Nickel Research Centre

Nickel News Roundup - Week 27

7th July, 2022

Market Overview:

Digital assets spent the majority of the week trading in a narrow range, but with a gradual upward trajectory.

  • The first half of the year was tough on Bitcoin—but other major investment classes have also suffered in 2022, including the worst stock market performance in more than half a century
  • The Federal Reserve warned that more big interest rate hikes were a probable course of action, as minutes from the central bank’s June meeting signalled a “more restrictive policy stance” to prevent high inflation from becoming “entrenched”
  • Recent price action also saw users withdrawing Bitcoin from exchanges (generally seen as an intent to trade) to their own personal wallets (generally seen as signalling more long-term holding intent)
  • According to analytics firm Glassnode, Bitcoin held on exchanges is down 20% from its January highs
  • Bitcoin faced downward pressure as the end of June’s monthly candle approached, closing the month with a weekly low of around $18,800
  • Price recovery began soon after confirmation of June closing below $19,000—surging back to a weekly high of $20,630 by 2:30am on July 1st
  • Despite these sharp swings at the monthly close and open, Bitcoin traded within a tighter range for most of the week, staying mainly between $19,200 and $19,700 before a more prolonged run above $20,000 started late on Tuesday
  • Bitcoin’s current price of $20,350 equates to 4.8% weekly growth
  • Ether hit a weekly low of $1,010, with a weekly high of $1,194 on Wednesday
  • Ether’s current $1,168 price represents a 10.4% weekly growth
  • Overall market capitalisation recovered to $916bn
  • Total value locked in DeFi grew slightly to around $40.9bn, according to industry monitor DeFi Pulse

Digital assets experienced a week of gradual recovery from last week’s late slump, as more clarity emerged around firms affected by some of the industry’s recent contagion events. Outside of the markets, there were major developments in European legislation, consolidation moves from industry leaders, enhanced transparency efforts from stablecoin issuers, another major bank moving into digital asset custody, new information on Bitcoin miner behaviour, and an optimistic forecast from JP Morgan analysts.

What happened: Contagion-affected firms file for bankruptcy and move to restructure

How is this significant?
  • Several key players behind recent contagion events that plunged the crypto market downwards filed for bankruptcy this week, potentially shorting the shadow that they cast on the industry
  • Following a liquidation order for their British Virgin Islands presence last week, embattled hedge fund 3 Arrows Capital (3AC) filed for Chapter 15 bankruptcy in New York on Friday, represented by law firm Latham & Watkins (Chapter 15 bankruptcy aims to stop US-based assets from being seized by creditors)
  • This move came a day after the Monetary Authority of Singapore (MAS) increased their scrutiny of 3AC, issuing a statement reprimanding them for exceeding their maximum permitted allowance of assets managed, and misrepresenting information
  • The MAS also referenced “recent developments which call into question the solvency of the fund managed” as a trigger for their actions
  • Fallout from 3AC also led Singaporean lawmakers to publicly consider safeguards such as limitations on retail investor access to crypto, or bans on leverage trading
  • Media reports this week also indicated that 3AC co-founder Zhu Su is currently attempting to sell a $35m Singapore property he acquired late last year 
  • Meanwhile, beleaguered digital asset broker Voyager Digital halted withdrawals from its platform on Friday, before filing for Chapter 11 bankruptcy on Wednesday, citing its exposure to 3AC after the hedge fund defaulted on a $675m loan from Voyager
  • The filing listed Sam Bankman Fried’s research firm Alameda as its largest creditor, following the recent credit line they secured from the FTX CEO
  • Chapter 11 bankruptcy allows for the reorganisation of corporations, and Voyager CEO Stephen Ehrlich tweeted “We strongly believe in the future of the industry but the prolonged volatility in the crypto markets, and the default of Three Arrows Capital, require us to take this decisive action… This well-established legal process whereby companies reorganise their financial obligations to emerge as stronger organisations, provides an efficient & equitable mechanism to maximise recovery. Our goal is to come out a stronger organisation
  • He also disclosed that under the reorganisation plan, customer assets stuck on the platform could be restructured after withdrawals were disabled; “Customers with crypto in their account(s) will receive in exchange a combination of the crypto in their account(s), proceeds from the 3AC recovery, common shares in the newly reorganised Company, and Voyager tokens…We are actively pursuing all available remedies for recovery from 3AC, including through the court-supervised processes in the British Virgin Islands and New York”
  • Another firm affected by the collapse of 3AC (and the previous death spiral of the Terra Luna blockchain which catalysed 3AC’s insolvency) is Hong Kong-based lender Babel Finance, who enlisted the services of restructuring specialists Houlihan Lokey this week, according to industry publication Coindesk
  • Genesis Trading reportedly faces “hundreds of millions” in losses following exposure to both 3AC and Babel Finance, according to unnamed sources
  • Lenders Celsius—the first major firm to suspend withdrawals and kickstart the recent market sell-off—have been aggressively paying off debts to DeFi protocols, according to recent onchain data
  • This includes repayment of $183m in collateralised debt on DeFi platform Maker, which released $40m worth of WBTC (a token pegged to the value of Bitcoin, used as a synthetic Bitcoin substitute on Ethereum-based DeFi) back to Celsius
  • Celsius owes an additional $41m in loans to the Maker platform, collateralised by 22,000 WBTC which it could potentially use to repay outside debts
  • Fundstrat executive Walter Teng told Coindesk “By repaying the debt, Celsius is possibly freeing up collateral (BTC) that then can be sold on centralized exchanges or over-the-counter to meet creditor demands and customer withdrawals… Given that DeFi loans are overcollateralized, it makes sense for them to do this, as the value unlocked from paying back their loans (collateral less loans) is greater than the value of the loans themselves (should they opt to not repay)”

