Nickel Research Centre

Nickel News Roundup - Week 8

23rd February, 2024

Market Overview:

Digital assets experienced steady performance following last week’s extreme bullishness, with slight pullbacks in Bitcoin offset by growth in Ether.
  • Bitcoin reached a new post-2021 high of $52,790 on Tuesday, before pulling back amidst widespread profit-taking in a week marked by volatile movement
  • The leading digital asset oscillated widely, with a Saturday low of $50,690 and most trading between $50,980 and $52,150
  • Ether outperformed Bitcoin again this week, moving above $3,000 for the first time since April 2022
  • Ether exhibited steady growth throughout the week, rising from a Saturday low of $2,729, to a high of $3,028 on Thursday
  • According to industry monitoring site DeFi Llama, total value locked in DeFi grew by to $76.3bn, helped by Ether’s strong weekly performance

Digital assets performed somewhat modestly compared with last week’s explosive growth, but Ether shone as investors seemingly turned their attention towards the market’s second-largest asset. Positive performance continued across ETFs, registering a record week of spot Bitcoin inflows and further interest in Ether-based products. Elsewhere, South Korea exhibited signs of increased Bitcoin trading, nine-figure investments and raises returned to the VC space, another major American firm disclosed balance sheet crypto holdings, Japan continued a positive approach to the industry, and much more.

What happened: ETF news

How is this significant?

  • Spot Bitcoin ETFs once again exhibited remarkable performance this week, demonstrating continued institutional interest in the asset class
  • According to CoinShares data published on Monday, digital asset investment products experienced record weekly inflows of $2.45bn—99% of which came from the United States, home of the spot Bitcoin ETFs driving volume
  • This was around twice as much as any other weekly inflows this year, and pushed year-to-date inflows above $5.2bn
  • CoinShares analyst James Butterfill notes that this put the value of digital assets under management above any level seen since the 2021 bull market; “These inflows, coupled with recent positive price moves, have elevated the total assets under management (AUM) to US$67 billion, marking the highest level since December 2021”
  • Amongst the latest weekly performance was also a standout day for issuers VanEck, whose ETF (ticker: HODL) experienced a huge uptick in trading volumes, growing 2,200% on Tuesday
  • The VanEck ETF traded almost $400m of volume; but this didn’t equate to straight inflows. Bloomberg ETF analyst Eric Balchunas theorised it could be retail mania ahead of a fee cut, but analyst Dave Nadig indicated that it was likely driven by institutions based on algorithmic trading
  • Bitwise became the latest issuer to cross the $1bn AUM threshold, joining BlackRock, Fidelity, and ARK in the billions-club
  • BlackRock continues to lead in assets (excluding Grayscale’s converted GBTC fund), now sitting at around $6.35bn in Bitcoin holdings, followed by Fidelity at $4.52bn
  • Bloomberg ETF analyst James Seyffart also pointed out that Thursday was the first day of net outflows amongst Bitcoin ETFs since January 25th
  • Reuters reported that “A surge of interest in bitcoin exchange-traded funds is prompting some investors to swap out holdings in gold-backed ETFs”, noting the BlackRock and Fidelity inflows, contrasted against over $1bn of outflows from gold ETFs between Bitcoin ETF launch and February 14th
  • Not all industry observers appear to be as enthused about Bitcoin ETFs as the overall market however; in a show of apparent sour grapes (given BTC:EUR price action), the European Central Bank published a report on Thursday claiming that Bitcoin has failed to act as a currency, and despite ETFs, its “fair value” should be zero
  • Meanwhile, interest in (and anticipation of) possible spot Ether ETFs continues to build: Ether options open interest soared to a multi-month high (with positions skewing bullish), as traders apparently anticipate appreciation ahead of possible ETF approval by the SEC’s May 23rd deadline
  • On the opposite side of optimism, ETF issuer Valkyrie’s CIO expressed doubts of spot Ether ETFs within the next two years
  • Steven McClurg told industry publication TheBlock that Valkyrie believe “There was a lot of work put into getting spot Bitcoin launched on behalf of regulators and the SEC, as well as the issuers... So I think it will take the SEC a lot of time to get their head around what disclosures look like for a product like that… it could take another year just to understand the disclosure aspect”
  • He also expressed concerns over issuers like Franklin Templeton and ARK offering Ether staking services and passing on the validator rewards to investors; “It would be very difficult to offer ETH staking without deeming that to be a security feature”
  • Analysts Andrew O’Neill and Alexandre Birry wrote that Ether ETFs “could become large enough to change validator concentrations… there’s a potential to move the needle in terms of concentration risk”
  • A new report by Bernstein Research estimated the odds of a spot Ether approval at around 50% by May, but a high confidence by year’s end
  • Analysts Gautam Chhugani and Mahika Sapra argue Ether is the only other digital asset likely to garner SEC approval, positioning it as “the next institutional darling”
  • Supporting their theory, they praised its proof-of-stake consensus and DeFi smart contract capabilities as particularly compelling; “Ethereum with its staking yield dynamics, environmentally friendly design, and institutional utility to build new financial markets, is well positioned for mainstream institutional adoption”

