Nickel Research Centre

Nickel News Roundup - Week 21

24th May, 2024

Market Overview:

Digital assets experienced remarkable growth, with Ether posting one of its best-ever weeks following SEC approval for Ether ETFs.
  • Bitcoin continued its recent recovery, growing from a Friday low of $65,580 to a weekly high of $71,500 on Tuesday—approaching its record high of $73,750
  • Weekly trading was marked by a sharp rise sustained across Tuesday and Wednesday following political developments and rumours around support for further digital asset ETFs, before pulling back on Thursday as Ether stole the spotlight
  • This brought Bitcoin within touching distance of a new monthly high, after briefly hitting $67,000 on the 23rd of April
  • Ether had one of the best weeks in its history, as sentiment unexpectedly reversed regarding ETF approval odds, before approvals were confirmed on Thursday
  • Ether’s weekly low was $2,954 on Friday, before steady trading gave way to a massive rise on Monday, as the first reports regarding potential ETF approval were published
  • This led to a weekly high of $3,932 on Thursday, the day that approvals were confirmed, before pulling back as traders “sold the news” amidst realisations that actual ETF trading wouldn’t debut for some time
  • In one hourly candle on Tuesday, Ethereum’s market capitalisation increased by over $82bn—more than the entire value of leading altcoin Solana (currently ranked 5th in market capitalisation)
  • Increased activity on the Ethereum blockchain also increased the amount of Ether burnt from transaction fees, reversing several weeks of increasing annual issuance trends
  • Overall digital asset market capitalisation increased to $2.55tn, fuelled by Ether’s performance
  • According to industry monitoring site DeFi Llama, total value locked in DeFi exceeded $100bn for the first time since May 2022, driven primarily by Ether’s record growth

Digital assets enjoyed another week of considerable growth—but this time Ether was the leader, amidst an unexpected SEC U-Turn that led to approval for spot Ether ETFs. The US also witnessed significant bipartisan support for a crypto bill in the House of Representatives, appointment of a major Goldman Sachs figure to lead Grayscale, and a record share of Bitcoin trading volume. Elsewhere, Hong Kong mulled further development of its crypto ETFs and the UK approved its first ETPs.

What happened: SEC approves spot Ether ETFs

How is this significant?

  • As recently as last week, Bloomberg analysts deemed the odds of Ether ETF approvals “slim to none”, and said that issuers were bracing themselves for rejections—however this week saw a dramatic change in fortune, as the SEC approved eight separate spot ETFs late on Thursday
  • This switch in sentiment appeared to coincide with a successful House of Representatives vote on the FIT21 Act, which sought to give more digital asset oversight duties to the CFTC rather than the SEC
  • This show of bipartisan support for crypto assets—as well as the “arbitrary and capricious” legal precedent of its previous Bitcoin ETF rejections—may have forced the SEC to reverse course and approve spot Ether ETFs at the first time of asking
  • On Monday, Bloomberg senior ETF analyst Eric Balchunas surprised the market by revising the company’s odds of Ether ETF approval from 25% to 75%, citing increased political support for digital assets
  • The shift in attitude appears to have been rather abrupt; Bloomberg ETF analyst James Seyffart noted in an interview that the SEC returned to applicants requesting accelerated updates to their filings, ahead of a Thursday decision deadline
  • Updates to filings predominantly involved removal of any Ether staking facilities, echoing recent analysis that staking in particular was a concern to the SEC in the context of securities
  • Bernstein analysts Gautam Chhugani and Mahika Sapra published a new research note commenting on the developments, saying “Given the political ‘backroom’ drama, approval will be seen as significant regulatory relief for the sector… And ahead of US presidential elections, we would expect a softer [regulatory] regime”
  • Before confirmation, a bipartisan group of lawmakers sent Gary Gensler a letter urging the SEC to “approve spot Ether ETFs [and 'other' digital assets] because it offers investors crypto access in a regulated transparent safe format”
  • Standard Chartered analyst Geoff Kendrick attempted to quantify the possible effect of approval, stating “We expect significant ETF-driven inflows to ETH, as has been the case with BTC ETFs since their approval”, leading to a very broad estimate of between $15bn and $45bn for year one inflows
  • Since approval in mid-January, spot Bitcoin ETFs have already registered over $13bn in net inflows and $59bn in assets
  • However, K33 Research chief analyst Vetle Lunde attempted to temper such expectations, pointing out that existing Ether ETFs have experienced comparatively weak performance
  • Lunde noted “BlackRock will have a monumental task in building demand for ETH ETFs if approved… Futures-based ETH ETFs have seen cumulative net inflows of $126m since launch ~ roughly equivalent to the inflow to [Volatility Shares’ 2x Bitcoin ETF] BITX over the past 3 days”
  • Additionally, “Futures-based ETH ETFs aggregated AUM is only 7.4% of the AUM futures-based BTC ETFs had before the spot approval”
  • Part of this imbalance may have been due to the uncertainty around the asset caused by SEC chair Gary Gensler’s steadfast refusal to answer whether or not he viewed Ether as a commodity
  • ETF issuer 21Shares Head of Legal Andrew Jacobson called the approval "a significant step in the right direction", and Coinbase’s chief legal officer Paul Grewal said the approvals meant “ETH is effectively deemed a Commodity as we’ve always known”
  • The impetus of these developments to Ethereum interest was considerable even before confirmation, as traders “bought the rumour”, leaving Ether up more than 30% on the weekly candle at one stage
  • However, it appears unlikely that the Ether ETFs will begin trading immediately; as Seyffart points out this approval was for 19b-4 filings, whereas additional S-1 filings are required before such products can begin trading
  • According to the Bloomberg experts, “We’re expecting it to take a couple weeks but could take longer. Should know more within a week or so”
  • At the same time as reporting intensified around American ETFs, reports emerged that Hong Kong was considering addition of staking services to its Ether ETFs, providing another key differentiator from the US market
  • The local South China Morning Post newspaper reported that Hong Kong Ether ETFs jumped 18% upon news of possible US ETF approvals
  • Approvals in the US could raise concerns over a possible “Grayscale Effect” repeat, whereby conversion of an existing trust enabled Grayscale to open trading with huge AUM but high fees, creating large selloffs
  • The news around ETFs helped narrow the NAV discount on Grayscale’s ETHE from 20% to less than 7% from Friday to Monday, echoing how GBTC erased its discount in the lead-up to Bitcoin ETF approvals
  • It should however be noted that Grayscale’s Ethereum trust currently holds around $11.1bn in assets, vs $29bn in its Bitcoin trust at the time of launch, whereas overall daily Bitcoin and Ether trading volumes generally sit much closer to parity (with Ether actually overtaking 24h Bitcoin volumes following news of ETF approvals)