What happened: JP Morgan analysts predict end to crypto deleveraging cycle

How is this significant?
  • According to a new research note from JP Morgan, current industry liquidity crises may be nearing their nadir
  • Analysts including Nikolaos Panigirtzoglou wrote “The current deleveraging cycle may not be very protracted”, citing “the fact that crypto entities with the stronger balance sheets are currently stepping in to help contain contagion”
  • The note also pointed towards venture capital inflows continuing at “a healthy rate” throughout the last two months despite the crypto winter market conditions
  • JP Morgan’s net leverage indicators “suggest that deleveraging is already well advanced”, and the note says that 3AC’s insolvency “is a manifestation of this deleveraging process”

What happened: EU agrees on digital asset legislation

How is this significant?
  • The European Parliament and Council reached a preliminary agreement on identity reporting requirements for crypto providers, in an attempt to bring them in line with existing Anti-Money Laundering frameworks
  • Digital asset exchanges will be obliged to collect customer details and provide them to authorities if requested, as well as expecting the same of any privately-owned wallets transacting more than 1,000 Euros to exchanges
  • The draft proposal has proved unpopular amongst some within the digital asset industry, due to user privacy and safety concerns
  • On Thursday, EU officials reached an agreement on the Markets in Crypto Assets (MiCA) law, which also requires stablecoin issuers to maintain reserves necessary for mass redemptions, gives the European Securities and Markets Authority (ESMA) the ability to ban crypto platforms, and obligates the disclosure of energy consumption and environmental impact by crypto firms
  • Previous drafts included proposals to ban digital asset mining altogether within the EU, but were struck down by legislators
  • Some other issues not covered in MiCA include NFTs, or obligations on customer reporting for tokens not issued by an individual authority, such as Bitcoin
  • The bill’s chief proponent, Stefan Berger, commented “Today, we put order in the Wild West of crypto assets and set clear rules for a harmonised market that will provide legal certainty for crypto asset issuers, guarantee equal rights for service providers and ensure high standards for consumers and investors”
  • The new legislation could come into effect from 2024 at the earliest, and despite some industry disagreement over the aforementioned privacy issues, several analysts believe it will galvanise development of the industry within Europe; Patrick Hansen of venture fund Presight Capital commented “Harmonisation of the market is key in order to really generate bigger crypto companies in Europe… Europe is lacking huge crypto companies right now, and fragmentation is one of the reasons why”
  • Paola Ardoino, CTO of stablecoin firm Tether said “MiCA is one of the more progressive initiatives to date and is focused on driving crypto innovation and adoption in the European region”

