19th April, 2024
Market Overview:
Digital assets dropped significantly this week, following macroeconomic challenges and escalating conflict in the Middle East.
- Bitcoin experienced a major decline this week, as a combination of factors—Jerome Powell speaking against rate cuts, pre-halving miner sell-offs and profit-taking, and most significantly escalating geopolitical conflict - brought its price briefly below $60,000, and back to the levels of early March
- As a 24/7/365 market, Bitcoin responded immediately—and substantially—to news of Iranian attacks on Israel and subsequent Israeli reprisals, whilst TradFi markets were closed for trading and could wait for the situation to unfold before reacting
- The drop as news broke on Saturday led to the largest daily decline since March 2023
- Bitcoin pulled back throughout the week, from a Friday high of $70,890 to a low of $59,700 as news of Israel attacking Iran broke early (the next) Friday morning
- The leading digital asset did however quickly rebound from the news, bouncing back above $62,000 within a few hours of initial reports
- Ether was similarly shaken by the issues outlined above, dropping from a Friday high of $3,543 to a Friday morning low of $2,878
- Overall digital asset market capitalisation to $2.27tn
- According to industry monitoring site DeFi Llama, total value locked in DeFi dropped in line with broader market sell-offs, to $86.4bn
Digital assets experienced major declines this week fuelled by a combination of macroeconomic headwinds and immediate reactions to escalating conflict in the Middle East. However, outside of the charts, news and adoption remained positive heading into the long-awaited bitcoin halving event; Hong Kong approved spot Bitcoin AND Ether ETFs, Germany’s largest federal bank confirmed corporate client crypto custody and trading services.
What happened: ETF News: Hong Kong approves spot Bitcoin and spot Ether funds
How is this significant?
- Following Reuters reports last week that Hong Kong was on the verge of expediting approvals on spot Bitcoin and Ether ETF applications, the city’s regulators formally approved said products (in-principle) on Monday
- The successful applicants were ChinaAMC, Harvest Global, and Bosera International; all Hong Kong units of mainland China asset managers, leading some to suspect that well-heeled mainland investors may attempt to secure crypto exposure via Hong Kong funds (albeit unofficially) whilst the CCP maintains an official ban on crypto trading
- Bosera’s fund operates as a joint partnership with licenced Hong Kong crypto exchange HashKey
- OSL Digital Securities will provide custody services for the funds from ChinaAMC and Harvest
- Although no precise timelines have been issued for when the funds will actually start trading, reports based on an interview with OSL chairman Patrick Pan suggested it could happen by the end of the month
- He said that “All parties are working expeditiously to complete the process. However, exact dates remain unconfirmed at this time”
- Hong Kong had previously been the first Asian country to approve futures-based crypto ETFs, back in 2022
- This represents a further move in Hong Kong’s attempts to establish itself as an international crypto hub—and crucially also puts it ahead of the US in spot Ether ETF approval (for which Bloomberg analysts still forecast a mere 25% chance by the SEC’s May deadline)
- Another potentially impactful point of differentiation is that the Hong Kong ETFs offer in-kind redemption, allowing customers to receive their Bitcoin or Ether from the fund, rather than selling them for the equivalent cash value prior to transfer
- However, Bloomberg’s senior ETF analyst Eric Balchunas cautioned against expecting a US-like market impact from the launch of Hong Kong ETFs, citing several reasons including a smaller total ETF market size ($50bn), smaller issuers than BlackRock/Fidelity, and likely higher fees, leading to a Bloomberg estimate of $500m inflows for the funds
- In other Asian digital asset news, the CEO of leading Thai exchange Bitkub revealed plans this week for a 2025 IPO with a valuation between $1bn and $3bn, based on a “price to earnings ratio of 10 to 30”
- In other ETF news, US trading was muted this week in the wake of global investor uncertainty following escalating Iran-Israel tensions, leading to the longest run of net outflows in a month
- Fidelity’s FBTC ended its run of consecutive post-launch inflows at day 63 with a zero-flow day, but BlackRock’s IBIT continues its inflow streak, currently standing at 67 days and counting
- Several ETFs in fact posted zero-flow days rather than outflow days, which are “very normal” in the ETF industry and represent the activity of about 2,900 out of 3,500 funds on a daily basis
- GBTC continued its trend of outflows, which overwhelmed total inflows this week, leading to expectations of IBIT overtaking GBTC in total Bitcoin holdings by the end of the month
- Balchunas sounded a bullish note on Bitcoin ETF performance, saying “Over past five days the ten's net flows are -$223m, that is 1% of the ten's net inflows since launch and 0.4% of their assets. That net number is still GBTC-driven, as the new nine have seen INFLOWS of +$330 over past 5 days w/ IBIT extending its inflow streak to 67 days, which is minor miracle”
- He added that on longer timeframes “even with the price drop BTC is up 144% since BlackRock's filing last June and 47% YTD, which is 10x the return of $QQQ = if you are depressed with those returns you should prob seek medical help”
- Balchunas’ colleague James Seyffart also pointed out that whilst people remain fixated on days with net outflows, the real focus should be on total inflows since launch; over $12.4bn (or $28.9bn excluding GBTC)
- Although analysts remain pessimistic about imminent spot Ether ETF approval chances in the US, Grayscale’s global head of ETFs David LaValle remained optimistic about eventual approval for a myriad of digital assets
- Speaking at a NYSE roundtable event, he commented “I think 100%. The path to digital asset ETFs happened to be through this regulated market on the futures side, but as the digital asset market holistically continues to expand and to mature, I mean, we've already proven that we can do it with Bitcoin [and] we're having a really fruitful conversation around Ethereum”
What happened: Germany’s largest federal bank moves into corporate crypto services
How is this significant?