What happened: House of Representatives pass FIT21 Act with broad bipartisan support

How is this significant?

  • Digital assets secured a major political victory in the US this week, as the House of Representatives passed the crypto-centric Financial Innovation and Technology for the 21st Century Act (FIT21)
  • Not only did it pass, but it did so with a demonstration of “overwhelming bipartisan support”; 279 representatives voted yes, 136 voted no, and 15 abstained—71 of 213 Democrats voted in favour of the bill, including heavy-hitters like Nancy Pelosi
  • This split from party lines could be viewed as even more pronounced considering that the White House openly opposed passage of the bill, claiming it lacks “sufficient protections for consumers and investors who engage in certain digital asset transactions“
  • However, the administration confirmed it would not veto FIT21 if it passed a Senate vote
  • SEC Chair Gary Gensler was less diplomatic ahead of the vote—perhaps unsurprisingly, since FIT21 seeks to give greater oversight to the CFTC, including frameworks for tokens to reclassify from securities to commodities
  • Gensler claimed “[FIT21] would create new regulatory gaps and undermine decades of precedent regarding the oversight of investment contracts, putting investors and capital markets at immeasurable risk”
  • In contrast, FIT21 was widely supported within the industry itself, receiving backing from 60 crypto firms, including major exchanges like Coinbase, Gemini, and Kraken
  • A key aspect of FIT21 is that the CFTC should be responsible for “digital commodities”, which can demonstrate sufficient decentralisation via issuers controlling less than 20% of token supply or DAO voting power
  • Several politicians voiced a positive response to House passage, including Patrick McHenry, who stated “FIT21 provides the regulatory clarity and robust consumer protections necessary for the digital asset ecosystem to thrive in the United States”
  • Blockchain Association head Kristin Smith commented that “The House passage of FIT21 represents a watershed moment and badge of Congressional validation for the crypto industry in the United States”
  • The day before the House vote, Donald Trump’s presidential campaign confirmed that it is accepting donations via crypto
  • Indeed, in a soundbite that appeared to reference Democrat Elizabeth Warren’s overt hostility to the industry, the Trump campaign said it “will build a crypto army moving the campaign to victory on November 5th”
  • Noted congressional crypto supporter Cynthia Lummis of Wyoming echoed these sentiments on a wider political scale, tweeting “We are building a pro-crypto army in Congress”
  • This could have forced some Democrats’ hands in terms of signalling that overt opposition to digital assets could now alienate potential voters
  • According to Bloomberg data, crypto donors have already exceeded their total contributions from the 2020 election cycle, with $94m already provided to election committees
  • In another significant political development, the House passed the “CBDC Anti-Surveillance State Act” proposed by digital asset advocate Tom Emmer to ban the Federal Reserve from issuing a CBDC, which will now also face a future Senate vote
  • This vote followed party lines much more closely than FIT21, but Congressman Emmer nonetheless celebrated the news, explaining that his bill “prevents unelected bureaucrats from issuing a financial surveillance tool to fundamentally undermine our American values”
  • In other CBDC news, Hong Kong launched its Digital Yuan payments pilot program, working alongside the People’s Bank of China in the program’s first expansion beyond the mainland

