The European Central Bank has issued a caution regarding certain banks' overreliance on deficient models provided by their commercial real estate borrowers, heightening their susceptibility to economic downturns. The ECB's report highlighted notable gaps in these models, particularly when appraising less liquid assets or during significant market downturns. ECB examiners uncovered instances where the outputs from automated valuation models were unreliable for problematic or illiquid assets without further verification.

Amid expectations that traditional banks will need to decrease their exposure to commercial real estate loans—requiring subsequent refinancing by buyers—non-performing CRE loans surged by 12% to approximately €58 billion at the close of 2023. The European Banking Authority, which regulates and supervises banking within the EU, noted that 4.1% of all loans to the sector are now considered non-performing.

The ECB also advised caution to lenders and borrowers optimistic about recovering markets as interest rates drop, given the pervasive issues with property valuations. It found that banks often set "market value" based on the prices they hope to achieve in future sales, rather than the current recoverable value. Throughout the latter half of 2022 and into 2023, inspection teams discovered banks relying on transactional data from 2021 or before. Despite worsening economic conditions, increasing inflation, and rising borrowing costs, banks claimed there was no proof of declining market values without more recent transactional evidence.

The investigations also revealed that banks sometimes provided asset-backed lending without thorough valuations of the underlying properties, and in some cases, this lending was unsecured. Moreover, banks were found using listing prices instead of actual sale prices for valuing comparable properties. With rising interest rates and diminishing demand affecting critical segments, the likelihood of borrowers facing repayment difficulties has increased, making prudent collateral valuation more crucial than ever.

This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.

Offchain Labs, the innovative team behind the Arbitrum blockchain, is initiating a new division aimed at pushing crypto networks into the mainstream. Arbitrum operates as a layer 2 blockchain, enhancing Ethereum—widely regarded as the leading crypto network—by speeding up transactions and reducing costs. With its cryptocurrency holdings valued at approximately $15 billion, which accounts for 41% of the entire layer 2 market as reported by L2BEAT, Arbitrum is the largest player in its field.

The new venture, named Tandem, will receive an investment exceeding $10 million from Offchain Labs and will focus on endeavors beyond the Arbitrum framework, confirmed Steven Goldfeder, the CEO and co-founder based in Princeton, New Jersey. The company enjoys the support of notable venture capital firms such as Lightspeed Venture Partners and Ribbit Capital.

Tandem's efforts will mainly target projects still tied to the Ethereum network, particularly those that aim for widespread blockchain adoption. Goldfeder highlighted collaborations with entities like Robinhood Markets Inc, an Arbitrum partner, and ventures into blockchain-based gaming.

Goldfeder emphasized that the projects supported by Tandem would align closely with their existing operations, ruling out involvement with projects lacking relevance to their core mission. As Arbitrum's service provider, Offchain Labs primarily generates revenue through network fees, a figure expected to grow substantially with Tandem's launch.

This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.

In a pivotal moment last week for a closely followed legal battle within the cryptocurrency sector, a U.S. federal judge ruled that Ripple Labs Inc. must pay a civil penalty of $125 million for offering its XRP token to institutional buyers without SEC registration. This sum was significantly less than the $2 billion sought by the SEC, potentially signaling a positive precedent for other cryptocurrency firms facing similar legal challenges.

The controversy began in December 2020 amidst the pandemic when the SEC filed a lawsuit against Ripple and its key executives, co-founder Christian Larsen and CEO Bradley Garlinghouse. The agency accused them of creating an "information vacuum" which facilitated the sale of over $1 billion in XRP to a market lacking comprehensive data about the digital currency.

This lawsuit galvanized support for Ripple within the crypto community, with more than a dozen industry groups, such as the Chamber of Digital Commerce and the Blockchain Association, expressing their backing in letters to U.S. District Judge Analisa Torres.

Since the lawsuit, the SEC has initiated actions against several other crypto entities, including Terraform Labs, Binance Holdings Ltd., and Coinbase Inc. The Ripple case, however, has been seen as a potentially defining battle that could establish whether cryptocurrencies are considered securities that must be registered with the SEC.

The SEC argued that under the Howey test—stemming from a 1946 Supreme Court decision—a security involves an "investment of money in a common enterprise with profits expected from the efforts of others." Ripple countered, stating XRP sales in the secondary market did not meet this definition as there was no profit pooling.

In July 2023, Judge Torres ruled that XRP is a security when sold to institutional investors but not to the general public. She highlighted that there was no indication that retail buyers anticipated sharing in Ripple’s profits, noting many transactions were conducted anonymously via automated trading platforms.

This decision was broadly interpreted as a limitation on the SEC's reach, although the agency viewed it as a reinforcement of its regulatory framework applicable to digital currencies.

The SEC also sought more than $876 million from Ripple disgorgement, with interest towering above $198 million, and an additional $876 million in civil penalties due to the company’s increased cryptocurrency sales post-lawsuit and alleged disregard for legal compliance.

Judge Torres granted an injunction preventing Ripple from future securities law violations but rejected the SEC's demand for disgorgement of profits, pointing out the absence of fraud or egregious misconduct allegations in the case and a lack of evidence linking Ripple’s registration failures to significant investor losses.

Ripple’s chief legal officer, Stuart Alderoty, commented in a recent telephone interview that the firm is prepared to handle the financial penalty using its own resources and expressed relief at moving past the litigation. While the SEC may still appeal, the recent ruling might influence the direction of future legal proceedings in the crypto industry. Bloomberg Intelligence analyst Elliot Stein suggested that the decision might positively affect Coinbase Global Inc.’s ongoing legal struggle with the regulator, possibly improving its chances of a favorable outcome.

Shares of Coinbase Inc. climbed following a court decision that ordered Ripple Labs Inc. to pay significantly less than the amount the US Securities and Exchange Commission (SEC) had demanded in a lawsuit. This ruling is considered favorable for Coinbase, the largest cryptocurrency exchange in the U.S., in its ongoing legal battle with the SEC. Coinbase’s stock price increased by approximately 7%, reaching about $191, following a court verdict on Wednesday. The court mandated Ripple to pay a fine of $125 million, a significant reduction from the nearly $2 billion the SEC had sought, accusing Ripple of illegally raising funds without registering its digital token as a security in 2020.

