The $25 Trillion Dollar Opportunity: An Analysis on Recycling Success in the European Union and Maximizing Opportunities in the Circular Economy

Calls for decarbonization and reducing waste production by climate activists have put huge pressure on nations to find newer ways to accelerate circularity efforts in their economy. Therefore, despite the difficulties of revamping supply chain lines and climate change efforts conflicting with performance measures, economies must start thinking about circularity not just from an environmental risk mitigation perspective but also as a driver for economic growth. Given that developed nations accumulate the bulk of the world’s waste generation and have the majority of the capital to make the investments, they are in the most advantageous position to capitalize on the $25 trillion dollar global investment opportunity by 2050, according to Accenture. The European Union has been a leader in climate change regulations and has some of the highest recycling rates in the world; therefore, it can be a model of inspiration for how to conduct waste management around the world. While aware that each nation has different economic and political motivations that may constrain their abilities to create a resilient circular economy, I believe that there are still some opportunities to help, at least, start the process. With a focus on plastics, I want to explain what the EU has done in terms of recycling innovation and how strong regulatory frameworks are key to promoting a circular economy. In addition, there will be some terminology that may be confusing to some and I am going to keep the information as straightforward as possible. 

Short-term Headwinds, Long-term Tailwinds 

Creating a circular economy is not an easy feat to do on a global scale and the rates at which we are recycling showcase a pessimistic outlook. The global plastic recycling rate is only 9% across all materials, an extremely poor figure that shows the severity of the problem and the United States is one of the biggest laggards amongst developed nations. With this being said, the European Union has a municipal waste recycling rate of almost 50%, with countries such as Germany and those in the Benelux Region being the leaders. To understand how this occurred, it is necessary to dive into the developments in the European Union involving increasing, and hampering at times, circularity efforts.   

What is important to understand is that a circular economy model is all about capturing more value than what is being lost in a traditional linear model of consumption. Therefore, necessary infrastructure and technological advancements are a necessary part of achieving this. However, companies sometimes do not want to put up the upfront costs of buying the necessary technology or that the technology has yet to be proven effective on a large scale. For example, chemical recycling has been championed by some waste management companies as an alternative to mechanical recycling in that the main benefit is that it helps create ‘virgin’ plastic inputs. Unlike mechanical recycling where plastic experiences downcycling or a reduction in quality when used in a product, chemical recycling can recycle plastic in its original form and does not have to be separated with other mixed waste. However, as of now, only about 1-14% of all plastic during the process is recycled. While better sortation helps streamline the recycling process and potentially allows for more waste to be reused, chemical recycling has not become mainstream yet. In addition, established socio-cultural norms are another barrier that may explain poor recycling rates in certain areas in the European Union; after all, it is not a homogenous region. Sometimes, informing consumers of good recycling habits may not be enough as they may be reluctant to adopt certain measures and change their behaviors. As an example, in Southern European countries like Spain, they did not want to adopt Deposit and Return Schemes (DRS) due to certain economic costs and believe that it should be the role of companies, not government, to promote recycling of their products. 

Despite these two challenges, the supportive regulatory environment has been the biggest driver for creating a circular economy within the European Union. Since I will talk about the actual policies later in this article, I will focus just on the policy instruments here. To encourage higher recycling rates on the consumer end, the DRS that I mentioned before have been extremely popular and a model for how to incentivize consumers to recycle. Below is an illustration of what it is. 

                                                                                                         North Edinburgh News 

    

How it works is that when a consumer buys a drink, they must pay a certain deposit that they only get back if the bottle is returned. It has been massively successful in places like Norway and Germany, with the program in Germany having a 98.4% recycling rate. More importantly is that this does not just focus on materials like plastic, but can also apply to other recycled goods with aluminum or glass. It is a win-win situation for companies and consumers because as consumers save by getting their deposit back, companies reduce the CO2 needed to produce more packaging and keep up with EU product quality standards by using recycled plastic. As stated before, the upfront operating costs and infrastructure needed is a lot as places like England have debated the issue; nevertheless, it has shown to be widely successful in most places in the European Union and other countries have plans to adopt it. I will say that the some states like California in the U.S. do have something similar through something called a bottle bill, but it was Europe - or Denmark specifically - who first created the DRS.

Another interesting policy instrument that has also been used around the world is the Pay-as-you-throw scheme. Essentially, a consumer incurs more fees the more waste it decides to send to a waste management company. There are about 20 EU countries that have this model and I find this to be very effective on the consumer end. It encourages consumers to be more mindful of their purchasing habits and whether a product can be extended for longer. When looking at waste management companies and large producers of consumer goods, the End-of-waste criteria and Mass Balance Approach (MBA) have been noteworthy developments. End-of-waste criteria helps indicate whether waste can be deemed recyclable and used as a by-product meaning secondary raw material, for another good. The graph below shows what the waste hierarchy looks like for how certain waste is looked at along the value chain. 

