sense. Though generally there’s no prohibition against the occasional customer visitation. This third and final category of real estate investment includes areas such as warehouses, plants, factories, and shipment facilities.

    It’s critical to understand that each category will have a different investing approach. As an example, at times the residential real estate market was doing well, the CRE market plummeted. Novice real estate investors are best starting off here, at the first point of understanding the three different categories. Which category do you want to invest in? Why? Have you thought about the alternatives? Make sure you not only understand what real estate class is for you, but make sure you review the broad array of financial instruments available in each of those categories.