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  • Is the US Real Estate Market Finally Starting to Cool Off?

    According to recent trends witnessed primarily in California, but largely nationwide, the supply in the housing market appears to be growing, while the demand is shrinking. This is what experts are counting on leading to a “cool off” period in real estate prices. “Today, week after week, we see more and more inventory come on the market and demand is down,” said broker Justin Itzen. He added, “Buyers have more to choose from, they can be more selective” (Moscufo, ABC News). Taylor Marr, chief economist of Redfin, echoed a very similar narrative. Marr made a distinguishment between expensive coastal markets and cheaper, rural housing markets. As Itzen’s remarks indicated, Marr concurs coastal cities located in California, New York, etc. will witness most of the impact.

    But that still leaves the larger question unanswered; are we looking at a nationwide real estate cooling period? According to an investors report Redfin released at the very start of August 2022, the share of home listings that have been on the market for more than 30 days has increased more than 12% from 2021. Due to inflationary effects, interest rates for average mortgages were between 5-6% in July 2022, compared to 2-3% July 2021. Inflation and rising prices (or rates) go hand-in-hand, but this increase is steep enough to leave tangible impressions. With more listings, dropping prices, and definite near future housing market uncertainty, we’re hopefully finally entering a buyer’s market.

    Importantly, Iesha McTier-Whyte, a broker selling middle to high-end homes in Newark, NJ advised she’s seen the same pattern. However, she doesn’t view it as a bad thing. “It’s nice to see [the market] cool down and kind of go back to the basics,” McTier-Whyte said. “What we experienced last year was like no other”. Itzen’s partner, Gio Helou, remarked “buyers are [now] able to actually go through the natural home buying process”. Assumingely, Helou meant that buyer’s now have the luxury of options. They no longer have to make the same kind of extraordinary sacrifices to simply purchase a family home.

    At one point, “homes were going within days for way over the asking price,” said Tim Sherman, a prospective homebuyer. When he and his wife found a home in Huntington Beach, CA, they began considering liquidating investments to purchase it. Not only “15% over the asking price,” commented Sherman, “but it was now over the market estimates of what the property was worth” (Moscufo, ABC News).

    The end to Sherman’s story really ties into the underlying assertion of this article. That first house fell through, but he and his wife did wind up purchasing a home. As soon as they saw the photos their broker sent them, they put in an immediate offer. Their former home in Dallas then sold in just one day (Moscufo, ABC News). If that’s any indication of the market dynamics moving forward, expect lower prices, more supply, and increased quality listings. A true win-win, both for individual homeowners and for real estate investors. As for the critics who continue to say there’s somewhat of a 2008-like “housing bubble” getting ready to pop, there’s little quantitative evidence to support the theory. Yet even the critics concede:

    “There is now a huge supply of new houses for sale, in all stages of construction, over 9 months’ supply in total, according to the Census Bureau. In terms of the number of houses, by June [2022], there were 463,000 new single-family houses at all stages of construction for sale, the highest since May 2008, and up by over 30%, from a year ago.”

    -Wolf Richter, The Wolf Street Report

    Their perspective is investors need to remain patient, as market conditions are continuing to return to their equilibrium. After what we’ve witnessed with the COVID-19 global pandemic, anything is possible, but conceptually, our economy isn’t close to the same state it was in heading into the 2008 financial collapse. We have far more restrictions on speculative investments, strict leverage ratios, mandatory reporting requirements, etc. The lessons of 2008 essentially taught us how to avoid widespread economic fragility when a significant market starts looking vulnerable. Additionally, the credit worthiness, financial disclosures, and ability to repay have all tightened considerably for buyers. Time will only tell whether we are in the midst of a “cooling off” period, or if we’re about to witness about bubble bursting. From our research and observations, we see it as more of a buyer’s market than a ‘fragile’ housing market.  

  • 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.

  • What Happened to the Cryptocurrency Market on Black Friday?

    On a Friday that surely won’t be forgotten anytime soon, on January 21st, 2022, according to CoinMarketCap, cryptocurrencies lost $205 billion in combined market capitalization. Bitcoin was trading at $38,440 as of 10AM Eastern Time on the day many are already calling “Black Friday”. This represents a 16.6% year-to-date drop for the most widely recognized cryptocurrency (Morris, Fortune). Furthermore, Bitcoin has already successfully erased 75% of their gains from 2021 and we’re less than a month into 2022.

