Year: 2024

The Rise of Passive Management

Written by Massimiliano Silla on 22/04/2024. Posted in Insights. No Comments on The Rise of Passive Management

Over the last decade, there has been a marked decline in actively managed funds in favor of passive management, such as ETFs and index funds. Particularly in the United States, the amount of money flowing into passive management has surpassed that going into active management for several years. In Europe, this trend is less pronounced due to a predominantly bank-based financial system. However, the majority of financial assets are still invested in actively managed funds, accounting for about 80% of the total in Europe.

The volume of ETF management has shown steady and exponential growth, reaching $6 trillion globally and €1 trillion in Europe. In Italy, on the ETFPlus platform, between 20,000 and 50,000 ETF trades are recorded daily. The amount of resources invested in this segment is about €100 billion. The Italian Stock Exchange, being one of the most significant in Europe, competes with the German market in terms of the number of contracts traded and trading volume.

Types of ETP (Exchange Traded Products)

The term “ETP” identifies a set of financial products that share a common goal: to replicate the performance of a benchmark index and to be traded on an exchange. Among these, we can distinguish:

ETF (Exchange Traded Funds): These funds are similar to mutual funds and are subject to the UCITS directive. This regulation imposes limitations on the manager regarding the types of investments allowed, promoting risk diversification and increasing investor safety. Another advantage is that the fund’s assets are held separately from those of the issuing entity, protecting investors in case of the manager’s insolvency.
ETN (Exchange Traded Notes): These instruments are structured bonds that can replicate the performance of a variety of assets, including more volatile or exotic ones. A specific example of an ETN is the ETC (Exchange Traded Commodity), which focuses on commodities. Unlike ETFs, ETNs are not bound by the UCITS directive, allowing greater investment freedom but with fewer guarantees for the investor, such as in investments in cryptocurrencies or the use of high financial leverage.

ETFs (Exchange Traded Funds)

ETFs are investment tools that, similar to indexed funds, allow investors to expose themselves to specific market indices, which can be geographic, sectoral, equity, or bond indices. These funds passively replicate the composition of an index, strictly adhering to its performance, risk, and return. Their distribution of investments (asset allocation) is closely linked to the benchmark index they aim to replicate. Unlike traditional mutual funds, which are bought or sold at the net asset value calculated at the end of the day, ETFs offer the flexibility to be purchased and sold like stocks during market hours. This allows investors to operate in real-time, with the ability to respond to the current market value through a single buy or sell order.

Difference Between NAV and Market Price

The Net Asset Value (NAV) represents the book value of a fund, calculated as the difference between assets and liabilities. This value is updated daily and expressed in the base currency of the fund.

In contrast, the market price of the fund’s shares is formed in the secondary market through the interaction of supply and demand from investors and is expressed in the currency in which the shares are quoted.

It’s important to note that the market price may not correspond to the NAV of the fund. There are no automatic mechanisms that ensure the alignment of the market price with the NAV in ETF shares, which can lead to misalignments.

These misalignments represent a risk for the investor, who may find themselves buying or selling shares at a price that does not reflect their real value.

An example of this phenomenon occurred during the market crash in March 2020, following the COVID-19 pandemic. During this period, some ETFs investing in less liquid asset classes, such as high-yield bonds, recorded significantly lower quotations compared to their NAV.

Replication Methods

There are two main replication approaches for ETFs: physical replication and synthetic replication, both aimed at minimizing tracking error relative to the reference index.

Physical replication is the most common among ETF issuers and is divided into two categories: full and optimized. In full physical replication, the ETF includes all the securities of the underlying index, while in optimized physical replication, the ETF invests in a representative subset of these securities.

On the other hand, synthetic replication is articulated in two forms: funded and unfunded. In both cases, derivative contracts, such as swaps, are used to emulate the performance of the index. The unfunded version is currently preferred for its ability to reduce counterparty risk. In this model, the ETF and the swap counterparty periodically exchange performances of a substitute basket with those of the index benchmark, adjusting for the cost of the swap, if present. If the benchmark outperforms the substitute basket, the issuer will have a credit towards the counterparty, but in the event of default by the latter, losses could occur for investors. UCITS regulations limit counterparty risk to 10% of the net assets of the ETF, but issuers often adopt additional precautions to further mitigate risk.

The main advantage of physical replication lies in its ability to eliminate counterparty risk through the segregation of assets; however, this method may be slightly less efficient and more expensive compared to synthetic replication.

