4th August, 2023
Market Overview:
Digital assets held steady this week, as market volatility levels approached record lows.
- Bitcoin traded in an exceptionally tight range this week, with a low of $28,790 and a high of $29,960 proving brief outliers against the main trading channel between $29,150 and $29,350
- Indeed, according to industry data firm Kaiko, 180 day volatility for both Bitcoin and Ether is at multi-year lows
- Industry analyst Noelle Acheson notes the market is currently in a holding pattern, without any specific “catalyst” to boost volume, which is at its lowest level since November 2020
- CoinShares data revealed minor outflows from crypto investment products, bringing the year-to-date total to $500m
- Trading volumes in funds and products were also low, clocking in at $915m; below this year’s weekly average of $1.5bn
- Ether underperformed Bitcoin, with an apex and zenith of $1,885 and $1,823 respectively
- Overall digital asset market capitalisation dropped slightly to $1.16tn
- According to industry monitoring site DeFi Llama, total value locked in DeFi this week dropped to $40.5bn, driven by an exploit on the popular DeFi platform Curve
Digital assets experienced stable performance in a week of historically low volatility and volume. Traders may have felt cautious after a US judge issued a ruling in a new SEC suit which contradicted (but didn’t affect) the recent ruling in the Ripple trial. Outside of continued US regulatory confusion, Ether futures ETF filings flowed freely, Coinbase outperformed expectations, Binance achieved a new landmark, and Tether earned $1bn in quarterly profits from their USDT stablecoin. Across the globe, Dubai and Hong Kong granted several major crypto licences, while Cboe expanded its involvement in the space.
What happened: Ether futures ETF filings follow spot Bitcoin enthusiasm
How is this significant?
- Following the recent flood of spot Bitcoin ETF filings after BlackRock reignited interest in the space, this week saw a slew of applications targeting Ether as the underlying asset
- Between markets closing on Friday and Wednesday, six separate firms filed (or re-filed) for Ether futures products, including VanEck, Volatility Shares, Grayscale, and ProShares (the issuers of the first approved Bitcoin futures ETF)
- Alongside a regular futures product, ProShares also proposed a new short Ether ETF product
- Todd Sohn, ETF strategist at Strategas told Bloomberg “Bitcoin futures have worked well with no major trading issues, so this seems like a natural progression of the category… the 2x Bitcoin launch a few weeks ago. So the comfort level seems to be growing”
- Sohn believes that the first Ether futures filing kicked off a domino effect, as BlackRock’s earlier spot Bitcoin application did; “It’s mass hysteria—the potential market size is just too big for issuers to ignore”
- Bloomberg Intelligence analyst James Seyffart believes that the SEC’s reluctance to endorse any digital asset beyond Bitcoin could lead to most applications being withdrawn
- However he also notes that “I doubt all these issuers would file at the same exact time if there weren’t at least a meaningful chance at approval”
- Additionally, ETF issuer Direxion filed for a combined Bitcoin and Ether futures ETF
- Bloomberg Intelligence analysts Eric Balchunas and James Seyffart returned to their previous predictions regarding the chances of a spot Bitcoin ETF approval; they upgraded their odds from 50% to 65%
- Part of their reasoning was Gary Gensler stressing the presence of other commissioners in a recent interview; “The deflection seemed a change in the way he normally handles these topics. We believe this may be a signal that aspects of the anti-crypto stance are becoming politically untenable for Gensler… if the SEC is going to bend anywhere on crypto ETFs, it will be with regard to bitcoin ETFs”
What happened: Coinbase outperforms analyst expectations
How is this significant?
- Despite ongoing legal action from the SEC, Coinbase Global posted better-than-expected Q2 results
- Interest income helped to drive this performance, as volumes more than halved year-on-year; but losses also dropped to less than 1/10th of the Q2 2022 figures
- Overall, Coinbase Global posted revenue of $708m, compared to analyst predictions of $663m
- This led to an initial boost of 11% for Coinbase shares in after-hours trading, although those gains were pared back as more granular breakdowns of their revenues emerged
- The company’s finance head, Alesia Haas, acknowledged challenging market conditions as a result of stability, rather than a downturn; “In Q2, crypto volatility, which is a key input into our trading business, continued to decline, and it reached multi-year lows”
- Lower volatility correlates with lower trading volumes, and thus lower revenues due from trading fees; leading to estimations of further year-on-year revenue declines
- COIN stock is however up around 80% since mid-June, helped by the exchange’s status as surveillance partner across numerous spot Bitcoin ETF listings, but industry analysts remain uncertain as to its prospects
- One such analyst, Berenberg, called it “uninvestable in the near term… simply because the company continues to face very significant risks on the regulatory front”
What happened: Regulatory news
How is this significant?
