Q9 Markets | The Real World: Crypto

30 June 2022

Q9 Capital: www.q9capital.com

The Real World: Crypto

• 3AC liquidation ordered by BVI
• GS downgrades Coinbase rating to Sell
• Charles Hoskins details real-world use cases of crypto to Congress

It feels wrong as a markets writer to hope for a boring week. But after the last few, I could use a moment to catch my breath. Alas, this week proved no different and presented another unrelenting onslaught of fast moving markets, crypto news and industry developments:

Bitcoin dipped below $20k after the reports came out stating the British Virgin Islands court ordered the liquidation of crypto hedge fund Three Arrows Capital. Ethereum rose +4.7% and Cardano +1.5% while Solana fell -0.3% and Polkadot -5.4%.

Polygon (MATIC) and Sandbox (SAND) were notable exceptions, posting +8.5% and +12.7%

returns respectively. Polygon has deployed Avail, a new scaling system for developers to launch their blockchain applications atop the main Polygon chain and other blockchains.

Goldman Sachs has downgraded Coinbase (COIN) to Sell as revenue and trading volumes fall. Shares of the firm have slumped to $49.75, extending their decline this year to 80%. “We believe Coinbase will need to make substantial reductions in its cost base in order to stem the resulting cash burn as retail trading activity dries up” GS noted.

Coinbase v Nasdaq v BTC/USD, % YTD

Source: Trading View

All eyes are now on the European Central Bank (ECB) with an upcoming critical meeting on interest rates. These changes in interest rates are a really big deal and are weighing on traditional and crypto markets. The yield on the 10-year Treasury has almost doubled to 3.3% since December, a big change in a short time. As a result, look at what it has done to the prices of corporate bonds. Long duration bonds from the strongest companies in the world are now trading at huge discounts to their face values.

Crypto investment products saw outflows totalling $423mn last week, the largest since records began by a wide margin. The outflows were solely focussed on Bitcoin products, which saw net outflows for the week totalling $453mn. Short-Bitcoin saw inflows totalling $15mn due to the launch of the first US-based short investment product last week.

Source: CoinShares

An Interconnected Web3 of Credit

The liquidity crunch in the sector continues:

• A court in the British Virgin Islands has ordered the liquidation of Three Arrows Capital (3AC), according to a report
• Crypto brokerage Voyager Digital (VOYG.TO) issued a default notice to 3AC this week after the fund failed to make required payments on loans of 15,250 bitcoins and $350 million in USDC. Voyager’s shares had plunged after it disclosed its exposure to 3AC.
• Celsius Network is reportedly considering filing for chapter 11 bankruptcy.
• Crypto exchange CoinFlex has also closed withdrawals after a major client — outed as Roger Ver by the CoinFlex CEO — failed to repay a massive debt. Ver has denied owing CoinFlex the money. The firm plans to issue a new token to raise $47mn in a bid to restart withdrawals for its customers.
• Market troubles and counterparty insolvency issues have also led to significant losses at Babel Finance and BlockFi.

What started this year in crypto markets as a “risk-off” bout of selling fueled by the Fed, suddenly determined to rein in excesses has now exposed a web of interconnectedness that could cause systematic harm to the industry if there is contagion.

In recent weeks, crypto collateral was sold down in a cascading effect that has hit many crypto platforms. Looking ahead, nervousness in the market is ongoing and there is worry of more shakeout to come, possibly from the mining sector which is worth keeping a close eye on. These guys have huge inventories and becoming forced sellers would weigh on the price of Bitcoin and other crypto assets.

The Future Monetary System

The Bank for International Settlements released its annual economic report, with an entire section (Pages 75 through 103) dedicated to the future of crypto, DeFi, DLT, CBDCs and the future of finance. It’s worth a skim. You don’t have to agree with their conclusions to appreciate all the great graphs!

High Level Goals of the Monetary System (according to BIS)

Source: BIS

A Case For Real World Use

Cardano (ADA) founder Charles Hoskinson addressed Congress this week in an attempt to detail the real-world use cases of crypto assets. His testimony argues blockchain technology helps marketplaces thrive due to its decentralized and permissionless nature:

“Distributed ledgers (i.e., blockchains) store information that needs to be transparent, auditable, timestamped and immutable. This process enables records of social and economic concerns to be reliable and programmable.

Public blockchains, just like many commodities, are intrinsically decentralized and permissionless. For example, I grow hay on my farm in Colorado. I did not ask for permission to plant and harvest my hay, and now I am a member of a global, dynamic marketplace. There are regulations and controls in all of these markets, but we do not assume there is a centralized hay agency to ensure somehow this market works.

Such absurdities were reserved for the Soviet central planners of old, not modern economies. Blockchain projects operate and embody this decentralized ethos and would fail under the weight of a heavy-handed and outdated regulatory structure.”

He also says digitizing the logistics of large-scale businesses would make them more organized and transparent to regulators.

“As a rancher, I have to deal with water rights, grazing leases, public land authorities, and numerous other agreements, covenants and economic events.

The management and oversight of much of these activities are not digitized, nor are they shared in ways to provide emergent value to policymakers, regulators and researchers. When these activities are conducted and managed, and the resulting information is shared, on a blockchain they are transparent and auditable.”

He concludes:

“Cryptocurrencies and the broader blockchain industry, which relies on cryptocurrencies to operate and function, have grown over the past decade from a small group of uncommercialized, volunteer developers to a trillion-dollar, global ecosystem encapsulating sophisticated engineering, scientific research, publicly traded companies and tens of millions of people using these technologies throughout the world.

The great growth of blockchain technology rivals only the internet and arguably yields more significant opportunities ranging from cheaper and more efficient payment systems, cryptographically enhanced infrastructure security, new forms of governance, self-sovereign identity and so much more. However, this new technology has also presented new challenges and amplified the existing problems of many legacy systems. The instantaneous movement of information and value without counterpart risk nor the need for centralized middlemen combined with reducing complex business processes and structures to open source software that can be rapidly upgraded means that commercial activity can now proceed at the speed of thought on a global scale.

You can read the full transcript or watch the video testimony.

Digital assets will transform the real world and has the potential to transform every industry.

Crypto may be facing short-term pain against a backdrop of rising rates and deleveraging, but the long term narrative remains incredibly strong. The recent declines in crypto, while painful, are likely to be healthy for the ecosystem’s development. We have written previously about the rise and fall of the dot.com market. It was painful for many companies and investors, but ultimately the technology proved to be transformative and produced some of the most successful businesses in history.

Despite an understandable reservation from the market, client engagement continues to grow and focus remains on the rapid development and disruptive nature of blockchain technology. Despite falling token prices and headlines suggesting otherwise, blockchain technology and the digital asset ecosystem is here to stay.

Charles Hoskinson testifying to Congress

In the News…

• SEC Chair Gensler affirms Bitcoin is a commodity
• More hedge funds are betting against Tether
• Bankman-Fried’s FTX seeking a path to buy Robinhood
• Morgan Creek trying to counter FTX’s BlockFi bailout, leaked call shows
• Australia confirms crypto is not a foreign currency
• Hacktivist group “Anonymous” takes aim at Do Kwon for LUNA collapse
• What happened to Seth Green’s stolen Ape ?
• A $2tn free-fall rattles crypto to the core
• Kaiko raises $53mn in Series B
• Stablecoin issuer Circle partners with New York Community Bank
• Crypto exchange Huobi says layoffs are a ‘possibility’