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iTrust Daily Insight

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21st October
iTrust Daily Insight
Edition 10.21.2019

October 21 — News and Analysis to Inform your Trading Day 

Market Data Today

  • Bitcoin:  $8,223 (up about 2% in last 24 hours) (Source: Coinmarketcap.com)
  • Digital currency price movement today: very mixed, down 1%, unchanged, up 1-2%, up 9-11% (Coinmarketcap.com)
  • Number of digital currencies with market cap over $1 billion: 13 (almost 14) (Coinmarketcap.com)
  • Market Capitalization of Bitcoin: $148.1 billion (Coinmarketcap.com)
  • Gold “F” futures contract: $1489 (source: Yahoo Finance)
  • Silver “F” futures contract: $17.60Copper “F” futures contract: 2.6475 (Yahoo Finance)
  • Oil “F” futures contract: $53.05 (Yahoo Finance) 
  • DJIA: $26,821 (up 0.2%)  (Yahoo Finance)
  • S&P 500: $3,004 (up 1/2%) (Yahoo Finance)
  • FTSE (main London stock index): 7,163 (up 0.2%) (Yahoo Finance)
  • Shanghai stock index: 2,939 (basically unchanged) (Yahoo Finance)
  • VIX (volatility implied in near contracts of S&P 500 futures in US): 14.25 (Yahoo Finance)
  • Probability of 25 bps cut at Oct 30 meeting of US central bank (Fed FOMC): 90% — up from 20% a month ago (source: CME Group’s “CME Fed Watch Tool”)
  • Probability O/N rates are unchanged from current rates (1.75%-2% target range) after Dec 11 FOMC meeting: 7%
  • Probability O/N rates are only 25 bps lower than now after Dec 11 FOMC meeting: 69% (source: CME Group’s “CME Fed Watch Tool”)
  • Probability O/N rates are 50 bps lower than now after Dec 11 FOMC meeting: 24% (source: CME Group’s “CME Fed Watch Tool”)
  • US 10 year Treasury yield: 1.80% (basically unchanged today) (WSJ.com)
  • US 2-10 yield difference: +0.21% (i.e., positively sloped — normal — yield curve) (WSJ.com)

Today’s Big News:

1) Using Blockchain, a number of US crime-fighting agencies along with overseas counterparts has taken down the largest Darkweb purveyor of child porn — call this one a “win” for Blockchain (see our comments below as well as a link to the well-written Forbes article)

2) In doing some further research on this topic we found a report published by Oxford University in February 2018 discussing use of BTC in illicit activities on the Darkweb — please see our comment below

3)A report was published recently about the risks to the international monetary system posed by Libra and other potentially non-regulated digital currencies by the Bank for International Settlements (kind of a coordinating body for the world’s major central banks and other financial regulators)

4) On Saturday October 19 the UK parliament gave itself more time to review the UK government’s proposed agreement with the EU for the UK to withdraw from membership with the EU

5) As required by UK domestic law, the head of the current British government, Prime Minister Boris Johnston, requested more time to negotiate with the EU.  That letter was not signed.

6) In a move likely not expected by the opposing members of Britain’s parliament, the Prime Minister in a separate letter also asked the EU not to grant the request for more time  

7) Still no news regarding ongoing China-US trade negotiations

8) Still no news regarding US demands for China to improve Intellectual Property protections within China

9) The Trump campaign and related Republicans have reportedly already raised $300 million for Trump’s re-election campaign

10) The impeachment investigation continues in the lower house of the US legislature, which is controlled by the opposition party Democrats;  if charged, the ruling party Republican-controlled upper house, the Senate, would be very unlikely to convict President Trump and remove him from office

11) The first caucuses and elections to determine who will be the Democrat Party nominee for president will be in February 2020.  “Super Tuesday” is March 3rd, after which candidates who did not do well will likely quickly drop out of the race and any “second tier” candidates will start peddling their votes (which they can pledge to another candidate) in return for influence or a role in any future Democrat administration.  See our previous analysis on this topic.  According to our analysis, a single candidate only needs 40% of the pledged electors if that same candidate can win 100% of the “superdelegates” to vote for him / her in the second ballot at the DNC’s convention next summer.

12) After Saudi Aramco facilities were targeted recently by drone strikes, the US is sending 2000 more troops to Saudi Arabia to help defend the kingdom and it now seems likely that Saudi Aramco’s much-ballyhoo’d IPO is set finally to proceed

13) In early 2020 the Chicago Mercantile Exchange (CME) is launching options on Bitcoin futures — this will do much to allow institutions to enter the market for Bitcoin; see our analysis below 

Market Commentary for Today:

  1. There is an article in the Wall Street Journal (WSJ.com) today saying that there is currently an “extreme level of uncertainty”. (Russolillo, “Financial Markets Face Fresh Wave …”)  We take extreme umbrage at both parts of this comment. First of all, the current level of political risk and monetary risk and economic risk is likely not any higher or lower than it typically would be for this part of the economic cycle (except for the political theater caused by the two major US political parties’ seeming to be targeting turnout by increasing the number of their own fervent base of supporters rather than trying to woo the thinning numbers of undecided voters).  In 1980 there were already over 100 banking and monetary crises since WWII.  Since then, we’ve had the mid 1980s S&L crisis in the US, the early 1990s wave of banking crises in Scandinavia, the 1994 “Tequila Crisis” in Mexico and Latin America, the 1997-1998 Asian Debt Crisis, the 1998 default by Russia, the 2000 “popping” of the internet bubble — exacerbated by the 2001 Terrorist Attacks, the Great Recession, the de facto bankruptcies of Greece, Iceland, Ireland, Portugal and Cyprus and the annexation of the Crimea by Russia even though England, France and the US had all pledged to defend the territorial integrity of the Ukraine when Ukraine voluntarily gave up its Soviet-era nuclear weapons arsenal. So, we are certainly NOT in a period of “extreme” risk.  Furthermore, “uncertainty” is meant to connote unknowable and unmeasurable levels of risk.  Yes; there is some risk that President Trump is impeached by the House of Representatives and then the Senate will have to decide whether to convict him.  But reasonable people can assess probabilities around all those risks.  And, yes, there is some probability that China and the US do not resolve their trade dispute.  But, again, reasonable people acting within rational price-setting markets can assess market values and probabilities around these risks.  So we also do not believe these risks are “uncertain” in the proper sense.  And, given the Wall Street Journal’s at least historic role as trusted source for financial news and economic education, we thought it important to comment on such an “extreme” 🙂 set of hyperbole.

2) Markets are now assessing a pretty high likelihood the UK will have a “soft” exit from the EU (Brexit) on or soon after Halloween (October 31st).  Any political news contrary to such an expectation may cause markets quickly to adjust.

3) We are excited about the prospect for the CME’s introduction of options on Bitcoin futures.  Bitcoin futures are financial instruments based on the value of Bitcoin.  Each Bitcoin futures contract creates the financial equivalent of making a “future” purchase or sale of 5 Bitcoin coins on the last Friday of the contract month.  For example, if today, I enter into a “long” Bitcoin futures contract for December, then I am making the equivalent transaction of saying I will buy 5 bitcoins on the last Friday in December (unless that’s a holiday in which case it reverts to a slightly different day).  Today, the CME contract for Bitcoin for December is trading at $8,345, up $300 from Friday.  If today I go long that contract and the market price on the last Friday of December is less than $8,345, I lose money.  If it is more than $8,345, I make money.  I make money because if the market value that day is $8,500, for example, but I only have to pay $8,345, then I make $155 per coin, x5, because each contract is for 5 coins.  So, in that example, I would have made $775 per contract.

4) Options are call or put options — the right to buy or sell a futures contract — at some price before some date.  Options are interesting for all traders — irrespective of whether we participate directly in futures or options markets — because options traders look at many, many factors which can be directly measured with math.  One such measure is the implied volatility.  For options on the S&P500 equity index of the largest 500 companies in the US, the measure of volatility is so widely followed that it not only has a name — the VIX — it also has many financial products directly tied to it.  Today, the VIX is at about 14% — meaning the implied volatility of the underlying index is about 14% per year.  When options on futures of Bitcoin become available, Bitcoin traders will be able to see directly what options traders think the prospective price volatility of Bitcoin will be.  We will comment further on this as we learn more.

5) We applaud the efforts of global law enforcement to shut down the world’s largest known seller of child porn; rape of these children was not only not being stopped but it was being recorded for others’ demented enjoyment; we laud the efforts of law enforcement to use the blockchain to track down the buyers of the porn as well as the sellers

6) Of course we laud closing down the child porn site; we also wanted to think about whether law enforcement’s growing sophistication in using blockchain to track down criminals may also be used to thwart efforts of people using digital currencies to escape countries with oppressive capital controls — such as Venezuela and North Korea — or to go after law-abiding citizens who want to store their wealth in ways not subject to physical security risk or the whims of some central bank

7) According to the academic paper we found from February 2018 published by Oxford University (see link below), some $8 billion of Bitcoin was held by criminals.  From what we could tell that amount included people trying to avoid capital controls.  $8 billion — then and now — is only about 5% of the market capitalization of Bitcoin

8) That same study said that criminals accounted for $72 billion in annual transactions — assuming that amount is about the same, that is about 4 1/2 days of trading activity in Bitcoin

9) Additionally, the CME reports on its website that Bitcoin December futures volume on Friday 10/18,2019, for example, was for 3314 contracts  — worth about $133 million in notional value

10) We encourage digital coin investors and traders to consider and investigate whether improved law enforcement actions will have a chilling effect on trading and liquidity in digital currencies

11) We think the offsetting benefits caused by improved transparency and price discovery versus any possible chilling effect caused by improved law enforcement trying to prevent capital escaping from repressive regimes will likely tilt toward the benefits — given that criminals seem to account for such a small portion of trading activity and assets held

As always, please direct your questions to Blake Skadron.  He’s awesome, so he’ll probably be able to answer any questions you may have.  If he cannot, iTrust Capital’s economics team is happy to speak with you directly

Links:

Link to Oxford’s study of February 2018:
https://www.law.ox.ac.uk/business-law-blog/blog/2018/02/sex-drugs-and-bitcoin-how-much-illegal-activity-financed-through
Link to Forbes article about using Blockchain to catch criminals:
https://www.forbes.com/sites/kellyphillipserb/2019/10/16/irs-followed-bitcoin-transactions-resulting-in-takedown-of-the-largest-child-exploitation-site-on-the-web/#7ce4da3e1ed0

Tim Shaler is Chief Economist of iTrust Capital.  He is a published Real Estate economist, was a portfolio manager and asset allocation expert at his previous firms and is an adjunct professor at Webster University. His MBA (Finance) and MA in Russian Economic History are both from the University of Chicago.

For all media inquiries, please contact Blake Skadron at b.skadron@itrustcapital.com.

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