                                                                                           Superfy

End-of-waste criteria tackles the recovery stage near the bottom and allows for companies to have a more shared understanding of what is deemed as a recyclable quality. So as mundane as this may be to some, this is important because it helps waste management companies to distinguish whether the waste can now be recycled into an object without causing any human health or environmental effects that come with reusing the waste. When I talk about some of the policies that have been implemented in the EU regarding product material composition, it will make more sense for why the criteria is deemed essential. Finally, the MBA helps companies understand how much recycled content is in a certain product or packaging. Similar to End-of-waste criteria, it is useful for adhering to EU legislation and making sure that there is a minimum recycled content within a certain material. It follows how certain materials flow through the supply chain and tracks whether companies are using enough sustainable materials within their products. These are only some of the many policy instruments that the EU uses, but found them to be considerably interesting for the rest of the article and just to know the nuances that come with learning about the waste management industry. 

Assessment of Recent Policy and the Recycling Value Chain

To now dive into what policies have been recently implemented, it all starts with the Circular Economy Action plan. To start broadly, the Circular Economy Action Plan adopted in March 2020 helps outline a framework for not only how to reach the EU’s climate neutrality goals by 2050, but achieve sustainable growth through circularity. It tackles anything from enforcing more sustainable materials in products to empowering consumers with better informed purchasing decisions to tackling a wide array of sectors to ensure sustainable product and product value chains. Beneath this broad plan are several crucial regulations and I am still going to focus on the main area of discussion, which is plastic. The plastic packaging tax is one of them and was implemented on January 1st, 2021. It states that for every kilogram of plastic packaging waste produced that does not contain at least 30% recycled plastic must pay .80 Euros. While the implementation of it varies by each EU member state, it shows the effort to reduce plastic consumption and stop the free flow of goods that do meet environmental standards of the EU. Furthermore, it shows why End-of-waste criteria and MBA are important policy instruments for tracking the amount of recycled plastic in each product as well as deeming if certain waste is sufficient for reuse. Another regulation was the Single-use plastic directive, which banned certain items such as straws, cutlery and other plastic items from EU markets. While it does not exempt other friendly-alternatives such as bioplastics from the mix, it is another sign of banning plastic waste. Finally, there is the ban on sending off waste to non-OECD countries, so that countries have to start dealing with their own waste problem within their borders. I find this one quite interesting since it brings up a lot of free trade questions and the possibility of what if a country’s waste management system can not handle the amount of waste it produces. So, while more specific can be given regarding just these policies, I wanted to highlight the relevance that waste production has within the EU and what ways it uses strong policies to tackle the issue.

So looking at certain legislation, it is very encouraging to see the commitment and effort policymakers in the EU have made towards creating more material circularity in the economy. However, I believe that there are still some needed improvements needed to be made in certain phases of the value chain. To see where inefficiencies lie, you need to look at how everything flows starting with the raw material. Below is a simple illustration of what the value chain may look like. 

                                  A review of the plastic value chain from a circular economy perspective 

On the consumer end during the Use & demand phase, I do feel that the regulatory environment and generally positive norms towards recycling have been really strong at encouraging consumers to recycle easily and conveniently. In addition, legislation tackling the product production phase has been strong as well as companies operating in the EU have started to become more aware of the importance of sourcing more recycled feedstock, with recycled plastic demand growing 2.5% in 2022 from a year before that. Very similar to how large technology companies have, or are trying to at least, follow EU rules regarding data privacy and competition, so have many goods manufacturers with creating circular business models and I see that they have priced that into their operations, according to what I read online. However, I believe that there is concern when trying to find the supply of recycled materials as well as sufficient technology to make the sorting and and processing of the waste easier. This is why I believe that despite the high upfront CapEx and difficulty integrating the technology into the value chain, chemical recycling is the best way to actually tackle the quality and contamination issues that plague mechanical recycling. If anything, it should complement mechanical recycling operations by working with the most contaminated types of waste. Given this increased demand for recycled materials by legislation, having the investments to build out the recycling capacity and improved sortation of these waste facilities will be essential. While some funds have made investments recently like Infinity Recycling and EIF, it should be monitored how these investments play out and whether increased investments must be made in the future.

