Run, Rabbit Run!

In This Report…

Post Chinese New Year Digital Asset Rally…?fundamentals still are broadly suppressed; however, a bullish price rally is likely to induce a rush of FOMO investors back to the market. Additionally, investors have access to several new access products to get market exposure, including a raft of new ETF’s. Further dovish news coming from major central banks will continue to fuel the digital asset rally, supported by US unemployment which remains at historic lows.

Bitcoin Miners Show Signs of Recovery…?Bitcoin’s mining industry is relatively stable compared to the massive bearish and tumultuous fallout of exchanges and lending companies. Improving price metrics show profit margins indicate to us that the peak of force BTC selling by miners is past and unlikely to persist in 2023.

Stablecoin / Central Bank Digital Coins (CDBC’s) Interest from Policy Makers and Banks…?with regulation top of mind, major announcements from both the UK and Japan aim to revamp of the regulations with respect to Stablecoins and CDBC adoption. The UK government is considering introducing a national cryptocurrency or “digital pound,” committing to becoming a world crypto hub. Japan aims to overturn a ban on stablecoins as part of efforts to support digital finance and Web3 adoption.

Amazon’s Enters the Web3 Foray…?The retail giant’s announced initiative from the 27th, fuelling some of the surges in crypto trading, may force some regulatory clarity for digital assets, especially in NFTs.

US SEC (Again) Rejects Bitcoin Spot ETF?from Ark Investment Management and 21Shares to jointly issue a much-coveted BTC Spot ETF. Public chain assets are still rejected by regulators, while enterprise smart contract solutions supporting incumbent ABS (Asset Backed Securities) for legacy assets gather steam.

Post Chinese New Year Digital Asset Rally

Digital assets continued their 3rd week-row rally, leaving many on the sidelines hoping for a meaningful dip to get involved as FOMO takes hold. Crypto natives remain cash-heavy, and fundamentals remain in the shadows of recent contagion pain. However, moves through ~US$ 25k would be difficult for retail not to chase if participants have been watching since ~US$ 16k. BTC eventually broke the US$ 23,500 level as of the morning of the 30th of Jan.?Exhibit A?shows a meaningful increase in open interest for BTC long call options, driving up the call/put ratio and powering sentiment around a BTC recovery.?Exhibit B: The alt-coin sector performed well as ETH, SOL, and APT, amongst others, outperformed BTC. Typically, risk rallies see lower liquidity coins outperform.

Exhibit A:?Altcoins Outperform BTC and ETH (1 Week: 22-Jan to 29-Jan)

Exhibit A:?BTC Options Open Interest Increases (By Expiry)

Numerous events upcoming in macro – US Fed rate decisions on Wednesday, BoE, ECB on Thursday and both US ISM manufacturing and services data (Wed & Friday). For the US Fed, market expectations are for a 25bps and pause, a far cry from a few months ago. Any dovish language from the Fed could see crypto and risk assets grind higher; this is supported by?Exhibit C,?with US unemployment at the lows ~3.5%, its lowest level since 1969! On January 26, the U.S. Department of Commerce announced the Q-on-Q rate of U.S. GDP of 2 9%, better than market expectations of 2.6%, achieving growth for two consecutive quarters.

Exhibit C:?FRED Unemployment Chart

For the whole of 2022, the real GDP of the United States will grow by 2.1%, which is 3.8 percentage points lower than the growth rate in 2021.s

Bitcoin Miners Show Signs of Recovery

While hurdles within the industry remain, improving price metrics show profit margins slowly improving for Bitcoin miners. This industry has been relatively stable compared to the tumultuous fallout of exchanges and lending companies.?Exhibit D,?the network’s hash rate dipped slightly toward the end of 2022, primarily due to an unprecedented blizzard in the U.S. however has since recovered strongly to surpass its previous peak above 270 EH/s.

