Nickel Research Centre

Nickel News Roundup - Week 6

9th February, 2024

Market Overview:

Digital assets continued their recent recovery, as sell-offs from Grayscale’s GBTC dwindled in overall share of ETF trading volume.
  • Bitcoin broke back above $46,000 early on Friday, erasing the decline caused by GBTC sell-offs following ETF approval and launches
  • Bitcoin spent the first half of the week trading in a relatively narrow range between $42,600 and $43,200, before accelerating upwards on Thursday and Friday, growing from a Monday low of $42,270 to a Friday high of $46,300
  • Ether followed suit, exhibiting similar chart behaviour from a Monday low of $2,274 to a Friday high of $2,457
  • Ether also saw a large increase in network activity leading it back into deflationary annual issuance via transaction fee burns
  • Overall digital asset market capitalisation increased by $100bn to $1.74tn
  • According to industry monitoring site DeFi Llama, total value locked in DeFi increased nearly $3bn to $60.4bn

Digital assets continued last week’s recovery, as TradFi titans such as BlackRock and Fidelity continue to make inroads on Grayscale’s head start in the spot Bitcoin ETF volume race. Elsewhere, hedge fund billionaire Alan Howard moved to increase his digital asset firm’s funding, Bitcoin mining stories developed across the world, tokenised carbon credits were created in Germany, Ethereum reached a new staking milestone, a leading global Bitcoin advocate was re-elected as president of his nation, and much more.

What happened: ETF news

How is this significant?

  • The impact of sell-offs from Grayscale’s converted GBTC ETF continued to decrease this week, as GBTC’s price closed at a 0.02% premium to NAV on Thursday, signalling an end to its pre-ETF history of NAV discounts
  • Digital asset analyst Noelle Acheson commented “It represents the closing of an unfortunate chapter in crypto’s history… GBTC’s premium was an uncomfortable example of traders using leverage to take advantage of an inefficient market, and its discount became a stark reminder of the power of markets to ‘fix’ themselves”
  • As of Thursday, Bloomberg ETF analyst James Seyffart disclosed BlackRock’s IBIT as the leading ETF by volume, exceeding GBTC by over $100m during trading
  • Seyffart also showcased Fidelity’s ETF closing in on $3bn worth of Bitcoin holdings
  • His colleague Eric Balchunas also noted some confirmed institutional purchases of BlackRock’s IBIT; Canadian asset manager Redwood, and investment managers Gerber Kawasaki
  • When ETFs launched, Grayscale’s GBTC, thanks to its inbuilt liquidity, accounted for approximately 50% of daily trading volume—that figure has now declined to around 30%
  • The reduction of GBTC outflows led to weekly digital asset fund inflows of $708m (as of Tuesday), according to Coinshares data
  • Spot ETFs now account for 84% of all Bitcoin ETF volume, and on Thursday, the “Newborn Nine” (i.e. all spot ETFs excluding GBTC) overtook MicroStrategy in cumulative Bitcoin holdings, with a total of 192,000 Bitcoins owned by the funds
  • ETF Store president Nate Geraci pointed out that, following the latest round of fee slashing, nine of the ten active spot ETFs now have fees below 0.3%; this is 0.1% cheaper than the largest gold ETF, meaning exposure to digital gold is now cheaper than physical gold, within a month of ETFs launching
  • Le Shi, head of trading at Auros, commented “We expect to see a general uplift in liquidity across the board”, whilst Wintermute co-founder Evgeny Gaevoy said “I expect us to get to 2021 levels of volumes by the end of the year, for Bitcoin especially” said. “If we get to the level of 2021 in terms of how crazy everything is, we would need to raise hundreds of millions in trading capital"
  • Elsewhere in ETFs, Standard Chartered analysts predicted likely approval of spot Ether ETFs by the time of the SEC’s final May 23rd decision deadline on the first filings
  • Several of the leading spot Bitcoin ETF issuers have filed for spot Ether ETFs, including BlackRock, Fidelity, and ARK Investment
  • Standard Chartered’s head of FX and Digital Assets Research, Geoff Kendrick, predicts Ether could potentially—in a best-case scenario—almost double Ether’s value by late May, to $4,000
  • Bitfinex head of derivatives Jay Krooger agrees on bullish sentiment for Ether, pointing towards open interest, which has experienced “a noticeable uptick in call side open interest for long-dated options for March, April and May”
  • ARK and 21Shares updated their Ether ETF filing to bring it more in line with the approved spot Bitcoin ETFs. This included a move towards cash creation/redemption as the liquidity mechanism of the funds, rather than allowing direct transfer of Ether to investors as the underlying asset
  • They also updated the filing to take advantage of a key difference between Bitcoin and Ether; the latter’s existence as a proof-of-stake consensus blockchain, allowing for Ether to be staked (for a return) in order to process transactions and secure the network
  • The filing reads “ The Sponsor may, from time to time, stake a portion of the Trust’s assets through one or more trusted Staking Providers. The Sponsor generally expects to stake Ether tokens from the Trust’s Cold Vault Balance. In consideration for any staking activity in which the Trust may engage, the Trust would receive certain staking rewards of Ether tokens, which may be treated as income to the Trust. The amount of Ether the Trust may receive as reward for its staking activity can vary significantly”

What happened: Hedge fund billionaire Alan Howard grows crypto firm’s capacity

How is this significant?

