Wall Street’s immune

Welcome to The Daily Moon. It’s a brand new week. And the US finally has a vague idea on how to regulate crypto. For starters, the focus will be on investor protection and upholding democratic values. Simultaneously, it wants to reduce the use of crypto in illicit finance. There is no answer to the “how” yet.

Moving on, today we talk about why investment banks aren’t worried about the crypto winter, and Celsius has been sued.

It was a mixed bag for the markets, with Bitcoin seeing a marginal slide and Ethereum falling below $1,200. Nasdaq stayed flat on no major movement in technology stocks. Back home, the Sensex and Nifty extended gains on the back of positive global cues.

Image by Gerd Altmann from Pixabay 

Why Wall Street is unmoved by crypto’s winter

The Street’s financial bigwigs predicted tough times for crypto. The 2022 crypto bear market is the worst in its history. Crypto market cap has eroded to ~$975 billion from $2.3 trillion at the start of the year. Retail investors lost billions and crypto firms are going belly up. But one segment has escaped unscathed: Wall Street’s investment institutions.

Be it Morgan Stanley, BNP Paribas, or Goldman Sachs, these financial giants have not felt an impact of the crypto crash. These entities knew the tricks of diversification. Stocks, bonds, and then crypto. Through a risk-balancing strategy, the investment banks have been able to avoid big losses.

Unlike retail investors who went all-in, the wall street only teetered on the edges of risky crypto. So, when their market came tumbling, bigwigs were easily able to rein in their losses.

What was the strategy?Unlike retail crypto investors who went all out, Wall Street chose its bets. In addition, crypto exposure largely stayed indirect after the SEC tightened rules. Banks have been asked to keep crypto off their balance sheet.

To simplify:

• Risk of contagion is low because the I-Bankers invested in a diverse mix of assets.

• Investing in stocks towered over crypto on Wall Street. It's also in line with the general American household wealth profile. Crypto contributes only 0.3% of the mix in US households compared to 33% in equities.

• Regulatory scrutiny also played its part. The US SEC is not in favour of spot Bitcoin ETFs.

Hedging their bets also helped the institutions escape large losses. Over the years, crypto and stock markets have seen a growing correlation. Hence, money managers approached crypto just like other volatile instruments such as oil, gas, and technology stocks.

Can they HODL?In a 2021 report, Goldman Sachs disclosed that while crypto is a volatile investment, they engaged in the space purely because of client demand. Investing directly requires a basic understanding of the sector and hours of research to reposition risks. But for wealthy clients that’s not a concern because large financial institutions take care of their portfolio.

The securities regulator isn’t keen on crypto directly creeping into these banks’ books. Hence, derivatives of Ethereum and Bitcoin ETFs and Futures are getting popular.

For instance, Goldman Sachs is launching a derivative of Ethereum. Through this, high-net worth investors can dip into crypto, minus all the hefty risks. In addition, GS is also diversifying. It has also traded in Bitcoin Futures, just to not rely on a single crypto asset.

Morgan Stanley is also bullish on crypto. Investors with at least $2 million worth assets and institutions with $5 million or more worth of assets can invest in three Bitcoin-based funds. However, these investments can only make up for 2.5% of their net worth.

Similarly, BNP Paribas, along with GS, is also advising clients to trade short-term in fixed income assets via JP Morgan’s blockchain network. So while these finance firms get a taste of crypto, they aren’t too close for comfort.

The big rescueContrary to popular perception, the big financiers aren’t shy of crypto. In fact, they are doubling-down ever since a bear market hit in January 2022.

Some institutions are even eyeing M&A. For example, Goldman Sachs is interested in buying Celsius' assets. It is also looking to raise $2 billion to save the crypto lender from going bankrupt.

With assets worth $2.39 trillion at its disposal, Goldman Sachs can afford to take chances. But you can’t. Don’t try this at home.

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Celsius Gets Sued

Crypto lender Celsius is being sued by one of its own. Staking firm KeyFi has filed a lawsuit alleging mismanagement of customer deposits. KeyFi CEO Jason Stone claimed that Celsius allegedly rigged its crypto token price and didn’t hedge risks. He even called it a “ponzi scheme” that didn’t honour its contract.

What happened?KeyFi managed $2 billion worth Celsius assets. Stone alleges that Celsius did not hedge the risks, causing the entire portfolio to be exposed to market risks. He is seeking undisclosed damages.

That’s not allThough it paid off its loans worth $143 million, Celsius has other worries. It has transferred ~$529 million worth Wrapped Bitcoin (wBTC) to FTX. This may lead to a mass dump of wBTC, leading to a fall in Bitcoin prices. Meanwhile, Celsius is mum on when withdrawals will resume.

FYI: Wrapped Bitcoin is a token that represents Bitcoin on the Ethereum blockchain.

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Who are we? There is a lot happening in our world. Everything has layers, and each layer has to be carefully peeled so you, the reader, know how the world of money is changing every day. That’s our promise. Help you unpeel the onions, which are the public markets in the US, India, and crypto, so that you know just a little more.