Crypto Investor Briefing – February 2023

February 2023

Kong Hei Fat Choi! Happy Lunar New Year to those that celebrate the holiday, and we wish everyone a prosperous Year of the Rabbit ahead! 

Markets have ushered in the new year on a strong footing, with total cryptocurrency market capitalization rising 30%, reclaiming the $1 trillion mark. Majors BTC and ETH are up 38% and 31% respectively, erasing the losses suffered from FTX. Have we finally turned a corner in this “crypto winter”, or will this “relief rally” fizzle out?

The folks at Bankless made great points on “Why This Rally is Different”, which we’ve summarized below:

  • Leverage has been wiped: open interest on perpetual futures has declined 60.4% from its peak in November 2021, sitting at levels not seen since June 2021 after the massive May 2021 crash and before the pump observed in Aug-Nov 2021. Similarly, on-chain, there is “just” $164 million of liquidatable ETH positions above $1,000 across lending protocols such as Maker, Aave, Compound, Euler and Liquity.
  • Dry powder remains: Nansen Smart Money stablecoin positions, which measures the percentage of large whales portfolios that are held in cash, currently sits at 25%. Although it has fallen from its peak of 40% in the immediate aftermath of FTX, it’s still at a historically elevated level, roughly the same value as in the days following the LUNA crash.
  • Loosening financial conditions: after raising interest rates a cumulative 425bps since March 2022 to rein in inflation, markets are expecting a pause, or maybe even a pivot from the U.S. Federal Reserve. Easier financial conditions generally bode well for risk assets.

Additionally, looking on-chain, CryptoQuant’s proprietary BTC PnL Index signaled the start of a bull market with the index moving above its 365-day moving average (the index combines three different metrics into a single indicator of Bitcoin’s market value).

Nonetheless, downside risks remain, especially with the Fed’s first FOMC meeting this week. U.S. financial conditions have reverted back to pre-Fed hiking levels (see chart below), indicating that markets might have run ahead of themselves. Additionally, the bankruptcy of Genesis and its potential impact on its parent Digital Currency Group (DCG) and the broader industry cannot be overlooked.

Kenny Chiang
Senior Research Analyst

Crypto lender Genesis files for bankruptcy, ensnared by the FTX collapse. In its filing, Genesis Global Capital said it had more than 100,000 creditors and between $1 billion and $10 billion in assets and liabilities. Genesis Global Holdco and Genesis Asia Pacific each had between $100 million and $500 million in assets and liabilities.  The bankruptcy is due to unrecoverable loans it made to FTX affiliate Alameda Research. Genesis’s derivatives and spot trading subsidiary, and its custody business and brokerage arm Genesis Global Trading aren’t included in the filing and continue client trading operations.

Digital Currency Group (DCG) is under investigation by US authorities. Bloomberg reports that the investigation centers around internal transfers from DCG to its subsidiary crypto lending firm Genesis Global Capital. Genesis halted withdrawals in November 2022, which impacted Gemini’s Earn program, causing its clients to be unable to withdraw their assets. DCG has since suspended dividends in January 2023, reflecting liquidity constraints at the digital asset conglomerate. In separate news, the U.S. Securities and Exchange Commission (SEC) charged Genesis and Gemini with illegally selling securities through their crypto lending program.  

Indonesia plans to set up a crypto exchange this year before regulatory power shifts. The current crypto asset governing body is the commodities agency (Bappebti), which plans to transfer governance responsibility to the Financial Services Authority (OJK). Indonesia is taking big strides towards a stance on crypto. The central bank recently published a report on central bank digital currencies and embarked on a plan to launch one of its own soon. 

China made considerable headway in its development of its CBDC: it included digital yuan in its cash circulation data for the first time. The digital yuan, e-CNY, represented 0.13% of cash and reserves held by the central bank. Additionally, China also launched smart contract functionality on digital yuan on the e-commerce platform Meituan.

Turkey is to use blockchain-based digital identity for online public services. E-Devlet, Turkey’s digital government portal used to access a wide range of public services, will use a blockchain-based digital identity to verify Turkish citizens during login.

