Nickel Research Centre

Nickel News Roundup - Week 3

19th January, 2023

Market Overview:

Digital assets rallied strongly this week, as Bitcoin experienced its longest daily winning streak in nearly a decade. 

  • Bitcoin showcased bullish momentum throughout the week (except for a brief pullback on Wednesday catalysed by concerns over a Department of Justice enforcement announcement), climbing from lows of $18,040 on Thursday to a high of $21,560 on Wednesday
  • Bitcoin’s thus broke through the $19,000, $20,000, and $21,000 marks for the first time since before the FTX collapse, with its weekly high representing the asset’s highest price since mid-September 2022
  • Bitcoin experienced its 14th consecutive day of growth on Tuesday; the longest such run since 2013.
  • Bitcoin’s current price of $20,800 represents 14.5% weekly growth—but at certain points on Wednesday, weekly growth exceeded 22%
  • Ether followed suit, breaking through $1,500 and $1,600 for the first time since November, posting a weekly high of $1,602 (versus a low of $1,383)
  • Ether’s current price of $1,529 equals a 9.2% increase
  • Total Ether issuance dropped sharply, bringing current supply back below pre-merge levels thanks to high burn rates from increased transactional activity. Current annual issuance stands at -0.3%
  • Overall market capitalisation peaked at $1tn on Wednesday, before pulling back slightly to $970bn
  • According to industry monitoring site Defi llama, total value locked in DeFi this week across all blockchains and platforms grew over $2bn to $44.4bn

Digital asset markets built on last week’s growth with some major positive momentum, creating strong year-to-date performance not just in crypto assets, but in companies defined by exposure to the industry. Binance made a move towards off-exchange settlement mechanisms, a Hong Kong VC raised $500m for Web3 investment, Bitcoin mining experienced a major difficulty increase, troubles mounted for institutional lender Genesis, a major Australian bank created their own fully-backed stablecoin, and the US Department of Justice announced a significant international enforcement action.

What happened: Binance introduces off-exchange collateral mechanisms

How is this significant?
  • One of the key consequences of the recent FTX saga was an increasing concern around asset safety when using centralised exchanges
  • In particular, there has been rising institutional demand for off-exchange settlement services, such as Copper’s Clearloop or Zodia’s Interchange systems
  • Now Binance, the largest digital asset exchange in the world, have made their first move into off-exchange services, aimed at institutional clients
  • Firms engaged in leveraged trading will be able to post their collateral to Binance Custody (a separate legal entity registered in Lithuania), where it will be held in offline cold storage until the trades are settled
  • Although not yet a blanket position of off-exchange settlement for all trades, it does nonetheless represent recognition from the industry’s leading player regarding demand for greater security, introducing some standards and practices from traditional finance in place of a one-stop approach that could introduce centralised points of failure
  • Binance knows more about about customer concerns regarding asset storage than most; in December they experienced record levels of withdrawals worth billions of dollars as user spooked by FTX’s failure resolved to self-custody their digital assets
  • Catherine Chen, head of VIP and Institutional at Binance commented “Our clients are a lot more conscious of managing risks. We… need to look for ways to help them diversify the on-exchange risks”
  • FTX’s collapse may also have yielded benefits to Binance’s institutional arm; a spokesperson said that “new clients increased by 17.4% in the fourth quarter from the prior quarter”

What happened: Hashkey secures $500m for digital asset investment

How is this significant?
  • Hong Kong-based Hashkey closed a $500m raise for a new fund designed to “buy the dip” and take advantage of depressed valuations
  • Crypto winter conditions did impact funding somewhat; their initial goal was a $600m raise, but the half-billion dollars nonetheless represents one of the largest crypto investment pools in Asia
  • Hashkey CEO Deng Chao said they favoured launching the fund over holding out for their initial target; “Timing matters more than size… We think the market is already at the bottom of a cycle, and that’s why we moved faster”
  • A company statement said that blockchain infrastructure and applications with mass adoption potential would be key targets for investment, and that the funding was secured from “investors including sovereign wealth funds, family offices and high-net-worth individuals”
  • The firm has a distinguished pedigree in digital assets; opening their doors in 2018, with a Shangai-based parent company (Wangxiang Group Corp.) who were one of the earliest backers of the Ethereum protocol
  • In other VC news, capital markets advisory firm Dealbox announced the launch of their own venture arm this week, featuring a $125m warchest for Web3 investments
  • Dealbox CEO Thomas Carter told TechCrunch “We believe in the transformative power of web3, and we plan to invest in both web3 startups and companies that use web3 technology, including blockchain, to impact and reshape people’s everyday lives”

