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Is PayPal driving the bitcoin spike?

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Bitcoin’s price has been mooning in the wake of the US election, so much so it is nearing the record highs it set back in December 2017, at pixel time trading above $18,000:

© Chart courtesy of Coinmarketcap.com

Speculation as to what is causing the run-up is rife. Some blame growing distrust in authority following the yet-to-be conceded US election. Others believe it’s the result of Covid-related stimulus gone mad. Others still see it as simple confirmation of bitcoin’s time finally having come.

But another theory fell into our inbox on Thursday, which we think possibly has legs. That is that the price increase has come as a result of a bitcoin shortage propelled by Paypal getting into the crypto space, announced on October 21.

As Erik Lowe, head of content at bitcoin fund Pantera noted to FT Alphaville by email:

PayPal’s October 21st launch announcement coincided with the service’s availability for select US accounts. It was a gradual roll out. You can see a spike in the chart the day of the announcement. Paxos Crypto Brokerage provides crypto custody and trading for PayPal. Paxos owns itBit, their exchange.

He was referring to this chart, featured in a communication by Pantera’s CEO Dan Morehead on Wednesday:

According to Morehead, the idea PayPal may already be having an impact after launching on Oct 31 is supported by the fact that its rival Square, which began offering bitcoin access 30 months ago, is now estimated by Pantera to purchase about 40 per cent of all newly issued bitcoin.

That doesn’t leave a lot of spare supply on the table for any other payment giants to get their teeth into without moving the price significantly.

What also makes a big difference is that with the entry of PayPal comes a large pool of already-KYC’ed users, meaning the friction usually associated with getting into bitcoin (from taking selfies of yourself with your passport to extended daily limits) is eliminated.

Another indicator of the PayPal influence is the increase in itBit volume since PayPal entered in the market:

ITBit is owned by Paxos, PayPal’s broker-dealer. Morehead estimates the above volume spike indicates PayPal may already be buying more than all the supply of newly issued bitcoin that’s available (currently there are 6.25 bitcoins mined every ten minutes.)

Another thing to bear in mind is that all of this comes in the context of a wider crackdown on official bitcoin intermediation in China. Long-standing cryptocurrency-watcher David Gerard, for example, drew our attention to Chinese reports that domestic miners are finding it so difficult to convert bitcoin into yuan, they are facing a major problem paying electricity bills.

If this is true, this would definitely make it much more difficult for new bitcoin to make its way to market — at least for as long as the miners remain operational.

Echoes of dollar shortages 2008

The bigger question to consider is: should the bitcoin community really be celebrating a price rise driven by a potentially structural shortage of bitcoin?

One of the big problems in 2008 — and what eventually distressed the entire global financial system — was a shortage of dollars in the offshore market, which began to impede everyone’s capacity to keep servicing pre-existing dollar-denominated debts.

It was this dollar shortage which eventually prompted the Federal Reserve to initiate one of its boldest extraordinary interventions to date: the provision of unlimited dollar swap lines to a number of foreign central banks.

Bitcoin clearly isn’t as leveraged as the equivalent dollar fiat system was in 2008. Indeed, the rehypothecation — or relending — of bitcoin is strictly controlled in regulated markets, limiting much of this problem.

However . . . the rise of bitcoin-funded stablecoins has created a different type of vulnerability, especially among stablecoin-issuers that cannot properly back their outstanding dollar liabilities with real dollars all of the time.

To explain what we mean, think of Tether not as a stablecoin but as a sort of central bank that works hard to stabilise the price of bitcoin by flooding the market with lookalike (unfunded) dollars whenever the price of bitcoin weakens. This pre-emptive and unfunded issuance of Tether dollars (USDT) is usually justified by the notion that their unfunded nature is only temporary. If the reserve expansion is sustained, funding eventually materialises by those seeking entry into the USDT market with real dollar collateral.

The growth in Tether reserves during a bitcoin down market is thus akin to the expansion of a central bank balance sheet when it conducts quantitative easing operations.