Costs

ETFs incur various costs, which can be classified into two main categories:

Costs incorporated in the Net Asset Value (NAV) of the fund, thus reflected in the fund’s performance chart. These include:

Management fees.
Administrative costs, such as custodian bank fees, quote publication, organization of meetings, sending of communications, legal expenses, and other similar costs.
Transaction costs associated with the trading of securities within the portfolio or fees imposed by swap counterparts.

It is important to note that management and administrative costs are included in the Ongoing Charges Figure, while transaction costs are not included and can only be identified through EMT flows.

Costs that occur at the time of investment or divestment:

The bid/ask spread, which is the differential between the purchase and sale price observable at the time of the transaction of the ETF shares.
The costs of executing operations, which are applied by the bank, the Securities Brokerage Company (SIM), or the broker.

It is relevant to emphasize that ETFs do not have entry or exit fees, nor performance commissions.

ETC (Exchange Traded Commodities)

ETCs and ETNs (Exchange Traded Notes) differ from mutual funds in their method of issuance: they are not distributed as fund shares but rather as debt securities. This characteristic excludes them from the category of collective investment schemes defined by the UCITS directive, hence they are not subject to related regulations. However, they can be considered compatible investments for UCITS funds, i.e., they can be included among the assets purchasable by such funds.

Regarding the guarantee, ETCs can be classified into two categories:

ETCs with physical replication, which are secured by a physical asset. This type of ETC is typical for commodities that are easy to store, such as precious metals (gold, silver, platinum, and palladium). In this case, the price of the ETC follows the spot price of the corresponding commodity.
ETCs with synthetic replication, which instead use a derivative contract to offer exposure to the commodity. These ETCs are generally supported by collateral guarantees, and their value follows the index of future contracts on the commodity in question.

Futures and Rolling Contracts

The future contract is a forward purchase and sale agreement, in this case on commodities. Such a contract allows the purchase of a defined quantity of commodity at a future date, known as “expiration,” at a price fixed at the time of the contract’s stipulation, called the “Forward Price.” The future can also be treated as an independent derivative contract.

In the normal context of Contango, an Exchange Traded Commodity (ETC) may incur losses not directly related to price changes of the reference commodity, but rather linked to the need to continuously adjust positions to maintain the desired exposure.

ETCs that use synthetic replication of the commodity can show significantly different returns compared to the commodity itself, especially if held for medium or long periods. Therefore, it is recommended to use these instruments mainly for short-term speculative operations, on the order of a few days.

ETN (Exchange Traded Notes)

ETNs are financial instruments that act as zero-coupon bonds and are without expiration, designed to track the performance of a specific index. Those who invest in ETNs essentially lend money to the issuing bank, becoming its creditor. This exposes the investor to counterparty risk, or the risk of losing the invested capital in case the issuing bank fails. ETNs may offer collateralization options to mitigate this risk.

These instruments are regulated by the UCITS directive, which allows them to cover a wider range of asset classes or indices than is normally allowed for mutual funds. However, this flexibility results in fewer guarantees for investors compared to the diversification norms typical of UCITS products. For example, ETNs can invest in assets like cryptocurrencies, which are excluded from mutual funds.

ETNs can also incorporate strategies that use financial leverage, aiming for returns that are either positive or negative relative to the reference index, with leverages that can exceed a 2:1 ratio. This means they can amplify gains, but also increase the risks of losses.

Leverage

Leveraged Exchange Traded Products (ETP) are financial instruments that aim to replicate the daily performance of a given index, multiplied by a specified leverage factor. This leverage factor amplifies the daily returns of the reference index. However, for periods longer than one day, the overall return of a leveraged ETP can deviate significantly from the initially expected return due to the cumulative effect of the daily applied leverage.

Leveraged Exchange Traded Notes (ETN) that use leverage or adopt short strategies are primarily designed for short-term trading operations. It is not advisable to maintain these instruments for periods exceeding the duration of a single market session, given their structure and associated risk dynamics.

Mandatory Reporting of Investment Costs: an Overlooked and Little-Known Document

Written by Massimiliano Silla on 19/04/2024. Posted in Insights. No Comments on Mandatory Reporting of Investment Costs: an Overlooked and Little-Known Document

Since January 3, 2018, when the MiFID II (Markets in Financial Instruments Directive II) regulations came into effect, banks, Poste Italiane, brokerage firms, and financial advisor networks are required to provide their clients with a detailed statement of the costs associated with their investments in the previous year. This document, which must be sent by April 30 each year, aims to increase transparency and allow investors to better understand the expenses incurred in investment services.

Despite the importance of this provision, its notoriety among clients remains low. The reasons for this lack of awareness can be numerous. Firstly, banks and financial operators may not be incentivized to widely publicize a document that outlines the often high costs borne by clients’ investments. This could lead to a negative perception of the services offered and, consequently, possible commercial repercussions.

