Nickel Research Centre

Nickel News Roundup - Week 38

22nd September, 2022

Market Overview:

Digital assets experienced significant pullbacks as many global markets exhibited risk-off behaviour in the face of interest rate hikes.

  • Bitcoin and other digital assets again moved in the same direction as traditional markets, with the 60-day Bitcoin/S&P500 correlation co-efficient near record levels
  • Sweden was the first economy to confirm major interest rate hikes, with their highest raise (100 bps) in 30 years, followed by a third consecutive 75bps hike by the Federal Reserve leading to instant marketwide sell-offs
  • Bitcoin peaked around $20,400 on Thursday, and generally traded between $19,400 and $20,200 from Thursday to Sunday, before a steep drop on Monday led to weekly lows of $18,420
  • Bitcoin’s current price of $18,540 represents a 7.3% weekly decrease
  • Ether successfully upgraded to a proof-of-stake consensus model early on Thursday, but underperformed Bitcoin thereafter
  • Ether hit a weekly high of $1,647 early on Thursday, before dipping as traders hedged their bets on a stable network upgrade, and took profits on its strong recent performance
  • Ether declined consistently throughout the week, with a low of $1,257 following Wednesday’s Federal Reserve interest rate hike announcement
  • Ether’s current price of $1,260 represents a 21% decrease from last week’s figure
  • Overall market capitalisation dropped sharply to $898bn
  • Total value locked in DeFi remained stable at $26.7bn according to industry monitor DeFi Pulse
  • The fact that the dollar value locked in DeFi remained stable despite the drop in Ether valuation could likely be attributed to holders returning Ether to DeFi protocols following the Merge counteracted the drop in Ether value

Digital assets suffered in anticipation—and in the wake—of continued hawkish central bank policy announcements. However, Ethereum accomplished a major technological milestone, and institutions continued to invest in long-term digital asset exposure; including leading banks Nomura and Societe Generale, Nasdaq offering custody services, and continued VC raises for promising startups in the space.

What happened: Ethereum successfully completes proof-of-stake protocol upgrade

How is this significant?

  • The Ethereum network completed its long-awaited “Merge” upgrade on Thursday, 15 September, successfully transitioning from a proof-of-work consensus model to proof-of-stake
  • Not only did this represent a major technological achievement—switching consensus models seamlessly without any downtime or pauses to the blockchain—but potentially a major social achievement too
  • One of the key critiques of digital assets has long been the energy usage and carbon footprint of mining in proof-of-work (PoW) consensus—by switching to proof-of-stake, the entire Ethereum blockchain exponentially reduced its energy consumption overnight
  • A new report from the Crypto Carbon Ratings Institute calculated that Ethereum cut energy consumption by 99.988% and carbon-dioxide emissions by 99.992%
  • Ethereum co-founder Vitalik Buterin tweeted that the Merge effectively reduced global energy consumption by 0.2%—a figure which fellow Ethereum co-founder Joseph Lubin touted as “likely the biggest decarbonisation effort of any industry in history”
  • This level of carbon reduction could make Ethereum more palatable for ESG investors, institutional forces and industrial applications
  • The market response suggested that the successful merge was a “sell the news” event, with prices falling as proof-of-stake moved from anticipation and “hype” to reality
  • Additionally, there was an increased selling pressure from Ethereum miners, as the network moved from miners to validator nodes for its network confirmations
  • SEC Chair Gary Gensler voiced concerns that staking—effectively earning a return for locking tokens into a smart contract—could possibly qualify digital assets as securities, although he didn’t specifically name Ether in his statements
  • Additionally, a filing against an ICO (Initial Coin Offering) promoter on Tuesday appeared to suggest the SEC believes that Ethereum could fall under US jurisdiction due to large numbers of Ethereum nodes hosted there
  • Although Ether issuance hasn’t been consistently deflationary (as some anticipated) since the Merge”, it has been greatly reduced
  • On Ethereum metrics tracker, one can compare the actual rate of issuance against simulated PoW issuance; in the week after the Merge, Ether issuance reflected a 0.2% annual supply growth, versus 3.74% under the previous PoW system

What happened: Nomura deepens launches digital asset company

How is this significant?