 

In addition, Waste-to-energy has to play a larger role in the circular economy as some materials like certain types of plastics like Polyvinyl Chloride (PVC) and Low-density Polyethylene (LDPE) are extremely difficult to recycle due to their chemical composition. Below is a map of which countries contain the most incinerators. 

While true that Waste-to-energy does cause CO2 emissions, it may be able to replace more polluting forms of energy such as coal and fossil fuels as well as CO2 emissions from landfills. It is important to monitor that only non-hazardous waste is being incinerated to generate steam for electricity production because that is a big concern from environmentalists; nevertheless, with some countries relying heavily on Waste-to-energy in certain areas and the ban on waste exports to non-OECD countries that I talked about, I do believe that this type of energy production will be far more common and necessary. With all of this being said, I will be following a lot more of the waste management and plastics developments happening in Europe to see whether my observations are correct. 

Thanks for reading my article on the waste management industry!

Sources

“Bottle Recycling Scheme to Cost at Least £1.8bn per Year.” British Retail Consortium, 21 Aug. 2023, brc.org.uk/news/corporate-affairs/bottle-recycling-scheme-to-cost-at-least-18bn-per-year/.

“Circular Economy Action Plan.” Environment, environment.ec.europa.eu/strategy/circular-economy-action-plan_en. Accessed 21 Jan. 2024.

“Deposit & Return: The Plastic Recycling Success Opposed by Southern Europe.” Investigate Europe, www.investigate-europe.eu/posts/deposit-return-the-plastic-recycling-success-opposed-by-southern-europe. Accessed 21 Jan. 2024.

Director, Janet Domenitz Executive, et al. “‘chemical Recycling’: What It Is, and What It Definitely Is Not.” PIRG, 19 Sept. 2023, pirg.org/articles/chemical-recycling-what-it-is-and-what-it-definitely-is-not/#:~:text=It%20doesn’t%20recycle%20much,burned%20for%20energy%20and%20fuel.

“Plastic Food Packaging: Simply Awful, or Is It More Complicated?” Science in School, 5 June 2023, www.scienceinschool.org/article/2022/plastic-food-packaging/.

Plastic Pollution Is Growing Relentlessly as Waste Management ... - OECD, www.oecd.org/environment/plastic-pollution-is-growing-relentlessly-as-waste-management-and-recycling-fall-short.htm. Accessed 22 Jan. 2024.

Stefan Lang, EUWID. “Plastics Europe: More Recycled Feedstock Used in Plastics Production in 2022.” EUWID (Production), 3 Nov. 2023, www.euwid-recycling.com/news/business/plastics-europe-more-recycled-plastic-used-in-manufacturing-in-2022-241023/.

“The Circular Economy Could Unlock $4.5 Trillion of Economic Growth, Finds New Book by Accenture.” Newsroom, newsroom.accenture.com/news/2015/the-circular-economy-could-unlock-4-5-trillion-of-economic-growth-finds-new-book-by-accenture. Accessed 21 Jan. 2024.

“Waste Recycling in Europe.” European Environment Agency’s Home Page, www.eea.europa.eu/en/analysis/indicators/waste-recycling-in-europe. Accessed 21 Jan. 2024.

Understanding Student Loan Asset-Backed Securities (SLABS)

If you are a college student and had to take out student loans, you probably understand how large of an issue the student loan crisis is. In the United States, statistics show that there are over 43 million Americans who collectively owe more than $1.7 trillion in student loan debt. To put that amount into perspective, there are only 11 countries in the entire world whose GDP exceeds that. This figure does not seem to be slowing down as the growing cost of college tuition, overborrowing, and students choosing majors and universities with low ROI exacerbate the issue. For some on Wall Street, however, they are finding ways to profit from this problem. In this article, I want to explain what Student Loan Asset-Backed Securities (SLABS) are.

What are SLABS 

Just like you can securitize mortgages, credit cards or anything that has stable cash flow, you can also securitize student loans. Therefore, a SLABS is an asset that is a package of student loans that delivers timely interest payments like bonds and principal payments. These loans consist of two types: federal loans that a student would usually get from the federal government via FAFSA and private loans that are obtained through a bank, credit union or some other entity that does lending to individuals. To sell these securitizations, a Special Purpose Vehicle (SPV) must be set up where the investors will exchange cash with whoever underwrote the securitization for the bonds. 