Furthermore, the complexity of the terms used and the very nature of the information presented, some of which are not strictly related to the purpose of the document, can make it difficult for most savers to fully understand the content and significance of the report. This aspect undermines the effectiveness of the regulation, which aims to ensure transparency and enable informed decisions by investors.

On the other hand, mandatory reporting offers clients a valuable opportunity to assess the effectiveness and convenience of the investment services received. Investors can and should use this information to compare costs and services offered by different market operators and check their impact on the efficiency of their portfolio, thus encouraging greater competition and improvement of financial services.

Regulatory authorities, consumer associations, and independent financial advisors play a crucial role in this context. It is essential that they promote greater financial education and push for more effective and accessible disclosure of investment cost information. Only through a joint effort and increased awareness will it be possible to ensure that all investors can fully benefit from the protections offered by MiFID II regulations.

In conclusion, while mandatory reporting represents a significant step forward towards financial transparency, its success depends on effective implementation and the ability to reach investors in a clear and understandable way. It is crucial that all stakeholders work together to overcome current challenges and ensure that every investor can make informed choices about their financial investments.

What Is the Bitcoin Halving?

Written by Massimiliano Silla on 15/04/2024. Posted in Insights. No Comments on What Is the Bitcoin Halving?

Bitcoin stands out as a decentralized and secure network that has gained prominence as a store of value in recent years, primarily due to the halving mechanism programmed into its code.

To thoroughly understand this process, it is useful to examine the concept of Bitcoin mining. Similar to gold miners who physically labor to extract gold from the earth, Bitcoin miners employ significant computational power to solve complex cryptographic puzzles necessary to validate a transaction block and generate new Bitcoins (BTC). This activity is incentivized by a well-defined reward system.

When Satoshi Nakamoto created Bitcoin in 2008, he established that the initial reward for mining a block was 50 BTC, worth about $5 at the time. This reward is automatically halved every 210,000 blocks, which occurs approximately every four years. This means that the number of Bitcoins issued per block is halved, as first evidenced in November 2012 when the reward dropped to 25 BTC (worth between $3,375 and $28,037 at the time). Subsequent halvings further reduced this figure to 12.5 BTC in 2016 and to 6.25 BTC in 2020.

Currently, with the Bitcoin price hovering around $70,000, the average cost of mining a single Bitcoin is estimated to be around $29,000, varying based on hardware capacity and other technical factors. The next reward reduction is scheduled for April 18, 2024, when the mining prize will drop to 3.125 BTC.

Beyond the economic aspects of mining, it is essential to reflect on the true purpose and value of Bitcoin, which is sometimes mistakenly labeled as a speculative bubble. The halving mechanism is designed to impose a maximum cap on the quantity of Bitcoins available, aiming to make it a scarce and valuable commodity, similar to gold. Thanks to the advanced technology it relies on, the demand for Bitcoin is tied to the growing need for an alternative and decentralized monetary system, and its value is significantly influenced by the progressive reduction of its supply.

This mechanism not only emphasizes the scarcity of Bitcoin but also contributes in a complex way to its market valuation.

How Does the Halving Work?

The Bitcoin halving mechanism, known as “halving,” is a fundamental feature of the Bitcoin network, programmed to cease the issuance of new coins around the year 2140, or as soon as nearly the twenty-one millionth BTC is mined. This process stipulates that the reward for each mined block is reduced to 1 satoshi in the final 210,000 blocks. The Bitcoin network’s programming enforces a rounding down to the nearest whole number, thus establishing the maximum limit of coins mined at 20,999,999.9769 BTC.

The competitiveness in the Bitcoin network constantly drives more nodes to actively participate in creating the next block. This financial system is primarily governed by three critical parameters:

Hash Rate: Indicates the computational power employed by miners to process transactions and maintain the network’s security. A high hash rate means fiercer competition among miners but also ensures greater network security.
Mining Difficulty: This metric refers to the complexity of the “puzzles” that miners must solve to generate a new block. The difficulty automatically adjusts based on miner participation, ensuring that the average block generation time remains about 10 minutes.
Block Time: The average time required to create a new block on the blockchain.

The interaction between these parameters is crucial: an increase in hash rate speeds up block production beyond the target time of 10 minutes. Consequently, the network performs a “difficulty adjustment” every 2,016 blocks to increase the complexity of the puzzles and slow down the production of new blocks, realigning it with the desired block time. Similarly, a drop in hash rate will lead to a lowering of the difficulty.

