Q9 Markets | Window of Innovation
8 July 2022
Q9 Capital: www.q9capital.com
Window of Innovation
- Voyager Digital files for bankruptcy
- Ethereum and Cardano undergo major testnet upgrades
- USDC set to become #1 stablecoin
Markets shook off the news of Voyager Digital’s bankruptcy filing suggesting contagion risks are priced in and the market believes the worst of the liquidity crunch may be over. However, trouble in the BTC mining sector remains a concern with mining firms owing up to $4bn in debt used to finance the construction of their gargantuan facilities. As their profitability slumps with the price of BTC and energy prices shoot up they could become forced sellers in order to meet their debt obligations which may weigh on the price of BTC in the near term.
Layer-1 tokens led the rebound over the last seven days with Ethereum (+16%) and Cardano (+4.1%) both implementing major changes to their testnets ahead of their much awaited mainnet upgrades. DeFi tokens also performed well with Curve-dao-token (+54.2%), Aave (+25%), Sushiswap (+20%), Basic attention token (+15.7%) and Uniswap (+15.2%) all outperforming Bitcoin. Low funding rates suggest the rally was spot buying, rather than speculators punting in the perp-swap markets.
Bitcoin rallied +9.4% this week following its worst month in 11 years.
NFT volumes have now fallen 94% between January ($16bn) and June ($1bn) this year. The start of this year was a boom period for NFT trading activity, which has come off as speculation diminishes.
Source: The Block
Bon Voyage
Crypto lender Voyager Digital has filed for Chapter 11 bankruptcy protection, becoming the second high-profile crypto firm to do so in recent days. It is estimated Voyager had more than 100,000 creditors and its loan book accounted for nearly half of its total assets. 60% of its loan book was composed of loans to failed hedge fund Three Arrows Capital.
Many crypto companies have faced solvency issues in recent weeks, with several stopping customers from withdrawing their funds. Singaporean based lender Vauld is the latest to pause withdrawals as the market downturn takes its toll. Nexo has offered to buy the firm as the market inevitably consolidates.
FTX has signed a deal with BlockFi that includes an option to buy the lending platform for up to $240mn. The firm was valued at $3bn in March last year.
Celsius has cut 150 jobs amid a restructuring, the Bullish exchange is reportedly cutting 10% of its workforce, broker OSL is laying off 15% of its employees, Huobi is reducing its headcount by over 30%, Coinbase, BlockFi and Crypto.com are also terminating staff contracts.
Sam Bankman-Fried of FTX, said he and his company still have a “few billion” on hand to shore up struggling firms that could further destabilize the digital asset industry, but that the worst of the liquidity crunch has likely passed.
Testing Times
Ethereum inched closer to “The Merge” this week with the Sepolia testnet launch. Sepolia was the second of three public testnets to run through their own test-Merge, switching from a proof-of-work to a proof-of-stake consensus mechanism. After this, the Goerli testnet is expected to merge. Then the real thing later this year.
Cardano (ADA) also witnessed a successful testnet upgrade in its runup to the Vasil hard fork, which aims to improve the network’s scalability and performance. The long-awaited Vasil upgrade is expected to be deployed on the mainnet in a month.
These impending upgrades have encouraged a lot of investors to preempt an investment strategy for ETH and ADA.
Most cryptocurrencies have fallen against Bitcoin since the November all-time-high. Alt-coins that are high-beta tend to outperform BTC in bull markets and underperform in bear markets. The alt-revival in recent weeks is a positive sign that markets may be looking for more upside.
Crypto Performance Relative to Bitcoin Since Market Peak
Growing the 𝝅
The Circle stablecoin has been on a tear of late and has accumulated a significant market share versus its rival USDT, with the USDT-to-USDC market cap ratio falling to its lowest ever reading.
USDT to USDC Market Cap Ratio
Source: TradingView
Market Cap of USDC and USDT, % Change, 1 Year
Source: TradingView
The diminishing gaps between their respective market caps (USDT: $66bn and USDC: $56bn) highlights a flight to transparent products amidst this current downturn, and speculation that Tether’s USDT tokens are not 100% backed by cash and other traditional assets as it claims.
At the current rate — and with less than $10bn now separating the two stablecoins — USDC could surpass USDT by market cap in a matter of months.
USDC’s bull case comes primarily from Circle functioning as a money service business, registered with FinCEN and other 46 state regulators in the United States. As a result, the firm reports its reserves to the authorities in line with money transmission laws. It is also audited by Grant Thornton and the attestations are published here.
