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Crypto Trading Will Grow In 2022 As dFMI Matures And Drives Efficiencies

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Crypto exchanges saw record-breaking trading volumes across the board in 2021. Centralized exchanges (CEXs) recorded trading volume of $14 trillion for the year, jumping 689 percent from 2020’s $1.8 trillion tally. Decentralized Exchanges (DEXs) had an even better year, recording a 858 percent rise in trading volume. DEX trading rose from $115 billion in 2020 to $1 trillion in 2021, with the peak volume in May 2021.

This meteoric recent rise of crypto exchanges is a strong indicator for the demand for crypto and digital assets by investors of all types. Unlike public stocks, which are listed on a single exchange, or in rarer circumstances on multiple exchanges, the nature of decentralized assets on the Blockchain and DLTs mean that anyone can build a tech stack to access them.

This new era of digital financial market infrastructure (dFMI) is more of an evolution for TradFi assets such as equity and debt securities, derivates, and property. It is the next phase of dematerialization following a transformation from paper certificates to an electronic format, which in itself, transformed the asset custody market. The move from electronic format certificates to smart contracts on DLT is having similar and often profound impact for how we design the dFMI for the next era of very digital financial services.

The historic note of interest for this maturity milestone is that it all started with an anonymous whitepaper by someone named Satoshi, and the subsequent development and evolution of the markets and infrastructure happened outside of the TradFi sector, primarily capitalized by retail market participation.

Equally of note is the tour de force that the crytpo and digital assets sector is, comprised of highly skilled blockchain and DLT teams combined for ex-TradFi traders, asset managers, regulators, tech brothers and sisters – BOOM!

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Highly Fragmented Liquidity

An inherent feature of blockchain and DLTs is that liquidity is highly fragmented across platforms. This keeps the ratio of exchanges to total market cap much lower that TradFi. For example, in 2019, 255 crypto exchanges had around $175 billion worth of cryptocurrencies between them, approximately $686 million per exchange. In comparison, 60 stock exchanges held $69 trillion in the global equities market, with $1 trillion per exchange.

As of January 2022, the number has ballooned to 455 crypto exchanges with a total market cap of over $2 trillion. Although this means that the exchange to market cap ratio has improved, the gains remain marginal. This is because exchange protocols can expand and develop when the liquidity locked within individual protocols breaks free of its traditional silos.

Firms such as Terraformer serve as a liquidity stack for startups of all stages and across all asset classes, offering Liquidity-as-a-Service. It deploys white-label solutions to help teams, DAOs, and market-makers reduce unlocked circulation to improve token liquidity. Improving liquidity is only one leg of the stool of a potential solution. The blockchain ecosystem also needs cross-chain liquidity protocols to allow seamless, domain-wide crypto asset trading.

Swing is one platform enabling crypto traders and yield farmers to access cross-chain liquidity using its decentralized bridge architecture. Viveik V., the founder and CEO of Swing.xyz, believes, “Users will benefit immensely once they start trading across Ethereum, Binance Smart Chain, Polygon, Avalanche, and a range of other blockchains. Thus, protocols need to design user-friendly solutions to add liquidity to DEXs, lending/borrowing protocols, and participate in cross-chain trading with minimum slippage.” Swing claims to provide friction-less liquidity for a range of crypto assets across multiple networks for the entire crypto community.

The community could make even further gains if protocols had the features needed to access the vast pool of fiat liquidity. To achieve this, however, requires better onramps for those who are curious about crypto but discouraged from participating due to market volatility. One company working on this is DeFi lending protocol, Pledge Finance, which offers borrowing and lending of crypto and fiat assets with enticing interest rates.

Pledge CEO Tony Y. Chan says, “Many people do not wish to get exposed to crypto’s market volatility yet desire crypto’s attractive interest rates. Stablecoins become a lucrative asset class for cautious investors who want to benefit from cross-system liquidity flows.” Pledge allows investors to lend or borrow stablecoins and fiat money at fixed interest rates as part of a long-term investment strategy, rather than short-term floating interests.

