Stablecoin flows hint at $50K Bitcoin after Tesla pump liquidates $500M in BTC shorts

Stablecoin flows hint at $50K Bitcoin after Tesla pump liquidates $500M in BTC shorts

Bitcoin (BTC) has extended its rally over $46,000 on Feb. 9, a day after a U.S. Securities and Exchange Commission (SEC) filing revealed that Tesla bought $1.5 billion worth of BTC. The price of Bitcoin immediately soared from around $39,000 to $45,000 across major exchanges on Feb. 8 after the news began to spread.

BTC/USD 1-hour candle chart (Bitstamp). Source: Tradingview

Mass Bitcoin liquidation

As the Bitcoin price initially rallied to $45,000, it caused $500 million worth of short positions to get liquidated.

Bitcoin liquidation. Source: Bybt.com, Twitter (@cryptounfolded)

The term liquidation in the Bitcoin futures market refers to when the price of BTC moves quickly in a short period beyond the liquidation prices of futures contracts.

For instance, if a trader borrows 10 times the base capital and trades a $100,000 Bitcoin position with $10,000, the position would get liquidated after a 10% price movement.

According to the data from Bybt.com, $1.34 billion worth of futures positions in the futures market were liquidated in the past 24 hours.

This indicates two trends; first, the derivatives market was extremely overcrowded with short-sellers. When the Tesla news broke, it caused a massive short squeeze, liquidating hundreds of millions of dollars worth of positions in several hours.

Second, it shows that many investors did not anticipate Tesla to actually invest in Bitcoin even after Musk changed his bio to “Bitcoin” on Jan. 29, 2021.

What happens next?

Meanwhile, cryptocurrency traders are cautious due to the extremely high funding rates across major futures exchanges.

BTC perpetual swaps funding rates. Source: Digital Assets Data

Funding rates increase when the majority of the market are buying or longing Bitcoin. When the funding rates are overly high, the market is vulnerable to a long squeeze, which can cause an intense short-term drop.

Nevertheless, a cryptocurrency trader known as “Loma” says that the market is not overconfident just yet. He said that when a point comes where traders are overly confident and do not expect a major drop, that is when a correction is likely to occur. He said:

“I want us to get to that point where people start talking about how it’s impossible for us to retrace 70-90% before I think of closing my spot $BTC positions. I remember feeling like there’s no way $BTC goes back below $10k in 2018. We went to ~$3,500. Never say never.”

Stablecoin inflows. Source: CryptoQuant

Meanwhile, CryptoQuant CEO, Ki Young Ju, emphasized that there is newfound buyer demand as stablecoin inflows into exchanges were spotted. In the near term, this would likely act as a catalyst for Bitcoin. He wrote:

“You can call me crazy, but I think we’ll see 50k soon. Just got another stablecoins deposit signal.”

Frances Coppola: Stablecoins Rely on Shadow Banking

We often talk about central banks creating fiat money. In fact, most fiat money is not created by central banks but by commercial banks. Furthermore, not all of the banks that create and hold fiat money are regulated banks. Many are what we know as “shadow banks.” In the cryptocurrency network, there is a whole shadow banking industry creating and holding fiat money, or something that looks very much like it.

Shadow banks are financial institutions that do bank-like things but aren’t subject to banking regulations. They include investment banks, non-bank lenders, money market funds, private equity and hedge funds, and insurance companies. They also include special purpose vehicles (SPVs), which are subsidiary companies created by regulated banks to enable them to do unregulated things. And they include banks headquartered outside the U.S., notably those in offshore jurisdictions.

Frances Coppola, a CoinDesk columnist, is a freelance writer and speaker on banking, finance and economics. Her book “The Case for People’s Quantitative Easing,” explains how modern money creation and quantitative easing work, and advocates “helicopter money” to help economies out of recession.

The “shadow dollars” created and held by shadow banks are known as eurodollars. “Euro” here doesn’t refer to the euro currency and doesn’t have much to do with Europe. Eurodollars nowadays tend to live in places like the Cayman Islands and the Bahamas.