 

For why these student loans would be securitized instead of just sitting on a company’s balance sheet, it is important to understand it from the lender, not the borrower, perspective. I will use  large banks for my example. For one, the Federal Reserve requires a certain amount of regulatory capital to be held relative to a bank's risk-weighted loan portfolio. What this means is that the more risky the loans held by the bank, the more capital that needs to be held, largely a development due to the 2008 Financial Crisis. For example, if a bank has $1 billion dollars of loans and 20% is rated as non-investment grade compared to a bank with the same quantity of loans but 10% is non-investment grade, the first bank will have to put up more regulatory capital than the second bank due to increased default risk.  Therefore, a bank like J.P Morgan may securitize some of its loans to meet these requirements. Another reason is to reduce any default risk from some of its large loans and this is mostly talking about Mortgage-Backed Securities (MBS). A paper by Andra Ghent and Rossen Valkanov wrote a paper detailing how loan size greatly affects the chances of whether a loan is securitized or not, with large sized loans being more susceptible to securitization and organization costs not being a substantial factor. This is due to the fact that large loans carry huge idiosyncratic risk and that there are huge risk-sharing incentives for the banks to offload some of these loans from their balance sheets. Therefore, these are two reasons for why securitization is done. 

For these student loan ABS, it is also important to understand the difference between a federal loan ABS like the FFELP student loan ABS and a securitization by a private lender like SoFi. First off, I do not believe you can combine federal and private loans into one securitization because federal loans are guaranteed. For the FFELP student loan, because all the loans are guaranteed, an investor should always be holding the equity tranche of debt because it will give the highest yield on investment and is basically default-free like a 10-year treasury, I would assume. The problem is that the return is so low that it may not be worth holding it. For an ABS issued by SoFi, the tranches will result in a much higher return given the default risk that is priced into holding that certain tranche of debt. 

Brief Outlook for 2024    

Now, whether they are a good investment or not has been disputed by many professionals who work in the space. In general, securitized products tend to have better credit quality and a higher yield than other fixed income products. That is quite attractive and, according to CNBC,  student loans are a lot harder than other types of debts to be discharged, meaning investors looking at SLABS know that there is a lesser risk of default. Looking at federal policy, the 3-year pause on federal student loans also recently ended in October 2023, which means that students will need to start making their student loan payments now. This all sounds good as there are some tailwinds that the SLABS market is facing.    

On the other hand, I would argue that it is quite bleak. Data from Finsight has shown SLABS issuances have decreased drastically from the peak of 2021 from $27.3 billion to under $5 billion as of August 2023. This is due to a couple of reasons. High interest rates are a concern for SLABS as securitized products are more sensitive to high interest rates than other fixed income products, though things may change as FED plans to decrease rates. For discharging student loans, Biden has recently made it easier for students to get a “fresh start” in their lives, causing a massive effect on why SLAB issuances may be down in the United States. Obviously, filing bankruptcy is never ideal given that it affects your ability to obtain other loans or buy certain assets like a house, but data shows that approval rates for getting the loans discharged is nearly guaranteed. Finally, for those who want to try and pay their student loans, they may just struggle as the U.S. The Department of Education indicated only 60% of borrowers made a payment by mid-November last year. This was the month after the 3-year pause ended, which may indicate why there was a huge shock from students being unable to repay their loans. Nevertheless, it will be interesting to see the default rate trends of SLABS. 

Next Bubble?

With all this being said, some have suggested that the SLABS market is starting to feel like a bubble that can have a similar effect to the 2008 financial crisis, but I would disagree. First off, it is important to understand that federal student loans will never pose any systemic risk given that they are fully guaranteed (which also may be a reason why colleges are incentivized to hike tuition and accept as many students as possible). Therefore, there has to be considerable signs of distress from the private student loan market, which makes up 8% of all student loans outstanding. While I only have limited data on Private Student Loan (PSL) default rates, I will just note that it declined for Q3 2023 for the first time after 8 consecutive quarters of increasing default rates. There is also the fact that the SLABS market is extremely small, with only approximately $150 billion outstanding, according to Seton Hall professor Eleanor Xu. It just does not pose that much of a risk to the overall market if something were to happen. Finally, Fitch and Moody’s have extremely robust credit rating evaluation frameworks that most likely know how to accurately look at these SLABS. If something were to pose a problem in the SLABS market, I believe these ratings companies would be able to see it before something happened. 

For large institutional investors who are bullish and want exposure to the student loan market, I would suggest looking at the private student loan market rather than looking at government-agency issued student loan ABS. Private student market is estimated to be $140 billion dollars since Forbes last reported it and continues to be an attractive source of investment in my opinion. What makes it compelling to me is the fact that investors can vet through certain lenders’ underwriting capabilities to see who not only does it best, but also has the right pool of loans that the lenders are willing to sell from their balance sheet. With debt having a huge focus on downside protection and risk-adjusted returns, I would strongly assume finding loans that have low duration will be key as well as factors such as high likelihood of student debt repayments. Therefore, looking into a student’s major, where he or she goes to college and perhaps parent’s income are strong indicators of finding “safe” pools of loans to invest in for an investor. Studies show a strong correlation between university major and potential earnings, with those doing STEM-based careers outperforming those doing social sciences careers from an income perspective, as an example. In addition, those attending a top 20 private university in the country have a stronger likelihood of success when thinking about career trajectory and earnings compared to someone attending a community college. This is an extreme example, but helps illustrate my point why investors must pay close attention to the rate at which these private lenders charge certain types of students and understand the probability these payments are made on time. 