TradFi players view fragmented liquidity as inefficient and will likely have a difficult time seeing the opportunities or benefits of a highly fragmented decentralized ecosystem. Thin markets, fragmented liquidity, and transparent trades fly in the face of institutional players seeking not to broadcast the positions they are building and requiring best execution on their orders at the time they chose to execute.

TradFi players of all types look to a range of prime brokers, custodians, OTC facilities, and asset managers, to access the crypto and digital assets with firms like Genesis, Paradigm, NYDIG all offering institutional grade services. Goldman’s has teamed up with Galaxy Digital for a crypto OTC facility, a strong signal of the maturity of the crypto and digital assets markets in the TradFi space.

The Investor Trading Continuum

The crypto trading fraternity comprises two primary players: investors and traders. In 2021, retail crypto investments grew by 881 percent as many first-time investors entered the market. However, many newcomers were stymied by minimum investment criteria or exorbitant asset management fees imposed by some trading platforms. Crypto trading is a high-risk game, where inexperienced investors can quickly rack up losses, but at the same time, there are traders out there with the necessary knowledge and skills but who lack means with which to utilize them meaningfully.

In most cases, investors and traders remain at the poles of the trading spectrum, with limited means of communication between them. But the trading landscape can flourish once the fraternity comes together under a unified trading schema.

Zignaly provides a platform for both investors and traders with a unique performance-based profit-sharing model to ensure fair profit distribution. Bartolome Bordallo, Zignaly’s CEO, explains that through integrated digital asset trading protocols, investors can opt for expert-managed trading services. Platforms like Zignaly can direct investments, managed by expert traders, towards partnering exchanges, unlocking new streams of liquidity.

Although the crypto community benefits from the approaches these trading platforms are taking, most are still unable to provide exposure to one crucial investment opportunity: crypto synthetics trading.

The Need To Diversify

The traditional synthetics market has demonstrated enormous growth potential, with a $610 trillion notional value in the first half of 2021. The nascent crypto industry has much to gain if the community actively adopts synthetics trading. Moreover, as global inflation reached 4.35 percent in 2021, everyday investors began clamoring for alternate investment options. Commodities and derivatives emerged as an alternative asset class, with a unique role in an inflation-ridden global economy.

The COVID-19 pandemic complicated the economic situation as governments flooded the market with cash as part of their national macroeconomic policies. One-quarter of all U.S. dollars in circulation were printed in the last year alone, so it’s really no surprise that inflation hit a 39-year high in the U.S. in 2021, with the consumer price index simultaneously witnessing a steep 7 percent rise. This confluence of events saw consumer savings and inter-bank lending rates slide to almost zero even in first-world economies, rendering savings accounts and term deposits helpless against the rising tide of inflation.

Maintaining a diversified portfolio is one popular method to beat the inflation blues, and opening up broader access to commodities trading can help investors do just that. However, trading in sophisticated financial instruments without the appropriate knowledge is a complex proposition fraught with barriers to entry & fees.

Protocols like Comdex are helping democratize access to finance via synthetics. Enabling non institutional investors to more easily participate in the market. Through its decentralized synthetics exchange, Comdex aims to provide it’s users access to the price fluctuations of commodities allowing them to effectively create an ‘All weather portfolio’ ready for whatever 2022 brings. Comdex CEO Abhishek Singh says, “Built on Cosmos with IBC’s interoperability features, the platform facilitates trades in inflation-resistant synthetics”

Although the current trading systems have loads of room for improvement, especially for TradFi balance sheets, protocol developers are already providing a steady stream of solutions to address them. As these improvements are dropped into the new stack of dFMI components, crypto and digital assets trading will be positioned to scale to new heights.

