Crypto Industry Report #49
Balzers (LI), 26 April 2021
This week, our blockchain experts assessed the following headlines:
Our weekly Crypto Industry Report news ticker provides you with the latest information on the global crypto industry – picked and analysed by our blockchain experts.
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Bitcoin might not be so bad after all
As we alluded to in our last report, there seems to be more regulation coming soon. This is at least what ex-SEC chair Jay Clayton has stated in a recent appearance. Consequentially, several spectators within the crypto space have been fearing that a coming wave of regulation could severely damage the adoption of crypto assets. Some consider it even highly likely that Bitcoin will be banned by governments.
Just recently though, with Binance.US, one of the world’s biggest bitcoin exchanges has hired a former US banking regulator. Known for his crypto friendly attitude, Brian Brooks will become the new chief executive of Binance’s subsidiary in the US, starting May 1st. The former head of the Office of the Comptroller of the Currency (OCC) has served under the Trump administration and was, among other things, responsible for OCC’s released guidance that made it possible for banks to provide cryptocurrency custody services and use stablecoins to facilitate payment activities.
This move ties in with the hiring activities of other crypto companies. BlockFi, a leading crypto lending start-up has announced to add former Commodity Futures Trading commission (CFTC) chairman J. Christopher Giancarlo to its board. In March, Brett Redfearn was hired as vice president by Coinbase. He’s another top regulator that previously served for the Securities and Exchange Commission (SEC).
The movement of highly esteemed former regulatory staff into crypto can be seen as a good signal that Western governments like the US might not be on the verge of banning bitcoin. Quite the contrary. It seems more likely that the US will lead the charge in adopting the new decentralized world for the better. After all, concerns about bitcoin’s alleged criminal use are faltering with more and more people stating the facts. In this regard, it was Michael Morell, former acting director of the Central Intelligence Agency, that refuted this often-heard narrative in a recent paper. In it he states that the broad accusations about bitcoin’s illicit use in finance are significantly overstated.
In addition, Morell also made it clear that the US cannot afford chasing false narratives that are preventing it from adopting and leveraging blockchain and fintech more generally. By making such statements he alluded to the geopolitical relevance Bitcoin has for the US in regard to China. Such comments overlap nicely with what Peter Thiel, one of Silicon Valley’s most popular entrepreneurs, meant when he said that the US cannot let China have dominion when it comes to bitcoin .
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The rise of meme coin doge
In mid-April, the crypto markets had another one of its bouts of volatility and all of the cryptoassets were in the red. Was it really all of them? Not quite. One of them was holding firm and was actually going up. To the bafflement of many, the one coin standing out was none other than dogecoin. But why? After all, the project was started as a mere meme coin back in 2013 by an Australian entrepreneur and technologist. As he admitted more than once, dogecoin was really just a “joke” cryptocurrency with no real use case in mind.
With Bitcoin’s recent price momentum accelerating, altcoins started to gain in value as well. It was Elon Musk, who likely re-ignited the interest in dogecoin and its subsequent price rally. In various tweets on Twitter, he called for a dogecoin standard and hailed the cryptocurrency the only true crypto. Ever since Musk tweeted about doge, the coin started climbing up the price ladder.
Until a few days ago, when dogecoin started its massive run. While its current market cap sits around $42 billion, dogecoin eclipsed the market cap of firms like Ford Motor and Kraft Heinz. This is remarkable, considering the fact that there is no serious developer and programming action going on with the cryptocurrency. The only thing programmed seems to be the fact that dogecoin is bound to follow the path of a classical pump and dump scheme. Already, signs of this are emerging. With a dogecoin price of about $0.4 cents, about 872 million dogecoins that haven’t moved in 5 years are re-entered circulation in the last few days. More of such coins will probably be dumped. On top of that and other than Bitcoin, Dogecoin is inflationary with no supply limit. Each minute, 10’000 Doge is added into the network. That amounts up to around 5 billion coins per year.
As of late, the meme coin definitely caught the intention of many investors all around the world. Even serious investor networks are talking about it. This goes to show that overall markets are at a peculiar stage, where groups like wallstreetbets can move markets. Ever since the popular reddit forum reallowed discussions about cryptocurrencies, dogecoin started its major rise. The fact that more and more retail investors can join in on such rallies is a sign that financial markets are currently reshaped. Technological breakthroughs of all kinds have enhanced the democratization of finance. At the same time, more and more liquidity entering the market through monetary and fiscal stimulus might contribute as well.
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Banks are weighing in on DeFi
Bank of America’s recent statement about the world of decentralised Finance (DeFi) being highly disruptive seems to have stirred quite some movement within traditional finance. Over the last few days (?) ConsenSys, the number one company promoting and enhancing Ethereum and its ecosystem has announced another large coup. They have been able to raise $65 million from giants like JP Morgan, Mastercard or UBS. With this money, the infrastructure for DeFi is planned to be expanded.
