Balancing the Rally
Favour a Balanced Risk Approach…?With recent price momentum consolidates, a good thing in our view, as market risk is increasingly pushed out of the market; we continue to favour hedging some of the recent stellar portfolio capital market gains. As trading volumes and arbitrage opportunities recover, chasing strong price increases, select liquid majorcoinpairs now provideinterestingbasis yieldopportunities when hedging.
ETH Staking:?Coinbase Ventures has invested in Rocket Pool and plans to use its $RPL and $ETH to establish a liquidity pool for Rocket Pool, closing the gap on LIDO. This is a direct reaction to the recent US SEC announcement to restrict ETH staking and, in our view, supports our thesis that tighter regulation will continue to push activity further offshore and into DEFI.
Ordinals (NFTs)?got much interest minting NFTs onto the Bitcoin blockchain. While an interesting technological innovation, peering into the data demand is drying up now that the rush for <100k inscriptions looks over. We generally support the BTC network being used for alternative use cases as it does not block and congest the network.
Top-Shot (NFTs), controlled by Dapper Labs, was deemed a security by US Court and impinging on the Howey Test. We highlight some of the legal analysis around this and impress our audience of its importance, as this ruling will likely set a precedent for the future of NFT’s and the marketplaces that trade them.
Filecoin (FIL)?saw a surge of over 72% this week as the network developers shared three major project updates for 2023: the Filecoin Virtual Machine (FVM) – smart contract capability - data computation (Bacalhau), and retrieval market. FIL has come a long way since launch in 2019; serving as a decentralised storage system and smart contract enablement will make this a value fundamental infrastructure pillar for the longer Web3 ecosystem development.
The overall market cap for digital asset markets hit multi-month highs?(Exhibit A)?of US$1.1 TRN before giving backsome gains in-line with the broad sell-off across risk assets amidst mixed economic indicators, i.e., persistent inflation pressures, US Fed minutes showed support for larger hikes vs. robust US jobs data. Further, BTC tested the upper US$ 25k resistance level multiple times but eventually retraced lower to settle at US$ 23.9k.
Exhibit A:?Total Market Cap Recovery Touched US$1.1 Trn
On major datapoint we are monitoring is the BUSD stablecoin market cap, which has now dropped from US$23bn to less than US$11bn, a 50% fall. This is the major trading pair for the global crypto exchange Binance and places pressure on the exchange to find new use cases for the stable coin. Its competitor’s USDT (Tether) market cap remains stable at just below ~US $68BN.
Exhibit B:?BUSD Woes Continue as Market Cap Falls below US$11 BN
See Exhibit B / C / D.?Chasing strong price increases, trading volumes and arbitrage opportunities have bounced up. Select liquid major coin pairs now provide interesting basis yield opportunities when hedging. Cetrus Paribas, annualised yields range between 14.43% - 6.67% when looking at more liquid coin pair futures markets.
Exhibit C:?Annualised Basis Hedging Performance for this Quarter
Exhibit D:?BTC Basis Rates Rallying
Exhibit E:?Basis Rates of ETH Improving
In the implied volatility options space, our largest trading counterparties report BTC mid-to-back (longer dated) volatility opportunities starting to react to improved market sentiment as implied risk levels generally move lower. This was supported by inflows in the mid-to-back part of the implied volatility term structure. Therewerereportsof buyers ofBTCDec-2023 expiries of 35k / 40k calls, a bullish signal. They also reported a unique seller of ETH market spreads (buy call sell put) for April expiry. Given the lower absolute levels of risk the data points indicate a generally long-risk bias in the short term, supporting our thesis that markets remain supportive into H1-2023. Investors can look at a ‘Renaissance’ style long only Web3 portfolio strategy to be long the market.
However, given the speed of price recovery, we still value a risk-managed approach. The backdrop of the potential further US ‘regulation by enforcement’ remains. Despite recovering underlying crypto fundamentals, on-chain transaction volumes and TVL have improved, above 2m moving averages, now standing at $67.8bn.