  • Japanese investment bank Nomura Holdings confirmed the creation of a new digital asset business this week, named Laser Digital Holdings
  • In a press release, they declared “Building on Nomura’s expertise in institutional investor businesses and global client base, Laser Digital will provide new value in the area of digital assets to our clients”
  • The first unit launched by this new digital asset holding company (incorporated in Switzerland due to a favourable regulatory landscape) will be Laser Venture Capital; a VC fund focused on Web3, DeFi, and blockchain infrastructure investments
  • Steve Ashley, Nomura Holdings’ head of trading and investment banking, will move into a new role as chairman of Laser Digital
  • Nomura CEO Kentaro Okuda identified digital assets as a “critical part” of future profitability earlier this year, and said that Ashley’s expertise “will be critical to the growth and success of our new digital asset business”
  • As Japan’s largest brokerage, Nomura’s move represents a major vote of confidence from a key player in one of the world’s largest economies

What happened: Contagion latest—Offers, Loans, and Disappearing Developers

How is this significant?

  • A court filing from bankrupt lender Voyager revealed that FTX-owned Alameda Research will repay a $200m loan of Bitcoin and Ether to the company
  • Voyager will receive over 6,500 Bitcoins and approximately 51,000 Ether towards principal and accrued fees
  • In return, Alameda will recover digital assets including 4.65 million FTT and 63.75 million SRM tokens which Voyager held as collateral for the loan
  • A Wall Street Journal report—citing people familiar with the matter—revealed that digital asset exchanges FTX and Binance are the leading bidders for Voyager’s assets, each submitting offers in the $50m ballpark (with Binance offering slightly more)
  • Final results of the asset auction should be announced by the 29th of September
  • Bankrupt lender Celsius filed a court petition seeking permission to sell their stablecoin holdings in order to fund ongoing operations
  • Meanwhile, Do Kwon—lead developer of the collapsed Terra Luna blockchain ecosystem which kicked off the crypto contagion crisis—says he is “not on the run” after being served with an arrest warrant in his homeland South Korea
  • However, Singapore police issued a statement he was no longer in the city-state, where the prosecutors’ office in Seoul had identified his location
  • Do Kwon issued a statement, claiming “For any government agency that has shown interest to communicate, we are in full cooperation and we don’t have anything to hide”
  • Digital asset issuers Ripple fought back in a long-running SEC lawsuit, filing a motion for dismissal and claiming that their XRP token cannot be a security as there are no investment contracts granting rights for token holders
  • Ripple counsel stated “filings show that the SEC is acting outside their legal limits. The SEC is not looking to apply the law—they are looking to remake the law in the hopes that it can impermissibly expand their jurisdiction”

What happened: Societe Generale introduces crypto services for asset managers

How is this significant?

  • French banking giant Societe Generale are the latest large financial institution to deepen their involvement with digital assets, driven by customer demand
  • The Societe Generale group have previously undertaken numerous trials and initiatives involving digital assets and asset tokenisation, primarily through their FORGE subsidiary—but this marks the greatest exposure thus far from Societe Generale Securities Services
  • In a press release, they stated “More and more investors want to integrate cryptocurrencies in their portfolios. Asset management companies are therefore looking to build new ranges of solutions invested mainly in digital assets”
  • As a result, they have launched crypto funds for asset manager clients, compliant with the European regulatory framework
  • According to the press release, “The first two products of the range in Euros are mainly based on Bitcoin, Ether and derivatives”
  • Another French banking heavyweight, BNP Paribas, developed digital asset custody services in July, making France one of the most crypto-friendly banking markets in Europe

What happened: Nasdaq makes largest-ever push into digital assets

How is this significant?

  • Nasdaq (the world’s second-largest stock exchange) this week announced a new digital assets unit aimed at high-value investors, following increased interest in the asset class
  • Nasdaq Digital Assets will initially concentrate on custody services for Bitcoin and Ether, limited to institutional investors
  • The new unit will be led by Ira Auerbach, formerly in charge of prime broker services at Gemini, the digital asset exchange owned by the Winklevoss twins
  • Auerbach said the company would offer other services after establishing their custody offering, including execution services and liquidity
  • Additionally, Auerbach said “We believe this next wave of the revolution is going to be driven by mass institutional adoption. I can think of no better place to bring that trust and brand to the market than Nasdaq”

What happened: VC news—new nine-figure fund enters the arena

How is this significant?