    Additional noteworthy cryptocurrencies that suffered substantial setbacks were Ethereum, Solana, and Cardano. Ethereum is especially relevant here, as they received a monumental endorsement from Goldman Sachs in mid-2021. It plummeted 13.5% on Black Friday (-24% YTD), while Solana crashed 16% the same day (-30% YTD), and Cardano dropped 15% (Morris, Fortune). Cardano is also unique since their early gains make their current -8.5% YTD slip seem almost unscathed by comparison.

    Fortune

    Dodgecoin and Shiba Inu, classified as “meme coins”, weren’t exempt from the carnage either, falling 10% and 13%, respectively (Shrivastava, Yahoo Finance). According to CoinMarketCap, judging by overall market cap, they are by far the two largest meme coins. With that, let’s dig into the question investors around the world are actively pondering; what happened?

    Russia’s Central Bank Proposed a Cryptocurrency Ban

    Let’s start with the most obvious. On Black Friday, Reuters reported Russia, one of the world’s largest economies the third-largest Bitcoin miner in the world, proposed banning the use and mining of cryptocurrencies via their central bank. This is eerily similar to a move China pulled at the end of May 2021. We similarly witnessed Bitcoin and other major crypto’s suffer short-term dips, while quickly rebounding in the immediate weeks that followed.

    Russia’s central bank argued cryptocurrencies pose a substantial threat to the country’s financial stability. Additionally, they highlighted reasons pertaining to citizens’ wellbeing and its monetary policy sovereignty (Reuters). Ultimately, Russia’s central bank didn’t mince words, concluding with:

    “The best solution is to introduce a ban on cryptocurrency mining in Russia”

    -The Central Bank of Russian Federation (CBR)

    What’s lacking coverage right now is Russia has been arguing against cryptocurrency adoption for years. Russia’s been extremely vocal in raising concerns about the ease of cryptocurrency markets being used for money laundering and even financing global terrorism. It wasn’t until 2020 that they were given legal status, despite still being banned as a means of payment.

    Specific to events that unfolded on Black Friday, Russia’s central bank focused heavily on the long-term stability of cryptocurrencies. To be blunt, it tore them apart. The central bank determined their rapid growth was reflective of potentially perilous instability. Essentially, the central bank issued stern warnings of the cryptocurrency market being one enormous bubble. They went so far as to indicate cryptocurrencies carried similar characteristics to a financial pyramid.

    Large Market Liquidations Led by Bitcoin

    As one would expect, Black Friday was one of the highest ever single-day cryptocurrency liquidations. The significance of losing a combined $205 billion in market capitalization over a 24-hour period cannot be underscored. Leading that effort was Bitcoin, with Ethereum not far behind. The two lost over $281 billion and $207 billion in 24 hours, respectively.

    The below chart, derived from CoinGlass Liquidation Data, does an excellent job in illustrating how Bitcoin’s price is impacted by investors taking a short position on crypto’s. As investors begin to show skepticism, it appears Bitcoin (BTC) begins to snowball downwards at an increasing rate.

    CoinGlass

    As the largest and most well-known cryptocurrency, historically Bitcoin’s performance dictates the overall crypto market trend. The same proved to be true on Black Friday.

    CoinGlass/Yahoo Finance

    Wall Street’s Weak Overall Weekly Performance

    Looking to recent history again, the US stock market performance has had a direct relationship with the crypto market’s performance. Before Black Friday, the S&P 500 Index (SPX) dropped nearly 4% over the course of 72 hours (Shrivastava, Yahoo Finance). When this was covered in real-time by Yahoo Finance, MacroAxis’ model had a maximum correlation of 0.59 between BTC and SPX. This is considered a significant correlation. The macroeconomic models from MacroAxis now show an existing correlation as high as 0.64, a stunning daily increase.

    While Russia’s central bank is undeniably the primary catalyst, Bitcoin’s rapid liquidation created an expected snowball effect. That made for terrible timing for historically safe, reliable US stock market investments to have a noticeably subpar week. Many investors, who were already feeling the pressure of safer investments in their portfolio losing value, were put in an even more precarious situation with their more speculative investments nosediving, causing many to quickly liquidate before further damage was done.