Thanks for reading my quick thoughts on student loans!  

Sources

Ghent, Andra, and Rossen Valkanov. “Comparing Securitized and Balance Sheet Loans: Size Matters.” Management Science, vol. 62, no. 10, 2016, pp. 2784–803. JSTOR, http://www.jstor.org/stable/44012216. Accessed 19 Jan. 2024.

Hahn, Alicia. “2024 Student Loan Debt Statistics: Average Student Loan Debt.” Forbes, Forbes Magazine, 16 July 2023, www.forbes.com/advisor/student-loans/average-student-loan-debt-statistics/

Hahn, Alicia. “Best Student Loan Refinance Lenders of January 2024.” Forbes, Forbes Magazine, 18 Jan. 2024, www.forbes.com/advisor/student-loans/best-student-loan-refinance-lenders/.

LindseyTweeted. “How Wall Street Trades Student Loans.” CNBC, CNBC, 13 Sept. 2023, www.cnbc.com/video/2023/08/31/how-wall-street-trades-student-loans.html.

Nova, Annie. “Only 60% of Student Loan Borrowers Made Payments When Bills Restarted.” CNBC, CNBC, 18 Dec. 2023, www.cnbc.com/2023/12/18/only-60percent-of-student-loan-borrowers-made-payments-when-bills-restarted.html.

Stange, Kevin, et al. “College Majors Affect More than Just Average Earnings.” CEPR, 27 Oct. 2022, cepr.org/voxeu/columns/college-majors-affect-more-just-average-earnings.

“U.S. Student Loan Debt Statistics [2023].” Credit.Com, 15 Nov. 2023, www.credit.com/blog/student-loan-debt-statistics/.

What Certain Board Games Can Teach Us about Competition and Zero-Sum Games

Board game nights on Sundays when I was younger were some of the most memorable moments of my childhood. They were filled with lots of fun and yelling between my parents and three younger brothers; more importantly, they taught me how to think about strategy and competition. I always sought to win no matter how and learned how to scheme against my brothers into giving myself a more advantageous position over them -- it was a lot harder to trick my parents into my tactics unfortunately. With this being said, there were many valuable lessons and values I learned from these games that have helped me understand competition more deeply. Through the board games I used to play during my childhood, I want to explain what can be learned about competition in the business world.

The Dichotomy between Monopoly and Catan 

As the name suggests, the game Monopoly is a zero-sum game. I assume that you know how to play Monopoly, so there really is no need for me to explain how the game works. The finite amount of properties means that it is important to buy as many as you can in the beginning to then hopefully build hotels on them to exploit those who land on your properties. It does not require much creative thinking to understand this and to play the game; interestingly, the game also illustrates how many Americans feel about the world today in terms of business competition. Researcher Shai Davidai states in one of his papers that because of the growing state of economic inequality, there are now stronger beliefs amongst people that the economy is a zero-sum game. The studies show how people have become more cynical in the way they view competing against one another and that there is a greater divide between the “have” vs. “have-not” of the world. Basically, there are only winners and losers in the world and the actions we decide to partake to our advantage will leave others with less. Quite a simple concept to understand yet one that is extremely fallacious to think of. As humans, we compete with each other in all facets of life, whether it be in sports or in the classroom or playing board games as I did when I was younger. It is easy to perceive the amount of money or the final score of a sports game as the only gain or win against others during competition. However, this type of thinking is toxic and outcomes should not be binary, with the results only being success or failure. Should being a winner only hinge on the fact that you succeeded at the expense of others failure? 

