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February 12, 2021

Weekly Market Roundup

Happy Chinese New Year, to those who celebrate, including Bitcoin – which appears to have started the party early.

A wave of good news sent Bitcoin soaring yesterday after it was revealed that BNY Mellon, the world’s largest custodian of assets under management (and America’s oldest bank) announced it will soon custody crypto assets; MasterCard announced a crypto payments service they are gearing up to launch; and SEC Commissioner Hester Peirce called for the approval of a Bitcoin Exchange Traded Product (ETP). Additionally, Tesla CEO and crypto uber bull Elon Musk tweeted that he “bought some Dogecoin for lil X, so he can be a toddler hodler”. It feels like months ago that Tesla announced the purchase of $1.5 billion in BTC for it’s treasury holdings, but it was only earlier this week.

Memes galore followed but, on a serious note, adoption is happening, and it is happening in a way that encourages hodling rather than using the network for its original (transaction-based) purpose. The actual transaction numbers have flat-lined for some time.

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On that note, JP Morgan strategists opined that the main issue with the idea that mainstream corporate treasurers will follow the example of Tesla is the volatility of bitcoin. Specifically, “corporate treasury portfolios are typically stuffed with bank deposits, money market funds, and short-dated bonds, meaning that annualized volatility – or the range of swings during the course of a year – hovers around 1%,” JPMorgan wrote, adding that a one per cent bitcoin exposure would cause a significant increase in a portfolio’s volatility to as much as eight per cent. Nonetheless, the bank’s strategists, however, acknowledged the positive impact of Tesla investment on the bitcoin market.

In terms of other positive developments, it was reported by CoinDesk that BNY Mellon, the world’s largest custodian bank with some $41 trillion in assets in its safekeeping, is moving into crypto. The bank will roll out a new digital custody unit later this year, to help clients deal in digital assets, including cryptocurrencies.

Furthermore, US capital markets are ready for a bitcoin exchange-traded product, U.S. Securities and Exchange Commissioner Hester Peirce said on CoinDesk TV. The regulator playfully known as “crypto mom” said people are already eager to trade a bitcoin ETP, “and so if we don’t give them the natural way, which I think would be an ETP, they are going to look for other (less optimal) ways to do it.” If all that wasn’t enough, PayPal’s CEO, Dan Schulman, laid out a vision during its investor day on Thursday for the company’s digital wallets being the means by which central banks distributed CBDCs to consumers across income levels.

But wait, there’s more

It wasn’t all about Bitcoin this week. DeFi continues experiencing exponential growth, as the total value locked has now surged to above $40 billion. Institutional adoption may have so far centred around Bitcoin, but the St Louis Fed made some interesting reading with their new research into decentralized finance and “how it may lead to a paradigm shift in the financial industry”.

Specifically, the report noted that DeFi already offers a wide variety of applications. For example, one can buy U.S. dollar (USD)-pegged assets (so-called stablecoins) on decentralized exchanges, move these assets to an equally decentralized lending platform to earn interest, and subsequently add the interest-bearing instruments to a decentralized liquidity pool or an on-chain investment fund.

Smart contracts are the backbone of all DeFi protocols and applications, and here’s how they set DeFi protocols apart from traditional financial services: they generally refer to small applications stored on a blockchain and executed in parallel by a large set of validators. In the context of public blockchains, the network is designed so that each participant can be involved in and verify the correct execution of any operation. As a result, smart contracts are somewhat inefficient compared with traditional centralized computing. However, their advantage is a high level of security: Smart contracts will always be executed as specified and allow anyone to verify the resulting state changes independently. When implemented securely, smart contracts are highly transparent and minimize the risk of manipulation and arbitrary intervention

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