  • Digital asset fraud detection firm Sardine closed a $51.5m Series B round led by Andreessen Horowitz (a16z)
  • This follows just over half a year after their $19.5m Series A round in February, showing that despite crypto winter, compelling startups can still attract significant capital
  • Sources speaking to industry publication Coindesk revealed that digital asset exchange FTX “is raising capital in parallel with a potential acquisition”
  • Although the size of the current raise wasn’t disclosed, the sources reported that the valuation of the company would remain unchanged from earlier this year, at $32bn
  • The raise is apparently predicated on FTX successfully negotiating the acquisition of retail-facing trading platforms, in an effort to expand the exchange’s client base, which generally consists of more sophisticated traders
  • Token management platform Magna achieved a $70m valuation after raising $15m at seed stage from a variety of investors, including Tiger Global, Tusk Venture Partners, and Galaxy Digital
  • Alternative investment firm Valkyrie attracted nearly $74m to two crypto-focused trusts, dedicated to the Tron and Avalanche blockchains
  • Hong Kong real estate mogul Adrian Cheng announced plans for his firm C Capital to raise $500m for new investment funds dedicated to blockchain businesses and private equity
  • $200m of that amount is earmarked for digital assets, taking advantage of current crypto winter conditions
  • C Capital’s CEO Ben Cheng believed bear market investments historically yield the best results; “When people are on defense, we’re on the offense… After another 6 to 9 months, it will come back”

What happened: MicroStrategy increases Bitcoin holdings further

How is this significant?

  • Leading corporate Bitcoin holders MicroStrategy added to their Bitcoin balance sheet this week—albeit at a smaller scale than previously
  • On Tuesday, they announced the purchase of 301 Bitcoins for approximately $6m
  • However, this reduction in scale isn’t necessarily indicative of an overall reduction in Bitcoin enthusiasm from the firm
  • The latest purchase brought their holdings to exactly 130,000 Bitcoins
  • Last week, MicroStrategy filed with the SEC for a potential $500m stock offering in order to fund the purchase of more Bitcoin
  • Executive chairman Michael Saylor was a vocal critic of Ethereum’s proof-of-stake transition this week, claiming that Bitcoin’s environmental impact is overstated because miners use large amounts of renewable energy
  • He also argued that Bitcoin could become stronger as a result of Ethereum’s move to proof-of-stake, believing that proof-of-work “is really the only universally accepted, proven method for creating a digital commodity”

What happened: Key Personae news

How is this significant?

  • Several individuals from both traditional finance and digital assets made the news recently regarding plans in the crypto asset space
  • Alexander Lebedev (former owner of Russia’s National Standard Bank and publisher of British newspapers The Independent and The Evening Standard) announced a move into stablecoins
  • Specifically, his InDeFi company plans to create a Ruble-backed stablecoin on the Ethereum blockchain; it “will not only make it easier for Russian citizens to access international cryptocurrency exchanges, but also, after changes in legislation, provide transactions with foreign counterparties via crypto”
  • In Canada, blockchain and Bitcoin proponent Pierre Poilievre was elected leader of the Conservative party, they key opposition figures to Justin Trudeau’s incumbent Liberal party
  • Chinese crypto billionaire and mining hardware entrepreneur Jihan Wu successfully purchased the Le Freeport maximum security vault in Singapore—dubbed Asia’s Fort Knox—for $40m, a steep discount on the $100m building cost

What happened: JP Morgan believes Chinese metaverse value could reach $4tn

How is this significant?

  • In a new research report, JP Morgan analysts forecast that in China alone, the total value of metaverse-related business could reach $4tn in the future
  • The report stated there could be “profound implications” for numerous industries, most significantly e-commerce, advertising, and gaming
  • In their most optimistic scenarios, metaverse integration could triple the value of China’s online gaming market to over $130bn, benefitting industry leaders like Tencent and NetEase
  • JP Morgan wrote that the metaverse “could digitalise everything in the long term” as the lines between physical and digital experiences blur, potentially leading to a $4tn total addressable market from “converting offline consumption across physical goods and services”
  • However, it should be noted that these projections could take several decades to materialise as they rely on factors like virtual reality hardware becoming lighter, cheaper, and more accessible; “We think ‘perfect form’ of the metaverse could take decades to achieve… While we believe the [total addressable market] for the metaverse is enormous, we believe there are various technological obstacles to overcome”
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