15th January, 2021
Market Overview:
Cryptocurrencies traded in an enormous range over the week, with a squeeze into record highs followed by a sharp reversal. A steady recovery soon followed, as the volatility calmed amid news of continued business development and investor adoption.
- Bitcoin began the week by climbing to new all-time highs, reaching $41,950 over the weekend before profit-taking spurred a 28% correction on Monday. Bitcoin did however hold the $30,000 level as support, and at the time of writing has recovered to $38,300
- Although the drop was significant, it remained well in line with some of Bitcoin’s historical volatility; 2017 alone saw six daily drops of a higher percentage en route to several new all-time highs
- Ethereum corrected in line with Bitcoin, dropping from a yearly high of $1,348 to a low of $925. This dip was short-lived, as Ether recovered strongly to trade at a current price of $1,231
- After achieving a record market cap of $1.16tn, the cryptocurrency market slumped as traders took profits, dipping to $832bn before rising up to a current valuation of $1.05tn
- The DeFi sector saw overall growth despite volatility in trading, up from the previous week’s record $26.9bn to a new all-time high of $27.8bn in Total Value Locked
The promising early performance of 2021 was sharply interrupted by profit-taking, after Bitcoin and Ethereum had both more than doubled in value within the last month. Following the sell-off, prices recovered and stabilised at higher levels.
What happened: Office of the Comptroller of Currency chief declares “antiquated” financial rules need updating for Decentralised Finance
How is this significant?
- The Office of the Comptroller of the Currency (OCC) is headed (in an acting capacity) by Brian Brooks, formerly Chief Legal Officer of Coinbase, giving the office a powerful advocate for cryptocurrency heading into a new administration
- In an opinion piece for the Financial Times, Brooks wrote that regulators need to come up with rules from the perspective of technology itself, rather than the people operating the technology
- The rise of DeFi (decentralised finance) has created many new financial opportunities, but Brooks fears that growth could be restricted (or exploited) if rules from an age before software are forced upon the sector; arguing the current regulatory framework represents a “patchwork of inconsistent rules that impede the orderly development of a national market”
What happened: Biden set to appoint MIT blockchain professor Gary Gensler as head of SEC
How is this significant?
- Several reports claim that Gary Gensler, head of Joseph Biden’s financial policy transition team, will be named head of the Securities and Exchange Commission when Biden is sworn in as president
- As a blockchain professor at the Massachusetts Institute of Technology, Gensler would be by far the most crypto-knowledgeable person to have held that level of authority within the financial legislature of the United States
- In a Coindesk editorial, Gensler noted that cryptocurrency and blockchain provide many benefits that address current shortcomings in the financial market, claiming “the potential for this technology to be a catalyst for change is real”
What happened: Trading volumes continue to break records for largest global exchanges
How is this significant?
- As two of the largest cryptocurrency exchanges in the world, volumes on Coinbase and Binance help indicate the momentum of the market as a whole. On Monday, they both saw new all-time highs in trading volume as the market corrected
- According to data from crypto analysis firm The Block, Coinbase volumes reached $9.56bn, more than a 50% increase from its previous peak
- Concurrently, Binance experienced $30.66bn in trading volume—38% higher than its previous record volume
- According to data by cryptocurrency analytics company Skew, December 2020 saw a new record in volume for Bitcoin derivatives, eclipsing figures set the previous month
- Total Bitcoin futures trading volume exceeded $1tn, a monthly increase of nearly 22%
- Options volume in the same period grew by just under 19%, for a total trading volume of $17.89bn
What happened: PayPal process nearly a quarter of a billion dollars in daily crypto trading
How is this significant?
- PayPal’s initial move into cryptocurrencies was one of the major digital asset stories of 2020, introducing a massive consumer base to crypto trading, as well as integrating crypto payments for their 26 million existing merchants
- Within three months of Paypal integrating cryptocurrency, Paypal’s exchange itBit achieved $242m in crypto trading volume on Monday, nearly double its previous daily record of $129m, set the previous week
What happened: Large Bitcoin holders “buy the dip”
How is this significant?
- Whilst Bitcoin saw a significant correction this week, the number of so-called “whales”—accounts holding 1,000 Bitcoin or more—actually increased, indicating a continued faith in the long-term value proposition of the leading cryptocurrency
- The number of “whale” accounts has increased by 200 since the beginning of the year, and rose to a new record of 2,140 on Monday
- Institutional support was also largely unfazed by the correction (at least publicly), indicating that institutional investment is primarily responsible for this rise in so-called “whale wallets”
What happened: US-based Bakkt exchange aims to follow Coinbase in going public
How is this significant?
