May 4th, 2023
Market Overview:
Digital assets traded steadily this week, as Bitcoin completed its best run of monthly performances since March 2021.
Digital assets had a mild recovery this week, even as Jerome Powell appeared resigned to a mild recession. Ongoing US banking problems in the form of the second-largest bank failure ever continued to promote several core value propositions of digital assets, Fidelity published insight into institutional investors, US exchanges expanded off-shore, and the lesser-mentioned Himalayan kingdom of Bhutan outlined plans to become a major presence in sustainable Bitcoin mining.
What happened: Fidelity publishes new report on institutional digital asset investors
How is this significant?
What happened: US exchanges move to establish off-shore international exchanges
How is this significant?
What happened: Hong Kong continues support for digital asset industry
How is this significant?
What happened: Bhutan outlines $500m plan for national Bitcoin mining
How is this significant?
What happened: First Republic collapse illustrates ongoing banking woes
How is this significant?
What happened: MicroStrategy benefits from betting on Bitcoin
How is this significant?
- Bitcoin hit a weekly high of $29,890 on Sunday, following a low of $27,790 on Monday
- Bitcoin’s correlation with global equities dropped significantly, as some industry analysts speculated the upcoming Bitcoin “halving” may begin to have an effect
- The Federal Reserve hiked interest rates another 0.25%, bringing them to their highest level in 16 years
- Overall macroeconomic confidence appears shaky, as Jerome Powell acknowledged the potential of “a mild recession”
- Bitcoin’s current price of $29,090 indicates 0.7% weekly growth
- Ether traded between $1,812 and $1,936
- Ether’s current price of $1,904 equals a 1.1% increase
- Ether supply dynamics remained deflationary, as increased network usage also increased burn rate, and thus led to a current annual net issuance of -1.17%
- Overall market capitalisation remained nearly unchanged at $1.2tn
- According to industry monitoring site DeFi Llama, total value locked in DeFi this week across all blockchains and platforms held steady around $49bn
Digital assets had a mild recovery this week, even as Jerome Powell appeared resigned to a mild recession. Ongoing US banking problems in the form of the second-largest bank failure ever continued to promote several core value propositions of digital assets, Fidelity published insight into institutional investors, US exchanges expanded off-shore, and the lesser-mentioned Himalayan kingdom of Bhutan outlined plans to become a major presence in sustainable Bitcoin mining.
What happened: Fidelity publishes new report on institutional digital asset investors
How is this significant?
- Fidelity Digital Assets have published annual reports and insights into the digital asset market since 2018; this week, they published their latest edition, a follow-up to their 2022 Institutional Investor Digital Assets Study
- The report was based on questionnaires to 1,052 total respondents; 410 U.S. investors, 359 European investors, and 283 Asian investors
- Fidelity’s sample composition included sample composition contained 324 financial advisors, 303 high-net-worth investors, 128 family offices, 99 traditional hedge funds, 97 pensions and defined benefit plans, 63 crypto hedge and venture capital funds, and 38 endowments and foundations—ensuring a broad institutional overview
- Research was undertaken during a period of significant downward movement in digital assets; yet headline findings still generally expressed optimism and enthusiasm for the asset class
- 81% of respondents revealed they believed digital assets should be part of a portfolio.
- 74% of respondents planned to buy or invest in digital assets in the future (up from 71% in 2021)
- As expected, Bitcoin and Ether led the way in terms of investor exposure, with 26% and 15% ownership amongst respondents respectively; more than twice as much as the next-nearest crypto asset
- Price volatility was the greatest impediment to investment, cited by 50% of respondents
- 58% of institutional respondents said they were invested in digital assets, but only 40% dabbled in DeFi
- Tokenised real-world assets provide an appealing prospect for blockchain, as 60% of investors expressed interest
- Fidelity believes that “Institutions Are Here, But the Biggest Players Have Yet to Arrive”, writing “while the institutions surveyed report investments in the asset class, their overall allocations may be very small in relative comparison to the rest of the aggregate investor pool. Study findings additionally reveal that pensions, endowments, and foundations have both the lowest adoption and the highest AUM among respondents, indicating that adoption is concentrated to the lower AUM institutional investors and the larger institutions haven’t yet made allocations”
- They also noted global appeal and long-term optimism for the asset class, despite recent market challenges; “institutional investors surveyed in all three regions expressed ambitions to make increasing portfolio allocations to digital assets over the next five years”
What happened: US exchanges move to establish off-shore international exchanges
How is this significant?
