21st March 2023 - Banks and selloffs.
tl;dr
So many questions about the bailout of Credit Suisse add weight to the flight to safety in cryptos.
Market Snap
Market Wrap
The failure to hold on to the 28-handle must be seen in the context of BTC’s ongoing decoupling from equities, and the near 40% gains over the last 10 days. As we see below, even bull markets in cryptos incorporate significant selloffs that do not change the narrative.
Curious Cryptos’ Commentary – Banks and regulation
Following the GFC (Global Financial Crisis) of 2017, additional capital requirements were placed on banks. It is unfortunate that these changes didn’t include the recognition that government bonds are far from being risk-free. It is surely a coincidence that classifying them as risk-free creates additional demand from regulated financial institutions, lowering borrowing costs for governments, and allowing governments to remain fiscally incontinent for longer than would otherwise be the case.
The extra capital requirements post GFC led to the creation of AT1 (additional tier 1) bonds, also known as CoCos (contingent convertibles), as deeply subordinated debt, but – critically - superior to equity investors, who always rank last.
Until now.
It has been reported that in the Credit Suisse bailout/take-over by UBS that AT1 bonds are being wiped out entirely, but shareholders retain value.
This is utter madness.
Changing the rules of the game mid-way through will always increase the cost of capital (*). Demand for AT1 will likely disappear, making the entire financial sector riskier than just 2 days ago.
If the regulators cannot understand the banking business - which has been around for millennia - there is no chance they can get their heads round cryptos.
I note that Credit Suisse’s largest shareholder – who should have been wiped out before the holders of AT1 debt – is the Saudi Arabian government. I wonder what arm-twisting saved the large proportion of their equity investment. Certainly immoral, probably illegal, the Swiss authorities have condemned banks worldwide to huge uncertainty.
A riskier legacy financial system simply encourages the flight to safety in cryptos.
*** Breaking news ***
The ECB (European Central Bank) has stated:
“… common equity instruments are the first ones to absorb losses, and only after their full use would AT1s be required to be written down.”
Remember this day folks.
It is the one and only time that Convicted Criminal Christine Lagarde, head of the ECB, and I will ever agree with one another.
Curious Cryptos’ Commentary – Mark Helfman
Mark Helfman is the author of Crypto is Easy newsletter:
He recently published this graph:
Note the log scale.
What we are looking at here is the percentage change for rallies and sell-offs in the price of BTC.
Mark makes the point that even during bull runs, there are short periods of fear and doubt that result in down moves of 30%-50%. If we are out of the latest crypto winter, and this is the start of the next leg up, then we should expect those kinds of downward moves anyway on occasion.
I think this graph reinforces two key points that apply to my investing strategy, which I share with you only for interest, not as any recommendation at all.
Firstly, DCA (dollar cost averaging) is the most sensible approach to investing over the medium-term or longer.
Secondly, and in stark contradiction to the first point, having a stash of cash to play contrarian when the rest of the world is panicking will always pay off big time, just so long as you are never a forced seller, a lesson that the leveraged children fail to heed.
…
(*) UK productivity has not recovered from the decision by Gordon Brown in 1998 to allow for retrospective tax changes, enthusiastically embraced by the Conservatives since 2010, and it never will.
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