The Crypto Hub Battle Royale

In this edition of Better Markets Digest #14, we look at:

- Hong Kong mulls over letting ETH ETFs stake their crypto

- NVIDIA stock goes through the roof

Raising the stakes

The Hong Kong Securities and Futures Commission (SFC) is thinking of whether to allow a staking option for spot Ethereum ETFs. That’s quite a mouthful, I know. Let me explain.

Cryptocurrencies are decentralised. There’s no institution that manages a currency or keeps count of where it flows. If I send you a hundred Rupees, for instance, both our banks will make note of the transfer. No such thing happens in the crypto world.

But you need to record transactions somewhere, right? Without that, your crypto has about as much value as a torn piece of paper with the words “One Million Rupeeeez” scrawled over it in crayon (and to be fair, a lot of it does).

Instead of a bank, regular users of a cryptocurrency do that job (or well, their computers do). One way of doing this is through a ‘proof of stake’. In essence, other users of the currency volunteer to check if a transaction seems alright. To ensure they don’t cheat, the system forces them to put some skin in the game. They must ‘lock up’ some of their own currency. Then, if they’re doing something shady, the system can penalise them by taking away their crypto.

Why would one volunteer for this? Well, it comes with perks. If you’re doing your job right, you’re rewarded with extra crypto. And because computers do the actual work of validation, to users, the rewards are like earning a little passive interest on one’s holdings, for no effort. Like an FD. On staking your Ethereum, for instance, you get ~4% extra Ethereum every year.

Now, Hong Kong is trying to draw crypto ‘investors’. To this end, it allowed platforms to launch Ethereum ETFs in April. If you don’t want to deal with the messiness of crypto yourself, but still want to bet on Ethereum prices going up, these ‘exchange traded funds’ can buy and keep Ethereum for you.

Only, these ETFs aren’t yet allowed to stake their Ethereum, perhaps to avoid opening a legal can of worms. That makes them a poor alternative to holding the currency yourself, though. After all, you’re losing out on ~4% of practically risk-free returns. And so, few people have signed up for them. Meanwhile, Hong Kong’s rival crypto-hub, the United States, is having a dream run with its own crypto-investment vehicles. On May 22, for instance, its newly minted Bitcoin ETFs drew in a record US$ 154 million in a single day. And then, only yesterday, it permitted its own Ethereum ETFs .?

Like Hong Kong, though, American Ethereum ETFs can’t stake their crypto either. In fact, last year, the US SEC had sued crypto exchanges for letting people stake their own crypto. By permitting staking, Hong Kong could score a key point over its larger, richer rival.

The way it’s meant to be played

On the topic of crypto: NVIDIA just announced its first quarter (Q1) results, and the numbers look like something straight out of the 2021 crypto bubble. Its revenues were up 262%, and earnings per share were up 461% year-on-year.

Its stock price responded, going past US$ 1000 for the first time:

For years, NVIDIA’s chips were largely used to power video games. They could break each task into small chunks and process them parallelly, which made them perfect for rendering the millions of pixels required to display life-like graphics.

That’s precisely what you require for artificial intelligence as well, though. As a result, the current artificial intelligence (AI) boom is almost entirely powered by NVIDIA's chips. They’re used to train everything from Open AI's ChatGPT to Tesla's self-driving system.

Big tech companies like Amazon, Google, and Meta are poised to spend hundreds of billions of dollars in building out AI infrastructure, and NVIDIA will continue to be the biggest beneficiary of this AI boom.

One interesting chart

Before you get too excited about Nifty crossing 23,000 to hit a lifetime high, you should know that lifetime highs aren’t all that rare:

By the way, have you checked out our Subtext blog yet? It’s where we explore finance, markets and the economy in depth. Here’s what we’ve written about recently:

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