Fruits de Mer
Bitcoin whales (wallets with over 1k BTC) have been stacking the asset at a remarkable rate. Cumulatively, these entities have been buying up about 140k BTC per month from crypto exchanges and now own 8.69M BTC which is about 45.6% of the circulating supply.
Source: Glassnode
Interestingly, Sharks (500 to 1k BTC) have been increasing their wallet at a much slower rate. These are overwhelmingly HNWs and likely affected by liquidity issues facing traditional and crypto markets.
Crabs (1 to 10 BTC) seem to have perceived $20k as a magnet of value, aggressively accumulating there at their greatest rate since 2017.
Shrimps (wallets with one or less than 1 BTC) have also been capitalizing on Bitcoin’s low price and adding to their balance at the most aggressive rate since March 2020. In the past two quarters, shrimps have added about 37k BTC per month which is about 0.2% of the aggregate circulating supply and now hold 1.12mn BTC in total.
This all makes some sense actually. The really big boys have money to spare, and are adding, they have seen this before. The ‘just wealthy’ are worried they might not stay there so they are scaling back. And everyone else who wished they would have bought more the first time around is buying now.
Source: Glassnode
S Curves of Innovation
In the 13-year history of Bitcoin, there have been multiple +70% drawdowns and, since coming on the scene in 2015, Ethereum has also experienced at least two. In hindsight, most of these downturns had a fairly obvious root cause, whether it be a hack, exchange shutdown, regulatory action, or a broader macro sell-off.
BTC Market Price Since Inception
Often, notable projects and investible themes came out of these bear markets as a response to whatever caused that particular downturn or as a response to underlying deficiencies plaguing the ecosystem at that time.
The S Curve of Innovation
As we eventually come out of the 2022 bear market, we can’t be certain what innovations will be created, but investors can look at the current problem set and extrapolate the solutions to the issues that we see today. The current market collapse will also end up teaching people some valuable lessons about who to trust and who not to. It will also cleanse the industry of the weaker, frothier projects and make crypto stronger as a whole.
Two areas that could come out stronger from this are more on-chain solutions (e.g. defi) and regulation. One of the issues with recent credit and insolvency events was that it was not clear how the yield was being generated by these lenders. On-chain solutions, like defi, will/can bring more transparency to the investments. However, this is insufficient. A dumb strategy or a risky investment remains so on-chain or off. Being transparent doesn’t solve this, especially if nobody is really doing their DD anyway. UST/LUNA was on chain, and performed exactly how it was promised, which eventually led it to zero. That having been said, more on-chain solutions should lead to better offerings over time, they are there for all to see.
In traditional finance, we also don’t know what our lenders are doing for the most part. I definitely can’t tell you exactly what my bank’s balance sheet is doing or how good their risk management is. However, these issues are partially mitigated by regulation. They need to hold a certain amount of capital, deposits are segregated and may be insured. It’s how we dealt with these issues pre-blockchain. Retail getting hurt by recent crypto events may see a quicker move towards new laws and increased regulatory activity. Let’s just hope we get clearer regulation sooner, not outright bans or regulation by enforcement. History is not necessarily on our side.
If you are one of the 16% of Americans who bought crypto over the past couple of years, you might not be thinking like this right now. It’s more likely you’re freaking out. But among crypto heavyweights, the general response to this drop ranges from zen to blasé. This bear market, like the others, presents a new innovation window to regroup, reset and rethink ways of doing things. Crypto is down, but probably not out.
If you are in this for the long term, there is currently a great sale on crypto assets. Not everything is higher due to inflation…. yet.
In the News…
- Three execs leave JPMorgan this week to join crypto firms
- Polygon joins Solana in bringing Web3 to smartphones
- Facebook launches NFT feature for select group of US creators
- Coinbase is reportedly selling geolocation data to US Government
- Inside the Three Arrows Capital money machine
- Dissecting the DAO: Web3 ownership is surprisingly concentrated
- Tim Draper — Staying bullish on Bitcoin, the power of blockchain & the future
- UK government seeks input on taxing crypto asset loans and staking in DeFi
- Salary payments in USDT stablecoin ruled as illegal in Chinese court
- NFT and Web3 gaming console to launch in 2024
- Are expiring copyrights the next goldmine for NFTs?
- Shiba Inu plans to launch stablecoin