- Germany’s largest federal bank, Landesbank Baden-Württemberg, revealed plans this week to move into crypto custody and trading for customers by the second half of this year
- The custody arrangements will be undertaken in partnership between the state-owned lender and licenced European exchange Bitpanda, based in neighbouring Austria
- Initially, custody will only be available to institutional and corporate customers
- Bitpanda undertook a similar partnership with Austrian bank RLB NÖ-Wien
- Jürgen Harengel, managing director of corporate banking at LBBW said that the decision was driven by institutional interest; ”The demand from our corporate customers for digital assets is increasing. We are convinced that crypto assets will establish themselves as a building block for further business models”
- LBBW are far from the only major German bank to undertake action within digital assets; Deutsche Bank announced its own custody intentions last year, its DWS unit recently revealed involvement in the creation of a Euro-denominated stablecoin, Commerzbank secured a BaFin licence for crypto custody, and DZ Bank is developing a custody solution for over 700 community bank members
What happened: Binance gets Dubai VASP approval
How is this significant?
- Binance, the largest digital asset exchange in the world, received a long-awaited nod of approval from the UAE this week with receipt of a Virtual Asset Service Provider (VASP) licence from local regulators VARA
- CEO Richard Teng confirmed the news in a Bloomberg TV interview, in which he also revealed that the company is “in discussions with several jurisdictions that could serve as a global base”
- According to sources, one of the final requirements for VASP approval was former CEO Changpeng “CZ” Zhao (who is domiciled in Dubai) ceding control of the local Binance FZE unit, which has held “operational MVP licences” in Dubai since mid-2023
- In other Binance news, the exchange also converted its $1bn SAFU fund (Secure Asset Fund for Users) into USDC this week, as part of a more compliance-centric strategic shift under new CEO Teng
- Established as a means to compensate users affected by “extreme circumstances” such as hacks, the SAFU fund has historically maintained a value of around $1bn, but used to be composed of multiple assets, including Bitcoin, Tether, and Binance’s own BNB coin
- Binance states that USDC’s links to Circle made it the most desirable stable asset for conversion; “Making use of a trusted, audited, and transparent stablecoin for SAFU further enhances its reliability and ensures it remains stable at $1bn”
What happened: US politicians push for stablecoin regulation
How is this significant?
- Stablecoins remain an area of key interest in US regulatory realms; and a new bipartisan bill seeks to “protect consumers and the US dollar while enabling innovation in payments” whilst satisfying both sides of the aisle
- Senators Cynthia Lummis (Wyoming) and Kirsten Gillibrand (New York) drafted their bill with “technical assistance from the Federal Reserve, the Treasury Department, the Federal Deposit Insurance Corporation and New York and Wyoming regulators”
- In particular, the bill seeks to ban algorithmic stablecoins, only allowing coins backed 1:1 with physical dollars (or equivalently-valued instruments like bonds and treasury bills)
- Lummis has established a reputation as a leading digital asset advocate in DC, with Wyoming positioned as one of the most progressive states in the Union for crypto businesses
- She commented “Passing this bipartisan solution is critical to maintaining the US dollar’s dominance and making certain the US remains the world leader in financial innovation”
- Meanwhile, noted congressional crypto opponent Sherrod Brown (Ohio) said that he was open to approving such a bill, as long as it was in a package with a bill “authorising banks to do business with marijuana businesses and another measure clawing back compensation for executives at failed lenders”
- House Financial Services Committee chair Patrick McHenry is hoping to advance multiple digital asset bills that have stalled in Congress before elections this year; the FIT for the 21st Century Act and the Clarity for Payment Stablecoins Act
What happened: Tether diversifies business model
How is this significant?
- Tether, issuers of the market-leading USDT stablecoin announced a restructuring this week “to reflect its expansion into other areas of digital assets”
- The firm is now split into four units concentrated on Data (with a focus on AI investments), Finance (dedicated to USDT), Power (concentrated on Bitcoin mining), and Edu (educational activities)
- In a statement, the decade-old firm said “Tether’s expansion beyond its well-established USDT stablecoin signifies a paradigm shift in its approach to financial empowerment. By focusing on sustainable solutions adaptive to the needs of individuals, communities, cities and countries, responsible Bitcoin mining, Artificial Intelligence infrastructure and decentralised communication platforms, Tether is actively contributing to a future-proof financial and tech ecosystem”
- This crystalises previous investments in projects such as Uruguayan Bitcoin mining and data-powered AI investment
What happened: Citadel-backed crypto brokerage raising funds at unicorn valuation
How is this significant?