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Because eurodollars are held outside the U.S. regulated banking system, they do not have FDIC insurance and the institutions in which they are held have no backing from the U.S. Federal Reserve. Really, they are “faux dollars.”

To their users, however, eurodollars are indistinguishable from real dollars created by the Fed and U.S. regulated banks. And when eurodollars flow from the shadow banking system into the regulated system, they become real dollars. Conversely, dollars created by the Fed and regulated U.S. banks become eurodollars when they are sent to offshore or foreign locations. The system works as long as the 1:1 implied exchange rate between eurodollars and real dollars holds. But when the peg fails, there is chaos.

Tether’s bank, Deltec, is part of the shadow banking network. It is located in the Bahamas, an offshore jurisdiction beyond the reach of U.S. regulation, and it holds U.S. dollar deposits. Deltec Bank is not backed by the Federal Reserve, and the U.S. dollars it holds have no FDIC insurance. So Tether’s deposits in Deltec Bank, including the cash reserves that Tether says back USDT tokens, are eurodollar deposits.

Deltec Bank might hold cash reserves in one or more U.S. regulated banks. But these reserves may not be sufficient to back all of its eurodollar deposits. And even if they are, dollars in regulated bank deposit accounts are not “in custody.” They are loaned to the bank and only insured up to the FDIC limit of $250,000 per customer per institution. Anyway, FDIC insurance only applies to deposits in regulated banks, not to deposits in offshore shadow banks, even if those shadow banks are customers of the regulated banks. If Deltec Bank failed, there would be no FDIC insurance for its depositors. Tether’s guarantee that 1 USDT = 1 USD therefore entirely depends on Deltec Bank remaining solvent.

See also: Pascal Hügli – Hyper-Stablecoinization: From Eurodollars to Crypto-Dollars

It’s not just Tether that relies on shadow banks. In a recent interview, Tether’s chief technical officer, Paolo Ardoino, said that not only Tether itself but the cryptocurrency exchanges that are its principal customers have U.S. dollar accounts at Deltec Bank.

Some of these exchanges might use Deltec Bank as their settlement bank. But others might simply have accounts at Deltec to make paying for Tethers more convenient. Instead of wiring U.S. dollars to Deltec Bank every time they need to top up their tethers, they can simply fund their Deltec account whenever it suits them and use the balance to pay for more tethers. But whichever approach they use, the money they keep on deposit at Deltec Bank is not FDIC insured and not backed by the Fed. And if their own settlement banks are also shadow banks, then any money they have with those is not FDIC insured or Fed-backed either.

The collapse of the money market fund Reserve Primary … shows how disastrous the breaking of an implied exchange rate peg like this can be.

Not only do Tether and its crypto exchange customers rely on the fiat shadow banking network, they are themselves part of it. And other stablecoin issuers are, too. Just as Tether guarantees that 1 USDT = 1 USD, other stablecoin issuers similarly guarantee that their coins are equivalent to U.S. dollars. They even call them U.S. dollars: USDT means “USD tether,” USDC means “USD coin,” and so on. But stablecoins are, with few exceptions, created by unregulated financial institutions that have no FDIC insurance and no Fed backing. Really, stablecoins are “faux dollars.”

See also: Frances Coppola – The Stablecoin Surge Is Built on Smoke and Mirrors

Whether stablecoins like USDT and USDC can be exchanged 1:1 for U.S. dollars depends entirely on the existence of adequate U.S. dollar reserves and on the solvency of the banks that hold those reserves. If there aren’t enough actual dollars to pay all those who want to withdraw their funds, the 1:1 exchange rate peg will break and coin holders won’t be able to get all of their money back.

The collapse of the money market fund Reserve Primary during the 2008 financial crisis shows how disastrous the breaking of an implied exchange rate peg like this can be. Investors in a money market fund pay dollars in return for shares in the fund. Until 2008, money market funds marketed themselves as high-interest versions of insured U.S. bank deposits. There was a widespread belief that shareholders would always be able withdraw what they put in, that no fund would “break the buck.” So, 1 share = 1 USD. Sounds rather similar to a stablecoin, doesn’t it?

