Happy Tuesday!

📝 Focus

• Bitcoin ETFs are in, NFTs are out

📊 In the Markets

• JOLTS and Ghosts

• Signs of Life, Pinduoduo, Temu and Social Commerce

📖 MoneyFitt Explains

🎓 Arbitrage

📚 What We’re Reading

📝 Focus

Bitcoin ETFs are in, NFTs are out

Grayscale won a significant victory against US regulators in its bid to launch a US-listed bitcoin ETF. A federal appeals court ruled that the SEC was wrong to reject Grayscale's application to convert its flagship vehicle, the Grayscale Bitcoin Trust (GBTC), into an ETF. The court found the SEC's denial of Grayscale's proposal "arbitrary and capricious." The decision pushed the bitcoin price up around 6% to over $27,500 on Tuesday while GBTC shot up 17%, which reflects the rise in bitcoin as well as the narrowing of the discount to NAV from 25% to 17% (having been as wide as 50% in December 2022.)

..... ▷ The SEC had previously allowed bitcoin futures-based ETFs but argued against spot bitcoin ETFs due to potential market manipulation... even though futures prices are priced partially off spot prices (see below.) Futures-based ETFs have a higher operating cost because the futures in the ETFs need to be rolled over to new ones when they expire, which a "spot bitcoin" ETF, i.e. holding bitcoin itself, would not have to deal with. An ETF actually holding the thing buyers want to be investing in is also easier to understand than anything to do with derivatives like futures.

..... ▷ GBTC raised $245mn in its initial public offering (IPO) in 2015 and is a closed-end fund that invests in bitcoin (obviously) but cannot get more money to invest unless it issues and sells more shares. More importantly, as a trust, investors own the shares of the trust but not the bitcoin directly, and there is no direct mechanism to make sure the value of the trust matches the value of the bitcoins owned by the trust. As a result, the trust can trade at a significant discount (or premium, as it did before 2021) relative to the value of the bitcoin it owns. ETFs are structured to allow arbitrage🎓 between the holdings and the traded price of the ETF, and fund units can be created at will, allowing the fund to grow and the manager, Grayscale, to make more and more money. (Grayscale is owned by Barry Silbert's DCG, the owner of bankrupt crypto-lender Genesis, which on Tuesday settled a suit brought by the Winklevoss twins' Gemini.)

..... ▷ This ruling increases pressure on SEC Chair Gary Gensler, who has taken various enforcement actions against the crypto industry. While the SEC could appeal, this development challenges its stance on spot bitcoin ETFs, with other traditional players also seeking to enter the sector, such as BlackRock, the world's largest asset manager. The SEC has been reviewing its proposal since October 2021, but it was only in July 2023 that it accepted for review six applications, including ones from Fidelity, Invesco and BlackRock (see here for more), to list spot Bitcoin ETFs. (Ignore talk about how "BlackRock owns" shares in crypto mining companies and even other investors, like Vanguard, that also own those shares. BlackRock's portfolio managers run funds owned by end investors, and it's those funds that own the shares. And by owning funds managed by Vanguard, a mutually-owned company, those BlackRock funds are automatically shareholders of Vanguard.)

The SEC may be licking its wounds on bitcoin ETFs, but...

..... ▷ Meanwhile, it has ruled that NFTs are securities. Podcast company Impact Theory will pay a $6.1mn fine and comply with a cease and desist order to settle charges that they offered and sold unregistered securities in NFT form. This marks the SEC's first enforcement action categorising digital collectables as securities, likely indicating a broader regulatory crackdown on NFTs. Impact Theory's NFTs were considered unregistered securities because they made claims of investment potential and profits tied to the success of the business.

Mini Explainer: Financial Futures

- Financial futures markets involve contracts where parties agree to buy or sell financial instruments (like currencies, interest rates or stock indexes) at a predetermined price on a future date and are traded through regulated futures exchanges.

- Futures pricing reflects market expectations of an asset's value at the contract's expiration. It's influenced by spot prices (current market prices), interest rates, dividends (for shares), storage costs and time to expiration.

- Traders use futures to hedge against price fluctuations or simply for speculation. The price difference between futures and spot prices can offer insights into market sentiment and supply-demand dynamics.

