Bitcoin Meets Real Estate
This week saw Australian real estate powerhouse L.J. Hooker making a move in the blockchain space, organising an auction with cryptocurrency specialists NuYen. The auction will make purchasing the Casuarina Beach property possible in both Bitcoin and Binance coin, and lay the groundwork for future crypto-based property auctions from the Real Estate giant.
We often talk about this being early days in crypto. Have a look at this great graphical representation of the relative scale of global assets from Visual Capitalist, which proves it. Crypto is tiny, bitcoin is the first gold block (each block represents 100 billion dollars).
The best bit though is the derivatives section ($1.2 quadrillion). It’s too big for this blog but here is the link, you can scroll through all the assets. It makes me wonder about the bad press cryptocurrency gets when you have this amount of value tied up in derivatives. Looks like much of what goes on in global finance is just people playing pass the parcel with a house of cards.
We covered Maker DAO a few weeks ago here. Maker enables Collateralised Debt Obligations in the crypto world (currently ethererum only). A quick reminder on how it works:
1. Put, say, $1,500 ethereum into a Maker contract
2. Receive $1,000 of DAI – the associated stablecoin
3. $500 is retained by the Maker contract as collateral
4. Sell the DAI on an exchange and receive $1,000 to spend as you wish
Many market participants, rather than actually spending the money, are doing the following:
5. Sell the DAI at (4) and use it to buy more ethereum
6. Repeat the whole process to gain leverage. It’s possible at 150% collateral to get 3x leverage.
The result of the selling pressure at step 5. above is driving down the price of DAI below $1 even though it is covered 150% by ethereum as collateral.
Why is this interesting?
Well if you believe in the quality of the collateral you can pick up all the gains between the current value of DAI and the $1 peg, the risk you run is a collapse in the value of ethereum while your at it
- No brokers or regulators here. This is software and smart contract driven.
- In a few clicks of a mouse you can collateralize your crypto holdings, this would take days of admin and signing things in traditional finance.
- Maker will add bitcoin in future which will be far more interesting because of its liquidity.
- This is a software driven derivatives system. I think it will be like bitcoin in that now it is released into the world I don’t see how it can be stopped by regulation.
Tether was the first stable coin launched in 2014. Stable coins enable the fast movement of value between crypto-exchanges without having to bear the risk of currency movement. They are generally backed 1 for 1 by fiat currency, in tether’s case, the USD. The current circulating supply of tether is $2 billion.
Recently, tether changed their terms and conditions indicating that the backing for the token may now include assets “other than cash”. In the past this would have caused a stampede for the exit as people tried to redeem their dollars. This time around, deafening silence.
I think diversifying the asset backing for tether is very sensible. Getting operating bank accounts is very hard for them and it seems appropriate that placing some of the cash in bonds, loans and other assets is probably less risky than holding pure cash. In fact it goes to show that investors in this sector at least are aware that holding cash is very far from the safe haven many people think it is.
The high contours in this chart are the longest holders, 5 years plus. During this bear market they have continued to accumulate (the green circle). Whereas into 2018, as prices fell, new entrants, the lower contours, capitulated (the red circle) with their holdings falling sharply.
This increasing tightness with which the asset is held will be important in the next wave. Once again interest in buying will rise but in each wave, finding a willing seller will get harder and harder.
That will be good for price but will make the ride as volatile as ever. We could well see price gapping on a scale we aren’t used with traditional assets too.