- As regulatory pressures and hostility continue in the United States, several major US-based exchanges decided to hedge their exposure to the American market this week, and move off-shore for products and services which they expect the SEC to agitate against
- Both Coinbase and Gemini have commented at length about issues and frustrations engaging with the SEC, including unresponsiveness and glacially-paced progress in a rapidly-evolving asset class
- Just last week, Coinbase took the drastic step of suing the SEC themselves in a bid to secure a public record around regulatory clarity for the industry
- Following up from that, they posted a video response to the SEC’s recent Well’s Notice on Friday, as well as a written response
- In the latter, they noted that whilst they didn’t wish for legal action, the SEC would find them to be “a well-resourced adversary that will necessarily be motivated to exhaust all avenues” if the commission did decide to litigate
- As a result of these ongoing tensions, US-based exchanges seem to have decided that any expansion to their ventures is best conducted outside of the SEC’s regulatory purview; Coinbase and Gemini both launched international derivatives exchanges within one day of each other
- Gemini’s platform—called Gemini Foundation—was announced on Monday, offering users “a capital-efficient, highly available, and trusted venue to trade derivatives. Purpose-built for both individuals and institutions”, but barring customers from the US, UK, and EU
- Gemini Foundation offers users 100x leverage on Bitcoin perpetuals, whilst Coinbase International Exchange (licenced in Bermuda) provides Bitcoin and Ether perpetual futures at a much more modest 5x leverage “only for non-US institutional clients”
- Over 80% of Coinbase’s revenues came from the US last year, so this move to establish products outside their borders is indicative of current concerns over US regulatory strategies
What happened: Hong Kong continues support for digital asset industry
How is this significant?
- Hong Kong continued its recent strategy to become a regional and global hub for digital assets, further enhancing a supportive local environment for the industry
- On Thursday, the Hong Kong Monetary Authority issued a circular urging banks to help (regulated) digital asset firms with “their legitimate need for bank accounts”—a far cry from the widespread de-banking of the United States
- Indeed, the contrast to the American approach is being keenly observed; crypto custody expert Shixing Mao noted “The tightening of regulation in the U.S. after the FTX implosion has a few consequences. In the past, several American banks played the key role of linking the traditional and crypto worlds, but that link is now broken, which presents a great opportunity for Hong Kong to step up”
- Hong Kong billionaire Richard Li (son of Li Ka-shing, Hong Kong’s richest man) is backing CMCC Global, a Hong Kong-based blockchain-focused VC raising a $100m fund for investments in the Web3 space
- CMCC co-founder Charlie Morris told Bloomberg TV “The US is shooting themselves in the foot… We see places like Hong Kong having a real opportunity at this point in time to bring those firms and entrepreneurs to the city”
- On Friday, the Hong Kong Monetary Authority and Securities and Futures Commission co-hosted a round-table discussion with 20 banks and 20 digital asset businesses to encourage more provision of services to the industry
- The Securities and Futures Commission also provided a timeline for more specific digital asset guidance, announcing “guidelines on the licensing regime for virtual-asset exchanges in May”
What happened: Bhutan outlines $500m plan for national Bitcoin mining
How is this significant?
