Nickel Research Centre

Nickel News Roundup - Week 12

22nd March, 2024

Market Overview:

Digital assets experienced volatility this week, with significant pullbacks from a combination of macro uncertainty, GBTC sell-offs, and Ethereum scrutiny, before staging a modest rally.
  • Bitcoin pulled back this week, cooling off from near-uninterrupted year-to-date growth, displaying volatility as it traded across a wide range
  • Bitcoin peaked early, reaching $70,450 on Friday, before falling to $61,160 on Wednesday
  • After this drop, Bitcoin staged a recovery, hitting a high of $68,090 on Thursday, although it was unable to maintain a sustained run above the $68,000 mark
  • Despite the current correction, Bitcoin appreciation since ETF launch is still significant, standing at 43% since mid-January
  • Ether suffered a similar loss of momentum to Bitcoin, retreating further due to pressure around reports of SEC investigations against the non-profit Ethereum Foundation
  • Ether went from a Friday peak of $3,790 to a weekly low of $3,070 on Wednesday
  • Despite the late pullback, several major altcoins still posted strong weekly performance; Binance’s BNB coin, Solana, Avalanche, Telegram’s TON coin, and NEAR protocol were all top-20 market cap projects which posted weekly growth above 20%
  • Overall digital asset market capitalisation dropped to $2.51tn, recovering from a weekly low of $2.31tn
  • According to industry monitoring site DeFi Llama, total value locked in DeFi pulled back to $94.7bn

Digital assets cooled off this week, amidst a combination of macroeconomic uncertainty, increased GBTC sell-offs in the ETF space, and concerns over apparent SEC hostility towards Ethereum. Adoption and enthusiasm nonetheless continued rolling in across the globe, including a new tokenised fund on Ethereum from BlackRock, digital asset consideration from the world’s largest pension fund in Japan, increased adoption as an inflation hedge in Argentina, and another legal condemnation for SEC conduct from a federal judge.

What happened: BlackRock launches tokenised fund on Ethereum

How is this significant?

  • BlackRock, the world’s largest asset manager, appear to be following through on CEO Larry Fink’s previous prediction that recently-launched Bitcoin ETFs are just a “stepping stone” en route to a “technological revolution” tokenising every financial asset
  • This week, news broke that BlackRock was working with digital asset firm Securitize in order to launch the tokenised BlackRock USD Institutional Digital Liquidity Fund (Ltd)
  • According to an SEC filing for the fund, the minimum outside investment for the fund stands at $100,000
  • One key aspect of this tokenised fund is that it will be hosted on Ethereum; a public blockchain, rather than the permissioned (i.e. private) blockchains used by many other TradFi institutions
  • Incidentally, if one looks closer at the fund’s name, the acronym is BUIDL; crypto industry slang for “build”, in the context of actively iterating and developing
  • Despite not being a household name in the same way as BlackRock, Securitize have been recognised and recruited in the tokenisation efforts of other finance heavy-hitters, including Hamilton Lane, and KKR
  • BUIDL will act a money market fund with a token value aimed at maintaining $1, and several blockchain sleuths claim to have located a blockchain address for BlackRock, holding $100m of USDC—the same stablecoin which BlackRock manages reserves for
  • The fund’s assets “will include cash, US Treasuries and repurchase agreements”, allowing “investors to earn yield while holding the token on the blockchain”—a key differentiator from existing stablecoins
  • Securitize will act as a transfer agency, whilst BNY Mellon serves as the custodian for underlying assets
  • Tokens will be available to eligible accredited investors, but can be transferred 24/7/365, which opens up new possibilities for treasuries market access
  • Some blockchain analysts also claim to have located the contract address for a BUIDL token matching BlackRock’s acronym, created 17 days ago; well in advance of the firm’s actual SEC filing
  • In a statement to industry publication Ledgerinsights, BlackRock’s Head of Digital Assets, Robert Mitchnick commented “We are focused on developing solutions in the digital assets space that help solve real problems for our clients, and we are excited to work with Securitize… Tokenization remains a key focus of BlackRock’s digital asset strategy”
  • However, as of press time, neither BlackRock nor Securitize responded to any requests for additional comment or confirmation regarding the reported blockchain address
  • Fink believes that tokenisation and the transparency of blockchain bring multiple benefits to TradFi, as “If you had a tokenised security … the moment you buy or sell an instrument, it’s known it’s on a general ledger that is all created together… This eliminates all corruption, having a tokenized system”

What happened: ETF news

How is this significant?

