Q9 Markets: Banking on Crypto
20th August 2021
Q9 Capital: www.q9capital.com
- Crypto rally continues for 4th straight week
- Derivative markets rebound from June lows
- 55% of the world’s largest banks now invested in crypto/blockchain companies
Digital assets continued their ascent as the total market cap of crypto reached $2.1tn and a slurry of new data emerged this week showing the extent to which traditional finance (TradFi) is trying to get in on the action by building digital asset infrastructure, investing in crypto businesses and offering products to their clients. Even the mortgage industry wants a piece of the action.
Prices of major digital assets tested new recent highs over the weekend before dropping off slightly mid-week, then tracking sideways. BTC seemingly held its ground despite a $94mn hack on Japan’s Liquid exchange (the second major crypto heist to take place in little over a week). Liquid ranks among the top 20 crypto exchanges globally by daily trading volumes so this is not a small knock.
Markets then surged back yesterday with BTC closing the week at $46,717 (+5.2%) and ETH at $3,182 (+4.6%). These results are not in the double-digit weekly gains territory seen during this recent rally, but they extend the run to 4 weeks. On the back of these decent recovery in prices seen in both BTC and ETH, Alt-coins and DeFi also continued their strong performance. EOS posted a gain of 13%, perhaps ahead of the Bullish Exchange rollout, and SUSHI rose 15.7%. UNI was slightly in the red at -0.3%.
On-chain data indicated positive sentiment for crypto markets as Bitcoin continues to flow from exchanges. ETH even more so, with exchange balances hitting an all-time low this week. If crypto is leaving exchanges, it can indicate an intention from investors to hold. Conversely, when crypto moves onto exchanges, it can indicate an intention to sell.
Bitcoin Net Transfer Volume from/to Exchanges
Derivatives markets have also sprung back to life again. Open interest on BTC options across all exchanges has more than doubled from this year’s low of $3.63bn in June to a high of $8.2bn on Aug 20th. Open futures interest has also shot up. This spike is mainly led by institutional players who are starting to put risk back on.
Exchange BTC Futures Open Interest
This Week on Storage Wars
A new SEC filing reveals that a parade of megabanks, including Goldman Sachs, JPMorgan and Bank of America, asset managers such as BlackRock, Miller Value Partners and Bridgewater; and even states such as Tennessee’s Treasury, hold COIN, or Coinbase’s stock. The investments speak to the exploding demand for long term exposure to the crypto economy, whether directly or by proxy.
There may be no better proxy for ‘large financial institution’ than the big banks, which is often first to mind when looking at what TradFi is doing. According to a Blockdata report, 55% of the world’s largest banks are now invested in crypto and blockchain-related companies. Financial institutions are grabbing for a piece of the booming $2 trillion cryptocurrency market, with 13 of the world’s largest banks pushing roughly $3 billion in funding so far into cryptocurrency and blockchain companies. Standard Chartered leads the list with $380 million in valuation of the funding rounds in which it participated while its London-based rival Barclays ranked as the most active investor based on the number of investments in blockchain companies.
One of the most noteworthy examples of where banks are investing is crypto custody and storage. Despite being very vocal about how bad Bitcoin supposedly is, many are still building and investing in solutions for them to store and offer crypto to their clients. The report highlights that 23 of the top 100 banks by assets under management are building custody solutions, or investing in the companies that provide them — they all now realise they can’t ignore the potential revenue streams and importance of having a strong strategic position in the crypto economy.
Starting with custody is the boring first step and it is a typically low margin business… But it means that these banks will actually own the plumbing that the ‘water’ flows through, meaning they can hold the crypto in their own ecosystem and on their own balance sheets. They can then build out the product curve from there to the high revenue, high margin stuff like borrowing/lending, structured products and providing advice around the asset. Without owning the custody and having access to the assets themselves, this is difficult. Currently the large banks are just offering 3rd party funds and trusts representing crypto to their wealthy clients (the storage of the asset is elsewhere), but when they hold the asset themselves this really changes what they can do. Think about how many clients these top 100 banks have and what it would mean for the price of crypto when they turn the taps on.