- Weeks after Judge Analisa Torres ruled predominantly in Ripple’s favour regarding SEC allegations of the XRP token’s status as an unregistered security, another judge in the very same district ruled in favour of the SEC in another case
- Regarding the SEC’s lawsuit against Terraform Labs and its founder Do Kwon, Judge Jed Rakoff said “The court declines to draw a distinction between these coins based on their manner of sale, such that coins sold directly to institutional investors are considered securities and those sold through secondary market transactions to retail investors are not… In doing so, the court rejects the approach recently adopted by another judge of this district in a similar case”
- Faryar Shirzad, Coinbase’s chief policy officer commented that “the law is not clear and that you can have very smart judges landing in different places”
- Judge Rakoff’s ruling does not negate Judge Torres’ earlier verdict, but it does indicate that the regulatory landscape in the US remains as murky and ambiguous as ever, and may reinforce the need for actual clarity from a legislative level
- One such legislative attempt is the House Republicans’ FIT For The 21st Century Act, a bill which proposed greater oversight for the CFTC, and passed through both the House Financial Service Committee and Agriculture Committee last week
- Meanwhile, noted anti-crypto congresswoman Elizabeth Warren secured the support of banking lobby group the Banking Policy Institute to reintroduce proposed legislation to increase KYC and AML obligations for crypto inflows to banks
- The IRS also released new guidance ruling that staking rewards must count as taxable income for US citizens “in the taxable year in which the taxpayer gains dominion and control over the validation rewards”
What happened: Binance reaches 150 million user landmark
How is this significant?
- Despite numerous ongoing legal challenges and withdrawals from several national markets, digital asset exchange Binance continues to grow; CEO Changpeng “CZ” Zhao tweeted that the exchange reached the milestone of 150 million registered users this week
- This figure is up from 128 million users in May, indicating strong growth in the intervening period
- Indeed, the company’s share of non-US trade is growing, accounting for about 65% of current spot volume according to data from industry publication TheBlock
- A report in the Wall Street Journal indicated that China is Binance’s largest market, accounting for about 20% of their global volume
- This indicates ongoing crypto trading interest in China despite the country’s official ban—although the Journal reports that “teams from Binance regularly collaborate with Chinese law enforcement to detect potential criminal activity”
- Other leading markets include South Korea, Turkey, Vietnam, and the British Virgin Islands
- Indeed, this strength in Asia correlates with declining volumes in Europe, where competitor Kraken has benefited most in Euro-denominated trades
- In other Binance news, the firm reported on Monday that it had been granted a licence for broker-dealer, institutional, and “qualified retail” investor services by Dubai’s VARA regulatory body, making them the first exchange to secure such approval in the Emirate
- In a Twitter Spaces discussion, Zhao commented “This is probably one of the most demanding processes we’ve gone through, but it’s good that the collaboration is there. Different parts of the world are moving at different speeds, but Dubai is definitely leading the forefront.”
- Elsewhere, online news platform Semafor (formerly owned by Sam Bankman-Fried) reported that the US Department of Justice were considering charges against Binance, but were concerned about the possibility of users being adversely affected by such action
- Binance formally launched its new Japanese trading platform on Tuesday, listing 34 different digital assets; the largest range available in Japan
What happened: Cboe collaborates on crypto clearing solution
How is this significant?
- Institutional digital assets firm Crossover announced a collaboration with the crypto arm of Cboe, providing Cboe with “clearing solutions for spot and futures trades across multiple digital asset execution platforms”
- In a press release announcing the partnership, Cboe Digital president John Palmer said “Cboe Digital's clearinghouse supports multiple digital asset execution platforms including crypto spot and futures… We look forward to supporting Crossover's clients in innovative ways as the digital asset market evolves”
- Crossover CEO Brandon Mulvihill stated “Institutional market structure in crypto is being reset… This collaboration is a natural fit for CROSSx, and we are proud to be the first external technology venue to provide connectivity to Cboe Digital”
- As a regulated US platform run by TradFi platform Cboe, this move appears to avoid concerns regarding “conflicts of interest and the captive nature of all-in-one providers”, as Crossover “unbundles execution from clearing, custody and brokerage”
What happened: Hong Kong awards first licences under new crypto regime
How is this significant?