The recovery in basis funding rates supports?Quant Market Neutral Strategy,?which seeks to stable income and returns, regardless of market direction.With recovering transaction volumes,this basis yield can look to persist, and makes sense to hedge a long-only portfolio position at this time.
ETH Staking:?Coinbase Ventures has invested in Rocket Pool and plans to use its $RPL and $ETH to establish a dedicated liquidity pool for Rocket Pool. Considering the past SEC announcement to restrict onshore ETH staking, this move by Coinbase is a strong support for the decentralization of ETH staking.
Exhibit F:?With over ~US$ 1.0BN in TVL, Rocket Pool is the third-largest liquid staking entity, behind Lido and Coinbase itself. It is popular with hard-line advocates of decentralization. Rocket Pool nodes only need to deposit 16 ETH per validator and 16 ETH from the staking pool (which stakers deposited in exchange for ETH) to create a new ETH2 validator. Rocket Pool has a dual governance structure, with responsibilities split between two decentralized autonomous organizations (DAOs).
Exhibit F:?Rocket Pool Liquid Staking Total (TVL) Tops $1BN
Rocket Pool’s ($RPL) token rallied ~8% after the announcement, reaching an all-time high relative to the price of Ether. Liquid decentralised staking protocols got another boost late last week when MetaMask, a popular crypto wallet providers, announced that users could now stake ETH via Lido or Rocket Pool on the MetaMask app.
Exhibit G:?Institutional Staking Yield Components
Ordinals (Digital Artifacts)?recently got a lot of interest ‘inscribing’ NFTs-like products into the Bitcoin blockchain.
Ordinals are like NFTs that can be directly created on the Bitcoin blockchain. However, unlike traditional Bitcoin transactions, which involve sending and receiving value between parties, Ordinals enable the inclusion of smart contract code within a Bitcoin transaction, inscribed within the block. This code can then create non-fungible tokens (NFTs) directly on the Bitcoin blockchain and takes up transaction space.
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There are some key differences between Ordinals and typical NFTs, despite some similarities. Non-fungible tokens (NFTs) on ETH and other EVM (Ethereum Virtual Machine) blockchains often require off-chain data storage. This data is typically stored on the Interplanetary File System (IPFS), a decentralized storage system like the blockchain’s hard drive.
Then, to update these NFTs, some existing projects change the metadata of individual tokens to improve image quality, and holders might be required to click the “refresh metadata” button to access these new, higher-quality images, referencing the data in the off-chain IFPS system. However, this reliance on off-chain datastorage creates a significant deficiency as they are considered “incomplete” by some, as parts are not 100% independently held on-chain. In contrast, Ordinals aim to be considered “complete” because all its data is inscribed directly on-chain, making Ordinals ‘digital artifacts’ rather than NFTs.
Exhibit G:?Despite strong initial interest the current numbers reflect ~US$ 29k spent inscribing Ordinals last week, a decrease of -75% when compared to the ~US$ 114k spent in the prior week. While an interesting technological innovation to modify the use case of the BTC chain, peering into the data, demand is drying up post the initial rush for <100k inscriptions. Despite what influencers will ‘shill’ online, demand has decreased post the initial excitement.
Exhibit G:?$USD Spend on Inscribing Ordinals (%) Falls Sharply
That said, we welcome a new use case for the Bitcoin network, and this may signal a cultural shift for the cryptocurrency network. Any increase in fundamental support for the BTC network is positive as long as it does not clogging the network. While NFTs have gained significant attention and popularity, Ordinals may become the new digital art ownership and authentication standard.
