Eclectic essays: Credit cards, crypto, capitulation

Originally published on my LinkedIn profile.

In the US, Citi's Double Cash Card and Amex's Blue Cash Everyday Card charge no annual fee, and offer 2% and 1-3%cashback respectively.

In Australia, the very best pure cashback you can get from fee-free credit cards max out at around 0.625% for cards like Amex's Essential Credit Card.

An exception exists in HSBC's Everyday Global debit card, surprisingly, with a 2% cashback, but only for in-person purchases under $100, capped at $50 a month. HSBC AU knows they can profit off the spread using cheap deposits, or by upselling customers on products like CC, mortgages and personal loans, or both.

The answer to the question in the header lies in how credit cards make money in the first place. The cashback has to be funded somehow, right?

How credit card issuers afford cashback

Credit cards are tiny unsecured personal loans. Like other loans, they make money through the spread between their funding rate and lending rate.

However, this spread does not chiefly contribute to how CC issuers subsidise cashback and joining bonuses. Fees (annual fees, late fees, etc.) and marketing contributions also help, but aren't THE way issuers afford cashback and rewards.

Marketing contributions are fees paid by businesses to CC issuers to get CC users to shop at those businesses. E.g. Amex offering a bonus 5% cashback at XGrocer, paid for by XGrocer.

Instead, CC issuers make it rain with a magical fee called interchange, which is the main source of funding for CC cashback.

Interchange is a catch-all phrase for a combination of fees charged by the CC issuer (customer's bank), acquirer (business' bank) and card scheme/network (e.g. Amex) to the business/merchant accepting card payments.

However, a massive proportion of interchange goes to the issuer, for a host of reasons, like bearing credit risk and acquiring the customer.

The interchange fee for each transaction changes based on a mix of factors, like the card scheme (e.g. Amex charges more than Visa) and type of business.

In AU, credit card interchange fees are capped by regulators at 0.8%+10c, but in the US, they're uncapped.

When you couple that with greater transaction volumes on US credit cards and fiercer competition due to the sheer size of its economy, it's no wonder US CC issuers have the ability to subsidise customers with more cashback.

Special thanks to @patio11's How credit cards make money, this article would not exist without it. I highly recommend reading it for an in-depth look at CCs.

On 30 August 2023, Grayscale, the manager of the largest Bitcoin fund globally, won an appeal in the US Court of Appeals (DC) to set aside the SEC's decision to reject its application for a spot Bitcoin ETF, and to force the SEC to review Grayscale's application to convert its closed-ended fund to an ETF.

There are a few Bitcoin futures ETFs in the US with a combined net asset value of >$1b but zero spot Bitcoin ETFs because the SEC has fervently opposed all spot Bitcoin ETF applications. Conversely, regions like Australia, Canada and Europe all have spot Bitcoin ETFs listed on locally-regulated exchanges.

One thing to note is that every one of these Bitcoin futures ETFs label themselves as 'Bitcoin Strategy' because they do not actually own any bitcoin but rather continually trade Bitcoin futures.

Futures contracts are agreements between two parties to buy and sell an asset at a specific quantity, price and time in the future. Many futures are settled with cash rather than delivery of the actual asset.

Bitcoin futures explainer

Bitcoin futures reflect what the market thinks the price of Bitcoin will be in the future. An example of how Bitcoin futures can affect Bitcoin's price is a trader causing the price to rise by buying Bitcoin and selling Bitcoin futures when the futures price is higher.

Futures prices are speculations on the price of Bitcoin and are always above or below the actual price based on market sentiment. This difference determines the cost of rolling over the futures (selling the current contracts and buying an identical amount with a later expiry). The rollover costs or profits, coupled with the fees charged to manage the ETF and transaction costs, mean that Bitcoin futures ETFs can have substantial differences in returns compared to just holding bitcoins or units in a spot Bitcoin ETF.

For example, as of 1 September 2023, Bitcoin is up ~54%, whereas BITO–the largest Bitcoin futures ETF–is only up ~26%. If you haven't caught on by now, a spot Bitcoin ETF just buys and holds bitcoins, as opposed to trading Bitcoin futures.

Why invest in a Bitcoin Strategy ETF then?

In the US, investors may invest in a Bitcoin Strategy ETF for various reasons like

• tax advantages;

• exposure to Bitcoin's price movements without owning bitcoins directly (because they may not be able to, legally or risk-wise); and

• legal advantages (Bitcoin is unregulated by nature, CME Bitcoin futures are regulated in the US by the CFTC and the ETF is regulated by the SEC).

The ruling is momentous. Many investors want regulated exposure to Bitcoin, not contracts speculating on what its price will be in the future. A spot Bitcoin ETF will be significant.

All eyes are on the SEC to see if it will approve the seven outstanding applications for spot Bitcoin ETFs in October. Among the seven is BlackRock, the world's largest asset manager with >$9 trillion in AUM.

On August 7 2023, PayPal launched its USD stablecoin, PYUSD.

More accurately, PayPal white-labelled Pax Dollar (USDP), an stablecoin on Ethereum issued by Paxos, a firm offering crypto brokerage (trading) and asset tokenisation (putting assets on blockchains; e.g. turning USD into stablecoins) services.

A stablecoin is a cryptocurrency pegged to a fiat currency, most commonly the USD. Example: 1 PYUSD = 1 USD.

Paxos is known for issuing billions of dollars of Binance USD (BUSD), which used to be the second largest stablecoin. However, in February 2023, the New York Department of Financial Services ordered Paxos to stop minting (creating) BUSD after the regulator found that it had 'violated its obligation to conduct...risk assessments and due diligence refreshes of Binance and Paxos-issued BUSD...'. Granted, BUSD holders were still able to redeem their BUSD for USD or USDP.