What happened: Contagion latest—Genesis on verge of bankruptcy

How is this significant?
  • Reports broke late on Wednesday that Genesis Global Capital—the contagion-afflicted lending arm of conglomerate Digital Currency Group (DCG)—could file for Chapter 11 bankruptcy as soon as this week
  • Such a filing would represent the latest chapter (no pun intended) of a gruelling few months for the institutional lender, who was caught out by exposure to FTX, before being publicly criticised by Cameron Winklevoss after Genesis’ liquidity issues led to Gemini exchange suspending a yield-bearing program
  • To compound matters even further, the SEC charged both Genesis and Gemini with an unlicensed securities offering last Thursday, citing the aforementioned Gemini Earn product
  • Gemini co-founder Tyler Winklevoss called the SEC action “a manufactured parking ticket”, saying they’d been in talks with the SEC about Gemini Earn for 17 months, with no enforcement action undertaken until well after Genesis suspended withdrawals
  • The wider Digital Currency Group displayed signs of belt-tightening ahead of the rumoured Genesis bankruptcy filing; CEO Barry Silbert wrote an investor letter on Tuesday announcing the end of quarterly dividend payments as the company seeks to strengthen their “balance sheet by reducing operating expenses and preserving liquidity”
  • Another group company, industry media platform Coindesk, revealed the retention of Lazard’s to explore options including a full or partial sale, according to WSJ reporting
  • Coindesk CEO Kevin Worth was quoted saying “Over the last few months, we have received numerous inbound indications of interest in CoinDesk”, and the Journal further indicated that DCG “has received multiple unsolicited offers north of $200 million in the past few months”
  • Beyond DCG, several firms in the industry made further cutbacks in order to save costs; are reducing their global workforce by 20%, and Ethereum software developers Consensys announced an approximate 11% downsizing
  • Of course, retrenchments aren’t currently limited to the digital asset sector, but a wider symptom of challenging macroeconomic conditions; the likes of Microsoft and Amazon announced five-figure job cuts this week
  • Creditors of Singapore-based lender Hodlnaut rejected a restructuring plan and voted in favour of liquidation
  • Also in Singapore, bankrupt lender Vauld was afforded an extra month of creditor protection, after an affidavit that takeover discussions with two separate digital asset fund managers are at an advanced stage
  • Anthony Scaramucci, whose SkyBridge Capital received a 30% investment from FTX Ventures, revealed a personal investment in a new crypto software company from Brett Harrison, former head of the (comparatively unscathed) FTX.US American unit
  • Harrison published a slew of tweets this week revealing his experience working at FTX, in which he identified Sam Bankman-Fried as an “insecure, prideful manager”, citing “months of disputes over management practices at FTX”
  • He also claimed that SBF purposely insulated knowledge of his alleged shady dealings from Harrison’s (US-regulatory compliant) FTX.US unit; “It’s clear from what has been made public that the scheme was held closely by Sam and his inner circle at and Alameda, which I was not a part of, nor were other executives at FTX US”
  • Media startup Semafor is one of several firms funded by FTX Ventures to face uncertainty regarding ownership; Semafor announced plans to buy out Bankman-Fried’s share, but not all have the available funding to follow suit

What happened: Samsung Asset Management considers crypto products

How is this significant?
  • Samsung is reportedly one of many companies looking to take advantage of Hong Kong’s recent shift towards a more digital asset-friendly economic strategy
  • Samsung Asset Management launched the Samsung Bitcoin Futures Active ETF on the Hong Kong market last week, and told Bloomberg they were interested in launching spot Bitcoin products depending on “how policy is going to be developed”
  • Rebecca Sin of Bloomberg Intelligence commented “Hong Kong is well positioned to become Asia’s crypto gateway”, and speculated that regulators could permit spot Bitcoin and Ether products “by the end of 2023”
  • Rather than lowering accessibility to the digital asset industry following FTX’s collapse, as regional financial rival Singapore did, Hong Kong is “clearly” keen on developing a crypto hub, touting a “regulatory environment offering transparency, compliance and investor protection”

What happened: Publicly-listed digital asset companies show strong start to 2023

How is this significant?
  • After experiencing extremely challenging conditions in 2022, several major publicly-traded digital asset companies made significant recoveries this week amidst a backdrop of strong performance amongst crypto assets
  • Shares amongst Coinbase, and mining companies Marathon and Riot were all up more than 50% year-to-date (albeit all after suffering heavy losses last year)
  • Marathon Digital displayed particularly impressive performance after a disastrous 2022 for crypto miners, up around 140% year-to-date
  • Silvergate Bank jumped 29% on Tuesday; although they recently reported a $1bn loss in Q4, they demonstrated that their business remains fundamentally “intact, and has battled through a historic shock to its system with plenty of capital and liquidity at hand”
  • Digital asset funds have also benefited in the ETF market; Bloomberg reported that the top 14 performers in (unleveraged) equity ETFs—out of more than 2000 tracked—were all focused on crypto exposure
  • Funds related to digital asset miners have led the way; Mohit Bajaj, director of ETFs at WallachBeth Capital commented “Bitcoin has had a nice run, and those that are miners of it will get a boost from crypto’s performance”