Whether you are retail or wholesale, trader or investor, this year holds a lot of promise for the evolution of the blockchain and DLT ecosystem for crypto and digital assets of all types. Crypto exchanges might yet become the most important component of this ecosystem but face stiff competition in the network on all fronts.

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“If I Ever Got Dementia, I’d Be Outta Here”

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Having heard this many times, I know it’s common for folks to say, “I’d off myself” or “I’d check out”. There seems to be a belief that if we ever did develop this sad disease, we would find a way to eliminate ourselves from it.

That we would never want to lose our minds is probably a universal desire. But is it realistic that we could just stop living if we did develop dementia? The truth is that dementia in any form, Alzheimer’s disease being the most common, has a gradual onset. People who are in the early stages of the disease often do not realize that they have any impairment at all. “I feel fine” they say. Physically, they may be otherwise fine, but their brains are not. And reasoning, planning, and looking ahead are functions of that brain that is losing ground. There is no clear marker for when one can definitely say, this is the moment I got dementia. It doesn’t work that way.

A frequent reason people seek advice at AgingParents.com, where we consult and strategize with families, is that they have an aging parent with dementia. The care and legal management of an impaired aging loved one presents a complex struggle. Those who have cared for a relative with dementia are often heard saying they’d never want to put their own families through this and they could not live with it. But in truth, there may be no realistic way to plan for what to do if any one of us actually does develop dementia.

Some people who show early signs of dementia in any form experience difficulty remembering simple things. They forget that you were coming to visit. Or they forget appointments even after being reminded. And the short-term memory loss issue grows progressively worse over time and begins to interfere with daily life. They don’t see this happening. The impaired person neglects grooming, hygiene, cooking, managing bills and other activities. Eventually the person is not able to remain independence. Many people are terrified of having to depend on anyone else to care for them on a daily basis. They don’t want to be that kind of burden. They don’t want what they see as humiliation. That is why we hear them say they’d end their life if they got dementia. But they can’t identify when they would know if they got it.

What Is The Risk Of Ending It All For Elders?

The subject of ending one’s own life is highly controversial, and fraught with religious, moral, ethical and legal considerations. Essentially, our society wants to prevent suicides. Elder suicide has been studied and is a matter of concern, often arising from a sense of hopelessness, grief, loneliness and depression. It’s not typically about dementia. However those with mild cognitive impairment are sometimes considered to be in the earliest stages of dementia. According to the National Council on Aging, this group is at higher risk than the already high risk group of elders likely to commit suicide. But that assumes that the person at risk is capable of looking ahead, planning and choosing an option. For many persons in the middle or later stages of dementia, the ability to carry out a plan has totally eroded.

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Couldn’t You Get Someone Else To Help You End It All?

Assisted suicide, legal in ten states, requires following strict legal rules. Among them, one must be declared by a physician to be terminally ill. There’s the dilemma with dementia. It can last 8-20 years. When is it “terminal”? And it is very critical to understand that where assisted suicide is legal, one must be fully mentally competent to have a physician prescribe a lethal drug cocktail. Dementia, by its very nature, means that in the terminal stage, one is definitely not fully mentally competent. The brain is too far gone by that time. Essentially, the idea that if you got dementia, you’d end our life may not be at all realistic. You certainly would not be able to do so legally with a physician’s assistance.

The Takeaways:

1. If you ever did develop dementia, there is certainly no guarantee that you would realize it at the earliest stages or that you would be able to form a plan as to what to do.

2. Elders do have a high risk of suicide compared with the general population most often from multiple factors that include grief, hopelessness, loneliness, depression, and loss. These can exist in anyone who does not have dementia. We simply do not know when, if at all, a person with these other factors would also realize they have developed dementia.

No one wants to lose independence later in life. Most people are very afraid of losing our minds. We are well served to consider that we are not helpless to prevent dementia, or to at least forestall the onset. The very same advice doctors give us about preventing heart disease is similar to the advice about dementia prevention. Every day-to-day decision we make to adopt or continue healthy habits contributes to prevention. We have more power to maintain our healthspan (the time we are in reasonably good health until the end) than many realize.