What happened: ETF News

How is this significant?

What happened: US share of Bitcoin trading reaches record levels

How is this significant?

  • One corollary of successful spot Bitcoin ETFs has been an increase in US Bitcoin trading—or at the very least, increased Bitcoin activity during US trading hours
  • According to data from analytics firm Kaiko Research, trading during US market hours in April accounted for 46% of overall volume
  • Additionally, Kaiko identified Thursday as the busiest trading day of the week, with a cumulative 15% of volume
  • This represents a 2% overall growth of US trading hours’ volume share compared to the last two years, suggesting that ETFs were indeed a crucial factor
  • Meanwhile, volume during Asian trading hours remains significantly lower
  • Toby Winterflood, chief product officer of CCData, told Bloomberg “That literally shows you the impact that these ETFs have had… I don’t think we’ll necessarily see that change until potentially ETH, for example, also gets approved for an ETF”

What happened: Grayscale appoints Goldman Sachs alum as new CEO

How is this significant?

  • After more than a decade at digital asset investment firm Grayscale, Michael Sonnenschein stepped down as CEO this week, to be succeeded by Goldman Sachs’ current global head of strategy for asset and wealth management, Peter Minzberg
  • First reported in the Wall Street Journal, Minzberg will officially take over in August
  • According to a Grayscale statement, Sonnenschein is stepping back to pursue other interests
  • Sonnenschein provided a quote that “The crypto asset class is at an important inflection point and this is the right moment for a smooth transition”
  • In his three years at the helm, Grayscale has experienced major successes such as court victory over the SEC, but also suffered over $17bn in outflows from GBTC since its ETF conversion, due to a strategy charging far higher fees than all its competitors
  • In other Grayscale news, the firm announced the launch of two new trusts this week, concentrated on popular altcoins
  • One will offer exposure to Near Protocol’s NEAR token, whilst the other concentrates on Bitcoin layer-2 Stacks (STX)
  • Head of product & research Rayhaneh Sharif-Askary stated “With continued demand for diversified crypto asset exposure, Grayscale remains committed to launching new products that enable investors to access emerging and evolving parts of the crypto ecosystem… Stacks and Near are poised to help foster greater adoption—ultimately helping to drive the crypto ecosystem forward”

What happened: Crypto social network Farcaster completes $150m raise

How is this significant?

  • According to its co-founder Dan Romero, blockchain-based social platform Farcaster successfully concluded a significant new funding round this week, worth $150m
  • The round featured many of the industry’s most notable VCs, including a16z, Haun Ventures, Paradigm, and Standard Crypto
  • Farcaster adopts a hybrid model for its social network experience, storing user identities on-chain to keep them fully immutable, whilst storing posts off-chain in order to reduce costs
  • The platform remains in its infancy, perhaps signalling a return of some euphoria to venture capital with such a raise; at the moment Farcaster has about 350,000 users signed up, and 80,000 active on a daily basis
  • Users can build and share apps on top of Farcaster, and also restrict posts to channels dedicated to specific topics

What happened: Uniswap Labs responds to SEC Wells Notice

How is this significant?

  • Uniswap Labs, creators of leading decentralised exchange (DEX) Uniswap, responded this week to the Wells’ Notice it received from the SEC in April
  • This notice informed Uniswap Labs that the commission intended to bring a legal case against the developers; but Uniswap insists in its 40 page response that there is no case to answer
  • Chief legal officer Marvin Ammori argued “The SEC’s entire case rests on the false assumption that all tokens are securities… Tokens are, in fact, simply a file format. They are a file format for value and they are not inherently securities. The SEC has to essentially unilaterally change the definitions of exchange, broker and investment contract in order to try to capture what we do”
  • Ammori added “We will litigate if we have to. And if we litigate, we will win”
  • Uniswap also argues that its UNI governance tokens do not meet Howey Test requirements, and that “LP Tokens are issued not for investment purposes, but instead as accounting tools [acting as a bookkeeping device], and they are, therefore, not securities”
News Roundups