The Israel Securities Authority is proposing to bring digital assets under the roof of laws governing securities, joint investments and investment consultation, marketing, and portfolio management. Once authorized and published, the new crypto laws will be enacted after six months.

The U.S. Federal Reserve Board has denied Custodia Bank’s application for membership, claiming the crypto-focused institution’s risk management framework was insufficient. The decision comes nearly 18 months after Custodia first filed its application for membership in the Federal Reserve System. The denial of Custodia is yet another example of the federal government’s increasingly assertive approach to crypto, as the SEC and DOJ launch primetime investigations into FTX, and Congress treats cryptocurrency regulation as a hot-button issue.

Lido overtakes MakerDAO to have the highest Total Value Locked (TVL) in DeFi. The liquid staking protocol, that has a TVL of over $8 billion, overtook that of MakerDAO, the organization behind the protocol that created the DAI stablecoin, which stands at $7 billion according to data from DefiLlama at the time of publication.

Crypto fund flows hit the lowest levels since 2018 with steep declines in crypto prices. Inflows into crypto products were $433 million in 2022 — down from $9.1 billion in 2021 and $6.6 billion in 2020, according to CoinShares. The 2022 flow total was nearly double the level seen during a tumultuous 2018, a bear market year that saw $233 million enter digital asset products. 

Silvergate Capital shares plunged after the bank said the crypto industry’s meltdown triggered a run on deposits, prompting the company to sell assets at a steep loss and fire 40% of its staff. Customers withdrew about $8.1 billion of digital asset deposits from the bank during the fourth quarter of 2022. Executives said Silvergate may become a takeover target.

Crypto exchange Binance plans a 15%-30% hiring spree in 2023 even as rivals slash jobs. At the same time, the world’s biggest asset manager BlackRock Inc. plans to dismiss about 500 employees, roughly 2.5% of its global workforce, after it grappled with sharp declines last year in equity and bond markets.

Bulgaria-based crypto lender Nexo agrees to a $45 million settlement over earn product. Crypto lender Nexo Capital has reached a settlement with the United States Securities Exchange Commission and state regulators for the alleged unregistered offering of its earn product, settling for $45 million in penalties. Nexo has also decided to exit the U.S. market entirely. 

Matrixport, a Singapore-based crypto investment and lending firm, has made job cuts in its marketing department, impacting 10% of its nearly 300-person workforce. Matrixport’s layoffs reflect the company’s new focus on accredited investors, given the significant shift in the regulatory climate following industry-wide capitulations. Hiring continues in other departments, namely compliance, legal and product development.

Co-founders of 3AC and CoinFLEX are looking to raise $25 million for their new project, GTX, an exchange where users can trade their crypto, stocks and debt claims from bankrupt companies like FTX. The founders see this as an opportunity to unlock the $20 billion worth of crypto claims. 

CoinGecko reports that more than 3,000 cryptocurrencies listed in 2021 have failed.

The last bull market run that started in November 2020 brought a spike in cryptocurrencies listed on CoinGecko, a crypto asset tracking and analytics platform, with more than 8,000 cryptocurrencies listed in 2021. As of the end of 2022, nearly 40% had been deactivated and delisted from CoinGecko. This is 2.5 times higher than the number of cryptocurrencies listed in 2020 that failed, and 3.5 times higher than those listed in 2022.

  • The Annual Bitwise/VettaFi Survey finds that 60% of financial advisors are long-term bullish on crypto despite the volatile market. 
  • Read about the 2023 market forecast and insights with The Year Ahead, a blockchain investor newsletter published by Pantera Capital. 
  • Bitcoin macroeconomic outlook with economist Lyn Alden, WhatBitcoinDid podcast. 
  • Rallying ~400% in 2023, Aptos (APT) is the best performing cryptocurrency in the Top 200. Bankless deciphers this extraordinary rally from an options perspective, while Kaiko Research analyzes its orderbook across CEXs. 
  • The VC Yearly Report 2022: total financing amounted to $37.7 billion (+19% from 2021) across 1,769 projects (+30% from 2021) — authored by WuBlockchain.

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You should not construe any such information or material as legal, tax, investment, or financial advice.

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