The timing accuracy of halving events is not absolute, but predictability is still high. Our “Bitcoin: Halving Countdown and Analysis” dashboard offers estimates based on the average block time of the last 90 days; for further details, it is possible to scan the QR code at the end of the report.

After the last Bitcoin is mined, miners will continue to earn through two sources: block rewards and transaction fees from network users. Over time, although block rewards will decrease, fees will become the main form of income for miners, emerging as a vital tool for financial sustainability in the advanced phase of the Bitcoin network.

What Is the significance of Bitcoin Halving?

Having explored what Bitcoin halving is and its mechanisms, it is time to delve deeper into the reasons for its necessity. Historically, centralized control of the money supply has been the norm since the birth of central banks in the 17th century. In this report, we will examine the financial system of the United States as a reference model. The control of the money supply is managed through two main levers:

The Federal Reserve (Fed) directs monetary policies using various tools, such as state securities trading to regulate the amount of money in circulation; imposing reserve requirements on banks to influence lending and the creation of new money; and manipulating interest rates.
The issuance of new money is the task of the Bureau of Engraving and Printing (BEP), under the control of the Fed. This implies that the Fed can request the BEP to issue new money to meet needs, without time or quantitative constraints.

The consequences of inefficient money supply management include various negative effects of centralization. For example, the expansion of the Fed’s balance sheet has often been a prelude to inflation increases, as evidenced by the data. This phenomenon has led to situations of hyperinflation and currency devaluation in the past, as occurred in Germany in the 1920s and in Japan in the 1980s.

In 2008, the vision of Bitcoin emerged as a response to the failures of the traditional financial system. After the global financial crisis, characterized by a severe lack of transparency and accountability, Satoshi Nakamoto launched a new idea of a monetary system: a limited-number, programmed, and publicly traceable currency through a distributed ledger on thousands of nodes.

The comparison between the centralized model of the Fed and the decentralized model of Bitcoin highlights significant differences:

Bitcoin’s monetary policies are managed through the verification of transactions by tens of thousands of nodes, operating globally and incessantly, with a transparent and open process accessible to all.
The supply of Bitcoin is fixed at a maximum of 21 million BTC, which will be gradually distributed over approximately 130 years, similar to gold miners adding gold to the market by consuming resources.

The halving process is crucial as it highlights Bitcoin’s coded and immutable monetary policy, completely independent of any centralized control and unchanged regardless of economic conditions.

What Are the Consequences of Bitcoin’s Four-Year Halving Cycle?

After analyzing the halving mechanism and its reasons, let’s examine the historical effects, miner behavior, and market price repercussions.

Why Does the Halving Occur Every Four Years?
Although Satoshi Nakamoto’s motivations for establishing a four-year halving cycle are not entirely clear, this time interval coincides with significant events such as U.S. presidential elections, which generate economic uncertainty. This coincidence might be interpreted as an attempt to mitigate the instability of traditional financial systems that occurs during political transitions, especially considering the broad impact of U.S. fiscal policies on the global economy. Moreover, the four-year period may serve as a psychological reference point, akin to traditional economic cycles, elections, or significant sports events.

What Has Been the Impact of Halving on Bitcoin Prices in Previous Cycles?
Over time, the effect of halving on Bitcoin prices has gradually diminished, with each subsequent event producing increasingly smaller growth rates. For example, after the first halving, Bitcoin saw a 5,500% increase, followed by a 1,250% increase after the second, and about 700% in the current cycle. This more controlled growth over time indicates a maturation of the Bitcoin market, stabilizing similarly to traditional assets like gold. Exponential growth is often a symptom of speculation, while steady and sustained growth suggests greater stability and adoption. Nevertheless, external investments, such as those from ETFs, could define a new growth standard for this cycle, as demonstrated by Bitcoin’s exceptional performance, which surpassed its all-time high (ATH) before the halving. It is hypothesized that this phenomenon may originate from a supply shock, a concept that will be further explored later.

How Does the Halving Affect Miner Operations?
The halving significantly impacts miners by reducing block rewards, affecting profitability, and altering operating costs, all dependent on Bitcoin’s value at the time. If rewards decrease, an increase in Bitcoin’s price could offset the losses. Some miners, like Marathon and Core Scientific, have chosen to refinance to maintain the liquidity necessary to continue operations. Despite the challenges, the withdrawal of miners from the network causes mining difficulty to drop, reducing energy consumption and making mining more economically advantageous. This invites miners to re-enter the network, strengthening its hash rate. Conversely, some miners may be forced to sell their reserves, a topic that will be analyzed through the use of a proxy metric to evaluate their selling pressure.

