Is Correlation a Cause of some Variability in Crypto?

Headline: Is the valuation of cryptocurrencies correlated to the performance of the stock market?

Date: 3/23/2022

Body:  Who cares?   Why do we care if the value of cryptocurrency is correlated with the performance of the stock market?  Cynic.   Well, actually, a good question.   Typically, we are looking at cryptocurrency to serve as a diversifying agent for our portfolio.  Assuming that it’s a largely stock-based portfolio (often it is) then our other investment should ideally not do really badly when our stock portfolio is tanking too.  This is why we should care.   If your investment is not correlated with the performance of the stock market, you can sleep a little better knowing that most likely as one investment or a few go down in value, the other ones are going up or staying even.   But, if they are highly correlated, then adding cryptocurrency does not achieve the diversification you are looking for.

OK, sorry for the flashback to Statistics…

Just as a reminder, if 2 things are uncorrelated (perfectly) the correlation will have a value of 0.  If there is a perfect positive correlation (as one increases in value, so does the other) the value will be 1.  If there is a  perfect negative correlation (as one increases in value 10%, the other decreases in value 10%) the value is -1.  Any other relationship between the two valuations slip somewhere betwixt the 1.00 and -1.00 values.  The value of bitcoin seems to have a slight correlation with the stock market (the value appears to be from .2 to .3 based upon what index is used.)  That being said, sometimes when there is a huge loss in  stocks, there is also a huge loss in value for cryptocurrencies.   Why does there seem to be a tie binding the two, and how can I either take advantage of it or account for it?

What Do Analysts Say?  

Good analysts don’t say much… ooh… sorry, wrong analysts.    There are 2 main hypotheses for this seeming correlation.   And, yes, they do interact with one another.

1.  Some analysts suggest that people get into stocks and cryptocurrencies for similar reasons: Namely, they wish to add some risk to their portfolio so that their chance of reward increases.   For this reason, as some people adjust their risk up with stocks, others adjust their risk with cryptocurrencies, often at similar timescales.   For this reason, there appears to be a correlation.
2. There is a large consultancy called Datatrek, and their analysts seem to suggest that investing in cryptocurrency is being normalized.  Per the analysts, “Since investors have only one brain to process risk, they will make similar decisions about cryptocurrencies and stocks when they see price volatility in the latter.”  So, when the butterflies in their stomachs become too great within the stock market, they also pull their investment in cryptocurrency. 

What is likely to happen down the road?

OK, we have to step back a bit here.   Per the Tabb Group (another consultancy) institutional investors (think pension funds etc.) represent up to 88% of trading volumes, and right now, they are reticent to jump into cryptocurrency.  But don’t be fooled: They probably will (and my guess is soon) and when they do, they will jump in with both feet.  This means, for little investors like us, that the volatility will likely dampen, and that’s probably good.

Just last week, President Joe Biden signed an Executive Order, instructing several government agencies to begin conversations (and publish reports) related to how they are likely to be best involved in the cryptocurrency markets.  This added regulation will likely help to dampen volatility.  President Biden’s executive order on crypto regulation is a “huge milestone” for crypto and further enhances “the legitimacy and long-term outlook of the space, which bodes well for Bitcoin, which is still king, at least for now,” says Brian Goldblatt, CPA and industry leader of digital assets at Prager Metis.

If a picture paints ten thousand words…

Bitcoin is meant to be an uncorrelated asset and this is/was a positive. However, it is clear that right now bitcoin correlates with stocks very closely:

Bitcoin and stocks are moving in sync

 CREDIT: ADVFN

From just a cursory inspection of this graph, it is pretty clear that the value of these two asset classes can be highly correlated over the short term.   I suspect this is likely due to emotions.  (Behavioral finance is a fascinating area of study.)  It does seem important to note, however, that this correlation seems to weaken over the longer span of time.

The Verdict

Small investors (like us) should probably limit their holdings in cryptocurrencies to 1% to 3% of their portfolio, since it could “lose a lot of its value in a short amount of time,” says Alex Chalekian, CEO of Lake Avenue Financial in Pasadena, California.  If you want to get a punch from cryptocurrency without being kicked by it, you might want to consider a different approach.   There are several ETFs that invest in Bitcoin and other cryptocurrencies.  These ETFs are easy to purchase and probably will do better than you buying random cryptocurrencies.  Alternatively, you could invest in stocks that make extensive use of cryptocurrencies (e.g. Coinbase Global, Paypal and MicroStrategy.)   In this way, you benefit from the aggressive earnings of the crypto world, but, you are not held prisoner to the craziness at full volume.  Investors need to view Bitcoin as a “very good vehicle for someone who is truly a speculator – either a bull or a bear,” says Robert Johnson, a finance professor at Creighton University. BTC could rise exponentially in value, collapse again or do both repeatedly. Investors can only speculate on the future price of Bitcoin because it has no intrinsic value, unlike gold, he says.

