Crypto Investor Briefing – July 2022

Crypto Investor Briefing

July 2022 

The crypto market continued its slump in the month of June and the total market value of all cryptocurrencies fell under $1 trillion for the first time since January 2021. A few systemically important companies in the crypto ecosystem failed to meet their debt obligations and suffered from liquidity crunches, forcing them to disable the withdrawal function and causing further panic from their users. As investors, you may wonder whether people have once again lost confidence in Bitcoin and other crypto assets and whether it could get worse from here. 

The real answer is, surprisingly, the opposite. All that has happened in front of our eyes is the result of people having strong confidence in mainstream crypto assets, namely Bitcoin and Ethereum, as digital stores of value. Many crypto players use Bitcoin and Ethereum as collateral to borrow and make leveraged investments in newly created DeFi protocols to seek high yields. When those new protocols experience liquidity imbalance and trigger price downfall, the good collateral is force-liquidated. In short, the major sell-off is a result of margin calls due to certain crypto lenders and traders’ poor risk management practices and over-leveraging positions. 

There is nothing wrong with the crypto ecosystemthe main blockchains still function as they always have, and user adoption continues to increase. Perhaps we could say that the crypto industry is experiencing a “Lehman Brothers moment,” and the ultimate culprit is human greed. We should expect more regulatory oversight in this area, which will benefit the quality of the entire crypto ecosystem. For long-term investors, this could be another great chance for bottom fishing.  

 

Christian Hsieh
CEO, Tokenomy 

Celsius Network, one of the largest crypto lenders, announced a halt on withdrawals and transfers between accounts due to extreme market conditions. This action triggered a wider market crash. Celsius is known for its involvement in the decentralized lending (DeFi) space, as its mission statement states its goal is to “disrupt the financial industry.” The platform had locked users’ funds into stETH, a wrapped ETH token by Lido Network, and a stETH de-pegging prompted a wave of redemptions, sparking a liquidity crisis similar to the TerraUST incident just a month ago.

Three Arrows Capital (3AC), the multi-billion dollar hedge fund based in Dubai, is facing financial issues; they have been selling down their stETH positions and reportedly failed to meet its margin call with BlockFi. Their co-founder Su Zhu wrote a cryptic Twitter post and the fund is rumored to have leveraged long positions where it is unable to meet its obligations.

market news

USD Coin (USDC) issuer Circle Internet Financial is expanding with a new euro-backed stablecoin, Euro Coin (EUROC). According to the company announcement, this new stablecoin will be “a regulated, euro-backed stablecoin issued under the same full-reserve model and built on the same pillars of trust, transparency, and security that have made USDC one of the world’s most trusted digital currencies.”

Goldman Sachs is looking to raise $2 billion from investors to buy up distressed assets from troubled crypto lender Celsius. The proposed deal would allow investors to buy up Celsius’ assets at potentially big discounts in the event of a bankruptcy filing. Celsius has tapped restructuring advisory firm Alvarez & Marsal, restructuring attorneys from Akin Gump Strauss Hauer & Feld, and Citigroup. Citigroup and Akin Gump have both recommended Celsius file for bankruptcy, according to various media reports

A survey conducted by Deloitte indicates that 85% of US merchants view enabling crypto payments as a high priority. Spending on crypto infrastructure is expected to increase, with more than 60% of survey respondents expecting to have budgets of more than $500,000 to enable digital currency payments in the next 12 months. Companies prefer not to hold digital assets, with 52% planning to have payment processors convert crypto into fiat currency, and companies partnering with third-party crypto payment processors are particularly likely to do so (61%). Barriers to adoption cited include customer security of the payment platforms (43%), changing regulatory landscape (37%), and instability of the digital currency market (36%).

The US House Agriculture Committee, which oversees the CFTC, held a hearing on digital asset regulation. Many crypto-industry experts, including Cardano co-founder Charles Hoskinson and Chainalysis co-founder Jonathan Levin, testified on how US government agencies can address potential risks in the market. 

The New York Department of Financial Services (DFS) issued guidance outlining compliance requirements for dollar-backed stablecoins, the first financial regulator in the US to do so following Terra’s collapse. The document has three main components: any USD-backed stablecoin regulated by the DFS must (i) be “fully backed” by a reserve of assets and set clear policies for redemption, (ii) separate their reserve assets from their proprietary assets and hold them in specific assets categories (e.g. US Treasury bills, government money-market funds, etc.), and (iii) be audited by an independent certified public accountant. 