Reserve Primary MMF didn’t have 100% cash reserves backing its shares. It had invested in commercial paper issued by, among others, the shadow bank Lehman Brothers. When Lehman Brothers failed in September 2008, the value of its commercial paper crashed to zero and Reserve Primary MMF could no longer guarantee the 1:1 peg. It announced to its shareholders that it could only return 97 cents for every dollar they had invested.

Reserve Primary MMF’s announcement, hard on the heels of the failure of Lehman Brothers and the collapse of the insurance company AIG, sent shockwaves through the financial system. Massive amounts of money ran from the shadow banking network into regulated banks and U.S. Treasurys. To stop the run, the Fed bailed out the shadow banking network, reinstating the broken peg and restoring confidence in eurodollars.

See also: JP Koning – What Tether Means When It Says It’s ‘Regulated’

Like Reserve Primary MMF’s shareholders, cryptocurrency traders treat stablecoins as simply a variety of U.S. dollar. Of course, traders know the exchange rate is not guaranteed, and not all stablecoin issuers have 100% cash reserves. But, hey, the Fed bailed out shadow banks before, didn’t it? Why wouldn’t it bail out stablecoins?

Unfortunately for crypto traders, stablecoins and their banks are nowhere near as dangerous to the global financial system as Lehman Brothers, AIG, Reserve Primary MMF and the rest of the shadow banks that crashed in 2008. If Tether goes down, the crypto market will be seriously disrupted, but the rest of the world will hardly notice. And few people are going to lose any sleep over a small Bahamian bank failing.