Whatever approach you choose, all I have to say is, “May the forks be with you…”

REFERENCES

https://www.marketwatch.com/story/is-bitcoin-an-uncorrelated-asset-these-stocks-and-funds-boast-correlations-higherand-lowerthan-coinbase-11622826320

https://www.investopedia.com/news/are-bitcoin-price-and-equity-markets-returns-correlated/

https://www.forbes.com/sites/investor/2020/05/13/bitcoin-and-stocks-correlation-reveal-a-secret/?sh=46277ddb12c2

https://www.fool.com/investing/stock-market/market-sectors/financials/cryptocurrency-stocks/is-cryptocurrency-good-investment/

https://money.usnews.com/investing/cryptocurrency/articles/is-bitcoin-worth-investing-in

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Sometimes I Feel Out of Sports…

Headline: Draft Kings and FanDuel.  How are these sites now advertising on TV?

Date: 1/2/2022

Body:  I was watching a football game and I slowly realized that I had seen at least 6 commercials  for different sports betting sites.  I had always thought that outside of Vegas, this was illegal, so, it was only done by shady bookies who had legs broken for non-payment.  Why was this suddenly legal and out in the open?   More recently, I had heard of some sites located on Caribbean island nations who capitalize on this form of capitalism. Is there really a way to make this fit into a commonsense method of managing money?  Twenty states as well as Washington, D.C. now have some form of legal sports betting.  “It’s a very strongly held view in the NFL — it has been for decades — that the threat that gambling could occur in the NFL or fixing of games or that any outcome could be influenced by the outside could be very damaging to the NFL and very difficult to ever recover from,” NFL Commissioner Roger Goodell said in 2012.      “Gambling no longer feels tawdry and in the shadows,” Chad Millman, CEO of betting data company Action Network, said shortly after the ban on sports betting was lifted. “It has democratized information, and people are thinking opportunistically because they love sports.”

Is sports betting REALLY a big deal?

Yes, it is a big deal.  Wagering on sports has ballooned to upwards of $65 Billion in the U.S., ever since the Supreme Court decision in 2018 to allow New Jersey to compete alongside Nevada.  Seeing their success, legislators in many states have worked to allow sports gambling in their states.  In fact, according to Legal Sports Report, New Jersey has begun to have more sports gambling than Nevada.  Much of this action has gone online, and per one study, more than 80% of the sports betting is done through FanDuel and DraftKings.  Unsurprisingly, there is even an ETF designed around these enterprises.  According to Play USA, estimates are nearly $12 billion will be wagered this season on NFL games at legal sportsbooks.

What was it like to watch NFL football before the change?

Before the change in law, it was not legal to have information about gambling on an NFL telecast.  So, there were no commercials for sports betting sites, there were no television shows strictly about how to gamble, and if one wanted to gamble, you had to make your bet with Vegas.  In fact, when somebody wanted to make any comments to fans about gambling, they had to do this very indirectly.  In one example, a noted announcer, when he would want to pass information to viewers who gamble, would make reference to “Our friends in the desert might be interested to know…”  This line would indicate that the information that followed would be of use in wagering, but anything more direct was not allowed.

What changed?

There was a court case.    The state of New Jersey made the claim that Nevada should not have a monopoly on sports betting.    New Jersey claimed that the Professional and Amateur Sports Protection Act (PASPA) impinged on their rights to legislate such issues within its own boundaries.  They claimed that this intrusion of Federal power into State responsibilities was against the Constitution.  The Supreme Court agreed with New Jersey and likened the act of sports betting to commandeering.   In total, the Supreme Court struck down PASPA, and New Jersey was then allowed to legalize sports betting within its’ boundaries.  Interestingly, however there are 4 states which have a program to allow for sports betting, and these programs were allowed to continue because they pre-dated PASPA.   

What changed in the business world as a result of the Supreme Court case?

In a deal among the companies and the NFL (supposed to be worth $1 Billion), the companies could now legally use the league’s logo in their advertising.  Now, it appears that others are wanting a piece of that action.  “The fact that the leagues have all kind of gotten into that business makes it easier for a rights holder like ESPN or Fox or TNT to be in that business as well, because there’s no pushback from the league,” said Eric Johnson, a former ESPN executive and faculty director of UCLA Anderson’s Center for Management of Enterprise in Media, Entertainment and Sports.  ESPN and Caesars Entertainment in August 2020 opened a 6,000-square foot studio facility at the Linq Hotel + Experience in Las Vegas to serve as the home of the company’s sports betting programming, including “The Daily Wager.” ESPN has discussed licensing its brand to sportsbooks, according to a Wall Street Journal report.  One of ESPN’s channels, ESPNews, has a constant stream of betting odds data along the side and bottom of the screen as it re-airs the flagship network’s news-talk shows “SportsCenter” and “Get Up.” When the recent Monday Night Football contest between the Los Angeles Chargers and Las Vegas Raiders was delayed by weather, the company saw a spike in traffic for an ESPN+ article laying out the odds on the game.  “The content space, for us, has been a really compelling one,” said Mike Morrison, ESPN’s vice president of sports betting and fantasy. “Betting absolutely has to be part of that storytelling and the content that we produce.” 