According to Bloomberg Intelligence analyst Elliot Stein, this unexpectedly positive result could enhance the likelihood of a favorable ruling for Coinbase, as noted in his analysis. Stein highlighted that the central concern is the extent of the SEC’s regulatory authority over transactions involving digital assets. Coinbase is potentially facing up to $4 billion in fines. The SEC has alleged that the exchange acted as an unregistered securities exchange through its staking-as-a-service program. This program enables cryptocurrency holders to earn rewards by holding certain types of tokens.

Stein estimated that Coinbase has a 60% probability of prevailing in its legal proceedings. Moreover, the favorable outcome in the Ripple case could result in reduced penalties for Coinbase even if it were to lose. Following the court's decision, Ripple's XRP token surged by up to 25%, reaching 64 cents, but it slightly fell to about 61 cents by Thursday. Concurrently, Bitcoin experienced an 8% increase in value, approaching $60,000.

This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.

Bitcoin reserves among blockchain transaction validators have diminished to their lowest in three years following an April update to the software code, which significantly cut their earnings. Data from Kaiko reveals that as of August 3, these miners possessed approximately 1,510,300 Bitcoin, a 2.4% decrease from the peak in December 2020. The current market valuation of these holdings is about $86 billion, representing roughly 8% of all circulating Bitcoin.

Miners began offloading Bitcoin in anticipation of higher prices as early as late 2023, a trend that accelerated post the April "halving" event. This latest update—the fourth of its kind—reduced the rewards miners receive for creating new blocks on the blockchain, which forced them to sell assets to cover operational expenses.

Bitcoin Miners Hold Least BTC in Three Years

This reduction in earnings was initially offset by an increase in network fees after the halving, though this relief was temporary as fees have now stabilized at $2, down from a post-halving peak of $143, Kaiko reports.

Interestingly, despite the general selling trend, public mining entities have augmented their Bitcoin reserves by 60% to 54,000 tokens since January 2023, as per filings with the US Securities and Exchange Commission. Notably, Marathon Digital Holdings Inc. acquired $100 million in Bitcoin recently.

However, the downturn has affected some more than others, with Core Scientific Inc. reporting a second-quarter loss of $804 million, largely due to a markdown in the valuation of its Bitcoin holdings to mirror the current market prices.

This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.

Even amid turbulent market conditions, the dark days of the cryptocurrency downturn seem to be receding for digital asset traders. The introduction of Bitcoin spot exchange-traded funds in January, combined with public support from Donald Trump, a Republican presidential contender, has enabled a recovery from the fallout triggered by FTX’s downfall.
However, the narrative is starkly different for the metaverse anchored in these digital assets.
Touted as a revolutionary leap in human creativity, this interconnected realm of digital universes is known as web3. Predicated on blockchain technology and digital tokens, web3’s vision was to allow creators to profit from their ingenuity without the meddling of large tech entities. Yet, in practice, pivotal metrics of web3’s worth—such as the value of NFTs and other tokens linked to certain lauded platforms—are predominantly waning.

Andrew Kiguel, CEO of a company in the metaverse sphere previously known as Tokens.com, expressed disillusionment with web3’s profitability. “The dream of this has not been realized,” he remarked, challenging anyone to identify a web3 enterprise that is actually profitable.
In 2021, Tokens.com invested heavily in web3 by purchasing a $2.5 million parcel in Decentraland, a then-prominent metaverse platform accessible via web browsers, where users could partake in varied activities such as gaming or fashion events. Kiguel likened this investment to acquiring land in an expanding urban area, with plans to develop and lease parts of their digital property holdings.

These digital land parcels, akin to other cryptocurrencies, fluctuate in value based on market demand.
Following multiple scandals in 2022, Decentraland suffered significantly, with nearly 90% of its users leaving, per Decentraland Metrics, and property values plunging by approximately 95%, as reported by DappRadar. Mana, the platform’s currency, has drastically fallen to about 30 cents from a peak of over $5 in late 2021. Decentraland representatives have not commented on these developments.
Major corporations attempting to forge their own centralized metaverse versions have also found it challenging. Meta Platforms Inc.’s Reality Labs reported a substantial quarterly loss of nearly $4.5 billion, highlighting the struggles faced by tech giants like Mark Zuckerberg in capitalizing on digital realms.

According to Kiguel, Tokens.com’s digital real estate assets have depreciated by 80%. The company has pivoted away from the metaverse, opting to rebrand as Realbotix and shifting focus to developing AI-driven silicon humanoid robots following its acquisition of Simulacra, a manufacturer of lifelike sex dolls.
A firm that provided loans for metaverse properties also suffered from the downturn. TerraZero Technologies Inc., at the start of 2022, had granted what it claimed to be one of the inaugural metaverse property mortgages, aiming to facilitate easier access to digital real estate. However, subsequent loan applications, driven by speculative motives without intentions to develop the properties, were all denied, stated CEO Dan Reitzik.

And when property values plummeted, the sole mortgage issued was returned at the original price.
According to Reitzik, the complexity of cryptocurrencies and NFTs remains a barrier for the average consumer and commercial brands alike.

He suggested that a metaverse operating with traditional fiat money might have broader appeal to the general populace and businesses.

James Casey, an associate professor of computer game design at George Mason University, echoed this view. Before his academic career, Casey had over a decade of experience in video game development, particularly in creating expansive multiplayer online games—a precursor to modern metaverse platforms. These games often featured personalized avatars, vast virtual landscapes, and in-game economies where real money facilitated the trading of virtual goods.
“Blockchain is an impressive technology, but gaming companies prefer to control their databases,” he noted. “In a virtual environment where anything is possible, there’s still a desire to possess, to own parts of the virtual world, viewing it as just another arena for possession.”