  • Billionaire Alan Howard, a noted digital asset supporter, is sacrificing some of his personal crypto wealth—for the benefit of his crypto hedge fund, Brevan Howard Digital (BHD)
  • According to Bloomberg sources, Howard “is exiting several of his personal crypto-company stakes including in custodian and broker Bitpanda”, with the goal of reinvesting the proceeds into BHD
  • Howard appears bullish on the prospects for digital assets to continue last year’s recovery; BHD were recently involved in a fund tokenisation agreement with Libre Capital, a firm backed by Nomura and Howard’s own WebN Group
  • Sources say BHD “is planning to add more capital to its existing strategies, and to launch new asset-management products and services in the coming months”
  • Operating as the digital asset arm of his existing Brevan Howard macro trading firm, BHD currently sports around 40 staff, following a founding in spring 2022, before the deepest darkest depths of crypto winter
  • The personal investments Howard is liquidating were all made before the founding of BHD, according to personae with knowledge of the matter
  • Howard himself is unlikely to require many of the proceeds for personal use; three weeks ago the Telegraph reported on a £145m payday from his hedge fund

What happened: Bitcoin mining news

How is this significant?

  • Bankrupted lender Celsius is selling off its Bitcoin mining division to a new mining firm, Ionic Digital, as part of its emergence from Chapter 11 bankruptcy
  • These assets include 142 megawatts (MW) of hosted mining services (with the capacity to rise to 240 MW), alongside 87 MW of self-mining capacity
  • Ionic have already filed a Form-10 with the SEC, the first step towards public listing
  • The new company’s executive suite will feature several veterans of publicly-traded mining firm Hut 8, and in a statement, Ionic commented “Our team is well-prepared to deal with the growing competition in mining, using our flexibility and strong financial backing to our advantage”
  • Miners are currently positioning themselves to be competitive when the forthcoming quadrennial Bitcoin halving event slashes rewards for mining new blocks (as the name suggests) in half
  • Mattew Sigel of VanEck notes “Miners have begun to sell more of their coins to bolster balance sheets and fund growth capex ahead of tougher times for margins when block rewards are halved in April. After the halving, scale will matter even more”
  • Some recent data shows that the amount of Bitcoin held as reserves by miners has decreased—indicating that companies are liquidating holdings in order to finance infrastructural expansion for the forthcoming halving
  • In a recent research note, digital asset exchange Bitfinex surmised “Miners seem to be selling their holdings of Bitcoin to finance the purchase of more efficient mining rigs… The reduction in revenue could especially impact smaller mining operations, potentially pushing them out of business”
  • Elsewhere in the world, Ethiopia has emerged as an unexpected haven for Chinese Bitcoin miners
  • Ethiopia recently constructed the largest dam in Africa, allowing Chinese miners—exiled by their government’s ban on mining—to hook their hardware up to a cheap power supply
  • According to Bloomberg, “The state power monopoly says it has struck power supply deals with 21 Bitcoin miners. All but two of them are Chinese”
  • Some industry analysts believe Ethiopia, which boasts the second-cheapest household electricity prices in the world, could become a potential rival to Texas, which currently accounts for around a quarter of global capacity

What happened: Crypto carbon credits exchange created in Germany

How is this significant?

  • German firms Neutral and DLT Finance teamed up this week to create “the first regulated trading platform for tokenized environmental assets, including carbon and renewable energy credits”
  • This represents the latest step forward in tokenisation of real-world assets (RWA), a movement promoted by financial heavyweights including BlackRock CEO Larry Fink and Franklin Templeton CEO Jenny Johnson
  • DLT is handling the regulatory aspect of the offering, whilst Neutral are involved in the tokenisation efforts
  • Farouq Ghandour, Co-founder and CEO of Neutral commented “We have ever-increasing interest from institutional clients and market participants to tokenise traditional assets but regulatory frameworks and infrastructure have not kept up with technological progress… We didn't see anyone building the market infrastructure that would allow for traditional traders to interact with these assets”
  • The EU is currently the largest compliance carbon trading market in the world, valued at 750bn Euros in 2022

What happened: Bitcoin advocate Nayib Bukele re-elected as president of El Salvador

How is this significant?

What happened: Regulatory news

How is this significant?