US District Judge Deems NBA Top Shot NFTs are Securities…
sourced from the analysis of Henri Arslanian, a former PWC partner, lawyer and author, he provides a textbook summary of the courts legal analysis of whether an NFT is a security. The US court does a detailed analysis of the different prongs of the Howey test:
First, the Court finds that Defendants’ public statements and marketing materials objectively led purchasers to expect profits and the Court focuses on tweets made by Dapper Labs in the NBA Top Shot Account.?Although the literal word “profit” is not included in any of the Tweets, the Court clarified that the “rocket ship” emoji, “stock chart” emoji, and “money bags” emoji objectively mean one thing: a financial return on investment. This should be another reminder to any crypto entrepreneur: what you say in public and what you put in a tweet is important.
Second, the Court finds that the fact that Dapper Labs created and maintained a private blockchain is fundamental. By privatizing the blockchain on which the Moments NFT value depends and by restricting the trade of Moments to only the Flow Blockchain, purchasers must rely on Dapper Labs’s expertise and managerial efforts, as well as its continued success and existence.?The Court hints that the situation could be different if it was on a public blockchain. This should be another reminder for lawyers that the features of the underlying blockchain matter when doing their legal analysis.
Third, the legal relationship matters.?The Court finds that the following links are important (i)that Dapper Labs maintains private control over the Flow Blockchain, which significantly dictates Moments’ use and value (II) that Dapper Labs touted Moments as a means for purchasers to realize substantial profits through the low sale prices for packs and marketing of the substantial profits others had made through sale on Dapper Labs’s proprietary Marketplace; and (iii) that without Dapper Labs’s essential efforts in maintaining the Flow Blockchain and Marketplace, Moments would be valueless.
However, and not surprisingly, the Court clarifies that not all NFTs offered or sold by any company will constitute a security, and each scheme must be assessed on a case-by-case basis.
The Court makes it also clear that it’s analysis is purely limited to the NBA Top Shot NFTs and not to the FlOW token that powers the FLOW blockchain via proof-of-stake.
Like the US ‘regulatory carpet bombing’ we have described in prior weeks, this judgment is an interesting development to watch as it may now set a precedent for how NFTs and associated NFT marketplaces are designed, developed, and sold globally.
Filecoin (FIL) Network Shares Major Updates for 2023:?the Filecoin Virtual Machine (FVM), data computation (Bacalhau), retrieval market and smart contract ability. $FIL tokens saw a surge of over 72% this past week.
Exhibit H. We are happy to report that FIL is currently a long-term position held within our IDEG Renaissance Strategy.
The Filecoin network aims to offer a reliable decentralized storage system to fuel the current expanding Web3 digital economy. The decentralized cloud-based storage system has earned a strong following since its launch in 2019. However, the launch date for the Filecoin main-net was pushed back until block 148,888 in mid-October 2020. Fast forward to today in 2023, estimates place its online active miners at 3,785, staking 134,023,969 FIL tokens and storing 18.767 EiB of data currently.
Exhibit H:?Filecoin Price Reacts to Protocol Upgrades Announcements
Filecoin aims to store data in a decentralized manner. Unlike cloud storage companies like Amazon Web Services or Cloudflare, which are prone to centralization problems, Filecoin leverages its decentralized nature to protect the integrity of a data’s location, making it easily retrievable and hard to censor. Decentralized storage systems like Filecoin allow people to be their custodians of their data and make the web more accessible to people worldwide.
While still off the 2021 peak, $FIL token rallied to US$9.40 before retracing, significantly supported by the news that the protocol is considering introducing its own smart contract capabilities, 23 March 2023, becoming a full-fledgedLayer-1(L1)protocolatthattime.With the smart contract update, Filecoin ecosystem developers will be able to create Dapps for Metaverses, non-fungible tokens (NFTs), decentralized exchanges (DEXs), and decentralized finance (DeFi)…etc. More importantly, the Filecoin Virtual Machine (FVM) can communicate with the Ethereum Virtual Machine (EVM), opening the wider interoperable DeFi ecosystem to the FIL token holder developers.
Author: Kevin Loo, Managing Director, IDEG
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