    Unsurprisingly, what’s next for Bitcoin and the cryptocurrency market is continuing to be widely debated. Multiple highly credible analysts and institutions remain firmly bullish, claiming Bitcoin will surpass $100,000. While a very wide network of high-net-worth individuals and financial giants still backing Bitcoin and crypto’s exists, it’s hard to imagine we won’t see another rebound yet again.

  • What Happened to the Cryptocurrency Market on Black Friday?

    On a Friday that surely won’t be forgotten anytime soon, on January 21st, 2022, according to CoinMarketCap, cryptocurrencies lost $205 billion in combined market capitalization. Bitcoin was trading at $38,440 as of 10AM Eastern Time on the day many are already calling “Black Friday”. This represents a 16.6% year-to-date drop for the most widely recognized cryptocurrency (Morris, Fortune). Furthermore, Bitcoin has already successfully erased 75% of their gains from 2021 and we’re less than a month into 2022.

    Additional noteworthy cryptocurrencies that suffered substantial setbacks were Ethereum, Solana, and Cardano. Ethereum is especially relevant here, as they received a monumental endorsement from Goldman Sachs in mid-2021. It plummeted 13.5% on Black Friday (-24% YTD), while Solana crashed 16% the same day (-30% YTD), and Cardano dropped 15% (Morris, Fortune). Cardano is also unique since their early gains make their current -8.5% YTD slip seem almost unscathed by comparison.

    Fortune

    Dodgecoin and Shiba Inu, classified as “meme coins”, weren’t exempt from the carnage either, falling 10% and 13%, respectively (Shrivastava, Yahoo Finance). According to CoinMarketCap, judging by overall market cap, they are by far the two largest meme coins. With that, let’s dig into the question investors around the world are actively pondering; what happened?

    Russia’s Central Bank Proposed a Cryptocurrency Ban

    Let’s start with the most obvious. On Black Friday, Reuters reported Russia, one of the world’s largest economies the third-largest Bitcoin miner in the world, proposed banning the use and mining of cryptocurrencies via their central bank. This is eerily similar to a move China pulled at the end of May 2021. We similarly witnessed Bitcoin and other major crypto’s suffer short-term dips, while quickly rebounding in the immediate weeks that followed.

    Russia’s central bank argued cryptocurrencies pose a substantial threat to the country’s financial stability. Additionally, they highlighted reasons pertaining to citizens’ wellbeing and its monetary policy sovereignty (Reuters). Ultimately, Russia’s central bank didn’t mince words, concluding with:

    “The best solution is to introduce a ban on cryptocurrency mining in Russia”

    -The Central Bank of Russian Federation (CBR)

    What’s lacking coverage right now is Russia has been arguing against cryptocurrency adoption for years. Russia’s been extremely vocal in raising concerns about the ease of cryptocurrency markets being used for money laundering and even financing global terrorism. It wasn’t until 2020 that they were given legal status, despite still being banned as a means of payment.

    Specific to events that unfolded on Black Friday, Russia’s central bank focused heavily on the long-term stability of cryptocurrencies. To be blunt, it tore them apart. The central bank determined their rapid growth was reflective of potentially perilous instability. Essentially, the central bank issued stern warnings of the cryptocurrency market being one enormous bubble. They went so far as to indicate cryptocurrencies carried similar characteristics to a financial pyramid.

    Large Market Liquidations Led by Bitcoin

    As one would expect, Black Friday was one of the highest ever single-day cryptocurrency liquidations. The significance of losing a combined $205 billion in market capitalization over a 24-hour period cannot be underscored. Leading that effort was Bitcoin, with Ethereum not far behind. The two lost over $281 billion and $207 billion in 24 hours, respectively.

    The below chart, derived from CoinGlass Liquidation Data, does an excellent job in illustrating how Bitcoin’s price is impacted by investors taking a short position on crypto’s. As investors begin to show skepticism, it appears Bitcoin (BTC) begins to snowball downwards at an increasing rate.

    CoinGlass

    As the largest and most well-known cryptocurrency, historically Bitcoin’s performance dictates the overall crypto market trend. The same proved to be true on Black Friday.

    CoinGlass/Yahoo Finance

    Wall Street’s Weak Overall Weekly Performance

    Looking to recent history again, the US stock market performance has had a direct relationship with the crypto market’s performance. Before Black Friday, the S&P 500 Index (SPX) dropped nearly 4% over the course of 72 hours (Shrivastava, Yahoo Finance). When this was covered in real-time by Yahoo Finance, MacroAxis’ model had a maximum correlation of 0.59 between BTC and SPX. This is considered a significant correlation. The macroeconomic models from MacroAxis now show an existing correlation as high as 0.64, a stunning daily increase.