This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.

HM Revenue and Customs (HMRC) is intensifying its efforts to enforce tax laws among cryptocurrency traders.

Recently, HMRC initiated the distribution of "nudge letters" to those holding cryptoassets who are believed to have not met their tax obligations on profits earned. A further batch of these letters is scheduled to be dispatched in the following month.

Individuals who have realized profits through the sale of cryptoassets may need to declare these earnings and potentially file a tax return to avoid accruing interest and penalties on any undeclared amounts.

It is estimated that non-compliance with tax obligations related to cryptoasset holdings could be as high as 55% to 95%, according to HMRC.

Crypto profits can be subject to several forms of taxation

Earnings from the ownership and trading of cryptoassets, such as Bitcoin and Ethereum, might be liable for capital gains tax, income tax, and National Insurance contributions, depending on how they were acquired.

Individuals identified as having "disposed" of cryptoassets—meaning converting them into another cryptocurrency or selling them for fiat money like sterling—are expected to pay capital gains tax on these transactions at a rate of 20%.

If the total capital gains for an individual within a single tax year, including those from cryptoassets, surpass the annual tax-free allowance, they must pay tax on the entire amount exceeding this threshold.

The capital gains tax exemption limit for the current tax year, starting from 6 April, stands at £3,000. For the 2023-24 tax year, it was £6,000, and for 2022-23, it was £12,300.

In certain scenarios, cryptocurrency holders may also need to pay income tax and National Insurance on gains that are considered income. For instance, some cryptocurrencies offer the option for investors to "stake" their assets, locking them away for a period in exchange for interest, akin to a fixed-term deposit, which is taxable as income by HMRC.

‘The worst thing crypto owners can do is ignore this letter’

Tax non-compliance is a widespread issue among cryptocurrency holders and can lead to severe repercussions, as highlighted by Paul Falvey, a partner at BDO.

Mr. Falvey explained that many cryptoasset owners might not realize their tax responsibilities and might not have previously needed to file a tax return. Receiving one of these letters unexpectedly could be startling, but disregarding it could lead to significant complications.

To rectify their tax status, affected individuals might need to gather reports from financial advisors or online platforms. In some cases, consulting with a specialist to determine the best disclosure approach is advisable.

Should there be unpaid taxes, HMRC has the authority to apply penalties for late payment, which can amount to up to 100% of the unpaid tax, and even higher if the assets are held offshore.

Crypto firms are obligated to share customer data with HMRC

HMRC has the capability to request transaction data from digital cryptocurrency exchanges and this process will soon become automated through the Crypto Asset Reporting Framework (CARF), developed by the Organisation for Economic Co-operation and Development (OECD) to enhance transparency within the industry.

By 2027, the CARF is expected to be fully implemented in the UK, requiring cryptoasset service providers, including platforms like Coinbase, to collect comprehensive transaction data on their users and report this information to tax authorities.

This system aims to facilitate the detection and correction of tax non-compliance among cryptoasset holders.

This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.

Cryptocurrency, once seen as an outsider in financial circles, is increasingly embraced by the establishment. However, the practice of trading cryptocurrencies often resembles a gambling den more than a traditional stock market, with a rising number of individuals, primarily young men, falling into addiction akin to gambling.

The market's notorious swings lure those prone to addictive behaviors. At 35, Albert (Name has been changed) found himself ensnared by the crypto market's allure, as his investment activities spiraled into an addiction fueled by the pursuit of euphoric highs.

"In traditional markets, a stock may fluctuate up to 10% in a day. In contrast, cryptocurrencies can skyrocket by 300% within the same timeframe, which was thrilling initially," he shared.

Yet, whereas a poor decision in stocks might lead to a gradual 20% loss, cryptocurrency investments can plummet by as much as 90% swiftly.

Albert's journey into the crypto world initially brought staggering gains, turning a $20,000 investment into $500,000. However, the initial rush led him to chase after the exhilarating feeling, eventually causing him to gamble away his entire fortune. Desperation drove him to misappropriate funds from his family's business.

"The better you perform, the more invincible you feel," he explained. "The thrill of succeeding in cryptocurrency trading is much more intense than traditional gambling. I've always wanted to amass wealth quickly, and cryptocurrencies seemed to offer that shortcut."

But as losses mounted, so did his desperation to recoup his funds, which led him to siphon money from his own family and their business.

"Making a fortune from crypto trading can be the worst thing that could happen to someone. I deeply regret my involvement," he lamented.

Since 2016, Castle Craig has supported over 300 individuals struggling with cryptocurrency trading addiction. About 90% of these are men. Treatment at the clinic costs £3,800 per week, funded either privately, through insurance, or the NHS, and it employs a 12-step recovery model.

Albert has been receiving treatment for a month and finds it beneficial.

"When I'm feeling down, I'm more likely to engage in risky trading," he said. "I'm learning to better manage my emotions and understand my addiction."

Bitcoin is a gateway into obsession

Traders often start with well-known cryptocurrencies like Bitcoin and Ethereum before venturing into more volatile assets, according to Anthony Marini, a senior therapist at Castle Craig.

"The relatively stable cryptocurrencies serve merely as gateways to the more erratic ones," he noted. "It's the volatility that triggers the compulsive behavior."

The number of cryptocurrencies has ballooned from about 2,000 at the end of 2018 to over 25,000 today. Most of these are highly unstable.

On social media platform X, users, some with vast followings, daily tout new cryptocurrencies, which can experience dramatic price swings.

Distinct from established cryptocurrencies like Bitcoin and Ethereum, many digital tokens don't purport to offer any real functionality; instead, they are known as "meme coins." These are designed to captivate potential investors with their humorous or catchy names and visuals.

Should a meme coin capture sufficient attention, its early backers might earn enough to cease working altogether. However, the typical outcome for most investors is a financial loss.