The underlying assets this “QE” supports (US Treasuries in the conventional market and bitcoin in the Tether example) can help maintain the appearance of stability. But only for as long as an artificial shortage is not replaced by a bona fide shortage — as eventually happened with the dollar fiat market.

In such a scenario somebody eventually has to pay for the engineered stability.

In the fiat world, the scenario has translated into a stealth wealth transfer from savers to the indebted via negative interest rates.

In the bitcoin Tether scenario, the prospect of a genuine bitcoin shortage in the face of a system that has regularly run asset-liability mismatches into bitcoin weaknesses presents the realistic scenario that Tether’s dollar reserves could break a buck. That is to say, a sustained bitcoin spike could incentivise a major bitcoin cash-out spree against new USDTs that cannot be funded quickly enough to maintain Tether’s USDT/USD 1:1 peg (which, we should add, has not always been successfully maintained).

To what degree that poses a financial panic or not depends entirely on Tether’s ability to convince those cashing out to keep holding USDT instead of demanding real dollars.

PayPal’s ETF/MMF structure

One other way of thinking of it is that PayPal’s bitcoin offering represents the exact countervailing force to that of Tether in the bitcoin market.

To understand that, it’s important to recognise that PayPal is in many respects the original digital stablecoin: its structure represents a type of MMF/ETF, obliged to hold every dollar of customer funds in a specially dedicated bank account.

From the PayPal perspective, every dollar in its system converted into bitcoin will also need to be reserved in exactly the same way to avoid any price fluctuation risk (regardless of whether payments are later facilitated with those reserves).

That, to a large extent, makes PayPal a pseudo Bitcoin ETF/MMF: its bitcoin balances representing bitcoin liabilities (or bitcoin lookalikes) rather than customer-controlled bitcoins outright. (Though it’s important to note this is also the case with many bitcoin broker-dealers, including those that accept USDT.)

Once you can use PayPal to switch effortlessly from lookalike bitcoin into lookalike dollars on a whim AND be able to spend those dollars anywhere PayPal is accepted AND be confident that you can cash out against real dollars whenever you want to TO BOOT, the real question is why anyone take a chance on Tethers at all? Especially given PayPal have also committed to not charging any fees on their Bitcoin offering.

Only, presumably, if you could not meet PayPal’s KYC/AML criteria for opening an account.

If that makes you wonder how PayPal actually plan to make money from bitcoin, the answer, duh, is on the FX conversion cost, a hefty 2.3 per cent on purchases between $25-$100, staggering lower the larger the transaction gets to a minimum of 1.5 per cent. (So much for bitcoin ending extortionate third-party transaction costs, eh.)

The other puzzle is how PayPal can be sure it is backing its crypto hoards with ethically (rather than criminally) sourced bitcoin?

One instant method that comes to mind is doing a long-term discounted off-take agreement with a legitimate mining source, much the way dealers in conventional commodity markets do with commodity producers.

But that too would be a sure-fire way to immediately reduce supply-side bitcoin availability. Conclusion: price goes moon.

Related links:
Is it a bank, a money transmitter, or a Silicon Valley shadow financier? No, it’s just Paypal! – FT Alphaville
PayPal is shilling crypto on the internet – FT Alphaville
People are freaking out about Tether – FT Alphaville





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Oil hits highest price since April 2019 before moderating

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The price of crude oil briefly hit its highest level for more than two years on Monday, lifting shares in energy companies, as traders banked on strong demand from the rebounding manufacturing and travel industries.

Brent crude crossed $75 a barrel for the first time since April 2019 before falling back slightly, while energy shares were the top performers on an otherwise lacklustre Stoxx Europe 600 index, gaining 0.7 per cent.

The international oil benchmark has risen around 50 per cent this year, underscoring strong demand ahead of next week’s meeting of the Opec+ group of oil-producing nations.

US manufacturing activity expanded at a record rate in May, according to a purchasing managers’ index produced by IHS Markit. Air travel in the EU has reached almost 50 per cent of pre-pandemic levels, ahead of the July 1 introduction of passes that will allow vaccinated or Covid-negative people to move freely.