    While Russia’s central bank is undeniably the primary catalyst, Bitcoin’s rapid liquidation created an expected snowball effect. That made for terrible timing for historically safe, reliable US stock market investments to have a noticeably subpar week. Many investors, who were already feeling the pressure of safer investments in their portfolio losing value, were put in an even more precarious situation with their more speculative investments nosediving, causing many to quickly liquidate before further damage was done.

    Unsurprisingly, what’s next for Bitcoin and the cryptocurrency market is continuing to be widely debated. Multiple highly credible analysts and institutions remain firmly bullish, claiming Bitcoin will surpass $100,000. While a very wide network of high-net-worth individuals and financial giants still backing Bitcoin and crypto’s exists, it’s hard to imagine we won’t see another rebound yet again.

  • What is a Private Equity Real Estate Fund?

    In the simplest terms, a real estate private equity fund is a partnership established to raise equity for ongoing real estate investments (Bond, NAIOP). A general partner (GP), most frequently referred to as the “sponsor”, creates the fund. The sponsor asks investors, known as limited partners (LPs), to invest equity in the fund or partnership. Those funds, along with money borrowed from commercial banks, investment banks, public institutions, asset managers, and other lenders, are supposed to be invested in a variety of real estate development or acquisition opportunities.

    Typically, the LPs provide the bulk of the equity capital and are passive investors, who have actively chosen to invest in an offering, which was presented by the sponsor. LPs earn an early return of capital and a preferred return on capital invested (Bond, NAIOP). Sponsors are in charge of providing the equity capital, securing investment opportunities, managing the real estate and the fund, and earning fees (that typically are based on performance).

    A real estate private equity fund differs from capital that comes from friends and family and joint ventures. A differentiating example of a joint venture could be among a landowner, a developer, and a money partner. None could complete the investment without the others, and the joint venture is specific to just one investment. Real estate private equity funds, on the other hand, are created to invest in a series of deals with a standardized risk and reward structure created for the overall fund in which the sponsor and LP participate unequally (Bond, NAIOP).

    What are the Sponsor’s Motivations?

    While there are arguments for a laundry list of motivations, we’ll highlight the general motivating factors for sponsors.

    • Diversify and expand funding sources, as well as holdings

    A sponsor with a pipeline of potential investments can use a fund to take advantage of a portfolio consisting of a variety of deals that would not otherwise be available. The capital-raising strategy should, however, focus on the sponsor’s history, the experience of the team, the potential for returns, alignment of interests and clearly identified opportunities. The most reputable developers with the best track records are able to find investment opportunities in their home markets that are outside their traditional property type focus, opportunities outside their historical geographic focus, or some combination of both (Bond, NAIOPI). A private equity fund has the potential to provide the scale that will allow the sponsor to fully take advantage of these opportunities, thereby generating returns over a much larger capital base and likely even lowering the risk of the firm.

    • Invest in larger and higher quality projects

    A sponsor that has capital constraints can use funds to invest in larger and more complex projects. Conversely, more partners also enable the developer to share the risks with their investors to create a better risk-return balance on large, complex projects that the sponsor would not be able to take on alone.

    • Obtain better terms from banks and other lenders.
    • Provide an alternative to mezzanine capital.
    • Develop projects using fund-level financing in lieu of project-by-project financing.
    • Earn fees from the fund, including a promoted interest. 

    The “Three Key” Considerations to a Private Equity Real Estate Fund

    While an argument could be made for a myriad of factors that are critical to take into account when setting up a private equity fund, three key considerations standout. These are pillars to success in establishing the fund and efficiently raising capital from the limited partners.

    1) Amount of Equity Capital to Raise

    The first consideration is the amount of equity capital that ought to be raised. This should include organizational fees. The minimum private equity fund size is generally considered to be $20 million. While organizational costs are generally proportional to fund size, the floor for organizational fees is about $400,000. While the sponsor recoups these fees from the fund once the capital is raised, the sponsor must carry these costs during the fund’s formation period. Examples of these costs include: formation costs for the legal entity or entities, filing fees, accounting fees, regulatory brokerage costs, clearing costs and the cost of producing marketing documents (Bond, NAIOP).