Rice-based stable coin is being launched in Indonesia

TipRanks

How important are dividends to a stock investor’s profits? Speaking before the Financial Industry Regulatory Authority (FINRA) on October 15, 2007, investing guru John Bogle laid out the case: “Over the past 81 years… reinvested dividend income accounted for approximately 95 percent of the compound long-term return earned by the companies in the S&P 500. These stunning figures would seem to demand that mutual funds highlight the importance of dividend income.” So in other words, dividends are pretty important! Of course, right now the average stock on the S&P 500 is only paying about a 2% dividend yield, which isn’t a lot. If you want to do better than that, though, the REIT sector is a great place to begin your search for high-yield dividend stocks. REITs are companies that acquire, own, operate, and manage real estate portfolios, usually some combination of residential or commercial real properties, or their associated mortgage loans and mortgage-backed securities. Tax law requires that these companies return profits directly to shareholders, and most of them choose dividends as their vehicle of choice for compliance, resulting in frequent high dividend yields across the sector. The slowly ebbing COVID pandemic was hard on real estate managers, as tenants had trouble making rents and owners had trouble leasing vacant space. However, BTIG analyst Tim Hayes believes there are reasons to stay bullish on CRE properties specifically. “While we recognize the headwinds to commercial real estate (CRE) fundamentals and the potential risk to equity/earnings power, we believe there are several reasons to be constructive, especially with the sector trading at a discount to historical levels and offering attractive dividend yields at wide spreads to benchmark rates,” Hayes commented. Against this backdrop, we’ve opened up the TipRanks database to get the latest stats on Hayes’ CRE choices. These are stocks that the analyst initiated Buy ratings on, pointing out their high dividend yield. We are talking about at least 9% here. Ares Commercial Real Estate (ACRE) The first dividend pick we are looking at is Ares Commercial Real Estate, a company focused on the commercial real estate mortgage sector. Ares boasts a diversified portfolio – featuring office space, apartments, hotels, and mixed-use properties – mainly across the Southeast and West. The company has over $2 billion invested in 49 separate loans, 95% of which are senior mortgage loans. At the end of October, the company released 3Q20 earnings (the last reported quarter), showing $22.4 million in total revenue, for a 13% year-over-year gain. The 45-cents earnings per common share was up 40% since the prior year. Furthermore, Ares closed a $667 million commercial real estate collateralized loan obligation, with firmed up funding on 23 senior loans. On the dividend front, Ares declared in December its 4Q20 dividend. The payment, at 33 cents per common share, was paid out on January 15 – and is fully covered by current income levels. At current rates, the dividend annualizes to $1.32 and gives an impressive yield of 10.50%. Among the bulls is Hayes, who wrote: “We believe shares of ACRE are unfairly discounted relative to other commercial mREITs given strong Ares sponsorship, a very healthy balance sheet, and limited exposure to at-risk assets.” In his view, this leaves the company “well positioned to face the headwinds from COVID-19.” In line with these comments, Hayes rates ACRE a Buy, and his $13.50 price target implies a 10% upside from current levels. (To watch Hayes’ track record, click here) Only one other analyst has posted a recent ACRE review, also rating the stock a Buy, which makes the analyst consensus here a Moderate Buy. Shares are priced at $12.28, and their $12.75 average price target suggests room for modest ~4% growth. (See ACRE stock analysis on TipRanks) KKR Real Estate Finance Trust (KREF) Next up we have KKR, which operates in the commercial real estate sector, with almost half of its holdings in the states of New York, Illinois, Pennsylvania, and Massachusetts. The company both owns and finances commercial properties; 83% of its activities are with apartment dwellings and office spaces in desirable urban locations. KKR’s quality can be seen in the company’s quarterly results. The liquidity position was strong – KKR reported $700.6 million available at the end of 3Q20, the last quarter reported. The 56-cent EPS was up 7% sequentially, and 36% year-over-year. Further evidence of KKR’s sound position came at the beginning of January, when the announced it had closed 7 new commercial loans in Q4, totaling $565.4 million. This level of activity is a clear sign that KKR is recovering from the pandemic-related economic turndown. The solid foundation put the company in position to continue its dividend – which has been kept reliable for four years now. The most recent declaration, made in December, was for a 43-cent per common share dividend that was paid out in mid-January. That rate gives an annual payment of $1.72 per common share, and a robust yield of 9.7%. Covering KREF, Hayes is most impressed by the company’s move back toward proactive loan origination, saying, “We view 4Q20 origination activity to be in line with pre-pandemic production, and demonstrates a shift from “defense” to “offense” as transaction activity has picked up and the capital markets remain accommodative. We expect increased capital deployment to support earnings power and dividend coverage, and could potentially warrant an increase in the dividend as the macroeconomic outlook improves.” To this end, Hayes gives KREF a Buy and sets a $19.50 price target that indicates ~6% growth from current levels. (To watch Hayes’ track record, click here) Wall Street has been keeping quiet on all things KREF, and the only other recent review also recommends a Buy. Put together, the stock has a Moderate Buy consensus rating. Meanwhile, the average price target stands at 19.26 and implies a modest ~5% upside. (See KREF stock analysis on TipRanks) Starwood Property Trust (STWD) For the third stock on Hayes’ list of picks, we turn to Starwood, a commercial mortgage REIT with a varied portfolio of first mortgages and mezzanine loans, in the $50 million to $500 million range. The company operates in the US and Europe, boasts a $5.9 billion market cap, and has offices in New York, London, and San Francisco. Starwood’s high-end portfolio has brought it solid earnings, even during the ‘corona recession’ of 2020. The company recorded $152 million in GAAP earnings for 3Q20, coming out to 53 cents per share, for gains of 8% sequentially and 6% year-over-year. With that in the background, we can note the company’s dividend, which has been held steady at 48 cents per share for over two years. The last declaration was made in December, and the dividend was paid out on January 15. At the current rate, it annualizes to $1.92 and the yield is 9.23%. Once again, we’re looking at a stock that Hayes recommends to Buy. “We view STWD to be one of the few “blue chips” in the commercial mREIT sector given its size, liquidity, best-in-class management team, strong balance sheet, and diversified investment platform which has consistently generated stronger ROEs than peers. To that end, STWD is one of few commercial mREITs that neither restructured its liabilities with expensive rescue capital nor cut its dividend since the onset of COVID-19,” Hayes opined. Overall, there is little action on the Street heading STWD’s way right now, with only one other analyst chiming in with a view on the company’s prospects. An additional Buy rating means STWD qualifies as a Moderate Buy. However, the $21 average price target suggests shares will remain range bound for the foreseeable future. (See STWD stock analysis on TipRanks) To find good ideas for dividend stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights. Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.