“This is a higher consuming part of the year,” said Pictet multi-asset investment manager Shaniel Ramjee, referring to the summer travel season. “And the oil market is pricing in strong near-term demand that is better than previous expectations.”

In stock markets, the Stoxx Europe 600 dipped 0.3 per cent while futures markets signalled Wall Street’s S&P 500 share index would add 0.1 per cent at the New York opening bell.

The yield on the 10-year US Treasury was steady at 1.494 per cent. Germany’s equivalent Bund yield gained 0.02 percentage points to minus 0.154 per cent.

Equity and bond markets have consolidated after an erratic few sessions since US central bank officials last week put out forecasts indicating the first post-pandemic interest rate rise might come in 2023, a year earlier than previously thought.

US shares tumbled last week, while government bonds rallied, on fears of tighter monetary policy derailing the global economic recovery.

Wall Street equities then bounced back on Monday, with a follow-on rally in some Asian markets on Tuesday, as sentiment got a boost from more dovish commentary from Fed officials.

Fed chair Jay Powell, in prepared remarks ahead of congressional testimony later on Tuesday said the central bank “will do everything we can to support the economy for as long as it takes to complete the recovery”.

John Williams, president of the Federal Reserve Bank of New York, also said that the US economy was not ready yet for the central bank to start pulling back its hefty monetary support.

Jean Boivin, head of the BlackRock Investment Institute, said that “the Fed’s new outlook will not translate into significantly higher policy rates any time soon”.

“We may see bouts of market volatility . . . but we advocate staying invested and looking through any turbulence,” Boivin added.

The dollar index, which measures the greenback against trading partners’ currencies and has been boosted by expectations of US interest rates moving higher before other major central banks take action, was steady at around a two-month high.

The euro dipped 0.1 per cent against the dollar to purchase $1.1901, around its lowest level since early April. Sterling also lost 0.1 per cent to $1.3909.



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Wall Street rebounds as markets adjust to Fed rate rise outlook

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Wall Street stocks bounced back and government bonds softened on Monday following tumultuous moves last week after the Federal Reserve took a hawkish shift on interest rates and inflation.

The S&P 500 added 1.2 per cent in early New York dealings. The share index’s resurgence came after it posted its worst performance in almost four months last week in the wake of Fed officials signalling the central bank could raise rates to tame inflation sooner than investors had expected.

The yield on the benchmark 10-year US Treasury bond dropped sharply last week as investors viewed the Fed as ready to control surges in inflation that erode the returns from fixed interest securities. On Monday it rose 0.02 percentage points to 1.472 per cent.

Fed policymakers on Wednesday projected that interest rates would rise from record-low levels in 2023, from their earlier median forecast of 2024. James Bullard, president of the St Louis Fed, told television network CNBC on Friday that the first rate increase could come as soon as next year as inflation grew.

However, Gregory Perdon, co-chief investment officer at private bank Arbuthnot Latham, urged caution. “The facts are that the Fed hasn’t done anything yet. Wall Street loves to climb the wall of worry.”

Fed officials’ statements last week prompted fears of rapid policy tightening by the world’s most powerful central bank that could derail the global economic recovery from Covid-19. Investors also backed out of so-called reflation trades, which had involved selling government bonds and buying shares in companies that benefit from economic growth, such as materials producers and banks.

On Monday, however, energy, basic materials and banking stocks were the best performers on the S&P 500. The technology-focused Nasdaq Composite index was also up, gaining 0.7 per cent in early dealings.

The Russell 2000 index of smaller US companies, whose fortunes are viewed as pegged to economic growth, gained 1.7 per cent. Europe’s Stoxx 600 share index rose 0.7 per cent, with materials stocks at the top of its leaderboard.

The yield on the 30-year Treasury briefly fell below 2 per cent on Monday morning for the first time since February 2020 before bouncing back to 2.065 per cent.

Investors last week had taken profits on reflation trades that had become “crowded” and “expensive”, said Salman Baig, portfolio manager at Unigestion.

Baig added that, following the initial shocks after the Fed meeting, markets would probably return to betting on “a cyclical recovery as economies reopen”.

