Charting the Road Ahead

In This Report…

Sentiment Remains Fragile, Separating the "Assets" from the Bad Actors

‘Majors’ like BTC and ETH, ~US$16K and ~US$1.2K respectively are holding up relatively well, given the systematic events of late. Meantime, exchange balances and stablecoin outflows continue to trickle (not flood) out, indicating some potential soft floor being established. That said, with the interconnected nature of digital markets and contagion risks abound, the short-term risk remains to the downside.

Bahamas Regulator Confirms FTX Asset Seizure

During the recent collapse of FTX, The Bahamas regulator confirmed that “it had seized digital assets” of FTX's Bahamas unit. For long-term creditors and the current liquidator, this will add yet another layer of complication to the ongoing Chapter 11 filing and workout process, extending the timeline for a "cents on the dollar" recovery, in our view.

Remain Tactically Cautious

CTH group / IDEG, does not have any direct exposure to the wider FTX complex. However, we remain cautiously positioned and aim to keep healthy reserves as concerns over the Digital Currency Group (DCG), particularly we note the Greyscale BTC trust market discounts, which weighs heavily over the industry however demand can be absorbed by larger branded institutions entering.

Crypto Industry Leaders Must Step Up

In the wake of the crypto biggest setback, global regulators will expect heightened diligence and risk burden on the crypto companies that will remain. A new institutional roadmap is being set, we look at how Singapore and Hong Kong are laying out their visions for the new "digital asset" world. With "controlled acceptance", tolerating public chain assets trading activity with appropriate disclosures, and elevated investor education, combined with updated regulatory policy, there are bright spots emerging for the blockchain-driven economy from the current turmoil.

Sentiment Remains Fragile, Separating the “Assets” from the Bad Actors

We welcome that more liquid markets, e.g. BTC and ETH remain relatively well supported at this time. As BTC declined from US$21K to $16K, Exhibit A: At the peak of the sell-off, BTC 24hr traded volume peaked at ~US$128 BN on 11th November. Interestingly, its pays to focus on the basics: with elevated trading and on-chain wallet exchange activity, the Ethereum validators who run the blockchain saw profits from MEV (Maximal Extractable Value) spike around the 11th Nov. Good revenue news for infrastructure providers. Currently, after mass liquidations the frenzy of traded volume fell to ~US$27 BN, currently, giving some pause on major outflows.

Exhibit D: Provides insight as market risk spiked and showed indications of trend recovery to more normal levels. However, Exhibit B and Exhibit C net options delta positioning paints a sombre picture as both long and short-term net delta positioning fell dramatically, a bearish signal.

BTC & ETH short-term net deltas declined below 1 as investors favoured short term puts. Long-term net delta BTC and ETH remained above 1, however, the Call / Put ratio also corrected downward, driven either by the numerator (selling or exiting long-term calls) or via the denominator of more long-term puts being issued / purchased as the bear narrative takes hold.

Bahamas Regulator Confirms FTX Asset Seizure?

They confirmed "it had seized digital assets" of FTX's Exchange during the frenzied collapse. The new liquidator CEO, John J. Ray III, who oversaw Enron’s liquidation and was appointed by a Bahamian court, will likely have to now deal with another "player" in the ongoing saga. This time, it is the local regulator who has confirmed they are holding FTX client collateral.

In our view, this likely adds further complication within the Chapter 11 filing. Typically, all assets should be held / frozen within the company books which would allow the liquidator to assess how the company can be wound up and provide some “cents on the dollar” recovery to both depositors and creditors. Now, some reconciliation will have to be negotiated with the regulator, excluding the issues of circumstances surrounding the FTX "hack".

One comparable we highlight is Mt. Gox. Exhibit E shows the collapse and timeline of Mt. Gox, one of the earliest digital asset exchanges, default post hack of its vault. The reasons behind the default of this exchange were materially different. Now, in our view, the FTX default is A. more criminal and B. vastly more complex given the size of the overall market compared to the times that 2014 Mt Gox defaulted, the market was considerably more na?ve, smaller and unsophisticated.

Therefore, by its nature measured by the simpler yardstick example of the Mt. Gox example, the FTX recovery process for depositor’s asset recovery will extend to decades, not years.

Remain Tactically Cautious

One of the sentiment indicators we are monitoring closely at this stage is the Grayscale’s Bitcoin Trust (GBTC) – Exhibit F. As of past Friday, the Bitcoin-tracking investment vehicle is trading at a discount of 42.69%. The GBTC trust is at a discount when its price to NAV (net asset value) of Bitcoin’s current price is negative. Simply put,?there are more shares on the market than people want to buy, creating this perpetual discount.

Historically, the GBTC trust filled a gap in the early days when BTC was difficult to buy / hold. Now, with increased client sophistication and education PLUS an increasing competitive landscape where several new institutional issuers have entered (with more to come), longer term we expect more efficient products to absorb flows, providing opened ended mechanisms to reduce the illiquidity discount / premium issues facing the legacy GBTC product. Institutional competition includes Canadian listed ETF (Exchanged Traded Fund), Fidelity International has listed a number ETP’s (Exchange Traded Products) in Europe and HK. Further, with the recent HK news to loosen restrictions, both Samsung and Mirae Asset Management have filed to launch BTC ETF's. ?

The trend is for BTC liquidity and demand by investors to be absorbed by larger, credible, and branded institutions now entering the digital asset market. With aftershocks still rippling throughout the digital asset market, this trend will likely be exacerbated and accelerate further as investors demand greater transparency and liquidity.

Crypto Industry Leaders Must Step Up

Despite market turmoil, there is huge opportunity, albeit guided by heightened regulation and cost of compliance and diligence on the providers that remain. The industry must accept this as a net-net good thing. Policy makers recognise the potency of the technology, lightspeed innovation of market entities. Both Singapore and HK have laid out visions for their “digital asset” economy, summarised for each jurisdiction in Exhibit G and Exhibit H, respectively.

Crypto Fundamental Metrics

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