Interestingly, the allowing for sports betting also extended the period when the people are invested in the performance of NFL teams.   Said one industry insider,“Starting in mid-August, the volume of bets has boosted significantly,” Zammit said.  “In years past, pre-season NFL games didn’t attract much interest… but this year we saw a real spike, and turnover has grown week on week through Labor Day with NCAA football action.”  So, it would appear that the 800-pound gorilla of the NFL, now has an infant too.

What is it like now, to watch NFL games?

Fast forward to 2021, and Charles Barkley now openly discusses gambling odds during his betting segment before and after NBA games on the popular TV show Inside the NBA, which airs on TNT.  In fact, many TV broadcasts of pro sports games today feature ads from leading U.S. sportsbooks DraftKings DKNG, -3.48% or FanDuel, and odds for games are now shown on TV networks regularly.  Sports betting TV shows have also launched: ESPN DIS, -0.67% created a show dedicated to sports gambling called the “Daitly Wager,” and CBS VIACA, -3.64% also has a gambling show called “SportsLine Edge,” for example. ESPN even began featuring point spreads on its famous BottomLine ticker.  They have their own shows too.  ESPN and FS1 have daily gambling shows and are also increasing their digital content. VSIN, which started with five hours a day of live shows in 2017, has jumped to 21 hours this season.  The biggest change viewers will see is during commercials. NBC, CBS, FOX, and ESPN will be allowed to make up to six spots available for sportsbooks during each game — one during pregame, one per quarter, and one at halftime.

Other people suggest that this additional information about wagering does not make the game itself any less entertaining.  Christopher Halpin, the NFL’s Executive Vice President, Chief Strategy and Growth Officer, said networks can reference betting lines in pregame shows, but only to help contextualize game analysis or a broader storyline. There can also be limited displays of lines during pregame in graphics and the bottom scoreboard updates.   One expert contextualized this debate quite well when he said,  “The question is, are you actually going to be a sportsbook or are you just going to license your name out?” said media analyst Rich Greenfield, of LightShed Partners. “How deeply is it going to be integrated?”

What is the argument FOR the change to allow sports betting?

The rise of regulated gambling gives viewers a literal investment in the outcome of a game, even if their home team isn’t the one playing, said Abraham J. Wyner, faculty lead of the Wharton Sports Analytics and Business Initiative of the University of Pennsylvania.  “I’ve been a lifelong fan of my favorite teams, particularly the Yankees, and that keeps me interested, but I’m not about to go watch Red Sox-Rays if I don’t have a betting interest or some other kind of interest in the outcome,” Wyner said. “As people are becoming more removed from the actual playing of the game in their lives, betting is a great way to cultivate more interest and deeper interest in the broadcast.”    So, the theory here is that to get people to actually play the game, get them to bet first… and incrementally, you can get them on the field to play, and ostensibly, bet some more.

FOX, NBC, and ESPN have all experimented with gambling-oriented features the past couple of seasons. FOX and NBC have run free-to-play prediction games offering cash prizes, while ESPN had a gambling spin during one of its MegaCast presentations of a playoff game last season.  “It’s safe to say that all the sports rights owners are trying to find new ways to engage fans,” FanDuel CEO Matt King told MarketWatch

What is argument AGAINST sports betting?

“We’re not necessarily looking to go after the hardcore, early adopter,” said Edward Hartman, senior vice president of corporate development at Fox Corp. “The real opportunity we see is what we think will be the fattest part of the bell curve — the mass adoption phase — which is the casual sports fans who love their teams and love watching games and will have a casual wager to enhance their enjoyment of a game.”  “There’s still a big percentage of the population that will never put a bet down, and you don’t want to tick that crowd off. But you can’t put your head in the sand and pretend that there aren’t billions of dollars at stake based on the outcomes of these games, so it’s a tricky balance,” said VSIN co-founder and Chief Executive Officer Brian Musburger.

Not everyone is happy, though, with the league’s new relationship with sportsbooks. During an NBC Sports conference call last week, Hall of Fame coach Tony Dungy said that the NFL shouldn’t be in a position where it promotes gambling, especially among young people.  “It’s a great game. I know people gamble. I know it’s legal. I don’t want to see the NFL promoting it,” he said. “I understand times change, but again, for me, it’s just a personal opinion.”

Of all the networks, CBS remains an outlier as it has not partnered with a sportsbook. CBS Sports chairman Sean McManus said gambling information will not be a part of game broadcasts for various reasons.  “There’s still a big percentage of the population that will never put a bet down, and you don’t want to tick that crowd off. But you can’t put your head in the sand and pretend that there aren’t billions of dollars at stake based on the outcomes of these games, so it’s a tricky balance,” said VSIN co-founder and Chief Executive Officer Brian Musburger.  “We’re trying to thread the needle with respect to how much gambling information that we should put in our studio shows. What is useful to the gambler but not obtrusive to the non-gambler. And I think that’s a delicate balance right now,” he said. “When we think it’s appropriate, and it makes the telecast more enjoyable and more informative for our viewing audience, we will add more information when we think that’s important.”  Even staunch gambling supporters know that distributing gambling information remains a delicate balance and that the approach of a steady rollout makes the most sense.