What Do Miners Do in Anticipation of the Halving Event?
One of the main indicators of their interest is manifested through their deposit activities on exchange platforms. Typically, miners proceed to sell Bitcoin to cover operational costs, such as electricity bills and expenses related to purchasing and maintaining the necessary hardware.
During the current halving cycle, it has been observed that miners are selling a smaller quantity of Bitcoin compared to previous cycles. Specifically, in February 2024, the average of Bitcoin deposited on exchanges was 127 BTC, nearly a 70% reduction compared to the 417.4 BTC deposited in the February-March 2020 period.
It is essential to consider that miners must face their operational costs expressed in U.S. dollars. This leads them to leverage the high Bitcoin prices, driven by the increase in ETF investments, thereby improving the market reach and accessibility of the cryptocurrency.

The Halving Effect: The Compass of Bitcoin’s Four-Year Cycle
The halving represents the most anticipated event in the Bitcoin landscape. Scheduled for April 2024, the fourth halving will see the reward for block mining for miners drop from 6.25 to 3.125 BTC, thus halving the annualized inflation rate of Bitcoin from about 1.70% to about 0.85%. This change follows the programming of the asset towards the maximum limit of 21 million units. The supply shock caused by the halving, along with the narrative created around it, has historically favored a Bitcoin overperformance in the following 12 months. On average, it takes 172 days for Bitcoin to surpass its previous all-time high post-halving, and 308 days to reach a new cycle peak once the previous one has been surpassed. Currently, with Bitcoin trading near its historical high, the trend of this cycle may differ from previous ones, when the price was typically 40%-50% below the historical peak in the weeks leading up to the halving. Furthermore, in February, Bitcoin recorded the largest monthly growth ever seen in dollar terms, increasing by over $20,000 and demonstrating an unprecedented level of enthusiasm for the cryptocurrency even before the actual halving.

What’s New in This Bitcoin Halving Cycle?

On this occasion, Bitcoin appears to be on a novel path, characterized by an increase in institutional adoption and an expansion of practical applications. Let’s analyze the current situation of Bitcoin supply and demand to better clarify what the novelties are.

Analysis of Supply and Demand Dynamics and Their Impact
To understand the possible consequences of the upcoming Bitcoin halving, it is essential to analyze the current dynamics of supply and demand. There are several emerging factors that not only diverge from previous cycles but could also precipitate an early rally. Let’s explore some of these elements.

BTC Spot ETFs in the United States
The approval of Bitcoin spot ETFs represents a pivotal moment in the history of this cryptocurrency, paving the way for traditional investors towards this innovative asset class. The significance of the initial success of these ETFs is notable, given that the value of Bitcoin has increased by about 50% since its debut on the stock market. These ETFs have also recorded extraordinary trading volumes, indicating marked interest from the traditional investment sector, with a peak of over one billion dollars in inflows in a single day, precisely on March 13, 2024.
The success of BTC spot ETFs in the USA has reached unprecedented levels, with nine issuers (excluding Grayscale) accumulating about 30 billion dollars in assets under management in just two months of activity. Including all ten issuers, it is observed that they have obtained more than half the market share of gold ETFs, which is estimated to amount to 90 billion dollars.

From the Demand Side: Buying Pressures from ETFs

Recently, Bitcoin has recorded a steady growth that has led to significant interest in spot ETFs in the United States, with net inflows exceeding 10 billion dollars. This phenomenon has translated into an average inflow of about 2,500 BTC every two weeks, equivalent to about 150 million dollars, tripling the daily Bitcoin production of 900 units and anticipating an increase up to 5.5 times post-halving, when production will drop to 450 units per day.

ETFs currently own more than 400,000 BTC, a quantity that exceeds the 240% annual supply of Bitcoin post-April halving, which is about 164,000 units. The current demand has also absorbed about 4.5% of the available Bitcoin supply, a figure based on Glassnode estimates, which include highly liquid and liquid assets, in addition to the supply of short-term Bitcoin holders and exchange balances, totaling about 4.7 million BTC.

The value of the ETF market in the USA, which stands at 7 trillion dollars, quadruples that of the European market. Before the approval of the ETFs, 77% of asset managers were reluctant to invest in Bitcoin. Now, with Registered Investment Advisors in the USA managing about 114 trillion dollars and bound by a 90-day moratorium for post-launch investments of new products, even a small 1% allocation in Bitcoin could generate significant inflows, potentially doubling the current market capitalization of Bitcoin and causing a supply shortage.