For Catan, while another game of competition, it showcases a contrast to Monopoly in the way you play it and better mimics how the world truly works. For those who are unaware of the gameplay, I suggest watching the quick 4-minute video by The Rules Girl on YouTube that explains everything. After watching the video, you most likely understand where the contrast is with Monopoly. It is evidently clear that there is only one winner in the game as the board game must end. But I want to make a strong emphasis on the aspects of trade and collaboration to explain my point about why thinking about competition as zero-sum is dangerous. In Catan, your success benefits other people. In order to build the roads and settlements, you need 4 different types of material. While there is a possibility you are able to obtain all 4 resources without trade due to early luck factors, the probability of not trading at all is unlikely; even if it were possible, it still may be advantageous for you to do so given a certain material comparative advantage. It is similar to the Ricardian model in that sense and showcases a much better way of thinking about competition: success does not depend on the failure of others. Of course, that is not always the case as you can use the robber to continuously harass the same player for resources or blocking houses from being developed. But this tactic can backfire as creating strong trade relationships with other players is a hallmark of how to succeed in the game; ignoring the needs of others is the same as ignoring your own and collaboration is almost necessary to win, just like the real world.  

The Zero-Sum Problem 

In an ideal world of competition, everybody's actions will objectively make everybody else better. While this is not true in absolute terms, I do believe there is a very strong reason to believe that competition and cooperation are how we should conduct business. Both games I have just described are inverses of each other in the sense of how they view competition, which is why I decided to use them as examples. When you look at real life, there is some evidence to show that the economy does function as a zero-sum game. Let me use housing as an example: the NYTimes estimates that about 28% of the overall housing stock in NYC is rent-stabilized, with a small portion of that as rent-controlled. Rent-controlled apartments are the best apartments from a price perspective for the tenants as landlords are limited to what they can charge tenants for rent. Those who obtain these apartments are fortunate while the majority must pay higher rents as there is a supply shortage in the city. I will not discuss the benefits and drawbacks to the NYC housing market that these types of apartments have, but I want to illustrate an example of what a zero-sum looks like in a real life scenario. There are many other examples to showcase this and shows how some may see the business world as one where wealth can only be taken, not created. Therefore, this goes back to professor Davidai’s point on why some believe the economy is a zero-sum game. 

For why market economies are not zero-sum, there are few things to point out. One, people have different levels of utility and value different baskets of goods and services differently. In Monopoly, everybody will value the Boardwalk property (or basically any property) because it gives one the best chance at earning the most money; there is no rational argument you can make to pass on it if you have the money as there is a finite amount of properties to buy. In Catan, one may value iron ore over lumber more in order to build certain things and this is one evidence point on why the markets are not zero-sum. In addition, think about the amount of wealth and technological advancements that have been made using trade and cooperation. Life expectancy has steadily been increasing around the world in both developed and undeveloped nations, we are more connected than ever through certain media and electronic devices and the global poverty rate has continued to decline since the beginning of the 21st century. Now, it would be ignorant for me to ignore the negative externalities that come with these developments, but it is important to understand that wealth is not fixed. According to the World Bank, since 1990 to 2021, the percentage of people globally who now have electricity has risen from 73.4% to 91.4%. This can be largely attributed to a study that shows how “globalization offer technological innovation, financial resources and international cooperation opportunities to achieve universal electricity access." While everything in life is measured on a relative basis, I do not see clearly how one can argue that the world is zero sum when the pie has been growing, not one size to split. Of course, the pie may not be evenly divided as some economists and researchers may suggest, but I take on the view that people have largely benefited from the participation of trade and cooperation with others.

I am a firm believer that not every single action between certain parties has to involve trade offs. It fails to account that parties involved may find it beneficial for different reasons and that overall utility may be satisfied given different indifference curves. As stated, Monopoly explains that since money and housing supply is never increasing or decreasing, there is no need to help those around you. This leads to unethical behavior and will only lead to distrust from others when conducting business. This is not how business should be done and do not believe this is very sustainable in the long-term. The world should not compete like that, with Catan showcasing that working with others may just benefit everybody around you. To end, I would like to end with a famous quote by a familiar previous U.S. president, which I hope you can reflect on when thinking about your next competitive encounter with others. I do believe it holds true in life and that one's actions can always benefit not just yourself but others as well.

“The rising tide lifts all boats.” - John F. Kennedy

Sources

“Access to Electricity (% of Population).” World Bank Open Data, data.worldbank.org/indicator/EG.ELC.ACCS.ZS. Accessed 19 Jan. 2024.

Goldberg, Gary. “Why Nobody Wins with a Zero-Sum Mindset.” Rolling Stone, Rolling Stone, 7 Jan. 2022, www.rollingstone.com/culture-council/articles/nobody-wins-zero-mindset-1277821/.

Noumba a, et al. “Assessing the Role of Globalization for Universal Electricity Access.” International Economics, Elsevier, 6 Apr. 2023, www.sciencedirect.com/science/article/pii/S2110701723000276.

Parogni, Ilaria, and Mihir Zaveri. “Understanding Rent Regulation in N.Y.C.” The New York Times, The New York Times, 22 June 2022, www.nytimes.com/article/rent-stabilized-apartments-nyc.html.