I thought this was an interesting tangent to go off on. But back to PWhyUSD.

1. Free press. Something about being 'innovative' and venturing 'further into crypto' (it partnered with Paxos in 2020 to offer crypto trading). I'm still trying to find out what is particularly innovative about rebranding USDP.

2. Free money. The millions in USD reserves backing PYUSD will accrue a substantial amount of interest. What the split will be between Paxos and PayPal remains a mystery.

3. Fee money. PYUSD being available to transfer across wallets on Ethereum will make PayPal an attractive fiat offramp (a place where crypto gets turned into cash). This is because PayPal will allow users to 'pay' with PYUSD by exchanging it for USD fee-free at checkout (vs paying a fee/spread by using their Checkout with Crypto feature). PayPal Checkout is a preponderance across online merchants and PayPal takes a cut whenever it's used.

4. Fee money pt 2. I don't actually know why anyone would, but if they do trade PYUSD-crypto pairs, PayPal will charge $0.49 to 1.45% of the transaction (e.g. PYUSD-BTC).

VinFast, an automaker from Vietnam based in Singapore, became the third most valuable car company on 15/8/2023, the day it went public via a SPAC.

This is a company that sold a mere 24k cars (16.6k ICE, 7.4k EV) in 2022. For reference, #1 Tesla sold 1.3m and #2 Toyota sold 10.5m cars.

A SPAC is a shell company created to raise money from investors and buy/merge with a private company to take it public.

VinFast has yet to turn a single dollar of profit.

So why are investors so excited?

Is it because VinFast is has an aggressive plan to build a factory in North Carolina costing $2 billion which will produce 150k cars/year by July 2024? Nope, and they have only managed to lease out/sell <150 cars in California (the only state for now) since their US launch in January 2023. Also, the start date of production for their factory has been delayed to 2025.

Then is it because their cars are amazing? If you haven't already guessed from the abysmal numbers, no. In fact, car reviewers have called the VF 8, the EV they are selling in the US, 'nowhere near ready for public consumption' (MotorTrend) and mentioned that its 'crap suspension damping and motion sickness–inducing body movements aren’t even the biggest issues' (InsideEVs). What's more, they have even started paying VF 8 owners $100 per minor issue, $100 per day in the workshop and $300 per breakdown.

So what is it then? Investors aren't excited, speculators are. VinFast tried to IPO in late 2022 but failed because institutional investors weren't interested. 92% of the SPAC's IPO investors redeemed their shares before the merger. The remaining 8% who got in at $10 have probably already made a killing. This is another case of SPAC speculation intertwined with human greed, compounded by 0.3% of VinFast's stock being available to trade, momentum from popularity in the news and tons of leverage.

Super-low stock float: ~7m out of 2.3b shares are tradable due to lock-ups.

Amateur investors love treating SPACs on NASDAQ like slot machines at casinos (see NKLA and LCID; both are EV SPACs that are down 98% and 88% respectively since all-time highs). The razor thin stock float also means that a little trading will move the price a lot. In fact, the entire stock float has already been traded 6 out of the 11 days since going public.

On 29 August 2023, its stock plummeted by 44%, wiping $83 billion off its market cap (which actually means nothing as 0.3% of the stock doesn't represent a real price), and a good chunk off of amateur investors' brokerage accounts. The price will probably get completely obliterated in the next week once the pump-and-dump manipulators have cleaned out the amateurs. If the stock is still trading above $11.50 in 2 weeks, then amateurs will get dumped on by the truckload of public warrant holders.

Disclaimer: Not financial advice. Everything here is a lie. DYOR.

You've probably heard of some insane yields in decentralised finance (DeFi).

How are USD-pegged stablecoins earning between 4-12% APY while banks offer 0.01% APY savings rates? Why and how do some tokens have yields in the thousands of %?

Surely they're all scams? Not so fast. While many (if not most) are scams, there are many DeFi protocols which aren't scams and have billions of $$$ locked away in them.

Here's how the juicy yields are derived (non-exhaustive list):

Users who deposit their tokens in DeFi protocols/platforms to earn yield are known as liquidity providers (LPs) who contribute to liquidity pools. Liquidity pools are used by platforms to provide liquidity for the exchange, lending and borrowing of tokens on a platform. The use of these platforms incur fees, which are then distributed to LPs based on how much liquidity they have provided (ie how much they deposited).

Users can borrow tokens on DeFi protocols, paying a fluctuating interest rate on their borrowed tokens. Lenders earn yield off of lending to these users. The rates for both lenders and borrowers fluctuates based on the ratio of amount deposited to the amount borrowed for a token (ie higher rates when there is less liquidity for borrowers).

Most (if not all) DeFi protocols have their own token (eg $COMP for Compound, $AAVE for Aave) which are rewarded to users of the platform (usually when depositing/lending or borrowing) on top of the yield for the deposited token.

eg: Deposit $USDC into Compound, earn 4% APY on $USDC + 1% APY in $COMP

The tokens represent equity in the protocol and are a way for protocols to acquire users quickly — especially at the start when rewards for using the protocol are high.

Sometimes, incentives are supercharged by special programs that provide a short-term, better than average yield through their own tokens to users and/or developers.

eg: 'Avalanche Rush' distributing US$180m of $AVAX on various DeFi protocols

Protocol tokens can also appreciate in value, making protocol token rewards which are distributed in addition to the deposited token yield more valuable.