Q9 Weekly | Out of the Ordinal-ry
16 February 2023
- Markets shrug off high CPI numbers
- Ordinals take BTC network by storm
- SEC cracks down on crypto
Bitcoin bolted past $24k for the first time in two weeks after surging more than 8% over the past 24 hours. The asset had dropped below $21.6k in recent days amid growing anxiety about crypto regulation and future Fed moves to tame inflation, but those concerns seemed to fade quickly as BTC surged past $24,300.
BTC and ETH, 5 Days
Source: TradingView
Inflation turned higher (although the upward trend is easing), as rising shelter, gas and fuel prices took their toll on consumers, the Labor Department reported Tuesday. The CPI rose 0.5% in January, translating to an annual gain of 6.4% — wore than analysts had expected and despite the Feds efforts to quell the problem. The central bank has hiked its benchmark interest rate eight times since March 2022. Markets now expect the Fed over its next two meetings in March and May to raise its overnight borrowing rate another half a percentage point from its current target range of 4.5%-4.75%.
US CPI, YoY %
Source: Bureau of Labour Statistics
Most other crypto assets joined the rally and crypto-related stocks also jumped, with Coinbase (COIN) and Bitcoin miner Marathon Digital Holdings (MARA) increasing over 15%. However, several metaverse tokens came off — SAND (-10.5%), AXS (-9.6%), MANA (-4.7%) and APE (-2.2%) were all down. Data from Coinglass shows that $65mn of BTC positions were liquidated over the past 24 hours, $60mn of which were short.
Decentralised exchange activity also continues to pick up. The Number of DEX traders on Ethereum reached its highest level since 2021. A recent survey also shows that institutional investors are returning to crypto.
Ethereum DEX Traders
Source: The Block
NFT marketplace, OpenSea, recorded a surge in its user base for the second month in a row, which grew to 329.4k users in January, up 10.6% over the month.
Number of NFT Traders by Marketplace
Source: The Block
Ordinal-ry World
The latest crypto sensation has seen many users flocking back to the original BTC blockchain to inscribe content on the network using Ordinals inscriptions, bringing new projects and slowing transactions. The project effectively allows users to create Bitcoin based NFTs and has taken the industry by storm.
The latest Ordinals inscripted onto the Bitcoin network
The number of Ordinal inscriptions on BTC crossed 100,000 on Tuesday, and unlike Bitcoin sidechains (ie Stacks or Counterparty), Ordinals are inscribed directly onto the blockchain. These “digital artifacts” can comprise of JPEG images, PDFs, video or audio formats. The images are actually stored on the Bitcoin blockchain, rather than somewhere else which is often the case with other NFT protocols.
The process represents a significant improvement compared to other chains because they can only store a link that then points to a webpage where the image is hosted. If that page gets taken down — like all of now-defunct crypto exchange FTX’s NFTs — then tough luck.
However, the Bitcoin community is divided over the project. One of the major talking points has been the increased use of block space to inscribe various Ordinals. Bitcoin’s average block size has hit all-time highs above 2.5 megabytes (MB) for the first time since its inception in 2009. This is creating upward pressure on the fees that miners can charge.
Average Block Size (MB) on BTC Network
Source: Blockchain.com
Some also suggest that it deviates from Bitcoin’s purpose as a peer-to-peer electronic cash system. However, proponents suggest it will bring more use cases for BTC and drive adoption. The inception of Bitcoin Ordinals has seen the network hit a record 44mn non-zero addresses.
Regular Regulation
US regulators had a busy week…
- The SEC hit Kraken with a $30mn fine and ordered the crypto exchange to halt staking in the US
- Crypto firm Paxos is to face SEC charges and ordered to stop minting Binance stablecoin.
- Binance is expected to pay monetary penalties to settle existing US regulatory and law-enforcement investigations of its business
- The SEC is ramping up its campaign against unregistered securities, which they claim put investors in risky situations without enough transparency
- The SEC is to target crypto firms operating as ‘qualified custodians’
These moves are only the latest in an escalating regulatory effort to rein in the once free-wheeling crypto industry… this really shouldn’t be surprising after the events of 2022.
While it’s easy to criticize the SEC as standing in the way of innovation, we’re coming out of a year where crypto investors (often retail) lost billions of dollars. Crypto’s popularity is now shaky, and it’s understandable why the SEC would consider regulations a priority for this industry. Ensuring guardrails for investor protection and financial stability are in place is important.
At the same time, it’s equally important to strike a balance and allow development and evolving technologies to thrive. Without that, we may miss out on improvements to financial products, services and inclusion.
One long running debate is if crypto, or certain types of crypto, are securities… The SEC uses the Howey Test in deciding whether something is an “investment contract” and, therefore, a security. The Howey Test holds that a security is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
Whether this test applies to crypto remains up for debate. Its likely some will be, others won’t. Joe Lubin, for example, claims there’s no chance Ethereum itself is a security. But is Kraken offering a pooled product to stake Ethereum a security? Are stablecoins securities? Are utility tokens securities? It’s a grey area and many questions remain.
One thing though is certain… the SEC and other global regulators will escalate their campaigns of cracking down on crypto companies, any you can definitely expect to see further regulations in the coming years.
In the News…
- Three Arrows founders roll out bankruptcy claims exchange
- SBF’s two bail bond guarantors unsealed
- George Soros’ fund dives deeper on crypto bets
- Arbitrum surges ahead as Ethereum’s Layer 2 landscape takes shape
- Polygon’s zkEVM beta going live on Ethereum mainnet next month
- Bitcoin trading volume up 80% at DBS Digital Exchange in 2022; customer base doubles
- Taurus raises $65mn Series B from Credit Suisse and Deutsche Bank
- Coincover, a digital assets protection firm, raises $30mn led by Foundation Capital
- Superplastic, creator of digital collectibles, raises $20mn, led by Amazon’s Alexa Ventures with participation from Google Ventures, Galaxy Digital, and Animoca
- How darknet markets fought for users in the wake of Hydra’s collapse
- UK regulator takes enforcement action against crypto ATM operators
- El Salvador to open first Bitcoin Embassy in Texas