    While the fund’s equity capital is typically combined with debt capital to create a total pool for investing, a successful fund needs to balance potential deal flow with the fund’s size to ensure that the fund can produce sustainable returns for the LPs, and that it doesn’t become too small, such that a follow-on fund might need to be launched. The timing of flows to and from the fund should also be considered. In general, LPs begin earning a preferred return on their capital as soon as the funds are invested. Therefore, in addition to obtaining a commitment from each LP for the total investment amount, astute sponsors stage the pay-in to match the fund’s anticipated timing of investments.

    2) Realistic Amount of Time, Energy, and Seed Funding Required

    Sponsors must be clear-eyed about the time, energy and seed funding required to launch a fund (Bond, NAIOP). The sponsor is responsible for all aspects of the fund: organizing the fund, which includes generating a partnership agreement, offering and subscription documents; securing investment opportunities; securing loans and other financing; managing the fund; operating the properties; preparing partners’ tax returns; and responding to accounting and audit matters, and this is to name only a few of the highlights. These responsibilities put the sponsor is under a constant, daunting amount of pressure. You may have the financial acumen, but you may not have other traits essential to being a successful sponsor.

    3) Clear Investment Fund Strategy

    It’s imperative for sponsors to have a clear and easily understood investment fund strategy. This differs from the market fundamentals, property type, and location strategies that dominate traditional real estate investing assessments. Though experienced sponsors and the largest funds may be able to raise funds for a “blind pool” – a fund for which no individual investments are identified – first-time sponsors typically must identify specific investments that are included in the fund’s offering memorandum.

    Concisely, there’s a lot of complexity to operating or owning a private equity fund that we didn’t get to. However, our goal was to cover the core basics. What is a private equity fund, how is it set up, and what are the key takeaways? We hope this piece was helpful and educational for those interested in private equity.

  • What is a Private Equity Real Estate Fund?

    In the simplest terms, a real estate private equity fund is a partnership established to raise equity for ongoing real estate investments (Bond, NAIOP). A general partner (GP), most frequently referred to as the “sponsor”, creates the fund. The sponsor asks investors, known as limited partners (LPs), to invest equity in the fund or partnership. Those funds, along with money borrowed from commercial banks, investment banks, public institutions, asset managers, and other lenders, are supposed to be invested in a variety of real estate development or acquisition opportunities.

    Typically, the LPs provide the bulk of the equity capital and are passive investors, who have actively chosen to invest in an offering, which was presented by the sponsor. LPs earn an early return of capital and a preferred return on capital invested (Bond, NAIOP). Sponsors are in charge of providing the equity capital, securing investment opportunities, managing the real estate and the fund, and earning fees (that typically are based on performance).

    A real estate private equity fund differs from capital that comes from friends and family and joint ventures. A differentiating example of a joint venture could be among a landowner, a developer, and a money partner. None could complete the investment without the others, and the joint venture is specific to just one investment. Real estate private equity funds, on the other hand, are created to invest in a series of deals with a standardized risk and reward structure created for the overall fund in which the sponsor and LP participate unequally (Bond, NAIOP).

    What are the Sponsor’s Motivations?

    While there are arguments for a laundry list of motivations, we’ll highlight the general motivating factors for sponsors.

    • Diversify and expand funding sources, as well as holdings

    A sponsor with a pipeline of potential investments can use a fund to take advantage of a portfolio consisting of a variety of deals that would not otherwise be available. The capital-raising strategy should, however, focus on the sponsor’s history, the experience of the team, the potential for returns, alignment of interests and clearly identified opportunities. The most reputable developers with the best track records are able to find investment opportunities in their home markets that are outside their traditional property type focus, opportunities outside their historical geographic focus, or some combination of both (Bond, NAIOPI). A private equity fund has the potential to provide the scale that will allow the sponsor to fully take advantage of these opportunities, thereby generating returns over a much larger capital base and likely even lowering the risk of the firm.

    • Invest in larger and higher quality projects

    A sponsor that has capital constraints can use funds to invest in larger and more complex projects. Conversely, more partners also enable the developer to share the risks with their investors to create a better risk-return balance on large, complex projects that the sponsor would not be able to take on alone.

    • Obtain better terms from banks and other lenders.
    • Provide an alternative to mezzanine capital.
    • Develop projects using fund-level financing in lieu of project-by-project financing.
    • Earn fees from the fund, including a promoted interest. 