Dogecoin, which started in 2013, is the quintessential meme coin. It astonishingly reached a peak market cap of $90 billion after eight years, surpassing even Starbucks' market value of $83.7 billion at the time. Investors who held on to their purchases have since witnessed their investment's worth plummet by over 80%.

The lifespan of a meme coin today is markedly shorter, often just about a week, compared to years previously. Those behind these coins, or investors aiming to inflate their value, might engage celebrities or influencers, offering them money or significant amounts of the token to promote it on social platforms.

Once the promotion inflates the coin's value, those early holders and influencers often sell off their stakes for substantial gains, leading to a drop in the coin's price.

Creating a meme coin is remarkably simple and cost-effective; virtually anyone can do it. One only needs to pick a name, create an image, and the token is ready for trading.

It’s devastating people’s lives – they’re losing everything

Recently, Amanda Pritchard, chief executive of the NHS, highlighted the dangers of "unregulated cryptocurrency sites" and the increase in young men addicted to trading.

"We need to consider whether we're content to merely deal with the consequences while the tactics to maintain addiction grow increasingly sophisticated," she stated during a visit to a national problem gambling clinic.

Approximately 15 NHS clinics have noted cases of crypto addiction.

Marini expressed frustration over the lack of regulatory action.

"How long must this continue before the government intervenes?" he questioned. "People's lives are being destroyed – they’re losing everything."

He recalled the first patient at Castle Craig, who lost £1.5 million to crypto trading and substance abuse. Another patient embezzled £1 million in company Bitcoin.

"Education is critical. People must understand the risks associated with cryptocurrencies," he advised.

The Financial Conduct Authority notes that between 6% and 10% of UK adults hold cryptoassets, emphasizing the high risks and lack of regulation in the UK. The Gambling Commission does not classify cryptocurrency trading as gambling.

Albert concluded, "Gambling platforms require a license – why not cryptocurrencies?"

This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.

Major cryptocurrencies experienced an uptick on Thursday following a legal ruling against Ripple Labs Inc., which was fined $125 million. Despite this, Ripple described the outcome as a win against the U.S. Securities and Exchange Commission. Bitcoin surged by as much as 4.5%, reaching over $57,600, while Ethereum also rose nearly 5%. However, both cryptocurrencies are trading below their prices from a week earlier, following a sharp decline on Monday, marking the biggest drop since the FTX collapse in 2022.

This decrease occurred amid a broader sell-off in global stocks, exacerbated by economic uncertainties, escalating tensions in the Middle East, and skepticism around the profitability of large investments in artificial intelligence.

According to Benjamin Celermajer, co-chief investment officer at Magnet Capital, the market remains on edge following the events earlier in the week. He suggests that if the concerns turn out to be overblown, the market might rebound from what is perceived as an overreaction. Cryptocurrencies initially recouped some losses on Tuesday, but the rally was short-lived. By Thursday morning in Singapore, Bitcoin and Ethereum were trading at $57,449 and $2,457, respectively.

On Wednesday, a federal judge ruled that Ripple must pay a civil penalty of $125 million, significantly less than the nearly $2 billion sought by the SEC. The SEC had accused Ripple in 2020 of illegally raising funds through the sale of its XRP token without registering it as a security. Following the decision, the price of XRP surged by as much as 25%.

This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.

Crypto investors are reeling from a significant downturn earlier in the week, directing their attention to Jump Trading's wallets for potential explanations. Between August 4 and 8, wallets presumably controlled by Jump saw a decline of about $247 million in cryptocurrency holdings, as reported by wallet analysis firm Arkham. Recently, Jump has been actively transferring large amounts of Ether— the second most valuable cryptocurrency— to exchange "hot wallets" on platforms like Binance, OKX, and Coinbase, typically indicating an intent to sell.

Ether itself has faced substantial losses, plummeting 23% this past Monday and totaling a 35% decline since July 22. This recent plunge mirrors a broader market sell-off that affected everything from global equities to lesser-known digital tokens. Dessislava Aubert, a Kaiko analyst, noted that Ether has particularly underperformed compared to Bitcoin during this downturn, suggesting this is due to increased selling pressure from market makers like Jump.

A spokesperson from Jump Trading declined to comment on these speculations or their wallet activities, and the ownership of the implicated wallets has not been independently confirmed. Although Jump's trading activities represent only a small fraction of Ether's average daily trading volume of about $9 billion, the firm's status as a prominent market maker and digital asset trader has raised concerns among investors. Rich Rosenblum, co-CEO of market maker GSR, expressed unease about Jump's unexpected moves, particularly their exits from positions on a weekend, which is considered atypical for them.

Meanwhile, some market observers dismiss the impact of Jump's actions on the market's fluctuations. Zaheer Ebtikar, founder of crypto fund Split Capital, labeled the accusations as baseless gossip, emphasizing the crypto community's fascination with prominent players like Jump.

In recent developments, Kanav Kariya, the head of Jump Trading's crypto division, announced his departure at the end of June after a tumultuous period for the company in the crypto space. Jump was deeply involved in the catastrophic collapse of the TerraUSD stablecoin and faced scrutiny from U.S. prosecutors following the token's debacle in 2022. Additionally, Jump had to provide about $320 million to cover losses from the Wormhole crypto project after it suffered a hack in 2022, leading to the project being spun off into a separate entity run by former Jump employees.

Amid these challenges, Jump scaled back its crypto trading operations in the U.S. last year due to regulatory uncertainties, though it remains active globally. According to Arkham, Jump's crypto assets have slightly increased since the beginning of the year, totaling around $434 million.

This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.

During a recent Zoom discussion, advisers from the Biden administration did not commit to any specific actions in response to the concerns raised by representatives from the cryptocurrency industry, according to an attendee. The discussion did not cover any potential policy adjustments and included officials from companies like Coinbase Global Inc., Kraken, and Ripple Lab. This session follows a similar conversation that took place in July. A request for comment from a White House spokesperson remained unanswered.

