Nickel News Roundup - Week 24

16th June, 2022

Market Overview:

Digital assets suffered major losses this week after record inflation figures and recession fears led to a global sell-off.

• Bitcoin experienced major losses this week, falling to its lowest levels since December 2020
• The decline was catalysed by CPI data on Friday, leading to widespread expectations (which were proven correct) of a 75 basis point interest rate hike
• The market drop accelerated from Monday as traditional markets crashed in response to CPI data, followed by concerns over the liquidation of lending platform Celsius and hedge fund 3 Arrows Capital spreading through the crypto space
• Bitcoin’s current price of $21,720 is 28% down on the week, with a weekly low of $20,180 taking Bitcoin within touching distance of the $20,000 mark, and the $19,511 price point of the previous Bitcoin issuance halving event
• Ether was hit even harder, shadowing Bitcoin’s momentum but falling further
• Ether’s current $1,165 price equates to an unprecedented 35% weekly drop
• Overall market capitalisation dropped below $1tn for the first time since February 2021, with a current value of $936bn, up from Wednesday’s weekly low of $830bn
• Total value locked in DeFi was slashed following Ether’s decline, sinking to $39.5bn according to industry monitor DeFi Pulse

Digital assets experienced one of the most eventful weeks in memory, after record inflation figures led to widespread de-risking and recessionary fears across global markets. Major players in the industry, including digital asset lender Celsius and 3 Arrows Capital both displayed concerning signs of insolvency, dragging market sentiment and performance down even further. However, even with all the pain in the market, many major institutions continued to display and declare faith in the foundational technology and the industry’s long-term potential; including the likes of Fidelity, JP Morgan, Goldman Sachs, Wells Fargo, Bank of America, Mastercard, Amex, and Alliance Bernstein.

News:

What happened: Crypto asset lender Celsius solvency concerns drive market down

How is this significant?

• Following the recent collapse of the Terra blockchain ecosystem after the de-pegging of their algorithmic stablecoin, Celsius, a major crypto asset lender, is reportedly suffering from solvency issues
• A blog post on Monday revealed that Celsius was suspending withdrawals, seemingly confirming major ongoing solvency issues; “Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, swap, and transfers between accounts. We are taking this action today to put Celsius in a better position to honour, over time, its withdrawal obligations”
• 1.7 million users of the Celsius platform are affected by this sudden shift in policy, leading to concerns of a possible “bank run” when they do re-open withdrawals
• On Wednesday, the Wall Street Journal reported that Celsius hired restructuring lawyers from law firm Akin Gump Strauss Hauer & Feld to explore possible financing options and other strategic alternatives, such as financial restructuring
• Celsius had in the past been criticised for offering exceedingly high-interest rates (over 18%) on users’ asset deposits, and a key issue in their current liquidity imbalance—besides previous losses from hacks—was a significant price discount on their large holdings of stETH compared to the actual current price of Ether
• Competing loan platform Nexo took the opportunity to demonstrate their financial stability, publishing an offer “to readily acquire any remaining qualifying assets of Celsius, mainly their collateralized loan portfolio”
• Concerns over Celsius’ position—including the risk of cross-contagion—led several other Web3 finance platforms besides Nexo to confirm their liquidity, including BlockFi and blockchain network Tron, who deployed additional capital in an attempt to secure their newly-launched USDD algorithmic stablecoin
• Another key statement addressing the Celsius crisis came from stablecoin issuers Tether, who wrote “Regarding the recent events impacting the Celsius lending platform, Celsius position has been liquidated with no losses to Tether. Tether’s lending activity with Celsius (as with any other borrower) has always been overcollateralized. Tether currently has zero exposure to Celsius apart from a small investment made out of Tether equity in the company”
• Tether additionally spoke out against unjustified FUD (industry jargon for Fear, Uncertainty, and Doubt) regarding their collateralisation, revealing that they have been shifting away from commercial papers towards short-maturity US Treasuries, which now represent 47% of reserves, compared to less than 25% for commercial papers
• On their website, they confirmed “Tether can report that its current portfolio of commercial paper has been further reduced to 11 billion (from 20 billion at the end of Q1 2022), and will be 8.4 billion by the end of June 2022. This will gradually decrease to zero without any incurrences of losses. All commercial papers are expiring and will be rolled into US Treasuries with a short maturity”

What happened: stETH:ETH price deviation causes additional market concerns

How is this significant?