What happened: UK Financial Conduct Authority creates “director of digital assets” role

How is this significant?
  • The Financial Conduct Authority (FCA) announced several new hires this week, including one for a newly created role dedicated to e-payments and digital asset
  • The Director of Payments and Digital Assets will be responsible for policy development related to digital assets at the UK’s financial watchdog
  • The first director in the role will be Matthew Long, a former leader of the UK financial intelligence unit

What happened: FTX and Nexo move towards acquisition of distressed digital asset firms

How is this significant?
  • Those with abundant liquidity continue to monitor the market for opportunities surrounding those with liquidity issues, as evidenced by several developments this week featuring industry players FTX and Nexo
  • The US subsidiary of Sam Bankman-Fried’s FTX exchange signed a deal to provide digital asset lender BlockFi with a $400m revolving credit facility, alongside an option to buy BlockFi for up to $240m, according to performance metrics
  • Speaking about the company’s financial status, BlockFi CEO Zac Prince said the lender would absorb $80m of bad debt from exposure to 3AC “with no impact to client funds”
  • He added “we found a great partner in FTX US, who shares our commitment to clients. This represents the best path forward for all BlockFi stakeholders and the crypto ecosystem as a whole”
  • Bankman-Fried said closer collaboration made sense, as “There are a lot of ways that our products can work together and can mesh together in a way that’s better than either would be independently”
  • In an interview with Bloomberg, Bankman-Fried indicated that the crypto mining industry would be the next focus of their attention as FTX moves to expand its capabilities in all realms of the digital asset ecosystem
  • “When we think about the mining industry, they do play a little bit of a role in the possible contagion spread, to the extent that there are miners that were collateralizing borrows with their mining rigs…There might come along a really compelling opportunity for us”
  • Back in April, the CEO of mining giant Marathon Digital expressed possible interest in a buyout, predicting a greater presence of energy firms in the industry
  • After outlining their expectation for “a great consolidation” akin to the 1907 Banking Crisis last week, crypto lender Nexo made their first move in that direction on Tuesday
  • In an interview, Nexo co-founder Antoni Trenchev revealed that they’ve begun a 60 day due diligence process on the acquisition of Singapore-based lender Vauld
  • Nexo had previously offered to buy up Celsius, but that offer lapsed on Thursday as Celsius instead explored options including restructuring and “strategic transactions”

What happened: Stablecoin companies seek to safeguard reputations

How is this significant?
  • After the collapse of the algorithmic UST stablecoin caused the wider crypto contagion concerns, issuers of reserve-backed stablecoins have moved to rehabilitate the token class’ image
  • Jeremy Allaire, CEO of USDC stablecoin issuer Circle, outlined the company’s position in a lengthy Twitter thread, acknowledging current industry paranoia, but proclaiming that “Circle is in the strongest position it has ever been in financially, and we will continue to increase our transparency”
  • Allaire shared reports on transparency, audits, and a liquidity overview
  • He also tweeted that “for the avoidance of doubt, Circle has suffered NO loss from any customer, creditor, partner or counter-party as a result of recent industry issues”
  • Additionally, he updated the state of Circle’s own venture fund, and their overcollateralised Circle Yield product, which is only available to accredited investors
  • According to the blog post about Circle Yield, “During these unprecedented times in the digital asset markets Circle Yield has performed as designed. All borrower margin calls have been met on time and Circle Yield remains overcollateralized. Neither Circle nor our customers have incurred any loss. As borrowing demand has fallen along with the turmoil in digital asset markets, our rates for new loans have followed”
  • Rival stablecoin issuers Tether meanwhile moved to de-risk their backing assets, reducing their commercial paper holdings by 58% to $8.5bn, with a further reduction to $3.5bn expected by the end of July