- Bakkt appears poised to become the second major American cryptocurrency exchange (after Coinbase) to go public
- On Monday, Bakkt announced their plans to merge with VPC Impact Acquisition Holdings to form Bakkt Holdings, leading to an initial valuation of $2.1bn
- Gavin Michael will lead Bakkt as their new CEO, following on from a previous role as head of technology for Citi’s Global Consumer Bank
What happened: Regional governments globally invest in and incentivise digital asset businesses, alongside continued CBDC development
How is this significant?
- Whilst rolling out support for cryptocurrencies on a national level may face regulatory and infrastructural hurdles, governments at a more local level are able to do so at a swifter pace
- Shanghai’s municipal government issued a research grant worth more than $5m to blockchain startup Conflux, to support development of their public blockchain (including aeronautics supply chain solutions)
- Kentucky lawmakers have proposed a bill exempting cryptocurrency mining companies from paying 6% sales tax and excise tax on mining hardware and electricity, citing “an opportunity to become a national leader” in cryptocurrency mining thanks to low electricity costs
- In Shenzhen, the Agricultural Bank of China (one of the “Big Four” state-owned banks) began a localised trial on Sunday, aimed at using ATMs to enable the conversion of bank savings or cash into Digital Yuan for use on smartphones, as part of China’s wider CBDC trials
What happened: Booking.com becomes latest major business to integrate cryptocurrency
How is this significant?
- Booking.com is one of the world’s largest travel sites, with over 28 million accommodation listings and over 3 billion guest arrivals since 2007; representing a prominent share of the online travel market
- On Monday, they announced a partnership with crypto.com, providing users of the crypto.com app and Visa card with perks such as extra discounts and cashback
- With COVID-19 vaccines beginning to roll out globally, and 65% of travellers announcing enthusiasm about travelling again this year, opening up Booking.com to cryptocurrency holders could help signal a further move beyond speculation and into fundamental utility for cryptocurrencies
What happened: UBS charges HNWI customers for holding their money, as US banks forecast 40% profit cut
How is this significant?
- As the traditional banking industry struggles to adjust to new economic realities, their practices and returns may look increasingly less compelling compared to decentralised finance solutions and digital assets
- UBS is effectively shifting negative interest to customers from July according to an internal memo. Customers with more than 250,000 Swiss Francs in cash balances will be charged 0.75% by the bank
- Banking head Axel Lehmann sees this as part of a new economic reality for the business, writing in the memo that “It’s becoming increasingly clear that we’ll have to contend with negative interest rates for years to come. That’s why we decided to lower the threshold for deposit fees”
- Meanwhile in the US, major banks are expected to begin reporting fourth-quarter earnings on Friday, with profits at major banks like Wells Fargo and Citigroup expected to drop as much as 42%—in stark contrast to the performance of digital assets in the last quarter of 2020
What happened: Biden prepares $3tn stimulus package in USA
How is this significant?
- Despite the widespread disruptions at the Capitol last week, Joseph Biden has finally been officially confirmed as the next president of the United States, with the run-off election victories in Georgia likely allowing him to push more policies through
- Biden’s “Build Back Better” plan will include stimulus cheques of $1,400 for every American (well in excess of the $600 in the last round of stimulus), and a subsequent $3tn tax and infrastructure package
- For those citizens with no pressing financial concerns, the stimulus payment represents welcome disposable income that can be used for investments; including crypto assets
- When the US government printed unprecedented amounts of money last year to boost the Federal Reserve balance sheet, cryptocurrency (in particular Bitcoin, with its verifiably finite supply) began rallying towards a bull market as currency supply inflated. An even greater stimulus package could have a similar effect
What happened: Cryptocurrency miners sell less of their supply as mining difficulty increases, whilst major businesses pivot into crypto mining and profit-sharing
How is this significant?
- Bitcoin mining difficulty is roughly emblematic of how many miners are competing to generate new Bitcoins; the more are competing, the more prized Bitcoin is
- Bitcoin’s mining difficulty (also known as network difficulty) reached a new record during the fortnightly difficulty adjustment on Saturday, alongside current all-time highs in hashrate
- However, despite the combined network difficulty and hashrate meaning miners have to invest record resources into mining Bitcoin, the rate at which they’re selling their new coins has been declining since May 2020, demonstrating belief in future appreciation
- Decreased flow from miners to exchanges has led to a shrinking of the available supply on exchanges
- Companies from outside the digital asset space are also seeking to enter cryptocurrency mining; US-listed Chinese lottery firm 500.com has confirmed a share issue worth over $14m to purchase mining hardware from Bitmain and MicroBT
- Poolin, the second-largest Bitcoin mining pool, have issued a hashrate-backed token to raise funds for new hardware; providing token holders with a share of the value mined via the total hashrate backing of tokens held, enabling indirect participation in proof-of-work mining