Executives from Coinbase and Ripple, who have been vocal critics of the current government's approach to cryptocurrency regulation and the actions of the US Securities and Exchange Commission, were present. These companies have also significantly contributed to the political action committee Fairshake in this election cycle.

In contrast, the campaign of former President Donald Trump, the Republican nominee, has recently shown strong support for the cryptocurrency sector, including promises to back Bitcoin mining in the United States and opposition to central bank digital currencies. Meanwhile, the positions of the Harris campaign on key industry issues have not been publicly disclosed yet.

Paul Grewal, Coinbase's Chief Legal Officer, emphasized the importance of looking ahead, noting his recent interactions with the Harris campaign starkly differed from the discussions in the latest call. Key figures such as Bruce Reed, Deputy Chief of Staff; Lael Brainard, National Economic Adviser; Congressman Ro Khanna from California; and Kristine Lucius, Vice President’s senior adviser and director of legislative affairs, participated in the call. Deputy Treasury Secretary Wally Adeyemo was also present.

The meeting included other notable industry figures like Ripple CEO Brad Garlinghouse, Anthony Scaramucci of Skybridge, Jeremy Allaire from stablecoin issuer Circle, Hayden Adams of the Uniswap project, Kraken CEO David Ripley, and venture capitalists Ron Conway, Chris Dixon, and Mark Cuban. Garlinghouse's attendance was confirmed by a Ripple spokesperson. The Treasury Department has declined to comment, and other participants did not immediately respond or could not be reached for comment.

This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.

Bitcoin exchange reserves have been dwindling since mid-2022, and new ETFs may accelerate this trend. Should we expect a reserve scarcity and much higher prices?

Bitcoin ETFs Matter

Spot Bitcoin ETFs have been a disappointment so far, attracting net inflows of just $1.5 billion in the 15 days ending on February 1. According to Bloomberg analysts’ calculations, new Bitcoin ETFs added $7.3 billion, while Grayscale Bitcoin Trust lost $5.8 billion.

Bitcoin ETF Flows

$1.5 billion inflow is small compared to Bitcoin's market cap, currently about $840 billion. This inflow represents less than 0.2% of the Bitcoin market cap, seemingly insignificant enough to not affect market dynamics. Despite this, the supply of Bitcoin at exchanges has started to decline, as shown in the year-to-date chart of Bitcoin reserves at exchanges.

Bitcoin Reserves at Exchanges (Year-To-Date Chart)

The long-term chart further illustrates that coins at exchanges are becoming increasingly scarce. Contrary to popular belief about a negative correlation between exchange reserves and price, over a 3-year interval, there is no apparent relationship; the price is roughly the same as it was 3 years ago, even though reserves are significantly lower.

Bitcoin Reserves at Exchanges (3-Year Chart)

Market Cap vs Free Float

The modest ETF inflows, juxtaposed with dwindling exchange reserves, suggest the necessity of a different metric for measuring the total Bitcoin supply. In the stock market, flows are usually measured against the free float rather than the total market cap. However, estimating Bitcoin's free float is challenging. Most Bitcoin holders remain anonymous, and the largest publicly known holders possess less than 20% of the total market cap, making accurate measurement difficult.

Largest Holders of Bitcoin (As of August 2023)

Source: River Financial

There are compelling reasons to believe that Bitcoin's free float may be significantly smaller than its market cap. Firstly, many known holders have a long-term investment horizon and are unlikely to sell their coins at any reasonable price, especially considering Bitcoin's meteoric rise since its inception. These long-term holders have likely already secured profits to their satisfaction. Additionally, exchanges maintain a portion of cryptocurrencies to facilitate trading, further reducing the free float available for new investments.

Secondly, Bitcoin is often viewed as 'digital gold' by many, particularly by unknown holders who prefer to hold their positions for extended periods, using it as a hedge rather than for short-term gains. This long-term view means that even significant price increases, such as 30%, are unlikely to trigger a sell-off among these holders.

Thirdly, a considerable number of coins are presumed lost, which further diminishes the free float.

Moreover, when considering Bitcoin's market cap in the context of the global population, it appears relatively small. Bitcoin's relevance seems most pronounced in mid-income countries with low credit ratings and/or capital controls, where traditional financial systems offer limited stability or growth opportunities. Residents of wealthy countries may view cryptocurrency primarily as a speculative investment, while those in poorer countries often lack the financial resources to invest. For instance, if 20% of the population in just the four largest countries within this demographic were to invest $1,000 each in Bitcoin, treating it as digital gold, this could represent 40% of all Bitcoins at the current price, highlighting the significant potential for market impact."

Selected Mid-Income Countries With Low Credit Ratings And/or Capital Controls

Source: IMF, Wikipedia

New ETF Inflows?

If inflows into new ETFs continue, they will further drain exchange reserves, potentially making the reserves scarce and inflating the price. Bitcoin halving expected in April will limit coin supply too.

Inflows into Bitcoin ETFs may continue picking up as some large investors and advisers consider adding Bitcoin. That takes some and so inflows may rise all this year. “Securing Gary Gensler’s ETF approval was just the first step toward bringing crypto investing to the masses. Now people like Rob Pettman at LPL Financial — a gatekeeper of more than a trillion dollars in capital — need to be convinced that the new spot-Bitcoin exchange-traded funds are worthy additions to their massive trading platforms… “We just want to see how they work in the markets,” he said. After the three-month assessment, the platform will decide which funds they want to offer, or whether they need more time to assess the ETFs. Like many gatekeepers in the money-management world, Pettman faces a balancing act between keeping his clients shielded from dodgy investments and allowing them to reap the rewards of an emerging asset class,” – reported Bloomberg in the article dated February 3.

To be fair, I personally do not see a case for strategic, long-term investing in Bitcoin ETFs (only a short-term gambling on it). Bitcoin’s greatest advantage is an independence from traditional finance, and so buying it via traditional finance infrastructure looks a bit strange.

