22nd January, 2021
Market Overview:
The digital asset market experienced a dip this week, although Ethereum took centre stage as it climbed to new all-time highs. Institutional investment continues to exceed mining capacity, and more institutions (both private and public) have announced their plans for blockchain adoption.
- Bitcoin receded this week, dropping from around $38,000 at the start of the week to current levels below $32,000, potentially in response to criticisms from incoming Treasury Secretary Janet Yellen and trader concerns after misreporting of a chain reorganisation as a double-spending exploit
- Ethereum reached record levels three years after its previous all-time-high, reaching a maximum of $1,430, alongside new records in open interest. In line with the overall dip on Wednesday, Ether’s value also decreased, to a low of $1,041, before rebounding to a current price of $1,150
- At its height earlier this week, the price of Ethereum had more than doubled over the course of the last month, having traded as low as $574 on December 24th
- The overall cryptocurrency market cap contracted, as Ethereum’s strong growth helped to negate the slight dip in Bitcoin’s value, ranging between $950m and $1.05tn before the marketwide dip on Thursday drove it down as low as $836m. At the time of writing, the market has recovered to a current value of $892bn
- DeFi experienced strong growth in Total Value locked this week, reaching new all-time-highs driven by Ether’s increase in value. Total Value Locked in Ethereum-based DeFi grew to a new record of $24.5bn, in addition to Bitcoin-based DeFi valued at $5.2bn, for a total of $29.7bn
Ethereum achieved new record levels over the last week, institutional investment saw new daily records set, and despite a dip in Bitcoin value, overall observed sentiment surrounding crypto investment is also at levels of record bullishness. The two largest cryptocurrencies saw expanded decentralisation of their networks, increasing asset security. CBDC trials continue and accelerate across the globe, laying the framework for long-term infrastructural support of blockchain and digital assets.
What happened: Gary Gensler officially confirmed as new Chairman of United States SEC
How is this significant?
- As widely reported before official confirmation, Gary Gensler was named Chair of the Securities and Exchange Commission by the Biden-Harris Transition Team on Monday, cementing his influence in American financial policy going forward
- For the first time ever, a leadership role within the financial and political hierarchy of the USA will be filled by somebody knowledgeable about the potential and applications of blockchain and cryptocurrency
- Gensler brings a wealth of experience from both traditional and digital finance into the role, having previously served as chairman of the U.S. Commodity Futures Trading Commission from 2009 to 2014, after a career at Goldman Sachs. His most recent role was as Professor at the MIT School of Management, including the role of Senior Advisor to the MIT Digital Currency Initiative, with a remit including “blockchain technology, and new financial technologies”
What happened: French Central Bank successfully trials CBDC and blockchain settlement
How is this significant?
- As one of the major European economies, France can add further credence to the concept of integrating digital assets into traditional financial systems
- On Tuesday, the Banque de France officially announced the successful CBDC trial of a €2m settlement on a private blockchain in association with organisations such as Citi, CACEIS, Groupama AM, OFI AM, and DXC
- More trials on the pilot program will continue through to mid-2021, with the governor of the French Central Bank previously declaring interest and support for a private-public sector partnership in development of a digital Euro
What happened: China pushes forward with integration of blockchain into financial infrastructure as AliBaba affiliate Ant Financial tests Chinese digital Yuan
How is this significant?
- China is a leading global economy, and AliBaba is the world’s largest retailer and e-commerce company
- AliBaba’s payment affiliate, Ant Financial, recently conducted a small-scale test in Shanghai involving digital Yuan payments through its AliPay app, representing the first trial of the CBDC in a mobile wallet developed by a non-state-owned entity
- Participation in China’s ongoing CBDC trials indicates a wide level of support for blockchain-based payments on both a public and private level
- The most recent 10-day trial of the digital currency in Shenzhen saw almost 140,000 transactions from those granted the currency through a lottery system, as well as topping up their digital currency value through bank accounts
- China’s government-regulated Blockchain Service Network this week announced plans to not only run a beta of the digital Yuan CBDC in the second half of this year, but also revealed aims to integrate with 30 public projects in 2021
What happened: Bitcoin node count reaches new record
How is this significant?
- The number of nodes across the Bitcoin network has grown to record levels, with sources citing between 11,500 and 11,700 nodes currently in existence
- Bitcoin nodes are responsible for validating transactions across the Bitcoin network and ensuring that no fraudulent transactions are recorded
- Wide distribution of nodes is a major factor in Bitcoin’s long-term value proposition; more nodes means more decentralisation, which in turn prevents Bitcoin’s monetary policy being affected by any one central entity, as has been the case with many government-issued currencies
- Running a node also allows users to store their Bitcoin more securely without relying on third parties; more nodes can be seen as a vote of confidence for the perceived future value of Bitcoin
What happened: Decentralised Exchange Uniswap averages more than $1bn a day in trading volume
How is this significant?