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With Democrats Gaining Legislative Momentum, Now Is The Time For Biden To Weigh In On Marijuana Legalization

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Last week Marijuana Moment broke the news that President Joe Biden’s daughter-in-law Melissa Cohen was spotted shopping at a cannabis dispensary in Malibu, California. This certainly raises ethical questions about an immediate family member of the President enjoying the convenience of legal cannabis sales while such behavior remains strictly illegal in the eyes of the federal government that her father-in-law oversees.

But for those who have been following cannabis policy development at the federal level, it raises a more pressing question: Why has President Biden been largely silent on the issue of cannabis policy reform when it has become a major policy priority for the Democratic Party this legislative session? After all, the President has been outspoken about the need to bring home WNBA star Brittney Griner for being unfairly detained and incarcerated in Russia. Yet he remains silent about the first consequential attempt at legislation that would impact tens of thousands of Americans currently languishing in American jails and prisons for the same offense.

Both House Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer have made passing marijuana reform a major priority. Speaker Pelosi’s House of Representatives has twice passed the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act that would federally legalize cannabis, and in July Leader Schumer introduced the long-awaited Cannabis Administration and Opportunity Act (CAOA), followed shortly by the first ever Senate hearings on federal legalization.

While their are no expectations that MORE or CAOA will become law in 2022, as there is virtually no path to either bill receiving the 60 votes needed to pass the Senate, both House and Senate champions on this issue have indicated that negotiations are underway for a more incremental compromise bill that could pass both chambers. The bill, being referred to as “SAFE Banking Plus” or the “cannabis omnibus,” is currently being negotiated by members of both parties who have been outspoken about the need for reform but have largely differed on their approach.

For the past year and a half this dispute has largely existed between members of the Democratic Party. Moderates and pragmatists like Rep. Ed Pearlmutter and Sen. Patty Murray have argued for the passage of the SAFE Banking Act, a bill that has passed the House five times with bipartisan support, while progressives like Rep. Alexandria Ocasio-Cortez and Sen. Cory Booker have argued that banking access should wait until more comprehensive reform that does more to repair communities that have been most negatively impacted by marijuana prohibition.

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As we near the end of the legislative session, the Democratic Party, and the activists and industry interests following along, finds itself at a critical juncture trying to piece together a bill that includes a handful of provisions that can garner 60 Senate votes. Discussions have reportedly included the language in the SAFE Banking Act, expungements for people with federal criminal records for cannabis offenses, Small Business Association loans for social equity cannabis licensees, and possibly revising the 280e provision of the IRS tax code that treats state licensed cannabis businesses the same as drug traffickers for the purposes of filing their taxes.

Yet throughout this process, arguably the most important voice in the Democratic Party, the President himself, has remained largely silent. Sure, his spokespeople have reiterated Biden’s campaign stance that he does not support legalization but instead favors decriminalization and allowing states to set their own policies. But none of this addresses the specific detailed and more nuanced proposals currently being negotiated as part of an incremental reform package.

Banking and tax reform, expungement, and SBA loans for equity businesses all fall short of full legalization, but go beyond decriminalization. Where does the President stand on these issues? Sure, he has historically been one of the Senate’s biggest supporters of marijuana prohibition, but Biden has also shown a willingness to change with the times, as evidenced by his political evolution on issues like same sex marriage and abortion. Would he sign a bill that includes all of these provisions and manages to pass both chambers of Congress? Would the President dare to veto something so universally popular among his party and base despite his long-documented opposition to marijuana reform? The answer is, we simply don’t know.

Senator Booker recently indicated that this compromise bill would likely be voted on during the lame duck session between the midterms in November and the new Congress being seated in January. That leaves precious little time to get the details right and pass the bill. Should Biden disapprove and veto, there may be no time left to make changes that would appease the administration. President Biden inserting himself into the process now, making clear what he supports and what he opposes, could avoid a disaster scenario in which nothing becomes law before the end of the session.