With a total value of over $50 billion that is currently locked in various DeFi projects, the decentralised ecosystem has become too big to be ignored going forward. While Ethereum is still the biggest public blockchain for DeFi services, many different blockchains are catching up, offering their own decentralised finance applications and protocols. Because more and more people are of the belief that DeFi will likely bring radical change to capital markets as well as how customers will interact with banks in the future, more and more incumbents see fit to weigh in on the action.
Nevertheless, some remain sceptical: British investment banking giant HSBC has recently blacklisted MicroStrategy’s publicly listed stock to the significant amount of Bitcoin that the company carries on its balance sheet. This means that HSBC customers can no longer buy or sell MicroStrategy stock. While the US software company headed by vocal Bitcoin bull Michael Saylor has certainly made some exotic moves in the recent months, effectively buying a total of 90,859 bitcoin at an average price of around $2 billion, this is no standalone move. Other highly renowned companies also plan on holding bitcoin on their balance sheet. It’s Times magazine that announced such endeavours making them the 33rd publicly-traded company to hold Bitcoin on their balance sheet.
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A new review on various crypto exchanges
The topic of regulation in the context of crypto exchanges is an going issue. Many outside observers consider cryptocurrency exchanges to be too loosely regulated. And these critics are also not shy to point to facts that reinforce their call for tighter regulation. For example, the fact that there was an order filed against Coinbase for “reckless, false, misleading, or inaccurate reporting as well as wash trading” on its GDAX platform.
A new investigation done for the LSE Business Review has thus made the case that just four out of the sixteen exchanges looked at were found to be subject to a significant level of regulation related to trading. While this might sound alarming, a closer look reveals: Some exchanges like eToro or itBit are pretty staunchly regulated. Most of the other exchanges operate as licensed Money Service Businesses (MSBs) or equivalent – including the ubiquitous Coinbase. This means that they must register with the Financial Crimes Enforcement Network (FinCEN) in the US, and/or the Financial Conduct Authority (FCA) in the UK. Although trading activities might not be that heavily regulated as of yet, all of the exchanges are forced to follow strict anti-money laundering (AML) and due diligence measures.
With the recent push of crypto into a greater limelight, it is only a question of time until more and more crypto exchanges will be more tightly regulated in all sorts of aspects. New, fully licensed securities marketplaces like the one just launched by digital asset firm Taurus will most likely further push the ecosystem into this direction.
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Crypto Market Update
This biggest event in crypto recently, or arguably one of the biggest in all of the ecosystem’s young history, was happening on the 14th of April: It was the day when Coinbase rang the bell and its stock (with the ticker symbol COIN) went live on Nasdaq via a direct listing. In the first few hours after the stock started trading, market cap was around $85 billion, which was only a little bit shy the $100 billion number that was thrown around prior to its listing. Over the last few days, Coinbase’s market capitalization came down a bit, settling around $60 billion as of now.
Despite this minor cool-off, the IPO of Coinbase was a highly expected event, one that would most likely be a boost to crypto’s stance in the eyes of the wider public. The company surely is one of the darlings of the Bitcoin ecosystem. They are known for having onboarded huge amounts of newcomers entering the space. Their success is reflected in the numbers they published right before they went public: In Q1 of 2021, revenues nine folded and soared to $1.8 billion, while net income landed within the range of $730 million to $800 million. To put things into perspective, last year, revenues were $1.28 billion and net income was $322.3 million.
With Coinbase going live, Bitcoin also saw a push to over $64’000. Immediately, several analysts expected the cryptocurrency to have broken out of its week-long consolidation phase. But then, all of a sudden, the message of a drop in Bitcoin’s hashrate, measuring the total amount miners provide to power the Bitcoin network, trickled in. This hashrate drop was accompanied by another Twitter message, tweeting out the unconfirmed headline that the US Treasury is accusing several financial institutions of laundering money in cryptocurrency has caused chaos in the cryptocurrency market. Prices dropped, and bitcoin briefly touched $51k.
So, what actually happened? On April 15th there was a power outage in the Chinese province name Xinjiang. This region is known for hosting a lot of mining facilities. Because of the power outage on that day, the hashrate receded almost 40%. This equals the single largest one day drop in mining hash rate since November 2017. The following day, 9000 BTC were sent into Binance and most probably sold. This sell down was acerbated by sell off of quarterly futures on derivative markets.
Whether this was some coordinated or planned move on parts of the sellers, cannot be said. Professional market analysts consider the recent sell-off to be healthy sign though as it has cleaned out the market. After all a total of $10 billion in crypto futures positions got closed with over 1 million trader accounts liquidated.
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Our weekly Crypto Industry Report news ticker provides you with the latest information on the global crypto industry – picked and analysed by our blockchain experts.
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