The independence from traditional finance has a great value for residents of high-risk countries, which have low credit quality (like many African countries) or are occupied by rogue regimes (like Russia). For investors at US exchanges (where Bitcoin ETFs are traded) this independence has almost no value as traditional finance in the US is extremely safe, and even if someone doubts it, he would buy Bitcoin directly rather than via ETFs. Generally, I believe that residents of most countries with high credit ratings do not need crypto at all (except for gambling on it), because their domestic banks are reasonably safe and a state guarantee for deposits is virtually risk-free. A probability of complete crypto rejection and Bitcoin going to zero is way higher than credit risks of most high-rated financial systems.

Conclusion

Bitcoin's free float is likely much smaller than its market cap, which limits potential supply. In my view, shrinking exchange reserves reflect this. This situation is a powerful long-term bullish factor for Bitcoin.

In the short term, if inflows into new ETFs accelerate, this could further reduce the reserves and inflate prices. However, such a scenario seems like a remote possibility because new ETF inflows are small compared to the reserves. So far, net inflows have been just around 2% of reserves.

Ethereum appears to be a better candidate to bet on for its scarcity in the short term since its supply is constrained by staking and level 2 applications, while spot ETFs are likely to be introduced (possibly in May).

However, amidst all the discussion about limited supply and bullish long-term trends, I would also like to present a concerning chart. Historically, the launches of new, large exchange-traded products linked to Bitcoin have almost perfectly coincided with mid-term market tops.

Bitcoin (BTC/USD)

This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.

The immense size of the US national debt has become a hotly debated issue. Some argue that it will destabilize the traditional financial system and promote independent currencies like gold and cryptocurrencies. I aim to investigate this issue further.

Current US Debt Is Not Too Large

The US national debt is often discussed in such harsh terms that it might seem as though the US is on the brink of default. In reality, the current level of debt is only somewhat worrisome. A far more pressing issue is the high budget deficits, particularly given the healthy state of the economy. Prudent fiscal policy typically involves high deficits only as a counter-cyclical measure to support a declining economy or during wartime necessities.

A simple comparison with major developed countries shows that the US debt level is largely in line with peers such as Canada, the UK, and France. The US credit rating might appear slightly overstated based solely on the debt-to-GDP ratio. However, rating agencies enhance the US credit assessment due to its robust economy and the unique global role of the US dollar and US Treasuries. Even Japan, with a truly concerning debt-to-GDP ratio, enjoys a very strong credit rating. This suggests that the US has ample room to increase its debt without triggering significant default concerns. Conversely, countries like Italy and Spain suffer in credit ratings because their economies have limited influence on Eurozone monetary policy. Essentially, a country with its own reserve currency and deep financial markets can sustain a high level of debt, likely much more than what the US currently has.

National Debt and Credit Ratings of Major Developed Countries

Source: IMF, Bloomberg

Furthermore, the US does not heavily rely on foreign investors for the purchase of its debt. A significant portion of the US national debt is held domestically, either by investors within the country or by state agencies. As of the end of 2022, approximately 22% of the national (gross) debt constituted intragovernmental debt, indicating liabilities among various branches of the US federal government. The national debt, excluding this intragovernmental portion, is termed public debt. Notably, around 70% of this public debt is in the hands of domestic investors. The Federal Reserve stands as the largest domestic holder, with its portfolio of US Treasuries being three times larger than the combined holdings of Japan and China, the two largest foreign creditors. It is crucial to understand that nearly a quarter of the US public debt is attributed to the central bank itself, which is significant because the Federal Reserve operates as an independent investor and its holdings are not classified as intragovernmental debt.

For a more comprehensive understanding of who holds the US debt, a detailed summary is available on the Peter G. Peterson Foundation’s website. This Foundation is a non-profit, nonpartisan organization committed to addressing America's long-term fiscal challenges to ensure a better economic future. Its co-chairman is Robert Rubin, who previously served as the United States Secretary of the Treasury.

Holders of US Public Debt

The Fed portfolio has become so huge after numerous quantitative easing (QE) programs introduced after the 2008 crisis in order to support the economy. Unlike traditional Fed market operations, QE involves buying longer-term securities (notes and bonds) in order to reduce long-term interest rates.

The Federal Reserve’s Portfolio of Us Treasuries (USD Billion)

A Danger Ahead?

The Federal Reserve's portfolio has grown significantly due to numerous quantitative easing (QE) programs initiated after the 2008 financial crisis. These measures, aimed at supporting the economy, marked a departure from traditional Fed market operations. QE specifically involves the purchase of longer-term securities, such as notes and bonds, with the objective of reducing long-term interest rates.

The Federal Reserve’s substantial holdings in US Treasuries, denominated in billions of USD, underscore the scale of these interventions.

However, a more pressing concern than the current debt level is its unsustainable trajectory, exacerbated by very high budget deficits. Post-2008 crisis, the US deficits escalated to levels not seen since the Second World War and surged even further during the 2020 coronavirus pandemic. While stimulating the economy during major crises is a standard and often beneficial macroeconomic strategy, the current situation in the US presents a different picture. The tight labor market indicates that there is no pressing need for additional fiscal stimulus; in fact, the opposite might be more appropriate. Despite this, budget deficits remain alarmingly high, and there appear to be no concrete plans in place to address this issue.

Federal Budget Surplus or Deficit as % of GDP

The US potentially has ample time, approximately a decade or more, to address its fiscal issues, contingent on political will. However, the current political landscape is fraught with challenges. Even in the best of times, it's difficult for politicians to advocate for reduced spending without risking voter discontent. In practice, leaders like Biden and Trump have supported expansive fiscal policies characterized by high deficits. Consequently, it's likely that the debt issue will worsen in the coming years. This situation could significantly impact the markets, especially if a new crisis arises and the US needs to increase deficits to support the economy. Alternatively, the introduction of a large stimulus package without clear macroeconomic justification, as might be proposed by someone like Trump, could also destabilize the markets.