  • In the United States, Republican lawmakers published a letter to Treasury Secretary Janet Yellen this week, questioning “how the Financial Stability Oversight Council (FSOC) she leads ascertains how cryptocurrencies should be defined at the federal level”
  • They claimed that the crypto industry has been heavily disfavoured, and “regulators have failed to facilitate an environment that ensures consumer protection and fosters digital asset innovation in the United States”
  • This followed Tuesday FSOC testimony by Yellen in which she warned about perceived risks of stablecoins, and requested congressional approval to regulate the assets
  • The United States SEC passed a rule change enabling broader definitions of entities considered “dealers”, potentially encapsulating crypto and DeFi
  • The rule appears to state a “person would be required to register as a dealer or government securities dealer” if their activity “has the effect of providing liquidity to other market participants as stated in the qualitative standard”, but several industry participants believe this to be too broad and “unworkable”, serving as “another example of the SEC’s continued hostility towards the digital asset industry”
  • Speaking of SEC hostility, another letter by Republican lawmakers alleged the SEC’s consumer protection mission was “compromised” under current chair Gary Gensler after a federal judge found they knowingly made misrepresentations and inaccurate statements in order to force an asset freeze of digital asset firm DEBT Box
  • The Senators wrote “It is unconscionable that any federal agency—especially one regularly involved in highly consequential legal procedures and one that, under your leadership, has often pursued its regulatory mission through enforcement actions rather than rulemakings—could operate in such an unethical and unprofessional manner”
  • They added that “It is difficult to maintain confidence that other cases are not predicated upon dubious evidence, obfuscations, or outright misrepresentations”
  • The Hong Kong Chamber of Commerce submitted proposals for the city’s upcoming budget, including requests yuan-backed stablecoin issuance
  • The Chamber also suggested “stablecoins backed by a basket of various fiat currencies, including the yuan, Hong Kong dollar, or U.S. dollar”, following on from the announcement of a stablecoin issuance sandbox last week, alongside a public consultation on OTC trading of digital assets
  • As part of their continued push to legitimise digital assets in the eyes of regulators (which includes donations to the “FairShake” Super-PAC), Coinbase released research this week on the improvements digital assets can bring to traditional financial infrastructure

What happened: One quarter of Ether currently staked in network validator nodes

How is this significant?

  • The Ethereum blockchain hit a major milestone this week, as for the first time, more than one quarter of its native asset (Ether) is being staked to validate transactions and secure the network
  • After transitioning from proof-of-work to proof-of-stake consensus last year, Ether staking as a percentage of overall supply rose from 15% in May to 25% now
  • The rise of liquid staking solutions has helped to drive much of this growth; although each Ethereum validator node requires staking of 32 Ether, platforms like Lido, Coinbase, and Rocketpool allow users to contribute lower amounts towards share staking pools
  • Meanwhile as staking participation has grown, the reward rate has naturally dwindled; from 8.6% last April, to around 4% now

What happened: Stablecoin developer Tether attests “record-breaking profits” in Q4 2022

How is this significant?

  • In its latest financial report, market-leading stablecoin issuer Tether attested record net profits in Q4 last year, worth $2.85bn (net)
  • Approximately $1bn of this was net operating profit (predominantly interest on US treasuries), with the remainder dominated by appreciation of Bitcoin and gold held as corporate treasury assets
  • The company’s decision to diversify holdings via investments appears to have paid off; “excess reserves registered an all-time high increase of $2.2 billion totalling $5.4 billion”
  • Tether also confirmed $640 million of investments “in various strategic projects such as mining, AI infrastructure, P2P telecommunications” took place under a new umbrella outside of its excess holding calculations
  • Total group net profit in 2023 was reported as $6bn, driven by $4bn in net operating profit on liquid backing assets like treasuries and money market funds
  • Additionally, the firm moved to mitigate risk in financial strategy, stating “Tether is proud to announce that it has achieved its goal of removing the risk of secured loans from the token reserves. While such secured loans are widely overcollateralized, Tether accumulated enough excess reserves to cover the entirety of the exposure. This is in response to the community’s past expressed concerns about this part of the portfolio”

What happened: MicroStrategy adds further to Bitcoin holdings

How is this significant?

  • Corporate Bitcoin advocates MicroStrategy walked the talk once again this week, revealing the purchase of an additional 850 Bitcoins for $37.2m in January
  • This brings the company’s total holdings to a nice round 190,000; approximately the same as all spot Bitcoin ETFs excluding Grayscale’s converted GBTC
  • MicroStrategy became the first company to promote Bitcoin as a capital allocation strategy back in 2020
  • Since then, it has acquired 190,000 Bitcoin at a total cost of $5.93bn; working out to $31,224 per Bitcoin
  • MicroStrategy’s share value has increased 300% since adopting its Bitcoin strategy, vastly outperforming the S&P 500 index (60%) and tech-focused Nasdaq 100 (70%) in the same timeframe
  • Having long served as a proxy for regulated Bitcoin exposure, MicroStrategy may face challenges after the approval and launch of spot ETFs; but chairman and founder Michael Saylor believes the firm has a niche
  • In a presentation, he framed MicroStrategy as “the world’s first Bitcoin development company… committed to the continued development of the Bitcoin network through our activities in the financial markets, advocacy and technology innovation”
  • MicroStrategy also touted differences in management fees, and that “the company has the ability to innovate value as opposed to the ETFs, which simply hold the crypto asset”
News Roundups