    The “Three Key” Considerations to a Private Equity Real Estate Fund

    While an argument could be made for a myriad of factors that are critical to take into account when setting up a private equity fund, three key considerations standout. These are pillars to success in establishing the fund and efficiently raising capital from the limited partners.

    1) Amount of Equity Capital to Raise

    The first consideration is the amount of equity capital that ought to be raised. This should include organizational fees. The minimum private equity fund size is generally considered to be $20 million. While organizational costs are generally proportional to fund size, the floor for organizational fees is about $400,000. While the sponsor recoups these fees from the fund once the capital is raised, the sponsor must carry these costs during the fund’s formation period. Examples of these costs include: formation costs for the legal entity or entities, filing fees, accounting fees, regulatory brokerage costs, clearing costs and the cost of producing marketing documents (Bond, NAIOP).

    While the fund’s equity capital is typically combined with debt capital to create a total pool for investing, a successful fund needs to balance potential deal flow with the fund’s size to ensure that the fund can produce sustainable returns for the LPs, and that it doesn’t become too small, such that a follow-on fund might need to be launched. The timing of flows to and from the fund should also be considered. In general, LPs begin earning a preferred return on their capital as soon as the funds are invested. Therefore, in addition to obtaining a commitment from each LP for the total investment amount, astute sponsors stage the pay-in to match the fund’s anticipated timing of investments.

    2) Realistic Amount of Time, Energy, and Seed Funding Required

    Sponsors must be clear-eyed about the time, energy and seed funding required to launch a fund (Bond, NAIOP). The sponsor is responsible for all aspects of the fund: organizing the fund, which includes generating a partnership agreement, offering and subscription documents; securing investment opportunities; securing loans and other financing; managing the fund; operating the properties; preparing partners’ tax returns; and responding to accounting and audit matters, and this is to name only a few of the highlights. These responsibilities put the sponsor is under a constant, daunting amount of pressure. You may have the financial acumen, but you may not have other traits essential to being a successful sponsor.

    3) Clear Investment Fund Strategy

    It’s imperative for sponsors to have a clear and easily understood investment fund strategy. This differs from the market fundamentals, property type, and location strategies that dominate traditional real estate investing assessments. Though experienced sponsors and the largest funds may be able to raise funds for a “blind pool” – a fund for which no individual investments are identified – first-time sponsors typically must identify specific investments that are included in the fund’s offering memorandum.

    Concisely, there’s a lot of complexity to operating or owning a private equity fund that we didn’t get to. However, our goal was to cover the core basics. What is a private equity fund, how is it set up, and what are the key takeaways? We hope this piece was helpful and educational for those interested in private equity.

  • What is a REIG? The Pros and Cons

    A REIG (Real Estate Investment Group) is a group of private investors who invest almost exclusively in real estate by pooling money, knowledge, and/or time to acquire properties that generate income (Brummer, Millionacres). Investment strategies for REIGs will differ based on each group’s specific strengths. A REIG is not a real estate investment trust (REIT) or crowdfunding real estate venture, although superficially, they may appear similar. They both invest the majority of pooled funds in real estate or real estate debt, earn income primarily from real estate, and distribute most of the income back to the parties involved.

    Pros of a REIG

    A REIG is a way for you to have your investment funds backed by physical real estate while allowing you to leverage the collective buying power and experience of the group. Additionally, investing in real estate as a group can give you a less “hands on” approach to real estate investing, or more, depending on your desires and the strengths of your group. Furthermore, a REIG is a form of “diversification” in the sense that your thoughts about the financial incentives of an acquisition may be different than your partners in the group. Of course, this can be a negative if you are unable to persuade others investors in the group and the property turns out to be a successful investment. However if you surround yourself with like-minded investors, which is generally the case for most REIGs, this is unlikely to occur often. Going back to buying power, groups of investors can pool a very substantial amount of money together. This would in turn allow them to invest greater sums of cash and diversify their investments over a greater number of real estate properties. Conversely, an individual investor may only have enough capital to put into one – or a few – properties that may wind up taking an unexpected downturn. Finally, there’s a benefit to having fellow investors with the same stakes you do because you have the opportunity to learn from them. You would be able to potentially use some of those successful strategies in your own personal real estate investments.