A recent example from the UK illustrates the potential consequences of such fiscal policies. As summarized by Wikipedia, 'In September and October 2022, the Conservative Party government led by Prime Minister Liz Truss faced a credibility crisis. This was triggered by the September 2022 mini-budget and a disorganized vote in the House of Commons over a motion to ban fracking, resulting in a loss of support from Conservative members of parliament.' This political turmoil led to a significant downturn in all British assets, including government bonds (gilts), the pound, and stocks of major British companies, even those like AstraZeneca or Shell with minimal exposure to the domestic economy. For a brief period, the UK's financial markets behaved like those of an emerging market, with widespread selling of UK-related investments. The impact on UK government bonds was particularly severe, with the yield on 10-year gilts soaring from 3% to 4.5% in just two months.

10-Year Gilts Yield in 2022

Of course, the last resort was the central bank. In the UK crisis, the Bank of England's intervention in purchasing government bonds (gilts) was a crucial move to stabilize the market. The political fallout led to the ousting of Prime Minister Liz Truss and a subsequent shift in fiscal policy by the new government.

Should a similar situation arise in the US, the implications could be far-reaching, potentially sparking a major global crisis. In such a scenario, it's interesting to speculate on the behavior of assets like gold and cryptocurrencies. Initially, they might experience a decline alongside other assets due to acute liquidity stress. However, in the longer term, a crisis of this magnitude might actually bolster the appeal of alternative assets like gold and cryptocurrencies.

Conclusion

While the current level of US national debt might seem manageable, its trajectory, driven by high budget deficits, is unsustainable. This could eventually impact financial markets, especially if the US faces a new crisis requiring increased deficits for economic support, or if there's a push for a large, unjustified stimulus package. The situation in the UK under Liz Truss could be a harbinger of what might unfold in the US, though the timing of such a development is uncertain. A more immediate concern is the potential destabilization of US politics and markets, especially under leadership that favors controversial fiscal policies. Ultimately, this situation warrants careful monitoring and a balanced approach to fiscal management.

This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.

Ethereum has significantly underperformed Bitcoin both this year and following the Merge, despite transitioning to a deflationary asset. Why is this the case, and what might the future hold?

Less Ethereum, More Bitcoin

So far this year, Ethereum's growth has been nearly half that of Bitcoin, increasing by approximately 80% compared to Bitcoin's nearly 150%. The Ethereum to Bitcoin price ratio (ETH/BTC) has dropped to its lowest level since April 2021.

ETH/BTC

Since the Ethereum network's transition to a deflationary model post-Merge (where the Ethereum supply starts to decline), Ethereum has notably underperformed Bitcoin, which continues to see a supply increase due to mining. The difference in supply growth rates between Ethereum and Bitcoin is marginal (about 1.6% annualized), yet the underperformance of Ethereum, now a deflating asset, is intriguing.

Seeking Gold in Crypto

This year's Bitcoin outperformance seems largely influenced by broader market movements, especially the surprising divergence between gold prices and real interest rates. Typically, gold prices rise when real rates are low. For example, gold peaked in August 2020 due to real rates nearing -1% for the 10-year tenor, a trend consistent with past observations such as in 2011-2013. However, in 2023, gold has rallied by 11% year-to-date and reached new highs, despite an increase in real rates. This anomaly in the gold market, with its rising value despite higher real rates, suggests a shift in investment strategies, possibly indicating a move away from traditional finance towards assets like gold.

In this context, Bitcoin's outperformance can be seen as logical. It's increasingly perceived as a digital alternative to gold, appealing to those diversifying away from traditional financial assets. This trend may explain why Bitcoin, more than other cryptocurrencies, has attracted investment flows seeking diversification.

In the short term, Bitcoin's rally since mid-October reflects macroeconomic shifts, particularly expectations of a more lenient monetary policy from the Federal Reserve. Lowered expectations for the Fed's interest rate hikes have led to a general uptick in asset prices, benefiting Bitcoin more than Ethereum due to its closer ties with traditional financial markets. Following recent soft inflation data and dovish commentary from the Fed, market expectations are tilting towards lower interest rates by the end of 2024, with the implied policy rate projected below 4%.

While Ethereum's transition to a deflationary asset post-Merge was significant, its performance relative to Bitcoin reflects broader market dynamics and investor preferences in a changing economic landscape.

Implied Fed Funds Rate Path and Number of Hikes/Cuts Priced in as of December 14, 2023

Two months ago, the Federal Reserve was expected to maintain interest rates until mid-2024, with a possibility of further hikes. The implied policy rate stood at approximately 4.6% for the end of 2024. However, there has been a significant shift in expectations, now anticipating a more dovish policy. This reevaluation has been the primary driver behind the rally of Bitcoin and other assets since mid-October.

Implied Fed Funds Rate Path and Number of Hikes/Cuts Priced in as of October 13, 2023

In 2022, Bitcoin's high correlation with stock indexes, combined with its inherent volatility, likened it to a high-beta stock. However, in 2023, this correlation has substantially decreased, distinguishing Bitcoin from traditional stock market dynamics. Its correlation with gold, typically negligible, saw an uptick from the fourth quarter of 2022 to mid-2023. This shift, especially during the banking crisis in March 2023, has led to Bitcoin being increasingly viewed as a form of digital gold, highlighting its potential as a diversification asset.

Bitcoin Daily Correlation With Ethereum, S&P 500, Nasdaq 100 and Gold in 3-Month Intervals

Is Ethereum Different to Bitcoin?

Despite a drop in the correlation between Bitcoin and Ethereum this year, their relationship remains strong. Many traditional finance investors may view Ethereum's technical differences (proof-of-stake mechanism, deflationary nature, adaptability for advanced protocols) as less significant due to its continued strong quantitative correlation with Bitcoin. The Bloomberg beta calculator indicates that while the R squared value (indicating the strength of the relationship between Ethereum and Bitcoin) has decreased from 0.777 over the last two years to 0.623 in the past six months, it remains high. Additionally, Ethereum's negative Alpha suggests it has underperformed in these periods.