- The Himalayan nation of Bhutan—renowned for its “Gross National Happiness” approach to economic output and development—rarely features in most digital asset reporting… but this week it emerged as the site of one of the most ambitious Bitcoin mining plans ever
- Bloomberg reported that Druk Holding (the nation’s investment arm), in association with mining hardware producer Bitdeer, is raising a fund worth up to $500m to finance green crypto mining in the mountain kingdom
- Ujjwal Deep Dahal, CEO of the investment arm stated that mining was the best way for the nation to gain exposure to the asset class, and that Bitcoin would be their focus; “It’s important for us to look at assets that are low volume, high value, or digital assets for that matter, and try to position ourselves in a way that we can be competitive globally over time to build our economy”
- Regulatory filings indicate plans for a 100 megawatt mining facility to be completed by September, powered by the nation’s abundant hydroelectric capacity
- Although the US emerged as the leader in digital asset mining following China’s ban in 2021, alternative destinations for mining may soon prove more appealing, as the Biden administration plans to levy a 30% federal tax on the electricity usage of Bitcoin mining in America
What happened: First Republic collapse illustrates ongoing banking woes
How is this significant?
- First Republic Bank became the latest—and largest—US banking domino to fall this week, being acquired at a steep discount by JP Morgan
- As the second-largest US bank to ever fail (after Washington Mutual in 2008) despite two recent bailouts, First Republic’s recent troubles were exacerbated as their Q1 report revealed $100bn in customer outflows, leading to a 50% share drop (on top of numerous previous drops) the next day
- For a $10.6bn bid, JP Morgan acquired $92 billion in deposits and $203 billion in loans and other securities, with the Associated Press reporting First Republic shareholders were likely “wiped out”
- Despite its size, First Republic became another bank to fall afoul of rising interest rates causing declines in investment value of supposedly-safe government bonds, as “Gross unrealized losses in held-to-maturity investment portfolio, mainly government-backed debt, ballooned to $4.8 billion at the end of December from just $53 million a year earlier”
- Although Gary Gensler attempted to lay blame for previous banking failures at the feet of crypto, that would prove difficult to do for the largest bank to fail since 2008; First Republic had a large percentage of uninsured depositors, but minimal (if any) crypto exposure
- JP Morgan’s winning bid caused concerns amongst some political circles; Elizabeth Warren declared “A poorly supervised bank was snapped up by an even bigger bank—ultimately taxpayers will be on the hook. Congress needs to make major reforms to fix a broken banking system”
- Additionally, there was some controversy once again over politicians’ conduct, as news emerged that Florida Democrat Lois Frankel sold First Republic shares and bought JP Morgan shares before the collapse and acquisition
- She said the trades were undertaken by an independent money manager, but the revelation did add further fuel to the fire of insider trading concerns, bolstering a bipartisan bill aimed at banning US lawmakers from owning or trading stocks
- As was observed in March, Bitcoin (and other digital assets) broadly rallied as news of banking failure spread; the transparency, decentralisation, and predictable supply dynamics of public blockchains provide direct countermeasures to several of the issues that catalysed the current cavalcade of banking collapses
- LMAX strategist Joel Kruger told Bloomberg “Ongoing stress associated with vulnerabilities in the banking sector have helped to put a positive spotlight on the value proposition of owning decentralised currencies that can be self-custodied”
- Despite Jerome Powell’s claims that the US banking sector is “sound and resilient” with “broadly improved” conditions since March, it appears that First Republic’s issues are far from isolated; PacWest Bancorp ($41bn in assets) shares dropped over 50% in after-hours trading on Wednesday, following reports the bank is planning a sale
What happened: MicroStrategy benefits from betting on Bitcoin
How is this significant?
- MicroStrategy posted a net income of $461 million in the first quarter, driven by Bitcoin’s strong year-to-date performance
- As the largest corporate holder of Bitcoin (registering current holdings of 140,000 Bitcoins), MicroStrategy’s fortunes are often viewed as a proxy of the leading digital asset
- On a Monday earnings call, chairman Michael Saylor remained bullish on Bitcoin, stating “Ultimately it’s not easy to see what better strategy there might be. We found by simply acquiring and holding Bitcoin we can outperform our peers in the enterprise software business. The regulatory environment for Bitcoin is improving. As capital flows out of the crypto industry, it flows into Bitcoin”
- MicroStrategy’s year-to-date performance is indeed difficult to outperform; share prices are up almost 120% since Bitcoin began rallying