Bitcoin is Tier 1 Capital

The news on bitcoin is as dramatic and volatile as the price swings. It’s like drinking from Niagara Falls trying to keep up. Here’s a pint for you to sip on.

The SEC denied both Bitwise and Grayscale’s applications for a spot bitcoin ETF. Grayscale immediately responded by suing the SEC. I imagine this will be a drawn-out process. To learn more about the Grayscale (GBTC) soap opera, Ryan Selkis from Messari put together a great write up on it. You can read it on this link but note it’s behind a paywall.

The Grayscale-Gensler Stalemate

VanEck just applied for their own spot bitcoin ETF. This is their second kick at the can as their first attempt was denied in November 2021. Meanwhile, the Netherlands approved a spot bitcoin ETF on the Amsterdam stock exchange and Switzerland approved their second spot bitcoin ETF. Be wary of the new Swiss ETF though. They are touting very low management fees which will be compensated for by lending out a portion of the bitcoin. The whole point of owning bitcoin, and gold, is to avoid counterparty risk. It’s not worth it for a few basis points IMO.

Counterparty Risk is What’s Causing the Meltdown in the Crypto Market

It’s important to understand that all the funds and centralized entities that are blowing up, are doing so because of poor business practices, not from the fundamentals of bitcoin. The same strategies that traditional banks and hedge funds employ have been applied to the crypto sector. Everything you are seeing come to light in crypto is 100 times worse in the traditional financial system. The main difference is crypto has no bailouts and the majority want it to fail. Whereas the traditional financial system is being kept on life support at all costs. If you think the crypto markets are crazy, just wait. It’s only a preview of what’s to come in the stock and bond markets.

Having no bailouts or interventions means the crypto market will bottom and recover much quicker. Students of Austrian Economics know the US Great Depression was drawn out for years because of interventions. Everyone knows how bad the Great Depression was. But did you know the US depression of 1920 was worse? There was a depression in 1920? Yes, and no one really knows about it because it came and left so quickly. Within about a year, markets were back to normal. This happened because the government didn’t intervene. The market was allowed to unwind the leverage and flush out bad actors. Leaving the savers and quality businesses to rebuild on a more solid foundation.

The decentralized finance (DeFi) part of crypto is holding up just fine through all of this. While the centralized entities are taking prices down with it. DeFi protocols like Maker, Uniswap, Curve, and my favorite THORChain, are operating business as usual. Their underlying token prices are down, but their fundamentals have not changed and their protocols are working as intended. No bailouts, no arbitrary intervention.

Bitcoin’s Fundamentals Haven’t Changed Either. If Anything, They’re Getting Better.

The Bank for International Settlements (BIS) is the central bank of central banks. For the last several years gold bugs have been peeing their pants in excitement about the implementation of Basel III and gold becoming Tier 1 Capital on bank balance sheets. Basel III has been delayed since the world lost its mind two years ago. It is slated to go into effect January 2023. Basel III is meant to strengthen bank balance sheets by holding high quality liquid assets and decrease bank leverage. Perhaps banks have already started doing this and is causing the selloff in all markets? I don’t know, just speculating. It’s interesting to note that while the BIS is trying to strengthen the banking system, they’re also proposing bitcoin be considered Tier 1 capital.

The large exposure rules of the Basel Framework are not designed to capture large exposures to an asset type, but to individual counterparties or groups of connected counterparties. This would imply, for example, no large exposure limits on cryptoasset where there is no counterparty, such as Bitcoin. The Committee proposes, therefore, to introduce a new exposure limit for all Group 2 cryptoassets outside of the large exposure rules.

Provisional limit set at 1% of Tier 1 capital, to be reviewed periodically.

Second consultation on the prudential treatment of cryptoasset exposures

Who knows if this will be adopted or not? And whoop-de-do, 1%? A little bit goes a long way and the simple fact they talk about bitcoin this way legitimizes it. Quite the news.

This proposal is just another crack in the dam holding money back from bitcoin. The cracks are adding up while the reservoir level is rising. The dam is going to burst at some point. I don’t know when but this a good time to prepare for it. Then, when the dam breaks and money floods in, you can kick back, drink a beer, and watch it unfold.

Cheers!

Thank you for reading.

I’m the founder of Youxia Crypto, an asset management company specializing in crypto. I can help you buy and sell precious metals too. I believe crypto is more than just about trying to make money, it’s about creating freedom for oneself and the rest of the world. I’m a contrarian, voluntaryist, and proponent of Austrian Economics. I enjoy downhill skiing, scuba diving, live music, yoga, and traveling.

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