• stETH was cited as a key reason for Celsius’ solvency issues, but it may have also influenced downward trends in other projects as market panic decoupled the stETH price from ETH
• stETH (staked ETH), is a derivative token devised by liquid staking platform Lido Finance, used to generate yield on DeFi platforms as an Ether analogue, in return for locking actual Ether (ETH) on Lido’s platform until the Ethereum network’s transition to Proof-of-Stake consensus; at which point 1 stETH will be redeemable for 1 ETH
• At the time of writing, stETH was priced at $988, compared to over $1,100 for regular Ether, leading to significant losses whenever Celsius had to sell their stETH (used to generate yield on DeFi platforms) in order to honour customers’ withdrawal requests for regular ETH
• News that Ethereum developers were delaying the network’s “difficulty bomb” (a code update designed to exponentially increase the difficulty—and therefore cost—of Proof-of-Work mining in order to incentivise miners to become validators on Ethereum’s updated Proof-of-Stake network) caused further panic surrounding stETH positions, as delaying the difficulty bomb could delay the Merge (the process of migrating the network to Proof-of-Stake)
• Delaying the merge would delay the earliest possible opportunity for investors to redeem their stETH on a 1:1 basis for ETH
• On Wednesday, major hedge fund 3 Arrows Capital also faced scrutiny and concern over liquidity, after CEO Zhu Su tweeted “We are in the process of communicating with relevant parties and fully committed to working this out”
• Sources told industry publication TheBlock that Dubai-based 3 Arrows “is in the process of figuring out how to repay lenders and other counter-parties after it was liquidated by top tier lending firms in the space” 
• According to the sources, total liquidations thus far amount to “at least $400m”
• On-chain data from blockchain analytics firm Nansen shows that on Tuesday, the firm “withdrew more than 80,000 stETH from decentralised lending project Aave in four transactions and then swapped 38,900 of the stETH for 36,700 Ether”; a significant haircut on the future 1:1 redemption between stETH and ETH, indicating “urgent liquidity needs” according to market observers
• This volume of stETH trading created additional sell pressure on the asset, driving its price lower and exacerbating concerns for those who can’t wait until the 1:1 redemption

What happened: New Bank of America survey reveals continued faith in digital assets

How is this significant?

• In a new report by Bank of America this week, respondents feared stagflation but cheered digital assets; despite their decline this year, more than 9 out of 10 planned to purchase crypto assets in 2022
• To be precise, 91% surveyed in early June said they expect to buy crypto in the next 6 months; a figure that Bank of America noted matched the percentage of respondents who’d purchased digital assets in the previous 6 months
• Analysts wrote that “Despite the sharp correction in crypto valuations, consumer interest in the sector remains strong”, and that the many planned to continue holding their current portfolio despite market conditions; “30% said they didn’t plan to sell any of their holdings in the next six months, and the same percentage said they haven’t sold any of their holdings over the past six months”
• Of the respondents who currently own digital assets, the main motivators for purchase were “expectations of price appreciation, portfolio diversification, and interest in the technology”
• Around half of respondents were also interested in using crypto assets to pay for goods or services, with slightly more interested in using them for in-person purchases rather than online; a fact which analysts linked to growing integration within payment processors; “We think this could be explained by the increased popularity of products which allow the use of stored crypto balances for consumer-to-merchant transactions, whereby an intermediary (such as PayPal via its Checkout With Crypto service, or Visa via its Coinbase Card) converts crypto to fiat currency before the merchant gets paid”

What happened: Fidelity chief Abby Johnson confirms digital asset plans despite crypto winter

How is this significant?