“The people watching the games make up the market, a very targeted market, that the sports gambling companies need to recruit. So this becomes just a cost of customer acquisition,” Ganis said.  This is backed up by many studies, and the sad truth revealed is that the people who might be most hurt by the explosion of gambling information, are also the people most financially unable to financially support it   For this reason and others, the  NFL was the last of the four major U.S. professional sports leagues to partner with sportsbooks even though it commands the most interest and dollars.

The Verdict

“I guess I am a little bit surprised at how quickly the league’s transition from being completely anti-gambling, at least publicly, to being now complete partners with the entire operation,”  said one baseball official.    If he admits to being surprised at the velocity of gambling becoming nearly as important as the sport itself, we can also be excused for being a bit shell-shocked by it all.  On the other hand, in the Coliseum of Rome, thousands of years ago, people made bets on which gladiator would win and survive.  Our current situation seems only a twist on what came before.  Perhaps the famous Latin phrase should’ve been, “Bettor, beware.”  So, keep your eyes sharp and mind thinking… even when enjoying the SuperBowl.

REFERENCES

https://www.marketwatch.com/story/have-you-noticed-how-much-gambling-talk-there-is-on-sports-tv-how-we-got-here-11616166093

https://www.latimes.com/entertainment-arts/business/story/2021-10-11/why-espn-and-others-are-placing-bets-on-sports-wagering

https://chicago.suntimes.com/movies-and-tv/2021/9/8/22662565/gambling-nfl-television-sports-betting-gaming

https://www.usatoday.com/in-depth/graphics/2021/09/12/sports-betting-terms-explained-what-does-over-under-moneyline-mean/5699628001/

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Are You Creative?

Headline: What is the creator Economy?

Date: 12/28/2021

Body:  I was just reading a news magazine and it mentioned the creator economy.   It focused upon one particular woman, but did not directly address this central question.  So, it seemed like a productive use of a blog post.  I hope that you find it as interesting as I did.

What is a “creator?”

This is NOT a theological debate, but the answer does seem to depend upon who you speak with.  Right now, it seems to include all people who make videos and upload them to any platform that is accessible.    Interestingly, it seems that those who create audio-only files or podcasts are “audio creators.”

Is the Creator economy a big deal?

Yes.  In 2021, this represents $1.3 Billion investment.  I think this qualifies as a pretty big deal.  Regardless of the amount of money involved, it is important to understand just what the creator economy is.  Many experts term it the “attention economy”  and this makes some sense.  People begin to make a lot of money when they begin to have relationships online with hundreds and thousands of people.  Then, the brands come knocking.    Case in point, I like dog videos and I love this lady’s videos with 8 huskies.  She just did a video that is essentially a commercial for an air filtration system.   She got this opportunity because enough eyeballs were glued to her content.  (Note carefully that the opportunities are tied closely to the reason that people come to your page.)

So, is this a worthwhile thing for me to pursue?

Well, if you are in a position to quit your job, for a while, your answer could be Yes.  But, be warned that this is seemingly part of the gig economy: you cannot get healthcare coverage, and the income will likely be ebb and flow.  That said, TikTok has started a Creator Fund, and Facebook promised to pay over $1 Billion to creators across its platforms in 2022.  So, maybe?  It is interesting to note that using social media might be just a platform-advertising device, and the videos could pull in a larger and larger audience until the crowd suggested that you think about merchandise or perhaps writing a book.   But, most likely, if you are looking to score a bunch of money quickly, this is probably not it.

To really put things in perspective, consider the following:

1.  On Patreon, only 2% of creators made the federal minimum wage in 2017.
2. On Spotify, artists need 3.5 million views to maintain the federal minimum wage.

Suffice it to say, you probably won’t be making a lifestyle changing transition from your participation.

Others seem to be of the opinion that the creator economy is not really a new thing.

Some are of the opinion that the creator economy is a completely novel thing.   Others see TikTok and other vehicles as newer mousetraps that merely distribute the content more efficiently.  “Platforms like TikTok, like Instagram have democratized the ability to make content that looks good, that is entertaining,” said Avi Gandhi, head of creator partnerships at Patreon. “The creator economy actually has been around basically forever. It is only now that the tools and the technology…have existed to enable creators to scale their audiences and actually monetize them.”   