We are observing the early stages of this trend with banking institutions such as Wells Fargo and Merrill Lynch starting to offer access to Bitcoin spot ETFs to selected wealth management clients. Morgan Stanley is also considering introducing Bitcoin funds on its brokerage platform. Cetera is among the first wealth managers to implement a formal policy on Bitcoin ETFs, thus signaling the start of a new wave of demand for this asset.

From the Supply Side: Increasingly Less Liquidity

The supply of long-term and short-term Bitcoin holders — investors who have maintained their Bitcoins for more than 155 days — is showing firm confidence and determination. The quantity of Bitcoin held by long-term holders (LTHs) reached a historical peak in December, touching 14.9 million BTC, before decreasing to the current 14.29 million BTC, representing almost 70% of the total supply.

Similarly to what happened in the 2017/18 and 2020/21 cycles, LTHs have gradually ceded their shares during the current cycle, stimulated by the significant approval of ETFs. Despite the supply in their possession decreasing by 4%, going from 14.9 million to 14.29 million BTC, the supply of short-term holders has grown by 33%, increasing from about 2.3 million to 3.07 million. This dynamic bears witness to a balance between the two categories of investors, typical of the onset of a bull market post-halving, which this time occurred prematurely due to external demand generated by the ETFs, creating an almost perfect balance of market forces.

This scenario aligns with the drop in BTC balance on exchanges, which has reached a five-year low, settling at 2.3 million, consolidating the hypothesis of an imminent supply crisis.

If the current trend continues, the supply side of Bitcoin will become progressively less liquid, predisposing the conditions for a marked reduction in available supply and the potential initiation of a parabolic price escalation.

On-Chain Dynamics in View of the Halving

Market Value to Realized Value Ratio (MVRV – Z-Score)
The MVRV Z-Score is an analytical tool for assessing Bitcoin’s price by comparing its current market capitalization to the realized value. The realized value represents the aggregated sum of the value of all BTCs, calculated on the price of the last transaction, thus serving as an indicator of the average acquisition price of BTCs in circulation. The Z-Score normalizes the MVRV metric, quantifying how many standard deviations the current MVRV is from the historical average. A significantly higher MVRV than the realized value may suggest an overvaluation of BTC, a signal that historically has coincided with market peaks, and vice versa. Currently, the MVRV Z-Score of BTC is approximately 3, in sharp contrast to the 6 recorded in February 2021. Despite this, compared to previous halving cycles, Bitcoin shows minor behavioral changes, as evidenced by the increase in its realized price, with an average of 2.4 in the last 30 days against 1.07 in the same period of the three past cycles. This suggests that investors have recently purchased BTC at higher prices, reflecting the last transaction price of Bitcoin. Although the MVRV is higher than the historical average, it indicates the possibility that we are at the dawn of a new bull market for Bitcoin, potentially triggered more by the approval of the ETFs than by the classic market euphoria linked to the halving.

Net Unrealized Profit and Loss (NUPL)
Analyzing the Net Unrealized Profit and Loss, or NUPL, we find parallel results. This indicator measures the profitability of Bitcoin holders by comparing the market value of their holdings with the original purchase price, functioning as an important barometer of market sentiment. With a value of 0 indicating complete capitulation and 1 indicating maximum euphoria, the current NUPL stands at 0.6, not reaching the greed levels of 0.7 observed during the growth period up to 60,000 dollars between February and March 2021. Comparing the current NUPL with those of the months preceding the three past halvings, an upward trend is observed, with a current 0.6 against the average of 0.42 of the previous cycles. This strengthens the hypothesis that capital inflows via ETFs are anticipating post-halving market activities, suggesting a possible moderate correction of BTC in the coming weeks, in line with historical precedents. The on-chain analysis also shows that this cycle might diverge slightly from the previous ones, suggesting a possible early inclination of the cycle itself.

The Halving Coincides with a Favorable Market Structure

In 2024, the “halving year,” we witness a convergence of favorable factors for Bitcoin, which together shape an interesting dynamics of supply and demand:

Favorable Macroeconomic Environment: With the Federal Reserve having kept interest rates unchanged in the last two meetings, market expectations suggest a probability of about 39% of at least one rate cut by June 2024 and 51.9% by December 2024, according to data from the CME FedWatch Tool. This climate of uncertainty, compounded by contradictory economic data signaling persistent inflation, highlights the benefits of a stable and rigorous monetary policy. Confidence in such a policy is reinforced with each new halving.
Increase in Purchases via ETFs: The approval of a Bitcoin ETF in the USA has reinforced the market structure of the cryptocurrency, with over 10 billion dollars of net inflows since its launch and an accumulation of more than 400,000 BTC, which exceeds the 240% annual post-halving emission.
Illiquid Supply from Long-Term Holders: In addition to the halving effect, there is a significant amount of Bitcoin held by long-term investors, defined as those who have not moved their BTCs for at least 155 days. This quantity has stabilized around 14.29 million BTC, approximately 70% of the circulating supply, as of March 15, 2024.
Resistance of the “Whales”: Despite the market having touched highs from the previous cycle, large investors (whales) with more than 1,000 BTC have not sold, demonstrating considerable confidence in Bitcoin. This, even though the price reached 60,000 dollars, a level that in the past often triggered massive sales. The current rally is still seen with great growth potential, even though 99.6% of the circulating supply is currently profitable, a condition that usually leads to aggressive profit-taking and potential price drops.