- Hidden Road Capital, a crypto and forex-focused prime broker backed by Citadel Securities, is “looking to raise new funds amid a bounceback in the digital-asset market”, according to Bloomberg sources this week
- According to people with knowledge of the matter, Hidden Road is raising around $120m in a Series B equity round at a valuation of around $1bn
- This firm concluded a $50m Series A in 2022, and provides prime brokerage services for numerous markets, including crypto
- Prime brokerages have gained popularity within the digital asset market since the collapse of FTX in 2022, as they help mitigate counterparty risk
- A nine-figure raise like this represents a continuation of a recent upswing in crypto VC activity; according to data from TheBlock, investments in crypto firms exceeded $1.4bn in March; the highest monthly figure in 18 months
What happened: Korean Won tops US Dollar as fiat trading pair in Q1
How is this significant?
- Demand for digital assets is surging in South Korea; an appetite illustrated by the fact that the Korean Won
- According to analytics firm Kaiko, cumulative Q1 Korean Won crypto trading volume on centralised exchanges amounted to $456 billion compared with $445 billion in US Dollar trading
- This reflects a visible rise in demand for digital assets in Korea; local traders have embraced a leveraged Bitcoin ETF, and political parties made crypto tax delays and Bitcoin ETF access pledges during the country’s recent election campaign
- There is however a considerable caveat; this is trading denominated directly in fiat currency, which is proportionally more popular in Korea than elsewhere globally, partly because of strict conditions limiting citizens to usage of Korean exchanges
- Additionally, the data is limited to centralised exchanges, as most DeFi solutions lack any fiat on- or off-ramps
- Globally, the US Dollar remains the dominant denomination for stablecoins, which represent much more trading volume within digital assets for their ease of use than direct fiat deposits
What happened: Bitcoin halving news
How is this significant?
- With only a couple hundred Bitcoin blocks left (at the time of writing) before the blockchain’s next “halving” event, speculation and predictions have increased concerning its potential effects
- The (roughly) quadrennial event will take place on Saturday, and halves the amount of new Bitcoin entering supply as miners secure block rewards; dropping from 6.25 Bitcoin per block to 3.125 Bitcoin
- BlackRock released an educational video around the Bitcoin halving, and the resultant changes in supply dynamics
- JP Morgan analysts led by Nikolaos Panigirtzoglou maintained their dim view on any halving price impact in a new research note on Wednesday, surmising that any immediate upturn is “already priced in”
- The analysts “see a downside for the Bitcoin price post-halving for several reasons”, including perceived overbought conditions, modest VC activity, and consolidation amongst miners in a post-halving landscape
- They wrote “As unprofitable Bitcoin miners exit the bitcoin network, we anticipate a significant drop in the hashrate and consolidation among bitcoin miners with a highest share for publicly-listed Bitcoin miners”
- Crypto.com appears to disagree with JP Morgan’s thesis; the exchange has moved back into hiring mode, and CEO Kris Marszalek posits that on longer-term timeframes the halving makes a “substantial difference” and is a “positive development for the market”
- The nation of Bhutan is leveraging the changing supply dynamics through increased investment in its Bitcoin mining capacity; an attempt to utilise the nation’s hydroelectric surplus whilst diversifying economic reliance on selling the electricity itself to neighbours
- The mining installations are a partnership between national investment arm Druk Holding & Investments, and Bitcoin hardware manufacturer Bitdeer, headquartered in Singapore
- The new hardware will sectuple Bhutan’s capacity to 600 megawatts, and is financed through a $500m raise conducted by the partners
What happened: IMF publishes paper on Bitcoin cross-border flows
How is this significant?
- The International Monetary Fund published a recent paper on Bitcoin, titled “A Primer on Bitcoin Cross-Border Flows: Measurement and Drivers”
- As summarised by Swan Bitcoin analyst Sam Callahan, the working paper came to numerous interesting conclusions regarding cross-border flows of Bitcoin and its perception as a financial asset
- Bitcoin’s perceived “riskiness” is decreasing; “An increase in the VIX is associated with higher Chainalysis [blockchain analytics firm] inflows and outflows. This significant, positive response may reflect increased activity via the Bitcoin market as investors move away from risk assets"
- Bitcoin is used as a means to combat both inflationary and governmental pressures; “off-chain cross-border outflows are positively correlated with a Bitcoin parallel premium, which we interpret as a broader proxy for exchange rate pressures, reflecting macroeconomic imbalances… An increase in the parallel premium is associated with higher LocalBitcoins [a peer-to-peer fiat-Bitcoin exchange] outflows. This finding indicates that Bitcoin may be used to circumvent capital controls”
- Bitcoin is increasingly viewed as a safe haven in emerging and developing markets; the paper identifies Seychelles, Venezuela, Moldova, Nigeria, and Central African Republic as the countries with the largest Bitcoin inflows
- Whilst some of those countries have notoriously unstable economies Callahan speculates that an “explanation for the high inflows in countries like Seychelles and Moldova is the low taxes and light-touch regulations that have attracted crypto exchanges to their shores”