What happened: South Korea sees increase in Bitcoin trading activity

How is this significant?

  • South Korea, once the leading digital asset trading market, is growing its share of digital asset trading activity once more, as local traders look towards crypto opportunities
  • In 2023, South Korea’s market share within digital asset trading grew from around 5% in January to 13% in November, the same month that the Korean Won overtook the US Dollar as the most popular fiat trading pair (albeit excluding the use of stablecoins, which are still dominated by USD denomination)
  • Local exchange Bithumb, which offered zero-fee Bitcoin trading, saw its local market share grow from 12% to 40% over the duration of the promotion, which ended recently
  • KODA, Korea’s largest institutional crypto custody service, reported massive momentum from H2 2023 onwards, as its assets under custody grew 248% over the second half of the year
  • The firm—a joint venture of Korean bank KB Bank, crypto VC firm Hashed and blockchain tech firm Haechi Labs—reported $6bn in assets under custody, as CEO Cho Jin-seok commented “In view of the flow of global capital markets such as the US and Hong Kong, the institutionalisation of digital assets is already irreversible… KODA will play a key infrastructure role if a Bitcoin spot ETF is approved in Korea”
  • Speaking of a Korean Bitcoin ETF, local news outlet News1 reported that the country’s ruling party will likely include spot ETF assurances within its campaign promises ahead of an April general election, as well as “gradually lifting the country’s ban on institutional investment in crypto and initial exchange offerings”, as well as creating an industry-specific regulator in the form of a “Digital Asset Promotion Committee”, as well as delaying taxes on crypto profits for two years
  • Elsewhere in Asia, institutional exchange FalconX established a presence in Hong Kong, “as the region’s institutional demand for crypto assets rises”

What happened: Andreessen Horowitz invests $100m in crypto startup

How is this significant?

  • VC giants Andreessen Horowitz (a16z) made a major investment in the digital asset sector once again; backing staking project Eigenlayer to the tune of $100m
  • Eigenlayer said a16z were the sole participants in the nine-figure round, building on a $50m raise last March financed by Blockchain Capital
  • Sreeram Kannan, founder of the startup, said that with restaking “The idea is that when you stake on Ethereum, you are promising that you’re going to run the Ethereum network nodes correctly. With restaking, you are taking the same Ether and making additional promises that you will also validate other networks correctly”
  • Meanwhile, another VC raised a total of $150m for a new crypto investment fund
  • New York-based Hack VC has already deployed around $50m of that sum in early-stage startups, according to co-founder Alex Pack
  • In a Bloomberg interview, he expressed the idea that the industry is still in its nascent stages, and that supporting companies building good user experience will propel it onwards; “There is still a whole industry of nerdy people building things underneath and that didn’t stop after FTX… [the industry is] the mid-90s equivalent of where the internet was. Which is to say: a lot of users and a lot of things happening, but the experience of using crypto is really poor from an infrastructure perspective”

What happened: Regulatory news

How is this significant?