  • Bitcoin ETFs continued to demonstrate considerable volume, but increasing outflows from GBTC led to a slowing of their recent juggernaut-like momentum
  • In fact, GBTC hit record net outflows, with around $643m on Monday
  • As of Thursday, GBTC’s weekly outflows hit $1.4bn; a sign of more customers voting with their feet as the firm maintains substantially higher fees for its converted fund than all its “newborn” rivals which had to attract fresh liquidity and acquire BTC at current market rates
  • As Bloomberg ETF analyst Eric Balchunas puts it “$GBTC getting a 'second wind' of outflows… now double any other ETF in outflows YTD and have set record for cumulative outflows for any ETF in history”
  • However, the advantage of their pre-existing liquidity indicates why they felt justified in their 1.5% fee, as “All that and they STILL rank 3rd overall (out of 3,400 ETFs) in annual revenue generated”
  • On Thursday, GBTC outflows stood at $359m, meaning the fund has lost around 42% of its shares since converting to an ETF
  • The uptick in GBTC outflows is theorised to be related to ongoing bankruptcy proceedings and liquidations of firms caught in 2022’s crypto contagion, including lenders Genesis, which this week agreed a $21m settlement with the SEC
  • BitMex data revealed three days of overall net outflows due to massive GBTC outflows outpacing more modest inflows across the “newborn” ETFs
  • This doesn’t represent the first three day stretch of outflows (late January saw four consecutive days), but it is the largest in dollar terms
  • Balchunas tweeted that despite Grayscale’s outflows, it wasn’t all doom and gloom; “The inflows are healthy. They were just outlier insane last few weeks. Also price swings prob not helping attract normal investors. Don’t overthink it”
  • To illustrate this sentiment, none of the “newborn” ETFs experienced outflows on Tuesday despite five consecutive days of Bitcoin price decline and an overall 11% correction at that point
  • Overall, Bloomberg noted on Thursday that “The funds have garnered net inflows of $11.4 billion to date, still one of the most successful debuts for an ETF category”
  • In particular, BlackRock and Fidelity maintained a record of consecutive inflow days since ETF trading opened
  • Heavy outflows also occurred outside the US—as legacy international funds suffered from investors re-allocating to the more prominent and liquid American ETFs
  • As FRNT Financial chief executive Stephane Ouellette explained to Bloomberg “American investors, who had previously managed to buy Bitcoin-ETPs on other exchanges, are highly likely candidates to have repatriated their investment dollars to US ETFs”
  • CoinShares chief of research James Butterfill however posits that the success of US ETFs may have provided “exit liquidity” for international investors; some international outflows might be attributed to “reshoring”, but “All these markets have had ETPs for many years now, unlike the US, so there is probably an element of profit taking at these levels”
  • As of last week, according to CoinShares data, “Investors have pulled a total of $738m from Bitcoin vehicles on German, Canadian, and Swedish exchanges so far in 2024”
  • CoinShares also indicates these international outflows are slowing, with about 50% of said volume occurring in January, after US ETFs were initially approved
  • BlackRock managing director Tony Ashraf sounded a bullish overall note on ETF performance, telling industry publication TheBlock “What we're really seeing over the past couple of months is pent-up demand being satisfied because of the ETFs”
  • He cited three key drivers for ETF demand; the macroeconomic environment and changing demographics in terms of wealth, the maturation of the industry, and an improved regulatory environment

What happened: Crypto VC Haun Ventures adds new general partner

How is this significant?

  • Haun Ventures, a crypto-centric VC founded by Andreessen Horowitz (a16z) alum Katie Haun in 2021, signalled further hope for renewed VC optimism in the sector this week, appointing Anchorage Digital founder Diogo Monica as new general partner
  • This marks the firm’s first new general partner since its founding, and the only general partner aside from Haun herself
  • Monica will also take on a new role as executive chairman at federally-chartered crypto bank Anchorage, after stepping aside as president for the Haun Ventures position
  • Anchorage currently stores $50bn on its platform for a variety of clients, including Haun Ventures, and Monica told Bloomberg he’s gained significant VC experience in his time at the bank, making around 125 angel investments
  • Monica and Haun outlined separate personal areas of interest which may dictate future investment paths for the firm; Monica is enticed by “crypto solutions to protect data, as well as startups working on stablecoins”, whilst Haun is focused on “areas like digital identity, digitally scarce goods and decentralised social networks”
  • Haun told Bloomberg that the appointment “adds an entirely new flank of capabilities to what our fund can offer other founders... Founders building at the earliest stages should really be coming to us now”

What happened: SEC allegedly launches securities investigation against Ethereum Foundation

How is this significant?