Monetization is an important topic related to the creator economy.  Take the technology piece out of it, and I think things can be seen more objectively.  One could have been a fantastic maker of horse blankets.   But, if that person was on an island, and there were no horses on it, the horse blanket making skill would be very difficult to monetize due to the lack of a market.   They would still be a “creator” but they would likely begin to create things that will be of use on that island.  In a similar way, TikTok and other platforms will allow one to create videos, but the monetization piece is largely left to the individual creators.  Thus, they must make videos about subjects that they know very well AND will be of  interest to a significant group of others, (just like the horse blanket example.) 

Are there plans in the future to change this stasis quo?

Yes, there are such plans.  For decades now, there has been some debate about a “Universal Basic Income” that would ensure that each citizen got what he/she needed for basic food, shelter and clothing and medical care.  There are some ardent supporters of this, and some people who see this a Welfare that should be avoided like a plague.  More recently, there has been put forward a kind of “Universal Creative Income.”    It seems unclear to me where the money will come from, but, TikTok started a $200 Million “Creator fund” to jump start the concept.

Others seem to suggest that content creators are the new small businesses of the economy, and suggest that there should be a mechanism to make upfront funding of such capital enterprises.  Within this space, Podfund is doing something related for podcasters.  They will provide between $25,000 and $150,000 to podcasters, in return for a share of revenue.    This would seem a game changing new business model for some.

The Verdict

The verdict seems to be that the creator economy is very exciting.   I know that I follow this 50-year-old retiree in the Midwest who owned his own landscaping business.   He is just VERY smart and provides excellent evidence for all of the views he espouses.  Without TikTok I never would’ve heard of him.(He now has over 1,000,000 followers.)  This is just a taste of what the creator economy might mean to us.  But, for now, we can revel in what we have.   Find your favorite content creators, and when you can, why not send them a buck or 2?   Maybe get them something off their Amazon list?   In doing so, you might encourage them to keep up their efforts and in effect, be a creator yourself.

REFERENCES

https://www.newyorker.com/culture/infinite-scroll/what-the-creator-economy-promises-and-what-it-actually-does

https://fortune.com/2021/12/02/brainstorm-tech-creator-economy-tiktok-patreon-mighty-networks/

https://www.inc.com/gabrielle-bienasz/louisiana-restaurant-charity-gofundme.html

https://hbr.org/2020/12/the-creator-economy-needs-a-middle-class

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Don’t Get Token for a Ride!!

Headline:  Be careful not to get Token.

Date:3/1/2022

Body: OK, “nonfungible” is not a word that many people encounter on a regular basis.   I promise you that it has NOTHING to do with mushrooms.  So, what DOES it have to do with?

What the heck does “fungible” mean?

Fungible just means that one certain quantity of that asset is identical to the same quantity of that asset taken at an other location.  Let’s mess with Texas a bit.   When you store oil in a tank, you usually have several owners represented by that tank.   But for quantity, Frank’s oil is identical to Dan’s oil, is identical to Cal’s oil.  The oil is fungible.   Pieces of land, for instance, are never fungible because, each one is unique, by definition.

NFTs are originals of digital art or music (or other novel composition), and are code-numbered to prove that it is the original.  Like a series of gallery tags on the backside of a painting, these code numbers are there to prove the authenticity and unique nature of the original.

Are there REALLY Markets for these NFTs?

The cynical side of me says that “there shouldn’t be.”   But, there seems to be a genuine number of people who are interested in making the investment.  Somebody paid $6.6 Million to receive a video from a person named “Beeple.”  Somebody paid just less than $400,000 for a 50-second video clip.   A staggering $174 million has been spent on NFTs since November 2017.   An NFT related to Labron James brought in $200,000.   In early March 2021, Twitter CEO Jack Dorsey put up his first ever tweet from 2006 for sale as an NFT. It sold for $2.9 million nearly 2.5 weeks later. Doing a modicum of research, I stumbled upon “penguin communities.”  To my dismay, this is NOT a club of hockey fans in the city of Pittsburgh.  In fact, it’s even more interesting.

For decades, there have been Corvette clubs, and the only entrance requirement was to own a Corvette.  The penguin communities are just like this but use NFT ownership instead of owning a chunk of automotive history.

Am I a Buyer or a collector?

Being a buyer often gets you basic usage rights, (e.g. using it as the lock screen of your cell phone), but if you are a collector, you are hoping that the market begins to value your NFT at a higher level than you purchased it.

The risk facing the collector especially, was well-stated by this author.    A collection is valuable, largely due to scarcity.   To paraphrase, assume the Kevin Spacey character from House of Cards put out note cards, this one pack was the only pack made.   But, true to his character, the truth is that 100 packs of the notecards were created.  What is preventing this from happening?  The  simple answer is, “not much.”  Your collection would at this point, likely not be worth much at all.

OK, I’m Sold, How do I Buy?

First you’ll have to purchase a wallet that can hold NFTs and cryptocurrency.  Once you have that, and have it charged with cryptocurrency, you can go out looking for NFTs to buy.  The 3 biggest NFT markets appear to be the following

•  OpenSea.io: This peer-to-peer platform bills itself a purveyor of “rare digital items and collectibles.” To get started, all you need to do is create an account to browse NFT collections. You can also sort pieces by sales volume to discover new artists.