In summary, considering all these factors, the outlook for the most important cryptocurrency appears decidedly optimistic. This cycle could present peculiarities compared to the previous ones. Although investors must remember that Bitcoin remains an high risk asset with high volatility, which could lead to deep price corrections, the overall conditions appear promising for the next cycle.

Legitimate and Necessary Succession

Written by Valentina Fabiano on 12/04/2024. Posted in Insights. No Comments on Legitimate and Necessary Succession

Inheritance by cause of death is a complex legal mechanism that activates upon a person’s demise, allowing one or more individuals, known as beneficiaries, to step into the patrimonial rights of the deceased. This process can occur through inheritance, involving the entirety of transmissible goods, rights, and obligations, or through a bequest, which is limited to the transmission of specified individual rights.

Inheritance is characterized by its universality, including all the active and passive rights belonging to the deceased at the time of death. Unlike bequests that transfer specific rights, inheritance must be accepted or rejected in its entirety; partial acceptance or renunciation is not permitted.

Succession can be classified as legitimate, when the beneficiaries are designated by law, or testamentary, when appointed through a will. According to Article 457 of the Italian Civil Code, inheritance is transmitted by law or by will, with legitimate succession prevailing in the absence, total or partial, of testamentary succession. Our legal system excludes the possibility of “succession pacts.” In the absence of a will, the law determines who the heirs are based on their relationship to the deceased, extending the right of succession up to the sixth degree of kinship. If a potential heir does not accept the inheritance, the right passes to the next in line of kinship, designated by the will or by law.

Article 457, paragraph 3, of the Civil Code also protects the rights of so-called forced heirs, i.e., those relatives who, by law, cannot be completely excluded from the inheritance, even in the presence of contrary testamentary provisions. These individuals, if they find themselves omitted or harmed in their legitimate shares by the will, can undertake legal actions for the reduction or restitution of goods, in order to restore the rights reserved for them by law.

The necessary succession is not considered a separate category, but rather a strengthened form of legitimate succession. It is based on a balance between the freedom to dispose of one’s assets by will and the protection of the interests of the deceased’s family, aiming to safeguard the economic foundations of those who had a direct link with the decedent.

Informal Donations between Parents and Children without Taxation

Written by Valentina Fabiano on 29/03/2024. Posted in Insights. No Comments on Informal Donations between Parents and Children without Taxation

Recently, the Italian Supreme Court clarified an issue concerning the taxation of donations between parents and children, particularly those made informally or through indirect payments, such as purchasing a house. The ruling no. 7442 on March 20, 2024, definitively established that such donations are not subject to donation tax unless they are formally registered.

The decision criticized Circular 30/2015 of the Italian Revenue Agency, describing it as ‘unshareable’, ‘imprecise’, and ‘incomplete’, because it imposed taxation on all gifts between living persons not accompanied by a registered written deed. However, the Court emphasized that only donations resulting from registered acts or those voluntarily declared by the taxpayer are taxable.

For indirect donations, such as those made through purchase deeds where the parent pays the price on behalf of the child, the Court reiterated that there is no obligation to register the deed as a donation unless specific conditions exist. In particular, the tax applies only if the donation is valued over one million euros and if it is revealed by the taxpayer during a fiscal inspection.

The decision establishes a clear distinction: not all indirect donations emerging from registerable deeds are automatically subject to taxation. The law allows taxpayers the option to voluntarily register such acts as donations, and the tax administration can impose taxes only if the value exceeds one million euros and the donation is declared in audit proceedings.

The Supreme Court’s ruling brings significant clarification for many taxpayers making transfers of assets informally or indirectly. This represents a tax relief, allowing parents to support their children without the fear of heavy tax burdens, unless specific criteria requiring the registration of the donation are met. This interpretation offers greater flexibility and fewer bureaucratic complications for substantial donations or in formal contexts.