  • According to reporting by Fortune on Wednesday, the SEC is investigating the Ethereum Foundation, a Swiss-based non-profit responsible for funding a great deal of development on the Ethereum blockchain
  • Fortune revealed that the SEC “is waging an energetic legal campaign to classify Ethereum as a security” and has subpoenaed several US crypto firms to “furnish any documents and financial records they may have regarding their dealings with the Ethereum Foundation”
  • According to sources, Ethereum’s shift to a proof-of-stake consensus model (which cut the blockchain’s carbon footprint by more than 99% overnight) “provided the SEC with a new pretext to attempt to define Ethereum as a security”
  • Allegedly, Gensler and his agency claim that, as validator nodes may earn rewards for helping to process transactions and secure the Ethereum blockchain, they could be viewed as investment contracts
  • The actions are seen as part of ongoing SEC hostility against the industry, with one of the firms interviewed (speaking to Fortune on condition of anonymity) classifying their conduct as “vindictive”
  • This has led to analysts dimming their hopes for an Ether ETF approval by the May 23rd decision deadline
  • Bloomberg’s ETF analysts currently forecast a 25% likelihood of approval in May as the SEC hasn’t engaged with issuers in the same manner as before Bitcoin ETF approval
  • However, none of the major issuers of Bitcoin ETFs withdrew their current Ether ETF applications; and indeed, some such as Fidelity and Grayscale amended their filings to request Ether staking capabilities within the ETF
  • VanEck Portfolio Manager Pranav Kanade commented that “From a market perspective the market size for a spot ETH ETF is potentially as big if not bigger than the spot Bitcoin ETFs…Even if you don't have an ETF that can offer staking as a part of it, it's still a cash producing asset, so I think ETH could make more sense as an asset to more people than Bitcoin does”
  • Andreessen Horowitz’s global head of policy Brian Quintenz pointed out an apparent contradiction in the SEC’s alleged desire to classify Ether as a security; “When the SEC allowed ETH Futures ETFs to trade on its regulated security exchanges, it explicitly acknowledged the status of the underlying, ETH, as being a non-security and outside of its jurisdiction”
  • He adds that “this ETF approval decision in October 2023 occurred well after Ethereum changed to PoS in Sept of 2022; meaning that to the SEC, ETH, in its present state as of Oct 2023, was not a security… Moreover, if ETH were a security, then the ETH Futures ETF would be an illegal instrument. The SEC cannot approve an illegal instrument to trade over a national securities exchange”
  • Additionally, in 2018, SEC director of corporation finance William Hinman stated that Ether didn’t resemble a security, which was a key piece of evidence in Ripple’s court victory over the agency
  • This reflects the lack of clarity within US regulation, and in particular conflicts over jurisdiction between the SEC and CFTC
  • CFTC chair Rostin Behnam recently told Congress that Ether is a commodity, and that SEC-approved SPBD platform Prometheum’s intent to custody Ether as a security “would put our exchanges who list Ether as a futures contract in non-compliance of SEC rules as opposed to CFTC rules… we need to preserve the integrity of our markets and understand that markets are functioning well under the decision and conclusion that Ether is a commodity”
  • Some analysts believe that Prometheum may be acting as a “Trojan Horse” for the SEC to force its own definitions on the wider industry
  • Meanwhile, JP Morgan analysts wrote this week that Ether could be a meaningful revenue driver for Coinbase; “ Ethereum use cases transcend the crypto ecosystem, and we think create a robust earnings driver near term for Coinbase. We also see the progression along the Ethereum road map, including the Dencun upgrade as driving crypto development, which is a longer-term positive”
  • Industry publication Coindesk had initially reported that the Ethereum Foundation was under investigation by a “state agency”, citing the fact that its Github page had been changed to remove an assurance that it had never been investigated by any state agencies

What happened: World’s largest pension fund researches on adding Bitcoin to holdings

How is this significant?

What happened: Prosecutors recommend 50 year sentence for Sam Bankman-Fried

How is this significant?

  • Federal prosecutors this week recommended a 40 to 50 year prison sentence for FTX founder Sam Bankman-Fried, over the numerous fraud charges he was convicted of last year
  • The maximum possible sentence for all his charges would have exceeded a century, but prosecutors argued a “life sentence” was unnecessary, and their recommendation “underscores the remarkably serious nature of the harm to thousands of victims; prevents the defendant from ever again committing fraud; and sends a powerful signal to others who might be tempted to engage in financial misconduct that the consequences will be severe”
  • Lawyers for 32-year old Bankman-Fried believe this is nonetheless still far too severe, arguing for a six-and-a-half-year sentence, with “SBF” claiming a 50 year sentence casts him as “a depraved super-villain”
  • However, Bankman-Fried’s successor as FTX CEO (a role essentially overseeing the bankruptcy process after the exchange’s failure became evident) said that claims of “zero harm” for customers were “categorically, callously, and demonstrably false”
  • John J Ray III wrote a rebuttal to his predecessor’s claims, saying “Mr. Bankman-Fried continues to live a life of delusion. The ‘business’ he left on November 11, 2022 was neither solvent nor safe. Vast sums of money were stolen by Mr. Bankman-Fried, and he was rightly convicted by a jury of his peers”
  • In other news of disgraced crypto founders, Montenegro’s appellate court upheld a decision to extradite Terra Luna blockchain developer Do Kwon to South Korea, rather than the United States

What happened: Fox Corp. invests in blockchain to beat deepfake technology

How is this significant?