•  Rarible: Similar to OpenSea, Rarible is a democratic, open marketplace that allows artists and creators to issue and sell NFTs. RARI tokens issued on the platform enable holders to weigh in on features like fees and community rules.

•  Foundation: Here, artists must receive “upvotes” or an invitation from fellow creators to post their art. The community’s exclusivity and cost of entry—artists must also purchase “gas” to mint NFTs—means it may boast higher-caliber artwork

Who is most interested in NFTs, and what’s in the future.

Game developers are very interested in the NFT as another income stream.  Imagine if you are playing a game that follows some Mafia  guy, you can make his house really unique by hanging in it art that is for sale only within the game.   Perhaps, for a fee, the publisher could transfer the design of one work to a t-shirt.  With NFTs, the sky is no longer a limit.

The Verdict

Cryptocurrency investing is one level of speculation.    Spending this cryptocurrency to obtain one or more NFTs is yet another level of speculation.      If you did invest like this, you could do fabulously well or lose your whole investment.  

Think of it like changing a very high light in your home.   You could go out and buy a ladder, use it once safely, but then what do you do with the ladder?   You decide to instead, use one of your chairs, which unfortunately, is a rolling chair that comes readily to hand.  You need just a few more inches, so you throw your balance board on top of the rolling chair and you can reach the light bulb.  You have saved a bit of time, but, you are atop an unsteady platform (balance board) that is atop another unstable platform (rolling chair.)   In this illustration, the rolling chair represents your investment in cryptocurrency, and the balance board represents your purchase of NFTs.  It can get you places, but, you could also suffer a tragic fall.  Be cautious.

REFERENCES

https://www.theverge.com/22310188/nft-explainer-what-is-blockchain-crypto-art-faq

https://www.forbes.com/advisor/investing/nft-non-fungible-token/

https://ethereum.org/en/nft/

https://www.thebalance.com/non-fungible-tokens-nfts-5184054

 Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Victory Goes to the SWIFT, Maybe.

Headline: What is SWIFT?

Date: 2/26/2022

Body:  OK, let’s start with just a little perspective.   Transactions can be EXTREMELY complex, with billions of dollars trading hands assuming that very technically demanding attributes are met.   This is made even more complex when considering transactions that occur between different nations with different monetary systems.    SWIFT is a messaging system that was set up to facilitate trade around the world and each day, billions of dollars of trade are executed each day.   All to say, this is a VERY important organization.   (Interestingly, my aunt has a nephew, not me, who had taken a job at SWIFT, near D.C.   They drove by a building that had a substantial fence around it AND had a substantial earthen berm around the building itself.  The address checked out, and they asked the deadly serious armed guards (Armed with AR-15s) if they were at the correct address for SWIFT.   The guards would not even confirm or deny that they had gotten the address right, and the German Shepherds weren’t saying anything either.   This is a VERY serious institution.)  Since Russia’s incursion into Ukraine, this organization is being placed into a spotlight.

Having mentioned that spotlight, this is not an article about Russia or politics.    It is an article to look at a very important international institution that is central to international trade.   That said, let’s continue.

What is Swift?

SWIFT is an acronym that stands for “Society for Worldwide Interbank Financial Telecommunication” and has become central to international trade.   SWIFT was started in 1973 as a facilitator for its’ members, as the engage in international trade.    In 2020, about 38,000,000 transactions were sent daily over the SWIFT platform, leading to Trillions of dollars of commerce.   In 2021, there were 42,000,000 messages daily.  But, it is not a payment processing platform, rather it facilitates the communication about deals, instead of the deals themselves.  (The Washington Post compared SWIFT to Gmail for international commerce.)

How secure is the Swift system?

Over the broad scope of decades, SWIFT has actually been surprisingly secure.  Having said that, there have been embarrassing breaches, the best known one in 2016.  In this attack, the  central bank in Bangladesh was breached.  Hackers installed a message that tricked the Federal Reserve Bank of New York to send $81 Million in cash.  In response, SWIFT issued several new measures designed to beef up their security and encryption standards.

Who regulates Swift and is Swift bound by economic sanctions?

Since it doesn’t hold deposits, Swift isn’t regulated the way a bank is. It’s overseen by the National Bank of Belgium and representatives from the U.S. Federal Reserve System, the Bank of England, the European Central Bank, the Bank of Japan and other major central banks. Generally speaking, Swift would cut off access only if the European Union passed sanctions against a particular entity or country. In the past, Swift has resisted calls to impose bans on certain countries, describing itself as neutral.   But, there were a few exceptions to this neutrality.    The first one was in 2012 when Iran was kicked off.  Vacroux told NPR that when Iran was kicked off, “they lost half of their oil export revenues and 30% of their foreign trade.”  Please note that in 2016, the Iranian banks were reconnected to SWIFT.  Swift suspended certain Iranian lenders in 2018 after the U.S. imposed a new round of sanctions, although it says that was “an isolated event” that was “taken in the interest of the stability and integrity of the wider global financial system.”  Recently, the Ukraine’s minister of Foreign Affairs  called for international officials to remove Russia from SWIFT, to punish them for invading the Ukraine. (There appear to be a few European countries that appear averse to this sanction, though, they are careful to pronounce that it might be a step taken in the future.)  The boil-out seems to be that Western nations do most of the regulation of SWIFT and they don’t want to be bound by economic sanctions, but effectively are.