  • Fairshake, a political lobbying group set up to support the digital asset industry, followed up a recent $1m donation from Coinbase CEO Brian Armstrong with $4.9m in donations from Gemini exchange co-founders, the Winklevoss brothers
  • According to Bloomberg “The super PAC entered February with $73 million cash on hand after spending a little more than $225,000 last month”
  • The group’s war chest is particularly crucial in an election year, especially within a hostile regulatory environment that includes a perceived “politically compromised” regulator in the SEC (as crypto exchange Kraken claimed in a move to dismiss a lawsuit), and politicians such as Elizabeth Warren
  • Trade group Chamber of Digital Commerce sent a letter to Senate Banking Committee chair Sherrod Brown, arguing that a proposed “unworkable” bill fronted by Warren could “kill” crypto in the US; “This bill, if passed, will erase hundreds of billions of dollars in value for US startups and decimate the savings of countless Americans invested in this asset class legally”
  • Concerns over the SEC’s anti-crypto positions apparently moved a senior SEC counsel to jump ship industry-side this week, as crypto litigation unit leader Ladan Stewart joined mega-law firm White & Case to develop an industry defence practice, stating “Crypto is here to stay—that’s become very clear with the launch of a slew of Bitcoin” ETFs. Given the complexity and the turbulent enforcement arena, legal questions surrounding crypto are going to be at the forefront for some time”
  • Despite having raised the ire of legislators, bankrupt exchange FTX could yet be in line for a windfall to repay users; a federal judge approved sale of its 8% stake in AI firm Anthropic, which would net the company over $1bn in cash
  • In another show of compliance caution, stablecoin issuer Circle withdrew its USDC stablecoin from the Tron blockchain, citing risk management motivations “to ensure that USDC remains trusted, transparent and safe”
  • UK legislators meanwhile claim to be pushing for specific stablecoin and staking regulations before the year is through
  • Speaking at a Coinbase-hosted event, treasury secretary Bim Afolami stated “We’re very clear that we want to get these things done as soon as possible. And I think over the next six months, those things are doable”

What happened: Content aggregator Reddit confirms Bitcoin and Ether investments

How is this significant?

  • In a recent move towards an IPO, internet content hub Reddit submitted an SEC filing with financial disclosures; including the revelation that it “invested some of our excess cash reserves in Bitcoin and Ether and also acquired Ether and Matic as a form of payment for sales of certain virtual goods, which we may continue to do in the future”
  • Reddit also stated “We hold cryptocurrencies and experiment with blockchain technology…we believe cryptocurrencies and blockchain technology have significant potential”
  • Investing excess cash reserves in Bitcoin and Ether makes Reddit one of the few firms (alongside MicroStrategy and Tesla) to directly hold the assets on its balance sheet
  • Although the firm didn’t disclose the scale of its crypto asset holdings, the filing did show rude financial health as a whole; boasting $804m in 2023 sales, alongside $1.6bn in assets, including ($1.3bn cash)

What happened: Japan moves to allow investment funds direct crypto exposure

How is this significant?

  • Japan continued its positive stance towards digital assets under prime minister Fumio Kishida’s government, with a new statement by the Ministry of Economy, Trade, and Industry indicating a loosening of existing restrictions
  • According to the bill “measures will be taken to add cryptoassets to the list of assets that can be acquired and held by investment limited partnerships”
  • This effectively means Japan’s investment sector will have access to more direct exposure; particularly crucial in VC situations where investors are often allocated a share of token supply in place of direct company equity
  • This appears to be the latest part of PM Kishida’s policy-level Web3 push, following earlier industry incentivisations such as relaxed token listing requirements and less restrictive taxation

What happened: JP Morgan analysts posit retail driving recent rally
How is this significant?

  • A new research note by JP Morgan analysts, led by Nikolaos Panigirtzoglou, believe that February’s rally in the digital asset market is evidence of returning retail interest
  • According to the note, “retail impulse” has been reawakened by several catalysts across the sector, including “the Bitcoin halving event, the next major upgrade of the Ethereum network and the prospect of approval of spot Ether ETFs by the SEC in May”
  • However, JP Morgan currently only forecasts a 50% chance of Ether ETF approval, whilst the previous two catalysts are believed to be “priced in”
  • Additionally, the bank notes that “retail-focused platforms such as the Block (SQ), PayPal (PYPL) and Robinhood (HOOD) all saw an increase in trading activity and investor flows in the fourth quarter of 2023”
  • Payment processors Block, owned by Twitter co-founder Jack Dorsey, benefited greatly from digital asset exposure, recognising a 90% year-on-year increase in gross profits on Bitcoin sales last year, despite low margins
  • “The total sale amount of Bitcoin sold to customers—which we recognize as Bitcoin revenue—was $2.52 billion, up 37% year over year”
  • These increases in trading activity were significant; Robinhood’s latest financial reports note that “crypto notional volumes in December jumped by 242% from a year ago”
  • Oppenheim & Co. Analyst Owen Lau agrees, noting that volumes on Coinbase “are only at 16% of the last peak retail volume”, but believes forthcoming windfalls could be recycled; “With the money returning from the bankrupt entities, there is a lot of room to run potentially”
News Roundups