Other analysts said the bond market reaction had been too pessimistic, predicting a broad-based economic slowdown in response to Fed rate increases that had not happened yet.

The fall in long-term yields “is only justified if the Fed is making a policy error, choking the economy”, said Peter Chatwell, head of multi-asset strategy at Mizuho. “We think this is far from the truth — the Fed has simply sought to prevent inflation expectations from de-anchoring.”

Elsewhere in markets, the dollar index, which measures the greenback against other major currencies, dropped 0.3 per cent after gaining almost 2 per cent last week.

Brent crude, the international oil benchmark, rose 0.9 per cent to $74.18 a barrel.

Additional reporting by Tommy Stubbington in London

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday



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Saudis agree oil deal with Pakistan to counter Iran influence

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Saudi Arabia has agreed to restart oil aid to Pakistan worth at least $1.5bn annually in July, according to officials in Islamabad, as Riyadh works to counter Iran’s influence in the region.

Riyadh demanded that Pakistan repay a $3bn loan last year after Islamabad pressured Saudi Arabia to criticise India’s nullification of Kashmir’s special status.

But the acrimony between the two longtime allies has eased after Imran Khan, the prime minister, met Saudi Crown Prince Mohammed bin Salman in May.

News of the oil deal with Pakistan comes as Saudi Arabia embarks on a diplomatic push with the US and Qatar to build a front against Iran, said analysts. Riyadh lifted a three-year blockade of Qatar in January in what experts said was an attempt to curry favour with the newly elected Joe Biden.

Pakistan had shifted closer to Saudi Arabia’s regional rivals Iran and Turkey, which, along with Malaysia, have sought to establish a Muslim bloc to rival the Saudi-led Organisation of Islamic Cooperation.

Khan has developed a strong rapport with President Recep Tayyip Erdogan, encouraging Pakistanis to watch the Turkish historical television series Dirilis Ertugrul (Ertugrul’s Resurrection) for its depiction of Islamic values.

Ali Shihabi, a Saudi commentator familiar with the leadership’s thinking, said that “bad blood” had accumulated between Riyadh and Islamabad, but recent bilateral meetings had “cleared the air” and reset relations to the extent that oil credit payments would restart soon.

A senior Pakistan government official said: “Our relations with Saudi Arabia have recovered from [a downturn] earlier. Saudi Arabia’s support will come through deferred payments [on oil] and the Saudis are looking to resume their investment plans in Pakistan.”

The Saudi offer is less than half of the previous oil facility of $3.4bn, which was put on hold when ties frayed.

But Fahad Rauf, head of equity research at Ismail Iqbal Securities in Karachi, said: “Any amount of dollars helps because time and again we face a current account crisis. And with these prices north of $70 a barrel anything helps.”

Pakistan’s foreign reserves were more than $16bn in June compared with about $7bn in 2019 before it entered its $6bn IMF programme.

Robin Mills at consultancy Qamar Energy said: “Saudi Arabia and Pakistan are allies, but their relationship has always been rocky. And the Pakistan-Iran relationship is better than you might think.”

Mills said that the timing of the Saudi gesture was “interesting” given that Iran was preparing to step up oil exports with the US considering easing sanctions.

“The Saudis are on a bridge-building mission more generally. They have sought to mend fences with the US and there is also the resumption of relations with Qatar,” he said.

Ahmed Rashid, an author of books on Afghanistan, Pakistan and the Taliban, said that there were a variety of factors that might have spurred Riyadh to restart the oil facility.

It may be “partially linked to the American need for bases” to launch counter-terrorism attacks in Afghanistan from Pakistan, he said, but added that its priority was probably to prevent Islamabad from falling under Tehran’s influence.

Rashid pointed out that Pakistan was caught between China, which has invested billions of dollars in infrastructure projects, and the US.

“Pakistan has to play it carefully, it is dependent on China for the Belt and Road, dependent on the west for loans,” said Rashi. “This is a very complex game.”

Anjli Raval in London and Simeon Kerr in Dubai



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