In conclusion, while Ethereum offers distinct technical features, its market behavior and perceived investment value remain closely aligned with Bitcoin. This strong correlation, coupled with a lack of clear fundamentals in the crypto space, may limit Ethereum's appeal to traditional finance investors seeking diversification benefits.

2-Year Ethereum Beta to Bitcoin (Daily)

6-Months Ethereum Beta to Bitcoin (Daily)

Conclusion

In my analysis, Bitcoin's outperformance this year is largely attributed to broader market movements, particularly the surprising divergence between gold prices and real interest rates. Traditionally, gold thrives in low real rate environments, but this year, it has rallied despite rising real rates. This trend suggests a shift in investment preferences, with gold being favored as a diversification tool away from traditional financial assets. In this context, Bitcoin's rise makes sense as it increasingly assumes a role similar to gold among cryptocurrencies.

However, Ethereum's journey is different. Its high correlation with Bitcoin limits its attractiveness as a diversification option for investors. While Ethereum shares some foundational aspects with Bitcoin, it still moves in tandem with it, reducing its appeal to those seeking portfolio diversification.

Looking ahead, the current gap between Bitcoin and Ethereum might not be sustainable, especially if Bitcoin continues its upward trajectory. If more capital flows into cryptocurrencies, it's plausible that Ethereum will benefit significantly from these investments due to its prominent status and unique features like supply deflation and technological adaptability.

The concept of Ethereum's supply deflation is somewhat analogous to stock buybacks. While buybacks alone aren't usually the primary driver for a stock's performance, they can amplify a stock's upward movement in a favorable market, especially if the underlying business is strong and growing. Similarly, Ethereum's decreasing supply might play a significant role in enhancing its value, particularly when the market starts to recognize its potential and unique attributes.

This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.

Lower commodity prices have been one of the key factors behind the recent rally in most assets, including crypto; however, this trend may reverse this year.

Commodities Have Been Helpful for Disinflation

After a plunge during the coronavirus pandemic and subsequent recovery, commodity prices spiked in the first quarter of 2022 due to Russia's invasion of Ukraine. Russia is a major producer of most commodities, and large-scale sanctions against it ignited fears of lower commodity supply. However, in 2023, commodity prices declined back to levels before the war.

Bloomberg Commodity Index (USD)

The commodity price drop in 2023 was very helpful for disinflation. In the first half of 2022, the US CPI rose more than the core CPI, which excludes food and energy prices that are highly correlated with commodities; however, it fell much more rapidly in the following months. Headline CPI has been below core CPI since March 2023. As inflation became less of a concern, major central banks were able to halt their rate hikes. This helped stocks, bonds, and crypto. Following the market's reassessment of the future rate path, primarily after the publication of inflation data in October, most assets experienced a historic rally in November and December.

US CPI and Core CPI (YoY, %)

Unlikely to Repeat

Lower commodity prices last year reflected both resilient supply and subdued demand. Sanctions were primarily aimed at decreasing Russia's revenue from oil and other commodities, rather than at reducing the supply from Russia. US oil production rose more than expected, largely offsetting the production cuts by OPEC+.

I believe the weaker global economy played an even more significant role in lowering commodity prices. Europe, China, and most other regions were far less resilient than the US, leading to depressed global commodity demand. For the US, it was a fortunate combination of lower prices for commodities and other globally traded goods, coupled with a still-strong domestic economy. This situation created a sort of soft landing, at least temporarily. The problem is that such a rare combination is unlikely to repeat.

This year, we are likely to face either a hard landing if the global economy continues to weaken, or more synchronized global growth if it improves. China looks to be the key factor deciding between these scenarios, and I think that the China recovery scenario is more likely. Chinese authorities seem to be increasingly concerned about weak growth, and the macroeconomic situation is very conducive to policy support. Unlike most other countries, China faces a deflation threat rather than too high inflation. Deflation makes a perfect case for a large-scale stimulus, maybe even direct money printing like it was in the US after the 2008 crisis.

China CPI (YoY)

Despite the widespread pessimism surrounding Chinese assets, especially real estate, the significant rise in iron ore prices, now at their highest since April 2022, suggests that the economy may be in better shape than perceived. In 2023, iron ore outperformed most metals. Iron ore, primarily used in construction, sees its demand predominantly driven by China.

SGX TSI Iron Ore Futures (USD)

Overall, this year could witness an increase in global demand for commodities, while the spare supply has already been largely depleted. For instance, a significant new copper project in Panama has been recently delayed, potentially for years, and recent comments from shale oil producers indicate that this year's production growth will be much slower than in 2023. 'Demand for raw materials is at record levels, inventories are low, and spare production capacity is largely exhausted,' said Bloomberg, citing Jeff Currie, the former head of commodity research at Goldman Sachs.

Positioning

Importantly, investors are not positioned for such a scenario. Commodities, as an asset class, are currently unpopular and might even be considered a contrarian bet, given that most investors are enamored with tech. The S&P 500's weighting of commodity producers is small. Speculative positioning in most commodity futures, such as copper — a popular commodity due to its role in the energy transition — is low.

Net Speculative Positions in Copper Futures

In the oil futures market, hedge funds and other speculators have reduced their net exposure to levels akin to the lows observed during the commodity crisis of 2015-2016.

Net Speculative Positions in Oil Futures and Brent Oil Price

Considering the bearish positioning, low-cost volatility, and the apparently escalating conflict in the Middle East, I would contemplate a modest, speculative bet on call options for oil.

At-the-Money Implied Volatility of WTI Oil Options

Conclusion

2024 could potentially be a pivotal year for commodities, given the strong existing demand — which might surge if China implements a substantial new stimulus — alongside growing supply risks and currently depressed market positioning. This scenario is generally unfavorable for crypto and most other asset classes. For investors heavily exposed to crypto or US technology stocks, diversifying into some commodity producer stocks as a hedge could be a wise strategy. S&P Global Natural Resources ETF (GNR) is an easily accessible option. For the more seasoned investors, European oil majors and major mining companies appear to be significantly undervalued.

This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.