🚀 It’s Time to Transform Your Financial Well-Being

📊 In the Markets

JOLTS and Ghosts: Buoying markets, US job openings (in the JOLTS report) hit a more than two-year low in July at 8.8mn, down from 9.2mn in June and the third monthly decline, signalling a cooling labour market that could allow the Federal Reserve to halt further interest rate increases this year. The decrease in vacancies came along with fewer voluntary quits while lay-offs remained steady at 1.6mn. (Focus now turns to Friday's non-farm payrolls and the Fed's preferred inflation gauge, the PCE, on Thursday.) Consumer confidence also dipped in August, hitting 106 from an expected 116 (with a baseline value of 100 representing a neutral level), keeping traders cheery and sending Treasury bond prices up and yields (the interest rate you actually get at the price) down, since a bond's price and its yield move in opposite directions.

..... ▷ Wall Street drew a straight line from the JOLTS report to Fed Chair Jay Powell's comments on future policy decisions last Friday and decided to shoot up, led by Nvidia (hitting a new high), Tesla (despite Autopilot issues) and other major growth stocks, leading the S&P 500 and Nasdaq to close at over two-week highs. Alphabet gained 2.7% due to AI enterprise tools and an AI chip, just as OpenAI launches its own enterprise tools (to turn ChatGPT into a “super smart personal assistant for work”) in competition with key backer Microsoft's own AI copilot offerings. While on the subject of offerings, Wednesday is the Hungry Ghost Festival, observed across much of Asia and which some say leads to subdued trading.

Signs of Life, Pinduoduo, Temu and Social Commerce

On the day that US commerce secretary Gina Raimondo warned her counterpart that American companies are beginning to see the country as “uninvestable” on the third day of a four-day visit to China (admittedly focusing on businesses rather than investors), the iShares China Large-Cap ETF put on 2%, the NASDAQ Golden Dragon China Index added nearly 4% in US trading and US-listed social commerce powerhouse PDD Holdings popped 15.4%, adding $16bn to its market value. Q2 revenues were up 66% YoY over Q2 the previous year and smashed through the best guesses of Shanghai's Finest. Net profits rose 47%, signalling that there are signs of life in China amid the general gloom over consumer and business confidence and the state of the economy at large.

..... ▷ Pinduoduo's budget-friendly e-commerce platform attracted cost-conscious Chinese consumers, while its international counterpart, Temu, launched in the US in November 2022 and already in 38 more countries, continued to grow rapidly and was the most downloaded shopping app in North America in Q2 when it featured with much fanfare during the Super Bowl. Sales were further boosted by spending during China's 618 shopping festival from late May to mid-June when all the platforms offered huge discounts and subsidies, including competitors Alibaba and JD.Com, which initiated the price war. Both recently reported better-than-expected results, but PDD has continued to show faster growth, using promotions and inroads into lower-tier cities to snatch market share from its more established rivals.

..... ▷ Pinduoduo and Temu are similar to Douyin and TikTok in that both pairs are owned by the same company (PDD and Bytedance, respectively), but they are operated separately and target different markets. Pinduoduo is a Chinese e-commerce platform founded in 2015 and is about level with JD.com behind Alibaba based on the Gross Merchandise Volume (GMV) or the value of all sales made on the platform. Pinduoduo is known for its group buying model, where users can get discounts on products by buying them in bulk with other users. Temu is the international version offering a wider range of products and is designed to be more accessible and user-friendly for international users. Pinduoduo started with group buying, and both platforms now offer live streaming sales, a popular and very effective way for sellers to showcase their products and interact with potential customers on real-time video that is gaining in popularity in China and elsewhere. Hosted livestreams are often led by celebrities or influencers, which helps to attract viewers. Livestreaming also lets shoppers connect with other shoppers who are interested in the same products, which they use to get advice and share tips.

..... ▷ Along with its original community or group buying angle, live streaming drops PDD firmly into the social commerce category, which TikTok has been pouring money into and which SEA's Shopee platform seems to be struggling with. Social commerce is a loose subset of e-commerce that involves using social media platforms to facilitate online shopping and e-commerce transactions. Besides livestreaming and group buying, social commerce also includes other activities such as social media advertising, influencer marketing and user-generated content.

..... ▷ Like Shein, which also specialises in “ultra-fast fashion” (clothing designed, made, sold and discarded in days - not even weeks), PDD is facing scrutiny from the US government. A House Select Committee has launched an investigation into its connections to forced labour in China's Xinjiang region, claiming that Temu "does not have any system to ensure compliance" with the act. But Temu and Shein aren't friendly rivals: Temu is suing Shein for violating antitrust laws by blocking clothing suppliers from working with it by using threats and intimidation, while Shein has sued Temu, alleging “false and deceptive business practices” along with trademark and copyright infringement.