Democratizing Access to Bitcoin: Why it is not a Risky Asset and the Implications of the Bitcoin ETFs on the Cryptocurrency World

Bitcoin has always been of huge interest to me since I first discovered it in 2017. Given recent news events, I thought it was worthwhile to write an article on it. Yes, I am not Michael Saylor or Michael Novogratz, but I think I can provide some interesting context as to why you should be following Bitcoin. To keep this article brief, I will give a quick history lesson on Bitcoin, what makes Bitcoin special and then talk about the Bitcoin ETF that the SEC recently approved. 

Why the U.S. Government Hates Bitcoin

I believe governments are extremely inefficient money allocators. The government recently reported spending an eye-popping $510 billion from October 2023 through December 2023, with the U.S. national debt recently rising to $34 trillion for the first time. In addition, a new $886 billion defense policy bill that got large bipartisan approval was just signed into law. I am not going to go into greater detail why I believe these debt levels cannot be maintained and my disdain for U.S. intervention abroad in some scenarios, but I do want to showcase that there is a contrast between what the people want and what government spends money and time on.

Important figures in our society from Elizabeth Warren to Jamie Dimon have called buying Bitcoin similar to “buying air” and have called for the government to “close it down.” Quite strong words to use and is largely due to the fact that it challenges the traditional financial system. What I would like to note is that we have actually experienced a similar instance from our government trying to ban a certain commodity from the ordinary citizen: gold. In 1933, the president at the time was Franklin D. Roosevelt who is largely known by people today for the launch of the New Deal, the president who had Polio and the one who entered the U.S. into World War II. He is the president who decided to ban gold. To keep it short, at the time, the U.S. used the gold standard for its currency, but this all changed during the Great Depression. Via Executive Order 6102, FDR basically told citizens “all hoarding of gold coins, gold bullion, and gold certificates” was forbidden as the federal government tried to increase federal spending to stimulate economic growth. Those who opposed could face up to ten years in prison and a fine of double what they had in gold. 

That is the quick history lesson that I wanted to share. It shocks me how many Bitcoin holders have no clue about this event, given how much the past can tell about our future. Whether it could be potentially easier or more difficult to ban Bitcoin in the United States is truly up for debate. One side can say that given that Bitcoin transactions can be traced more easily than physical gold, it is easier to ban. Some places like the U.S. and EU have also enacted regulatory efforts to make it easier to trace who has a crypto wallet and who is buying the currency. On the other hand, given the decentralized nature of Bitcoin, it may be extremely difficult. It has not stopped people in China to continue using its peer-to-peer payment application and I would assume most Bitcoin holders are technologically savvy enough to find other methods to get access to digital currencies. Whether a tax or a complete ban will be more effective for the U.S. government at reining in Bitcoin is up for debate. What needs to be noted is that the fight against Bitcoin by the government resembles closely to what George Orwell’s 1984 feared: a totalitarian government that suppresses the people through its absolute control. I am not comparing the entire U.S. government to a totalitarian one, but I do want to illustrate how we have seen efforts by our government to restrict power to the people and what people want.

Is Bitcoin a Risky Asset?

There are a lot of skeptics that believe Bitcion has no value for society and should be seen as a risky asset to hold. To that, I will try and defend Bitcoin. Do I believe Bitcoin is volatile? Depending on the timeframe used, potentially. But is it risky? I would have to say no to that. Bitcoin exhibits proof of work, not proof of belief. It is able to run 24/7 like any bank that is entirely decentralized so no single and small group of entities have power. That is what Bitcoin is backed by. In the United States, we are fortunately able to have the right to buy something we find valuable and hold onto it. If you heard last month, the market capitalization of Bitcoin recently exceeded that of Berkshire Hathaway. A huge accomplishment for supporters of Bitcoin and showcases that free market participants will continue to hold onto things they find valuable. Again, what they find valuable is that Bitcoin is valuable in that it is proof of work, not proof of beliefs as skeptics say.