• Speaking at the Consensus 2022 blockchain conference organised by industry publication Coindesk, Fidelity Investments CEO Abby Johnson affirmed the firm’s long-term commitment to the sector, regardless of current market conditions
• Although she said she “feels awful” about the recent value lost from the market, she also told attendees “I believe the industry in crypto has a lot more to come”
• Speaking about the bear market, the long-term Bitcoin bull said “I figure this is my third crypto winter. There’s been plenty of ups and downs but I see that as an opportunity… I was raised to be a contrarian thinker, and so I have this knee-jerk reaction: If you believe that the fundamentals of a long-term case are really strong, when everybody else is dipping [out], that’s the time to double down and go extra hard into it”
• Johnson revealed she has worked on getting Fidelity involved in digital assets since 2014, identifying “about 52 use cases” for Bitcoin, and spending $200,000 on Bitcoin mining equipment
• She also shared feedback for the company’s recent plans to integrate Bitcoin into American 401(k) retirement plans; “I would have never thought that we would have gotten so much attention for bringing a little bit of bitcoin to a little bit of the 401(k) business…. A lot of people now, that they've heard about it, have been asking, so I've been happily surprised at the amount of positive feedback that we've gotten on that”

What happened: Goldman Sachs executes first trade of Ether derivatives

How is this significant?

• Just over a year after its first Bitcoin derivative trades, and a month after its first Bitcoin-collateralised loan, Goldman Sachs executed its first trade on an Ether-linked derivative; an Ethereum non-deliverable forward
• London-based Marex Financial acted as Goldman’s counterparty for the trade, providing a new means for institutional investors to gain exposure to the market’s second-biggest digital asset
• They also plan to offer additional over-the-counter Ether options trading, spurred by “growing interest from clients”
• Despite the interest in derivatives, Goldman have stated they’ll wait for greater regulatory clarity before offering physical Bitcoin trading

What happened: Institutional digital asset interest drives new services from trading platforms

How is this significant?

• Despite bearish conditions in 2022, institutional investors continue to consider the potential of the digital asset industry, with several trading platforms this week debuting new products or services related to crypto
• Interactive Brokers appointed OSL Digital to provide digital asset trading services for their platform in Hong Kong
• David Friedland, the APAC head of Interactive Brokers, commented “Investors worldwide are rallying to digital asset markets, and the collaboration with OSL comes at a key moment in the development of the regulated digital asset ecosystem in Hong Kong”
• Paxos launched Financial Advisor Crypto Trading within their Paxos Crypto Brokerage, providing a range of wealth-management solutions to financial advisors through broker-dealers
• The company’s Head of Strategy, Walter Hessert, said “As interest in crypto continues to grow, it’s important to recognize that technology will underscore a company or industry’s success in this space. Our goal is to provide our clients with the ability to seamlessly access crypto safely and efficiently”
• Bloomberg also increased its data coverage of the industry, with the Bloomberg Terminal updated to include the Top 50 digital assets by market capitalisation

What happened: Leading digital asset exchanges step up hiring efforts

How is this significant?

• As some companies (BlockFi, Coinbase, and crypto.com) in the space announced they were cutting headcount to better weather the ongoing crypto winter, several leading exchanges declared current conditions an opportunity to step up their hiring efforts
• Changpeng “CZ” Zhao, CEO of Binance (the world’s largest digital asset exchange) revealed that “We have a very healthy war chest, we in fact are expanding hiring right now”
• Speaking at the Consensus 2022 conference, he argued that the market is now more balanced than during peak bullishness; “During bull markets, everyone’s starting their own projects, everyone’s paying everyone ridiculous compensation… if we are in a crypto winter, we will leverage that, we will use that to the max”
• An additional way that Binance plans to leverage crypto winter conditions is through mergers and acquisitions—Zhao said the company had been very frugal compared to several competitors in resisting the expense of large-scale advertising campaigns or marketing tools like naming-rights purchases; now, they are “kicking into high gear in terms of M&A activity”
• Kraken was another major exchange to signal ongoing hiring activity, with over 500 roles advertised and no plans for any layoffs
• In a blog post, the exchange noted “despite a steep decline in crypto prices and an uncertain macro environment, we’ve taken this opportunity to align our internal culture around a set of shared values we feel will keep us agile, focused, and competitive as we execute on our mission in the years ahead”