Taxation of Artwork Sales: New Guidelines from the Supreme Court of Cassation

Written by Valentina Fabiano on 25/03/2024. Posted in Insights. No Comments on Taxation of Artwork Sales: New Guidelines from the Supreme Court of Cassation

In the context of tax regulations, the systematic sale of artworks may constitute a business activity and generate taxable income, as established by ordinance no. 1603 of January 16, 2024, from the Supreme Court of Cassation. This decision follows the jurisprudential trend that continuous activity is not necessary to determine the entrepreneurial nature of sales; factors such as the number of transactions, significant amounts, the variety of goods sold, and the number of buyers are relevant.

The case in question involved an art dealer who had received two tax assessment notices from the Revenue Agency. The Agency argued that the individual qualified as a commercial entrepreneur, thus making the proceeds from the sales subject to direct taxes and VAT. In contrast, the taxpayer defended himself by claiming to be merely a private collector without an independent organization, and that his sales represented simply the disposal of part of his personal estate.

The Supreme Court of Cassation rejected the taxpayer’s arguments, reaffirming a distinction already made in the judgment no. 6874/2023 between the civil and fiscal definitions of “commercial entrepreneur.” For tax purposes, the essential organization required by civil law is not necessary; “habitual professionalism” of the economic activity suffices.

Articles 55 of the TUIR (Consolidated Income Tax Act) and 4 of the VAT decree clarify that habitual professionalism, even if not exclusive, of the activities listed in article 2195 of the civil code, meets the requirement for entrepreneurial qualification for tax purposes, without the need for an independent organization of means.

Furthermore, the Supreme Court of Cassation outlined a tripartition between art dealer, occasional speculator, and pure collector. The dealer, who acts professionally and habitually even without an organized business structure, is subject to direct taxes, VAT, and in some cases, IRAP. The occasional speculator, who buys and sells artworks sporadically for profit, generates different incomes, not falling within the scope of habitual entrepreneurial activities. Lastly, the pure collector, who purchases artworks for personal interest without the intention of resale, is not subject to taxation on such transfers, lacking the habitual and speculative intent requirements.

The judgment emphasizes the importance of analyzing the specific context to determine the nature of the activity, highlighting that even the mode of reinvesting profits (in goods rather than cash) does not alter the substance of the capital gain. This jurisprudential clarification provides a more defined framework for distinguishing activities in the art market, awaiting further legislative directives for complete regulation of the matter.

Modes of Acceptance of Inheritance: Simple, with Benefit of Inventory, and Options for Renunciation

Written by Valentina Fabiano on 20/03/2024. Posted in Insights. No Comments on Modes of Acceptance of Inheritance: Simple, with Benefit of Inventory, and Options for Renunciation

Inheritance is not only a transmission of assets but also of debts, thus requiring careful consideration before acceptance. This decision rests solely with the designated individual, who, once the inheritance is accepted, permanently assumes the status of heir, as expressed by the principle “once an heir, always an heir”. Acceptance can be “simple” or “with the benefit of inventory”. The former implies a merger of the estates of the deceased and the heir, with the heir’s estate serving as a guarantee for the creditors of the deceased. The latter option keeps the estates separate, with the inherited estate serving as a guarantee.

The right to accept an inheritance expires after ten years, but this period is not final, allowing the designated individual to become an heir even after this period, unless prescription objections are raised. Acceptance with the benefit of inventory requires a formal declaration in front of a notary or the clerk of the court, accompanied by an inventory of assets. Conversely, simple acceptance can be declared explicitly or deduced tacitly from certain behaviors, such as the sale or donation of inherited assets.

Tacit acceptance can also be inferred from actions that indicate active management of assets, inexplicable otherwise except by the will to accept the inheritance, for example, the destruction of the deceased’s property. However, essential conservative actions are not considered tacit acceptances. An inheritance can be formally rejected through a notarial deed, and such renunciation is final and retroactive, freeing the renunciant from any inherited debts.

Legal entities and individuals not fully capable must accept the inheritance with the benefit of inventory and are bound to this mode for a year after reaching full capacity or the end of a legal incapacity, unless they fulfill the required procedures. Failure to draft the inventory within the prescribed terms results in the loss of the right to accept for private entities.

Moreover, once the inheritance is accepted, it is no longer possible for the designate to renounce; the acceptance is irrevocable. Renunciation, on the other hand, is considered as if the renunciant had never been designated, with effects dating back to the opening of the succession. The renunciant’s creditors can contest the renunciation if they suffer harm from such action and may be authorized by the judge to claim the inherited assets in the name of the renunciant.

In summary, the complexity of accepting and renouncing an inheritance reflects the importance of carefully considering the legal and financial implications of such decisions.