- Major centralised exchanges have experienced record volume recently, indicating the scale of institutional movement into digital assets. Record volume on leading decentralised exchange (aka DEX) Uniswap indicates similar demand from retail investors
- Whilst centralised exchanges such as Coinbase and Binance are better suited to institutional traders, decentralised exchanges appeal more directly to cryptocurrency specialist, as they allow trading of the newest low market cap tokens (aka altcoins) via smart contract addresses
- Just over halfway through January, Uniswap has already surpassed its record monthly volume of $15.3bn, achieved at the height of the decentralised finance (DeFi) boom in September 2020
- Although the decentralised nature of Uniswap enables a vast amount of trading options (over 1,500 coins across more than 2,400 trading pairs), this volume isn’t driven by pure speculative mania; a full 45% of trades involve Ether paired against a stablecoin, marking them as lower risk compared to altcoin trades
- Via a 0.3% fee across all trades, Uniswap provides $30m in daily revenue to liquidity providers at current trading levels
- DEX trading has been growing beyond Uniswap, indicating wide-ranging retail interest; increasing over 110% over the last month. The second-largest DEX, Sushiswap, has already more than doubled its record monthly volume
What happened: Value of Ethereum 2.0 staking contract exceeds $3bn
How is this significant?
- The Ethereum 2.0 contract is crucial to the Ethereum network’s transition from a Proof-of-Work consensus mechanism to a less energy-intensive Proof-of-Stake mechanism
- Proof-of-Stake allows for quicker transaction confirmations and larger volume to achieve necessary scale for wider enterprise adoption
- In order for the Ethereum 2.0 upgrade process to launch in early December, users needed to stake 524,288 Ether to the address. Less than two months on, five times that amount has been deposited, with the total locked value now worth $3.2bn
- Roughly 2.6m Ether have now been staked, representing a great deal of faith in the future value of the network, since the contract effectively locks the staked coins for two years
- This amounts to over 4,800 validator addresses on Ethereum 2.0, ensuring a high level of decentralisation and network security
What happened: Bitcoin sees the most capital inflow according to Bank of America survey, fuelled by US monetary policy
How is this significant?
- According to a January survey of fund managers by Bank of America, “Long Bitcoin” is now the most crowded trade in financial markets, knocking “Long Tech” off the top spot for the first time since October 2019
- This represents a widely bullish mood around Bitcoin, fuelled by institutional demand, as Long Bitcoin rose from third place in December
- Bitcoin’s verifiable scarcity is a major selling point in its value proposition, acting for many as digital gold and a perceived hedge against inflation
- Expectation of inflation is at record levels, with macro analyst Holger Zchaepitz noting “Inflation expectations at an all-time high: Record net 92% of investors in BofA Fund Manager Survey expect higher inflation in the next 12 months”
- Whilst going long on Bitcoin is seeing the most capital inflow, shorting the US Dollar is the third most-popular trade, illustrating the relative effect that recent US monetary policy has had on the valuation of both assets
What happened: Largest-ever expiry of Bitcoin options scheduled for this month
How is this significant?
- Current levels of open interest in Bitcoin have hit $8.8bn, reflecting continued growth in both Bitcoin value and interest in Bitcoin options
- 45% of all options are set to expire on the 29th of January, worth approximately $3.3bn
- This exceeds the previous record of $2.4bn in option expiries on the 25th of December last year (a figure that represented 31% of options expiring)
What happened: BlackRock approves investments into Bitcoin
How is this significant?
- BlackRock is the largest asset manager in the world; managing $8.7tn worth of assets for its clients, almost 10 times the current market cap of all cryptocurrency
- For the first time ever, BlackRock has filed with the SEC for two of its funds to invest in Bitcoin, in the form of cash settled futures contracts
- The BlackRock Global Allocation Fund and the BlackRock Strategic Income Opportunities Portfolio will be able to purchase CME Bitcoin futures only
- This marks a change in policy from BlackRock; in 2018 their CEO Laurence Fink claimed their clients weren’t interested in cryptocurrencies, before Fixed Income Chief Investment Officer Rick Reider signalled more interest in November last year, commenting that Bitcoin “could take the place of gold … it’s so much more functional than passing a bar of gold around”.
- Fink himself commented recently that Bitcoin could “evolve into a global market asset”