Top Banks Investing in Crypto and Blockchain Companies
The Future of Money (Podcast)
Following on nicely from the report about banks entering crypto, Q9’s Managing Partner, James Quinn, spoke with Henri Arslanian (PWC’s Global Crypto Lead) this week on a podcast about “Why and How Private Banks and Wealth Managers Are Entering the Crypto Space”.
You can listen to the podcast here:
- Spotify: https://spoti.fi/3jIxfqp
- Apple: https://apple.co/3CG8vrG
- Google: https://bit.ly/3yFheYK
- Stitcher: https://bit.ly/3izy2uC
Worldwide Adoption Skyrockets
Chainalysis, the blockchain data platform, released its 2021 Global Crypto Adoption Index, the second iteration of its efforts to measure grassroots cryptocurrency adoption around the world. Patterns of cryptocurrency usage vary widely around the world but general adoption has really taken off in the last year, up 881%, with Vietnam, India and Pakistan firmly in the lead. Last year, China ranked fourth on Chainalysis’s global adoption index while the U.S. ranked sixth. This year, the U.S. ranks eighth while China ranks thirteenth.
In the News
- United Wholesale Mortgage, the second-largest mortgage lender in the US, announced plans this week to accept cryptocurrency for home loans, in an apparent first for the mortgage industry. The company hopes to start accepting bitcoin in Q3, and it is currently weighing other digital currencies like ether.
- Hundreds of investors are expected to take part in proceedings against crypto exchange Binance, seeking damages for money they lost during a major outage. Exchange’s clients claim they suffered $20m losses. Binance says it has no official headquarters. That has made it incredibly difficult for investors to figure out how, and where, to take the company to court.
- Japanese cryptocurrency exchange Liquid said on Thursday it was hit by hackers in a theft estimated to top $94 million, in the latest targeting of a crypto platform. “We are sorry to announce that #LiquidGlobal warm wallets were compromised, we are moving assets into the cold wallet,” it said on Twitter here, adding that deposits and withdrawals were suspended.
- The SEC now sets its eyes on DeFi. Gary Gensler, chairman of the U.S. Securities and Exchange Commission (SEC), has said that the agency could regulate decentralised finance (DeFi) projects.
- Singapore’s central bank has told “several” digital payments service providers that they will be granted licences to operate in the city state, in a move analysts say will help cements its status as Asia’s leading crypto-financial hub.
- Cardano (ADA) has become the world’s third-largest cryptocurrency by market capitalization, according to CoinGecko, after its price surged to a new 12-week high.
- US business magazine Fortune says it will hold half of the proceeds from the recent sale of its non-fungible tokens (NFT) in crypto.
- Watford FC, a Premier League football team, have officially started to wear Dogecoin (DOGE) logo on their shirts. The deal is part of a sponsorship agreement with a crypto-betting platform that expects to see the team wearing the logo on their sleeves throughout the season.
Legacy Markets
Traditional markets saw general “risk-off” sentiment this week as investors weighed in concerns over the Delta variant and potential Fed tapering this year, pushing the US dollar index 60 bps higher. Oil futures dropped -7.5% and the SPX dropped -1.2% as losses in cyclical sectors overshadowed mild gains in tech shares. Elsewhere 10-year US treasury yields slipped 12bps and the Gold & Silver index fell -5.5% from the previous week’s levels.
Markets
- BTC/USD & ETH/USD rose +5.2% and +4.6% respectively. Bitcoin dominance dropped below 44% as total market cap ex BTC crossed 1.1 tln mark during last week
- Among other majors EOS/USD jumped +13%. Among large cap DeFi names, SUSHI/USD and LINK/USD rallied +15.6% and 8.6% respectively
- Annualised volatility rose, climbing to 74% for BTC and 98% for ETH
Flows
- Better to buy client pad (3.6x buyers vs sellers) on muted volumes
- Two-way flow in ETH and net buyers of BTC and EOS
- Mild buying activity in LINK and UNI
Q9 Capital: www.q9capital.com