What happened: French government recommends blockchain for 2024 Olympics ticketing

How is this significant?

• Following ticketing disruptions at the recent Champions League final in Paris—which were worsened by widespread distribution of counterfeit tickets—recommendations have been made to the French government to issue Olympic tickets on the blockchain as NFTs
• A 30-page report to the Prime Minister’s office included 5 key recommendations to ensure a smooth ticketing process at venues, including “total dematerialisation of non-transferable tickets, transmitted by the organiser only a few days before by SMS messaging and comprising a rotating QR code using blockchain technology”
• Additionally, the chaos surrounding the Champions League final may catalyse adoption even before the 2023 Rugby World Cup in France, as the report’s author Michel Cadot wrote “coordination, applied to other Major International Sporting Events of major importance upstream of the cut of the Rugby World Cup and the 2024 Olympic Games, would make it possible to prefigure the planned systems and to break in the working methods, as well as the reflexes of multi-actor management to face difficulties”

What happened: JP Morgan outlines institutional-grade DeFi and asset tokenisation plans

How is this significant?

• Speaking at Coindesk’s Consensus 2022 conference in Austin this week, Tyrone Lobban, head of Onyx Digital Assets at JPMorgan, described the firm’s plans for the digital asset sector, potentially unlocking trillions of dollars in value
• “Over time, we think tokenizing U.S. Treasuries or money market fund shares, for example, means these could all potentially be used as collateral in DeFi pools… The overall goal is to bring these trillions of dollars of assets into DeFi, so that we can use these new mechanisms for trading, borrowing [and] lending, but with the scale of institutional assets”
• Institutional DeFi essentially imposes KYC practices on permissionless lending pools found in decentralised finance, such as in Aave’s Arc platform
• JP Morgan are already familiar with tokenised assets on permissioned (i.e. private) blockchains, such as its own Onyx blockchain, where the company’s proprietary JPM Coin has experienced $350bn in trading volume
• Lobban revealed the company has spent years developing digital identity on the blockchain, to enable permissioned access to DeFi protocols and tokenised assets that enable whitelisted trading at an institutional scale, with all the benefits of blockchain trading and mechanisms
• “We want to use verifiable credentials as a way of identifying and proving identity… they can introduce the scale that you need to provide access to these pools without necessarily having to maintain a white list of addresses. Since verifiable credentials are not held on-chain, you don’t have the same overhead involved with writing this kind of information to the blockchain, paying for gas fees, etc”
• He said they have yet to finalise decisions regarding which DeFi platforms they’ll work with, but that they’ll be “battle-tested with high total value locked”

What happened: Asset managers Alliance Bernstein integrates blockchain technology

How is this significant?

• In a press release this week, $687bn AUM asset managers Alliance Bernstein announced that they were partnering with AllFunds Blockchain to “adapt their asset services activities to the blockchain ecosystem”
• Alliance Bernstein innovation head Ronit Walny stated that blockchain technology could be “transformative to the asset management industry, uncovering significant transactional efficiencies and enhanced transparency as well as operational agility that makes investment solutions available to a broader investor base”
• Karl Sprules, the firm’s Global Head of Technology wrote “we are excited to announce this integrative collaboration between AB and Allfunds Blockchain, which we believe is an important step forward for the future of our firm—and across the industry”

What happened: Payment processors increase crypto asset integration

How is this significant?