Are there alternatives that are akin to SWIFT?

The answer is yes, and no (do you see a pattern here?   Sorry, I went to a Liberal Arts School.)   In simple terms, both Russia and China have systems analogous to SWIFT.   The Russian equivalent has only about 400 users and not much appears to be known about it.  There is a Chinese system (CIPS) but it is unclear how many participants are involved with this system.   In 2021, the Bank of China announced a joint venture with SWIFT, but it is unclear how far things have progressed.  But, the combination of these networks and the easy usage of cryptocurrency could conspire to endanger the USD status as the global reserve currency.

All this being said, none of these players can lay a glove on SWIFT.  Its reach is just too great.

The Verdict

Just like the very serious earthen berm around its building in D.C., SWIFT has quite a moat around it.   It started first and has the backing of the developed countries of the world.   Never discount the behemoth represented by China, but, they are starting from a distinct disadvantage.  Given these realities, being removed from SWIFT would seem to be a pretty terrible consequence of behavior for a nation.  More important still, it allows more developed and stable nations to economically encourage stability in smaller nations, and stability is better for everybody.  SWIFT might have its faults, but without it, the world would be a much less profitable place.

REFERENCES

What is Swift and what would shutting Russia out of it achieve? | E-commerce | The Guardian

What is SWIFT? Here’s why Russia could be removed from the system (usatoday.com)

What Is SWIFT? Here’s How This Banking System Could Be Used To Punish Russia For Invading Ukraine (forbes.com)

U.S., EU unlikely to cut Russia off SWIFT for now -Biden | Reuters

What is Swift? Inside the Major Sanctions Russia Could Face Over Ukraine – Bloomberg

What is SWIFT and why is the banking system a ‘nuclear option’ regarding Russia’s invasion of Ukraine? | Fortune

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Should Stablecoin be in Your Stable?

Headline: What is stablecoin?

Date: 2/14/2022

Body:  Doing research on cryptocurrencies, I keep running into some new vocabulary (new to me, I’m olde.  Sorry.)   The one I have seen that intrigues me most is Stablecoin.  This certainly seems to be on the minds of a lot of regulators, and no wonder why; Stablecoin investments exceed $150 Billion.   That’s REAL money!!

What is a Stablecoin?

A stablecoin is a kind of coin where the value is pegged to the value of something else.  Before you get the wrong idea, volatility is somewhat mitigated, not eliminated.  They obtain their relatively low volatility because they are collateralized or matched to transactions using the other currency or its derivative.  Said another way, Stablecoins are a cross between fiat currency (governed by a Central Bank, and backed by a nation state) and cryptocurrency.

Are there different flavors of Stablecoins?

Yes, there are different types of Stablecoins.  Chiefly, there are 3:

Are Stablecoins regulated at all?

In this nation, there has been some call to regulate Stablecoins to ensure that there is enough collateral or that the mechanisms of self-governance are in good order.   Internationally, in October 2021, the International Organization of Securities Commissions made a statement that these coins should be regulated as financial market infrastructure (like payment systems).   These rules are at this point proposed rules only.

Why do people use Stablecoins at all?

People use Stablecoins because they represent a very nice hybrid of fiat currency and cryptocurrency.   Like fiat currency, the volatility is relatively low, but, like cryptocurrency, it can be easily accessed and moved overseas in an instant usually without onerous fees.  This can be very useful if transferring remittances back to a home country or doing something similar.  Additionally, since the volatility is dampened, Stablecoins can represent an easy-to-use on-ramp for beginner crypto investors.

Can you give me some examples of stablecoins and some perspective on how important they are?

These are the 10 largest trading stablecoins by market capitalization as tracked by CoinMarketCap, a cryptocurrency data and analytics provider.

Valuations are current as of 2/9/2022

Can I still make some money with Stablecoins?

Yes, you can.   There are 3 main ways:

1.  Appreciation—Though they are “pegged” to a currency or some commodity price, there is often some level of appreciation that naturally happens.
2. Lending—You can lend your Stablecoins to other people, and earn 5 to sometimes 12% in interest.  This far outstrips anything a Bank will give you.
3. Staking—OK, this one requires a little explanation.  If you go to a Bank and open a Money Market account, any cash you put into that account, the Bank will turn around and lend out to entities with projects they want to fund.  In return, the Bank takes a relatively large rate of interest.   Because you originally loaned the funds to the Bank, they pay you a rate of interest.   Staking is the same within the cryptocurrency realm.   The concept is still to increase the velocity of money.   Several industry authorities have made comments to this effect.   “Due to being an important reserve of capital and high liquidity, exchanges and lending groups in the community often will pay significant interest rates to hold or lend stablecoins,”  according to Namil Dalal, head of crypto at Coinbase.