This is crucial, because if comprehensive reform doesn’t pass this year, and the Democrats lose one or both houses of Congress as is largely expected, it will be highly unlikely that a GOP controlled Congress will advance any of these measures. This makes it even more imperative that Biden chime in now, since under this scenario a president who clearly does not want to spend time on this issue will find himself faced with continued pressure and calls for action from his administration. After all, in a scenario in which Congress has failed to act on this issue with a new GOP controlled Congress unwilling to pass anything that could be seen as a win for Democrats, advocates and members of Congress alike will ramp up pressure on the Biden administration to take executive and administrative action to address these issues through the executive branch.

This could include seeking new guidance memos from the Department of Justice to replace the Obama-era Cole Memo, which was rescinded by then Trump appointed Attorney General Jeffrey Beauregard Sessions III, directives to the IRS to reinterpret the 280e provision of the IRS tax code to not apply to state licensed cannabis business, mass presidential pardons, commutations and expungements for those currently and previously convicted of cannabis offenses in federal court, guidance allowing for interstate commerce between states with legal cannabis laws, or instructions to the federal Small Business Association to consider making loans to social equity and mom and pop cannabis business owners.

If President Biden truly does not want this issue to be something he needs to address throughout his administration, it is in his interest to come out now and clearly state his position on which incremental changes he would sign into law before the end of the current session, rather than continuing to leave the discussion entirely to Congressional leaders. This could end nearly two years of intra-party fighting, allow Congress to pass a reform bill efficiently, and give the President a bill he can sign and move on to other issues that he would rather spend his time on. And hey, it might even add a little joy to the next Biden family gathering.

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Markdowns Are Coming To Private Equity, Highlighting The Wide Dispersion Among Managers

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Amid the soaring volatility in the public markets, investors continue to look for alpha, and many are turning to alternative investments. A recent survey conducted by With Intelligence found that while investors and allocators are bullish on both private equity and hedge funds, (private equity) PE is leading the way in investor intentions.

The survey found that 72% of institutional and private wealth investors planned on investing in private equity within the next 12 months, and a review of the asset class’ performance reveals why. However, a closer look at the performance data reveals why investors might also want to be selective about which PE manager they invest with.

Analyzing PE manager performance

Logan Henderson, founder and CEO of Gridline, a platform that enables investors to invest with top-tier fund managers, has been seeing average returns of 25% to 30% among private equity managers. In a recent interview with ValueWalk, he said investors who can get in with high-quality fund managers will significantly outperform the public markets over an extended period. In fact, the wide dispersion among PE managers can also mean a sizable outperformance within private equity when selecting only top-tier managers over lower-tier managers.

Of course, the public markets have done really well over the last four or five years, so they were evenly matched with PE returns. However, over the long term, private equity consistently outperforms public market returns, which average around 9%.

“Investors can see significant private market alpha, but they have to be involved and invested in top-tier managers to realize these returns,” Henderson explains. “I haven’t seen markdowns as big as we’ve been seeing in the public markets to date. Part of it is how private investments are marked in that they’re not market-based. It comes from a private funding round or some other financial event.”

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However, some PE fund managers had been marking their portfolios down to levels comparable to the markdowns in the public markets. He added that markdowns will undoubtedly come in the next six to 12 months, especially as portfolio companies don’t perform well due to the weakening economy.

Markdowns in private valuations

They will have to take down rounds, which means they will have to accept financing at lower valuations. As a result, PE managers will see the value of their portfolios decrease, even though most of them haven’t yet.

“I do think some private markdowns, some decrease in valuation, is healthy,” Henderson clarifies. “There needed to be a reset in valuation and a reset within the private as well as the public markets. Their forward multiples were close to historical highs, and normal valuations are more reasonable. We’re not seeing private companies valued at 100 times forward revenue, so it’s more reasonable, more tangible to achieve.”