In addition, it is important to bring up what makes bitcoin different from fiat currency. Ever since Nixon delinked the USD to gold, most of the world’s money has basically been floating currencies. Therefore, since the USD is the world’s reserve currency, any monetary policy that the U.S. conducts has huge implications on other nations, especially those in developing nations. We have seen how the Federal Reserve pumped more than $5 trillion of money supply into the economy since the pandemic as the government tries to pass it off as money. Again, nothing is backing the USD but as individuals, we have to just accept whatever those in power do to the money supply and go along with it. These demand and supply mechanisms utilized by fiat are abysmal and there many instances of fiat currency failures to point to where governments have hurt its citizens, from recent events like the Zimbabwean dollar in the early 2000s to the Turkish Lira in 2022. In addition, looking at the return curves of both Bitcoin and US treasuries should tell an easy story of which is risky and which is not. For US 10-year Treasuries, the cumulative return from 2013-2023 was about 9%. Bitcoin in that same time period is a 5569% return and has significantly outperformed the US 10-year Treasury on shorter timeframes. The threat of inflation has caused holding cash or treasuries as not safe and the volatility that comes with Bitcoin should be largely ignored if you can take a more long-term view of the value that Bitcoin holds, both in terms of price and practical application. If anything, looking at this, the USD is backed “by air” to me, which is what policymakers and detractors of Bitcoin will say about Bitcoin. 

News on Bitcoin ETF

This is quite big news as it has now allowed for more institutional investors to gain access to Bitcoin. Before, Bitcoin was largely for the rich or investors who would turn to Microstrategy, as an example, as a proxy for holding Bitcoin, given that 90%+ of its market capitalization derives from bitcoin holdings. Now, analysts are predicting a new bull market for Bitcoin as huge increases in the inflow of new funds into the Bitcoin ETF are being underway. What I am most curious about is what this means for Microstrategy and closed-end fund GBTC. 

 

Microstrategy is run by Michael Saylor and was largely seen as a great way of getting Bitcoin exposure. It is a software business, but what it really is known for is its large amount of Bitcoin holdings. However, it has been called out by fundamental traders and analysts as being extremely overvalued compared to Bitcoin and seen as paying too much of a premium for getting exposure to Bitcoin. Interestingly enough, despite the huge short interest on Microstrategy by traders, it recently popped in the last couple of months due to a short squeeze. What the Bitcoin ETF introduces now is possibly a lessened appeal towards using Microstrategy as a proxy investment. Now, it could also be possible that the rally in Bitcoin due to the introduction of the ETF may be able to offset any reduction in the premium and help its ability to keep on borrowing against its holdings to buy more Bitcoin. Whichever result happens, this ETF introduction could mean Microstrategy stock may start to finally converge to book value.

Besides Microstrategy, Grayscale’s bitcoin fund (GBTC) has recently just been priced at par to its NAV value for the first time since February 2021. Basically the inverse of what Microstrategy’s stock price was, GBTC was always trading at a steep discount as a closed-end fund. Closed-end funds lack redemption mechanisms that do not allow for arbitrage to occur. Now that the Bitcoin ETF has been introduced with lower fees and an easier means for investors to acquire Bitcoin, it will be interesting to see if investors decide to move towards the Bitcoin ETF, especially since GBTC charges a 1.5% yearly fee.

Hopefully, I gave a nice summary of these current events on Bitcoin and look forward to making more articles!

Sources

Biden Signs $886 Billion US Defense Policy Bill into Law | Reuters, www.reuters.com/world/us/biden-signs-886-billion-us-defense-policy-bill-into-law-2023-12-22/. Accessed 19 Jan. 2024.

“Executive Order 6102-Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates.” Executive Order 6102-Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates | The American Presidency Project, 5 Apr. 1933, www.presidency.ucsb.edu/documents/executive-order-6102-forbidding-the-hoarding-gold-coin-gold-bullion-and-gold-certificates.

“Grayscale’s GBTC Discount Closes to Zero for First Time since February 2021.” Yahoo! Finance, Yahoo!, finance.yahoo.com/news/grayscale-gbtc-discount-closes-zero-154442259.html. Accessed 19 Jan. 2024.

“Historical Returns on Stocks, Bonds and Bills: 1928-2023.” Welcome to Pages at the Stern School of Business, New York University, pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html. Accessed 19 Jan. 2024

JeffCoxCNBCcom. “U.S. Deficit Tops Half a Trillion Dollars in the First Quarter of Fiscal Year.” CNBC, CNBC, 12 Jan. 2024, www.cnbc.com/2024/01/11/us-deficit-tops-half-a-trillion-dollars-in-the-first-quarter-of-fiscal-year.html.

“M2.” FRED, 26 Dec. 2023, fred.stlouisfed.org/series/M2SL.

MSTR Microstrategy Incorporated Stock - Share Price, Short ... - Fintel, fintel.io/ss/us/mstr. Accessed 19 Jan. 2024.

Partz, Helen. “Bitcoin Market Cap Overtakes Berkshire Hathaway, Soars Past $800B.” Cointelegraph, Cointelegraph, 4 Dec. 2023, cointelegraph.com/news/btc-market-cap-passes-berkshire-hathaway.