The Verdict

If somebody wants to become active in the cryptocurrency markets, Stablecoins seem to be an excellent way to start.    Certainly an authority figure,  Janet Yellen said  that stablecoins were well designed and had the “potential to support beneficial payments options.” But she also cautioned that the absence of regulation was a problem.    This is the double-bladed sword that is represented by Stablecoins.  It would seem to me that if one invested a small amount of their disposable income into the top 3 Stablecoins (by far, the largest portion of these Stablecoins by Market Cap) one might do well.  More importantly, that investor would be able to inexpensively get more used to the mechanics of trading cryptocurrencies.

REFERENCES

https://www.investopedia.com/terms/s/stablecoin.asp

https://www.coinbase.com/learn/crypto-basics/what-is-a-stablecoin

https://www.nerdwallet.com/article/investing/stablecoin

https://fortune.com/2021/12/08/stablecoins-cryptocurrency-congress/

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Do You Believe This P.O.S?

Headline: “Proof of Work” v. Proof of Stake

Date:2/14/2022

Body:  Key to any cryptocurrency is the ability to earn new coin in exchange for validating transactions.   For this effort, the investor is compensated in the same currency.  To determine the level of compensation, one of 2 approaches seem to be used; Either “Proof of Work” or “Proof of Stake.”  This process is also known as a way to negotiate their way to consensus.

What is “Proof of Work?”

In a Proof of Work paradigm, the individual servers and server farms compete to solve complex computational problems.   (Please note that this approach uses a tremendous amount of electricity.  To give you an idea, most experts estimate that these miners spend 60-80% of their revenue earned on electrical power.) The first one to get to a solution is awarded a block of transactions to validate.

An example involving the Bitcoin system follows;  5 people (a.k.a. nodes or miners) are given a difficult computational task.  The first one solves it, and the solution is accepted by 3 other coders,  the solution is written on the community whiteboard (a.k.a. Blockchain) and then coder #1 gets an award of cryptocurrency for being first with a solution.

What is “Proof of Stake?”

In this system, the investor “stakes” some of their cryptocurrency, and in return gets the right to validate a block of transactions.  At any point, you can unstake your crypto coins, but, while staked, if a person validates an inaccurate transaction, they permanently lose a piece of their cryptocurrency as a penalty.

An example follows:  Investor A buys Cardano, a cryptocurrency that uses proof of stake.  If they stake some of their coins, they could be chosen to be a validator of a block of transactions, and when they finish validating the block, they are rewarded with more cryptocurrency of the same type.  Note that under this system, the more coins that are staked, the more likely it is that they will be chosen to be a validator.  Not surprisingly, there are now staking pools, pods of investors, when several investors put their money together to increase their chance of earning money from mining.    The amount staked is certainly important, but there are often other attributes considered such as time that the  person has been a validator and there is an element of randomness.

Can you give me some examples of cryptocurrencies that use proof of stake?

What are the Pros and Cons of the Proof of Stake paradigm?

Anything really new on the RADAR screen for this kind of crypto?

Ethereum, in its original package was a Proof of Work system.  There is a project being worked on, called Ethereum 2.0, which will be a Proof of Stake consensus model.  This effort is being supported by the Ethereum Foundation in Switzerland, which is bolstered by nearly $1 Billion in Ethereum coins.  “There’s hundreds of people that work on this project,” said Ryan, who is one of the few researchers employed by the foundation. “The EF certainly plays a kind of coordination role, and has tried to help facilitate and keep things moving. But I would say it’s certainly not centralized.”  When the change is made, electricity demands are expected to decrease greatly.

The Verdict

Proof of Stake seems to be an evolution of Proof of Work.  The whole goal of cryptocurrency is decentralization, so, if the Power Company takes the place of the Federal Reserve, the goal is defeated.  But, Proof of Stake allows for much lower levels of power usage, and seems in the mold of what the DeFi systems are set up for in the first place.  Now, should the “regular” investor sink money into this environment?   I think with investigation, investors can get a fair deal, but it seems even more important that the investor have a well-defined exit plan.  This seems to be the consensus, anyway.

REFERENCES

https://www.fool.com/investing/stock-market/market-sectors/financials/cryptocurrency-stocks/proof-of-stake/

https://www.forbes.com/sites/forbestechcouncil/2019/01/28/proof-of-work-and-proof-of-stake-how-blockchain-reaches-consensus/

https://www.thebalance.com/proof-of-stake-pos-5196135

https://www.nbcnews.com/tech/tech-news/cryptocurrency-goes-green-proof-stake-offer-solution-energy-concerns-rcna103000000000

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.