- After new rules went live in June, Hong Kong regulators officially granted the first licences for retail crypto trading platforms in the city this week, to local exchanges Hashkey and OSL
- The two firms were the first two registered under an earlier voluntary licencing program, which OSL CEO Hugh Madden describes as “a significant first-mover advantage, and a direct result of putting regulation and compliance first. It demonstrates how regulation is the foundation of future growth and mainstream acceptance in the digital asset space”
- Under the terms of the Hong Kong regime, retail investors remain restricted to larger-cap digital assets such as Bitcoin and Ether, which must “feature in at least two recognized, investable indexes”
- A Hashkey spokesperson revealed the company has partnered with Standard Chartered bank to provide fiat on- and off-ramps for investors, and stated that the licence would enable it to “expand [its] business scope from serving professional investors to retail users”
What happened: Contagion latest
How is this significant?
- Digital Currency Group, parent company of embattled lender Genesis Global, revealed the hire of a new CFO on Monday, as well as progress regarding Genesis creditors
- The firm hired Mark Shifke as CFO, and announced in its Q2 shareholder letter that “After months of tireless negotiations led by DCG leadership, we are close to reaching an agreement in principle to resolve the claims in the Genesis Capital Chapter 11 cases”
- In a Wednesday hearing, Genesis lawyers said the company had extended their mediation with creditors for the final time, ending no later than August 16th
- DeFi platform Curve experienced a major exploit on four liquidity pools, due to a vulnerability in the Vyper programming language
- In total, $1.5bn exited the platform; although a large portion of that figure was removed proactively by depositors for safekeeping
- Curve CEO Michael Egorov had previously taken around $100m in loans on other DeFi platforms, backed by Curve’s proprietary CRV token
- As of Thursday, his on-chain debts stood at roughly $80m, after securing just under $30m in funds through fixed-price OTC sales of CRV tokens
- This has led to concerns of possible cascading sell-offs, as drops in CRV value following the exploit could lead to forced liquidation of the aforementioned loans
- The SEC sued HEX chain and its developer Richard Heart, accusing them of selling unregistered securities; an allegation which did not surprise many industry observers
- Allegations against Heart include use of funds to purchase a 555 karat black diamond, as well as luxury goods flaunted on his social media profiles
- Two people accused of hacking Bitfinex exchange in 2016 were found guilty in court, after being arrested last February
- Due to the time lapse between the hack and their arrest, the value of the funds in question ballooned from $71m to $3.6bn at the time of recovery, which could lead to an unexpected windfall for Bitfinex and customers who were previously forced into a haircut
- FTX management disclosed plans to restart FTX as an exchange for non-US customers as part of the bankruptcy remediation proceedings
- Under the proposed restructuring, FTX suggested debtors could forego a cash payout in favour of equivalent stakes within the relaunched exchange; “Rather than all cash, the Debtors may determine that the Offshore Exchange Company remit non-cash consideration to the Dotcom Customer Pool in the form of equity securities, tokens or other interests in the Offshore Exchange Company, or rights to invest in such equity securities, tokens or other interests”
- Meanwhile, former FTX CEO Sam Bankman-Fried argued that attempts to jail him before trial for leaking information to the New York Times would violate his free speech rights
What happened: Tether continues to grow “excess reserves”
How is this significant?
- Tether, issuers of the USDT stablecoin, revealed another successful quarter, with $1bn in operational profits and growing financial reserves
- This represents a 30% quarter-over-quarter increase in operational profit
- The market’s largest stablecoin is currently backed by $86.5bn in reserves, of which 85% was stored in cash or cash equivalents according to a third-party attestation by BDO
- Total excess reserves amounted to $3.3bn according to Tether, an increase of $850m from the previous quarter
- Tether noted that “a share buyback, a healthy sign of consolidation amounting to 115M USD made to further strengthen the shareholder group, and other investments in energy-related initiatives financed from the profits of this quarter explain the difference between the announced profit and the respective increase in the excess reserves in the attestation”
- CTO Paolo Ardoino commented “We believe that open communication and strong financials foster trust and reliability, and this is what the global community deserves especially in a year devastated by many failures across the banking and crypto industry”