What happened: Bitcoin mining difficulty increases more than 10%

How is this significant?
  • Industry publication TheBlock reported that Bitcoin’s mining difficulty climbed more than 10% this week—its biggest increase since October
  • Mining hashrate also climbed, indicating that increases in the levels are a result of increased miner activity on the network (and increased competition to confirm transactions and mine new Bitcoin into existence)
  • Bitcoin’s price appreciation year-to-date may have helped bring more miners back into the fray, alongside slightly decreased concerns over energy amidst a milder-than-expected European winter
  • Increased mining difficulty and hashrate is not just a result of Bitcoin market performance though; it can also be considered a catalyst thereof, as more miners competing equates to greater decentralisation of control across the network, and therefore greater security as it becomes exponentially more difficult to control the protocol from a single point

What happened: National Australia Bank issues stablecoin

How is this significant?
  • The National Australia Bank (NAB) created their own stablecoin (AUDN) this week “to allow its business customers to settle transactions on blockchain technology in real-time using Australian dollars” according to reports in the Australian Financial Review (AFR)
  • AUDN will be launched on both the Ethereum and Algorand blockchains (both smart contract platforms), backed one-to-one with Australian dollars held by NAB
  • NAB chief innovation officer Howard Silby said “We certainly believe there are elements of blockchain technology that will form part of the future of finance… we see [blockchain] has the potential to deliver instantaneous, transparent, inclusive, financial outcomes”, including in areas such as repo agreements and green loans
  • The AFR promoted increased efficiencies and reduced settlement risk through stablecoin adoption, citing carbon credits and tokenised real-world assets as key use cases
  • NAB is actually the second Australian bank to launch their own stablecoin, following ANZ’s A$DC coin last year, created for institutional carbon credit trading

What happened: Department of Justice announced enforcement against Bitzlato exchange

How is this significant?
  • Late on Wednesday, the US Department of Justice (DoJ) announced they would hold a press conference regarding a major international cryptocurrency enforcement action—an announcement that briefly sent panic through traders still nervous after 2022
  • Market nerves were calmed after it was revealed that the enforcement and arrests concerned Bitzlato, a nearly unheard-of exchange in the Western world, founded by a Russian national and based in China 
  • DoJ officials hailed the arrest of Bitzlato founder Anatoly Legkodymov in Miami, claiming that “the defendant helped operate a cryptocurrency exchange that failed to implement anti-money laundering safeguards and enabled criminals to profit from their wrongdoing, including ransomware and drug trafficking”
  • A press release also announced that concurrent with the arrest “French authorities, working with Europol and partners in Spain, Portugal, and Cyprus, dismantled Bitzlato’s digital infrastructure and took enforcement actions”
  • Bitzlato is alleged to have funnelled $700m in illicit funds over 4 years thanks to lax or non-existent KYC procedures

What happened: International regulation news

How is this significant?
  • Japan continues to advocate for responsible adoption of crypto assets, arguing to international regulators this week that they should regulate the industry in the same manner as they regulate banks
  • Mamoru Yanase, deputy director-general of the Financial Services Agency’s Strategy Development and Management Bureau said “What’s brought about the latest scandal isn’t crypto technology itself. It is loose governance, lax internal controls and the absence of regulation and supervision”
  • Japan have argued through the financial stability board that digital asset exchanges should be subject to the same checks and requirements as banks and brokerages; “If you like to implement effective regulation, you have to do the same as you regulate and supervise traditional institutions”
  • This follows recent calls from Germany’s BaFin for global rules regarding the asset class
  • In Europe, a final vote on proposed MiCA (Markets in Crypto Assets) regulations was delayed until April, owing to the complexity of translating a 400 page document into all 24 official languages of EU member states 
  • This means a longer wait before European financial regulators can draft implementation rules, which would then mean another 12 to 18 months drafting technical standards
  • One area which isn’t heavily covered within those 400 pages is a discussion of DAOs (Decentralised Autonomous Organisations). Speaking at the WEF in Davos, Finnish communications minister Timo Harakka called for EU legislation outlining legal recognition of DAOs
  • He argued that they present too much potential to be ignored and administered in an ad hoc fashion across the bloc; “thinking on a multinational level” would help avoid “harmful regulatory competition” on an intra-EU basis
News Roundups