🧘♂️Crypto Wild West
Market Meditations | August 4, 2021
This town ain’t big enough for…
We all love a good story. It is the reason everyone supports the underdog and why the idea of cryptocurrency leading a financial revolution has gained so much traction. However such narratives can lead us to make irrational decisions in a phenomenon known as narrative fallacy bias ?
This refers to our tendency to construct stories with cause-and-effect explanations out of random details and events. As Nasim Taleb writes “we seek explanations even to the point that we will manufacture them”.
✅ In today’s newsletter, we explore: the latest crypto market updates, crypto regulation, how to avoid narrative fallacy bias and crypto credit cards!
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⏰ In A Rush?
Here’s 5 things you need to know about the crypto markets:
? SEC Chairman Gensler Agrees With Predecessor: ‘Every ICO Is a Security’
? Binance to bring Bitcoin payments to Shopify via new partnership
? DeFi platform dYdX is launching a governance token
We mentioned in our January 13th newsletter that this would be a possibility and suggested that users interact with the protocol to be eligible for future airdrops. If you did so, congratulations!
? Rothschild-founded RTI Capital invests in crypto platform Aspen Digital
? USDT Usage on Ethereum Shifts Away From Asia Daytime Hours
?? The SEC Needs More Manpower
You may recall from our recent newsletters that US Senator Elizabeth Warren had given the SEC a July 28th deadline to determine what authority they had to regulate cryptocurrency. The long-awaited response came in the form of a speech at the Aspen Security Forum by SEC Chair, Gary Gensler. The Aspen Security Forum is an annual non-partisan public venue for global leaders to discuss the current forces affecting national security.
? So how did the SEC respond, and what authority do they have to regulate cryptocurrency?
“I believe we have a crypto market now where many tokens may be unregistered securities, without required disclosures or market oversight.”
“Make no mistake, it doesn’t matter whether it’s a stock token, stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities, these products are subject to security laws and must work within our securities regime.”
Gensler did admit that there were cracks and gaps in the space, but securities laws are clear, especially the Howie Test, and do not need any further clarification.
He also remarked that where he would “focus legislative priority was on cryptocurrency trading, lending and DeFi platforms.”
There was some optimistic language, particularly if you are a bitcoin maxi and not interested in altcoins. It appears that the SEC is open to a Bitcoin ETF, specifically if it included CME traded Bitcoin futures. You can read his full speech here.
By responding in this Security Forum that cryptocurrency oversight was a national security issue and pleading for more funding for the understaffed SEC to provide this oversight, Gensler made it possible for lawmakers to respond by reaching into the deep bi-partisan pockets of the US National Security purse.
Our Market Meditations are longer format educational segments. Each letter features a Market Meditation which will deep dive and analyse a relevant crypto event, theme or tool.
? Good Story, Bad Decisions
As an investor, falling victim to the narrative fallacy can have substantial negative impacts on our returns. A good example of this is the current hype around DeFi and it’s potential to revolutionize finance. We use this narrative to explain the huge increase in DeFi token values over the last year, however in reality there could be a number of factors that will only be clear with hindsight. Even if this narrative plays out, it does not mean all protocols will succeed. Digging deeper, stocks convey voting and profit sharing rights however not all tokens have such clear ways of accruing value. As such investing in just any DeFi protocol, even if the narrative is correct, may not lead to profit.
1️⃣ Stick to a data led approach. The main reason this fallacy occurs is due to our tendency to construct stories. Building a system solely around data allows us to avoid getting trapped in a narrative.
2️⃣ Separate individual investments from the narrative. Take our DeFi example from earlier, even if a narrative becomes reality, individual investments in the relevant sector may not succeed. Always consider the merits of an individual investment.
3️⃣ Improve your emotional management. Narratives have a way of stirring up our emotions, such as the fear of missing out on a paradigm shift. Find ways to remove emotions from your investing decision making.
4️⃣ Avoid news sources that appeal to sensationalism. Most media is carried out for one goal – profit – and for this, there needs to be engaging narratives. Whilst it can be difficult, always consider whether your information sources are drawing links where there are none.
5️⃣ Don’t avoid it at all! Whilst you should avoid basing your decisions on narratives that do not necessarily correlate to positive returns, many people will not. There can be huge profits in objectively assessing the strength of a narrative and investing on that basis. If you want to find out more about this, check out our narrative investing guide.
Narrative fallacy bias can lead us to provide false explanations behind events and ultimately make irrational decisions based on these explanations. Construct a data led approach, learn how to benefit from a good story and you can avoid making bad decisions.
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? Credit Where It’s Due
The rise of the crypto credit card has accelerated of late, and CoinJar exchange in Australia has become the latest company in more than a dozen to offer one. But how do they work and should we take note? The basic premise is the spending of cryptocurrency via credit card, which is converted to fiat at the point-of-sale.
Here are some general pros and cons associated with crypto credit cards:
✅ Most can be funded by a crypto wallet, and several exchanges have started to offer their own cards, which prevents fiat off-ramping and can reduce blockchain transaction fees.
✅ Use of the card for purchases results in cryptocurrency rewards, which can either be held, transferred or converted. This could be viewed as a form of passive investing through routine spending.
✅ Most cards come with an app that can be used for bookkeeping, transfers and more.
⚠️ These companies still need to make money, and they do this through several methods including account fees, transaction fees (e.g. for routing via central banks), and the compulsory purchase of their own crypto tokens.
⚠️ The specific reward system may not suit a person’s spending pattern and there may be cash-back cards that are more suitable, where that cash could then be invested separately in crypto.
? There are also a few location-specific aspects to factor in, such as whether credit cards are widely accepted for purchases, whether crypto cards are offered in a certain jurisdiction, and whether spending of cryptocurrency will impact taxation.
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??♂️✍️ Stories in this newsletter were written by D. Beverly, Isambard FA, Nick T., Max P., Kimia K., Ellen B. and Koroush AK. Graphics were produced by Gerasimos P.
Not financial or tax advice. The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. We are not financial advisors. Every investment and trading move involves risk. Do your own research when making a decision. See our important security disclaimers here.
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