• American Express announced their first product linked to digital assets at Consensus 2022, partnering with industry firm Abra
• The Abra Crypto Card will allow customers to earn cashback on purchases in the form of crypto, choosing from over 100 different digital assets supported on the Abra platform
• Abra CEO Bill Barhydt told industry publication Coindesk “This has been a long time coming and is the first American Express crypto product… Amex retail offers from hundreds of merchants are integrated into the app with the whole fraud and purchase protection all integrated with the Abra wallet”
• He also pointed out that users of the card may represent a different clientele to existing crypto card offerings; “If you look at our client base and where the money is for us, it skews toward our private client business, which is upper-middle class to extremely wealthy, where they have six to eight figures worth of crypto with Abra… That group has a natural affinity and overlap with American Express”
• Meanwhile, Amex rivals Mastercard also increased their digital asset integration, through added support for NFT marketplaces and Web3 payment services
• In a blog post, the company wrote “we’re happy to announce we’re working to enable NFT commerce with Immutable X, Candy Digital, The Sandbox, Mintable, Spring, Nifty Gateway, and Web3 infrastructure provider MoonPay… We’re working with these companies to allow people to use their Mastercard cards for NFTs purchases… With 2.9 billion Mastercard cards worldwide, this change could have a big impact on the NFT ecosystem”
• They also revealed that 45% of 35,000 global survey respondents for a new report on digital payments expressed interest in NFTs, driving them to integrate their payment services across more platforms

What happened: Wells Fargo issues “buy” rating for digital asset bank Silvergate

How is this significant?

• Despite current market dismay, Wells Fargo issued a buy rating for Silvergate Bank in a new report published on Monday, citing institutional interest in the digital asset industry as a key factor
• Giving the stock an “overweight” classification and a sell target of $120 (nearly double the $61.06 price at the report’s release)
• Wells Fargo analysts wrote that “Much of the bear case is priced in at current levels, which makes for an attractive entry point”, and reasoned that Silvergate’s position as one of the only regulated and FDIC-insured US dollar on- and off-ramps for the crypto ecosystem makes it an attractive option for institutional investors
• The report’s authors placed particular emphasis on increased institutional interest in the space, name-checking JPMorgan, PayPal, Block, Tesla, Mass Mutual, CME Group, ICE, Fidelity, and Northern Trust, alongside mutual funds and pension plans
• “While crypto’s role in the financial ecosystem is still up for debate, what cannot be ignored is the wide scale adoption of crypto and blockchain products by some of the largest global institutions”
• Silvergate’s digital customers have been increasing by 35% to 40% year-on-year according to the bank, and they’ve successfully launched services such as Bitcoin-collateralised loans through the Silvergate Exchange Network (SEN) used by large institutions (such as MicroStrategy) and exchanges
• Additionally, the report noted plans for Silvergate to launch a US-based stablecoin payments platform this year

What happened: Michael Saylor confirms MicroStrategy safety from Bitcoin margin call

How is this significant?

• Speaking of Bitcoin-collateralised loans from Silvergate, MicroStrategy CEO Michael Saylor had to speak out on Wednesday to deny that his company faced a margin call on their SEN loan due to current prices
• MicroStrategy is the world’s largest corporate investor in Bitcoin, holding 129,218 BTC, purchased at an average price of $30,700
• Addressing rumours that a $21,000 Bitcoin price could trigger a margin call and liquidation, he informed CNBC that “The margin call thing is much ado about nothing… We feel like we have a fortress balance sheet. We’re comfortable and the margin load is well managed”, adding that they were ten times over-collateralised on their loan
• He says Bitcoin would need to fall to $3,562 before the company required extra collateral
• Despite currently being $1bn down on their Bitcoin investment, Saylor was unconcerned given the company’s long-term vision, tweeting; “When MicroStrategy adopted a #Bitcoin Strategy, it anticipated volatility and structured its balance sheet so that it could continue to #HODL through adversity”