  • Media conglomerate Fox Corp. recently partnered with Ethereum Layer-2 Polygon in order to explore a novel application of blockchain technology; as a protection mechanism against “deepfake” videos and content enabled by AI
  • Together, the two organisations launched Verify, “a protocol that aims to protect their IP while letting consumers verify the authenticity of content”
  • Fox CTO Melody Hildebrandt, speaking on a TechCrunch podcast, believes that blockchain provides immutable proof of provenance in a world increasingly shaped by realistic AI-generated content
  • She said “We had this immediate kind of ‘aha’ moment. I think that we could think about blockchain provenance as a bit of a grounding to think about the ‘input into model’ question and how to think about provenance and media in an AI-generated world”
  • Polygon Labs COO Mike Blank added “When you put that content on-chain, you can now validate that content was created by a certain individual or brand. It will be increasingly simpler for end users to understand where they’re receiving their content from and whether that’s actually valid or verified in some way”

What happened: Bitcoin beats dollar as inflation hedge amongst Argentinians

How is this significant?

  • As a country with a history of currency inflation (and hyperinflation), Argentina has experienced a lot of demand for US dollars as an inflation hedge—but increasingly, citizens appear to be eschewing the greenback in favour of digital assets, such as Bitcoin
  • Current 276% inflation is a key priority for newly-elected pro-Bitcoin president Javier Milei; but his “shock therapy” economic approach (which includes penalties for the central bank) cannot correct the issue overnight; so Argentinians must find other ways to protect their value
  • According to Bloomberg, “Bitcoin purchases in Argentina—one of the nations with the highest level of cryptocurrency adoption globally—approached their highest weekly value in 20 months at local cryptocurrency exchange Lemon”
  • Analysts added “Exchanging pesos for dollars has lost some of its appeal in the past two months as the commonly-used parallel exchange rate has strengthened 10% against the dollar, while Bitcoin has rallied almost 60% against the greenback over the same period”
  • In fact, the number of transactions buying Bitcoin are currently around double the weekly average in 2023 on the exchange, with some other local platforms reporting a ten-fold year-on-year increase in Bitcoin and Ether volumes

What happened: MicroStrategy adds more Bitcoin to holdings, reaches 1%

How is this significant?

  • MicroStrategy successfully executed it’s second major Bitcoin purchase within a week, bringing the firm’s total holdings to 214,246—slightly more than 1% of Bitcoin’s maximum total supply of 21 million
  • According to a new SEC filing, MicroStrategy purchased 9,245 Bitcoin for $623 million, a process which was financed by the sale of convertible senior notes
  • The filing also noted that MicroStrategy’s average purchase price now stands at $35,160; meaning a handsome profit even after the current market correction
  • MicroStrategy founder and chairman Michael Saylor is one of the most visible and vocal Bitcoin bulls in the corporate world, recently claiming “ Bitcoin is certainly at least digital gold, it’s going to eat gold. It’s got all of the great attributes of gold and it’s got none of the defects [such as slow transportation and unknown supply] of gold”

What happened: Judge sanctions SEC for “gross abuse of power” in crypto case
How is this significant?

  • Most observers of the industry over the last few years may have developed the impression that the SEC has treated the digital asset industry vindictively—and they now have another federal judge backing up such assumptions
  • A Utah judge determined that the SEC and its attorneys acted in bad faith during recent legal proceedings against industry firm Debt Box and displayed a “gross abuse of power”; another legalese condemnation following last year’s determination the agency was “arbitrary and capricious” against Grayscale
  • In a highly unusual sanctioning of a government agency, Democrat-appointed judge Robert Shelby ordered the SEC to pay Debt Box’s legal fees and other costs, denied its request to dismiss the case without prejudice, and stated the agency’s behaviour “constitutes a gross abuse of the power entrusted to it by Congress and substantially undermined the integrity of these proceedings and the judicial process”
  • He cited repeated cases of inferences passed off as evidence in securing an asset freeze, and its actions “proved to be some combination of false, mischaracterized, and misleading”
  • Fortune magazine’s Leo Schwartz called this judgement “about as strongly worded a denunciation as can be written in legalese”
  • Coinbase chief legal officer Paul Grewal tweeted “guess who pays the sanctions? You, me and every US taxpayer. The SEC just foisted a bill onto every one of us for their litigation misconduct”
News Roundups