New York Senator Gillibrand and Wyoming Senator Lummis have teamed up to propose a bipartisan bill that would shift much of the regulatory oversight of crypto assets from the SEC to the CFTC, acknowledging that these tokens are more like commodities than securities.

Now you can short Bitcoin via ETF! ProShares plans to launch a short bitcoin exchange-traded fund (ETF) to allow investors to bet on declines in the largest cryptocurrency. The ProShares Short Bitcoin Strategy ETF will give investors the opportunity to profit from a decline in bitcoin’s price, or to hedge their exposure to crypto. The product has been launched with the ticker BITI. The firm previously launched the ProShares Bitcoin Strategy ETF in October 2021.

The U.S. Federal Reserve published a paper exploring the impact on monetary policy of potentially issuing a retail central bank digital currency (CBDC). It considers a scenario where the digital dollar was widely adopted for both payments and as a store of value. In that case, it could result in the Federal Reserve needing to buy more Treasuries and having a permanently bigger balance sheet.

The Monetary Authority of Singapore (MAS) explores DeFi applications with DBS Bank, JPMorgan, and Marketnode, the central bank announced. “Project Guardian” will explore the feasibility of tokenization and DeFi using open, interoperable networks, enabling digital assets to be traded across platforms, including existing financial infrastructure—with wholesale funding markets as the first stage, with the creation of liquidity pools of tokenized bonds and deposits to carry out borrowing and lending on a public blockchain-based network.

More crypto hedge funds are being created as digital assets gain acceptance despite the market volatility, according to PwC’s 4th Annual Global Crypto Hedge Fund Report. Of traditional hedge funds surveyed, 38% are investing in digital assets. Of those who are investing, 57% of them have less than 1% crypto exposure, and 20% of these funds hold between 5% and 50% digital assets of the total asset under management (AUM). It is estimated that there are more than 300 crypto hedge funds globally.

An ex-OpenSea executive was charged with NFT insider trading, according to a press release from the US Department of Justice (DOJ). Nate Chastain was charged with wire fraud and money laundering in connection with trading on confidential information about which NFTs were about to be featured on the OpenSea homepage. This is the first time the DOJ has pursued an insider trading charge involving digital assets, which could mark the onset of a new wave of enforcement actions involving NFTs.

PayPal enables crypto withdrawals to non-custodial wallets, following the footsteps of Robinhood, which released the feature in April. In addition to withdrawals, they are also enabling users to transfer digital assets between themselves, according to its press release. An important consideration to note is privacy; by using this feature, users will essentially tie their non-custodial wallets to their personal information held by PayPal.

Bitcoin miner Bitfarms sold nearly half of its BTC to reduce its debt. The Toronto-based miner sold 3,000 BTC for $62 million and used a portion of the fund to rebalance its debt with Galaxy Digital from $66 million to $38 million. Despite remaining bullish on long-term BTC price appreciation, by no longer “HODLing” all its BTC production, Bitfarms enhanced liquidity and strengthened its balance sheet. 

  • It’s only been a month since the collapse of Terra, and now Lido Finance and its Staked Ethereum (stETH) are at the center of another potential liquidity crisis. Read about how Lido’s stETH is linked to Celsius Network’s liquidity crunch
  • Cash App parent company Block, Inc. partnered with Wakefield Research on a study to survey 9,500 people in the Americas, EMEA, and Asia-Pacific regions about public perception of Bitcoin. The survey focused on 14 countries. Read the survey report here
  • The Ethereum upgrade from Proof-of-Work (PoW) to Proof-of-Stake (PoS) has been one of the most talked-about events in crypto. This “merge” will take place in the next few months. ReadThe Investor’s Guide to The Merge: Understanding and Playing the Opportunity” by Tom Dunleavy at Massari research. 
  • Andreessen Horowitz (“a16z”), an American Venture Capital firm that manages >$30 billion of assets, released their “State of Crypto” report that looks at the current environment of the industry and highlights leading trends like DeFi, NFTs, and GameFi.

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