What happened: Societe Generale strikes deal for digital asset custody

How is this significant?
  • French banking giant Societe Generale became the latest institution—following the recent example of Citigroup—to partner with Swiss firm Metaco in order to provide digital asset custody services
  • Metaco’s partnership with Soc Gen’s SGFORGE subsidiary will focus primarily on security tokens
  • Societe Generale recognised “a larger context marked by the acceleration of market digitalization using blockchain technology”, with a particular focus of the partnership being “the forthcoming implementation of the EU Pilot Regime… which will permit the processing of security tokens through market infrastructures in compatibility with applicable EU regulations”
  • Metaco CEO Adrien Treccani told Coindesk that banks are increasingly focused on digital asset integration; “The series of banks that were already working on certain topics suddenly transformed from innovation pilots to concrete go-to market strategies… You will start seeing a series of announcements involving very big custodians. It’s almost FOMO [a fear of missing out] as these large banking players know that their future somehow depends on this capability”

What happened: Macro investor Raoul Pal founds new Web3 firm

How is this significant?
  • Renowned investor and digital asset evangelist Raoul Pal published a Linkedin post this week revealing that he has co-founded “a digital asset venture studio”
  • The newly-created ScienceMagicStudios aims to “tokenize the world’s largest cultural communities–music, fashion, movies/book/TV franchises and sports–utilising NFTs, social tokens and metaverse”
  • Pal’s stated goal is to help convert brand and community into tangible value through tokenisation; “helping big brands move into Web 3 in the right way - creatively but cautiously and meticulously”
  • Investors in this venture include Alan Howard’s Brevan Howard Digital, Coinbase Ventures, Liberty City Ventures, and the Digital Currency Group

What happened: Bitcoin miners engage in major selling action during June

How is this significant?
  • Recent market pressures have led several major Bitcoin miners into selling action; favouring immediate liquidity and reserves over the opportunity cost of driving prices down further in the immediate term
  • Bitcoin miners Cleanspark increased their mining output by 9% in June, selling 328 out of the 339 Bitcoins mined during the month at an average price of almost $26,000
  • The company still holds around 560 Bitcoins as of writing, but CEO Zach Bradford stated in a May earnings call that “We won't blindly accumulate Bitcoin at the cost of diluting our shareholders and taking on unnecessary debt”, signalling a willingness to liquidate holdings
  • Mining company Bitfarm sold off around 3,000 Bitcoins to pay off $62m of a $100m loan, including newly-mined Bitcoins
  • Bitfarm also secured a $37m loan from NYDIG, collateralised by their own mining hardware, with an eye towards possible acquisition or expansion opportunities during the market downturn
  • CFO Jeff Lucas told industry publication TheBlock “While we remain bullish on long-term BTC price appreciation, this strategic change enables us to focus on our top priorities of maintaining our world-class mining operations and continuing to grow our business in anticipation of improved mining economics”
  • The most significant selling pressure came from mining titans Core Scientific, whose June operational update revealed “During the month of June, the Company sold 7,202 Bitcoins at an average price of approximately $23,000 per bitcoin for total proceeds of approximately $167 million. As of June 30, 2022, the Company held 1,959 Bitcoins and approximately $132 million in cash on its balance sheet”
  • Sales were mainly used for data centre growth and debt repayments, with stated plans to continue selling “self-mined bitcoins to pay operating expenses, fund growth, retire debt and maintain liquidity”
  • According to recent SEC filings, Mining firm Terawulf took out a $50m loan for data centre infrastructure, as CEO Paul Prager said they sought to “take advantage of certain value-creating opportunities that might otherwise not be available during more healthy markets”

What happened: Nike-owned NFT company grants commercial rights to token owners

How is this significant?
  • In a blog post on Monday, NFT firm RTFKT—who were acquired by Nike in December 2021—granted owners of NFTs from their CloneX collection full commercial rights to exploit and monetise their assets
  • These rights grant owners the permission to create derivatives of their NFTs, merchandise based on them, and independent use of them in animations, music, brands, and businesses
  • To further aid this monetisation of NFT assets, RTFKT created a blockchain-enabled platform for the download of fully-3D-rendered files
  • Since NFT rights are limited to the NFTs a user themselves owns, the 3D platform is accessible via a user’s blockchain address; scanning the contents held on that address and granting access to only the 3D files corresponding to the NFTs stored there
  • The move represents a new business model popularised in the NFT space by projects such as BAYC, but is the first time such liberal ownership rights have been granted by a project owned by a much more established corporation such as Nike

News Roundups