    Cons of a REIG

    Many cons to a REIG can also be viewed as strengths, depending on the amount of weight you pull in it. For example, a more “hands-off” approach to investing through a REIG can turn detrimental if the individual(s) responsible for the “hands-on” tasks do a poor job. Additionally, since REIGs pool your investment money with others, you lose out on some profit prospective with it being shared throughout the group. To the contrast, this could be viewed as a way to mitigate your conceivable losses – as mentioned in the strengths – but skilled real estate investors rarely have a pessimistic view of investments they are willing to enter into. While some view this as insignificant, the tax structure and fees associated with REIGs similarly lower your bottom line profit. Along the same lines, due to regulations and commonplace agreements signed between the parties, pulling your money out of the REIG can be burdensome and costly. Finally, many investors are prone to different management styles, have different investment goals, and differ in many other germane ways. Conflicts arising from disagreements between members in a REIG can lead to not only unfavorable financial outcomes, but it can go as far as breaking up the REIG.

    Concisely, REIGs are a good fit for novice or expect real estate investors, as well as everything in between. From our perspective, the concept seems like it would be a better fit for those looking to enter the real estate market, rapidly expand their presence in that market, or if you have unique knowledge, but do not have the cash saved to personally invest in real estate yet. Reviewing the pros and cons alone, unfortunately, does not provide enough guidance as to whether or not this is the right investment vehicle for you. As with most financial investments, REIGs can be beneficial or detrimental for you, completely dependent on your financial situation, knowledge of the real estate market, and more. We do believe that an invaluable positive to REIGs is the knowledge potential from other investors in your group. Some of the most successful investors from different parts of the globe have said that intellectual capital can prove to be exponentially more valuable than simply having excess cash in a savings account, with no unique or constructive ideas on how to put that capital to use in order to maximize a positive return. 

  • Why Real Estate Investors Refer to Real Estate as an I.D.E.A.L. Investment

    Many real estate investors are familiar with the acronym ‘I.D.E.A.L. Investment’ in the context of real estate investing (Chad Carson, Coach Carson). This acronym is a great, succinct explanation for why real estate is preferred by many investors to other vehicles like dividend stocks, bonds, small businesses, index funds, bank certificate of deposits, annuities, and more.

    Income

    Real estate properties provide excellent cash flow on a regular (typically a monthly) basis and the income size can be quite substantial, depending on your properties’ interest rate, unpaid principal, and property value. This is the primary objective of any investor, which makes real estate a top choice for many. If you aren’t seeing much or any cash flow from an investment, especially after a lengthy period of time, typically it’s not a very successful one.

    Depreciation

    Another big advantage to real estate investing was actually made widely known by Donald Trump in the 2016 presidential campaign; depreciation. Depreciation occurs because for residential buildings, the U.S. government requires real estate investors to spread out most of the cost of real estate purchases over 27.5 years. This creates an annual depreciation expense, which can provide incredible tax benefits. This ‘expense’ doesn’t come out of your bank account, like purchasing materials to sell products, or insurance/maintenance costs. Instead it’s absorbed ‘on paper’ and you see real financial benefits in the form of tax relief.

    Equity

    Generally for real estate investors, as time goes on the more equity they’ll acquire in their own properties by repaying loans, which is directly linked to greater overall wealth. The shorter it takes you to pay off your own financial obligations on a property, the larger your ROI will be. Additionally, you’ll be able to optimize the length of time you’ll see financial benefits from that investment. While it may depend on your financial situation and the real estate market climate, real estate investing is a great way to acquire equity and see positive cash flow simultaneously.

    Appreciation

    Appreciations refers to the idea that your property value is supposed to increase each year. As we’ve seen in recent years, this may not necessarily be the case (primarily due to unpredictable circumstances). However, long-term investors (who comprise a very large segment of real estate investors) are satisfied with the long-term average of property values visibly pointing towards an upward trajectory.

    Leverage

    Leverage can refer to two distinct advantages of real estate investing. Firstly, some indicate this means the initial incurrence of debt leading to equity growth over time (this appears to be covered by ‘Appreciation’). Secondly, leverage can more commonly refer to the idea of using other people’s money (OPM) to earn a positive cash flow. This gives investors the opportunity to use relatively small amounts of cash upfront to gain control over multiple investment properties and earn returns on cash invested. This method isn’t typically used by passive investors, who would be concerned with over-leveraging and what could happen if there was a steep decline in the housing market.