He’s been looking at recent market commentary, especially what’s been coming out of the technology space. Logan states that what he’s been seeing suggests far more reasonable growth expectations with a focus on bottom-line profitability.

“This growth-at-all-cost mindset over the last four or five years has started to taper,” he said. “… A handful of companies are being rewarded for growth but with a clear line of sight to profitability. Someone who has a clear path to achieving a profitable and healthy, growing business will see continual valuation increases and large markups on funding rounds.”

Businesses growing in unscalable ways and pouring money into sales and marketing are feeling the pain of markdowns on their future valuations. He also noted that such businesses might not be able to survive over the next 24 to 36 months.

Benefits of investing in the private markets

Henderson highlights three advantages of investing in the private markets. Of course, one is the rate of return, especially among the top quartile of performers. He said the net investment rate of return averages 20% in the private markets. However, some outlooks for the S&P 500 over the next decade suggest 5% to 6% returns, depending on the analyst.

Another advantage of investing in the private markets is reduced volatility. Some of this is due to the way private portfolios are marked. It’s not through daily pricing of the asset like public equities are.

He said the private markets remove the human and psychological element of looking at their account balance every day to see the fluctuations in pricing. Investors aren’t trying to time the markets and sell at the right time, which no one has ever proven is possible in the public markets.

Henderson also points out that the private markets force investors to take a long-term mindset because they can’t just pull their money out at any time. In particular, venture capital and private equity are less liquid than public equities.

Staying invested throughout the cycle to combat volatility

Fund managers typically invest in seven- to 12-year horizons across market cycles. Logan uses the example of a fund manager deploying capital in the tech space now versus six months ago. He noted that the entry valuation is significantly lower today.

“It’s a great time because buying low is a sound investment policy,” he opines. “You can continue to find companies appreciating in value over next five to 10 years. The longevity and time horizon of the investment allow you to invest across short-term market fluctuations.”

Of course, no one can know how long the recent spate of volatility will last, but it’s clear why the volatility is happening. Corporate balance sheets and consumer spending are down, while interest rates are up. The war in Ukraine has resulted in significant geopolitical uncertainty while inflation is soaring, leaving investors wondering if or when it will taper. Energy prices are up as well, further contributing to the volatility.

“There’s a lot of volatility priced into the market already, but I do think we’ll start to see some normalization events happen,” Henderson states. “… There’s a number of factors at play, and one of the benefits of private market investing is when you’re focused on a particular asset class, you can monitor specific inputs that lead to changes in that market. They can be monitored, but clearly, external market factors still contribute to the health and growth of each asset class.”

What investors should know about investing in private equity

Investors who have only invested in the public equity or bond markets will have some things to learn before they dive into private equity. Logan believes the most important thing to understand is the asset class’ liquidity profile. He explained that private equity is an illiquid asset.

“That doesn’t mean there are not ways to exit a position in the private markets, but it’s not daily liquidity,” Henderson explains. “You can’t get out at any time… Make sure when you’re investing in the private markets, it’s money you’re comfortable being invested for a longer period of time, so you’re not investing your reserve account.”

He noted that investors should have other investments they can pull funds out of immediately if something happens. Another factor new investors are advised to consider is the lack of information on private companies. He noted that they don’t publish their financial information quarterly as public companies do, so there is more opacity with a private-market portfolio than with public-market holdings.

“I think some managers are doing a good job of providing updates and visibility into the health of their portfolio, but the level of information is not as readily available as you see on the public market side,” Henderson states. “One of the things we talk about with new entrants in the private markets and alternatives is looking at opportunities that come from a trusted source. A number of managers are raising capital right now, but it’s very significant to make sure you’re deploying capital with the highest-quality managers.”

He noted that with public-market options like exchange-traded funds, the differences between managers can be 1% to 3%. However, in the private market, the differences can be 20% or more, making it especially critical to select the best managers.

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