Exhibit D:?Bitcoin Network Hash Rate Touching New Highs

In 2023, we do not anticipate the same level of miner-induced selling as 2022 (Exhibit E) will reoccur. Many have strengthened balance sheets, cashflow is not as urgent. However, a challenge for any energy-sensitive business is the new-age efficient ASIC machines and the upcoming Bitcoin halving event in mid-March 2024, which will slash block rewards by half. Since June 2021, more energy-efficient miners have arrived, offering more than 100TH/s per joule and the trend for efficiency with new hardware equipment launches, with estimated breakeven prices below $15,000, will continue to make this a highly competitive sector.

Exhibit E:?Publicly Traded BTC Mining Sales of Inventory Peaked in June

Our sister company Atlas has been a long-standing purchaser of more efficient machines to ensure it remains both competitive and relevant in this area.

Institutional Stablecoin / Central Bank Digital Coins (CDBC’s) Interest?Both the UK and Japan aim to revamp the regulations with respect to Stablecoins and CDBC adoption.

The UK government is considering introducing a “digital pound,” the economic secretary to the Treasury, Andrew Griffith, told MPs. The UK was committed to becoming a world crypto hub, and the government was “a long way down the road… to establish a regime for the wholesale use, for payment purposes, of stablecoins”. Central banks around the world are developing or exploring digital currencies.

China, for example, is a front-runner in this global race and is in the process of testing a digital yuan in major cities, including Beijing, Shanghai and Shenzhen.

The European Central Bank, in July 2021, took a first step towards launching a digital version of the euro, kicking off a 24-month investigation phase to be followed by three years of implementation. Mr. Griffith told the committee: “It is right to look to seek to embrace potentially disruptive technologies, particularly when we have such a strong fintech and financial sector.”

The Financial Services Agency (FSA) of Japan announced that the new regulations on crypto would be implemented from June 2023, permitting domestic investors to trade certain stablecoins, including Tether (USDT). Japan aims to overturn a ban on stablecoins as part of efforts to support digital finance and Web3 adoption. Previously, in June 2022, Japan’s Parliament issued a bill restricting stablecoin trade in the country, especially to ban the issuance of stablecoins by non-banking institutions.

The bill stated that the issuance of stablecoins was limited to licensed banks only. The exact date of the implementation is not yet decided.

Exhibit F:?Stablecoin Market Share

Amazon’s Web3 Foray

The globe's biggest retailer has been hovering at the edges of Web3 tech for some time. While this new announcement does not make clear who will be leading Amazon’s NFT initiative, details are still to be published exactly on what the product offering is, the platform will certainly include elements of NFT and gaming initiatives. By all indications, the platform is set to run out of Amazon corporate proper versus its giant web-hosting platform, Amazon Web Services (AWS). This is big news for the NFT and crypto market adoption. However, it does also raise challenging questions for companies like OpenSea and Rarible. A successful launch/entry by Amazon would surely be considered a substantial threat to these early market movers.

US SEC Rejects Bitcoin Spot ETF (Again)

For the second time, the U.S. Securities and Exchange Commission (SEC) rejected a joint effort by Ark Investment Management and 21Shares to list a spot bitcoin exchange-traded fund (ETF). The U.S. markets regularly rejected a score of ETF applications for products that invest directly in bitcoin while approving several funds tracking the BTC futures market.

The SEC has rejected applications for bitcoin spot ETFs from a raft of companies, including WisdomTree, Fidelity and VanEck. One of the firms to have its bid rejected, Grayscale Investments (owned by CoinDesk parent Digital Currency Group), has chosen to take legal action over the SEC’s decision, with oral arguments set to commence on March 7.

Grayscale had claimed over the summer that the SEC was applying an unfair double standard by allowing bitcoin futures ETFs on the market and repeatedly denying proposals for ETFs that invest in spot bitcoin. The market is still in need of a large-scale spot ETF-based product. We remain optimistic that this will occur sooner rather than later, albeit it seems that US regulators do not seem to be in a rush to approve this.

All the while, Goldman Sachs and others, working with Digital Asset group, are launching enterprise smart contract solutions to develop and issue debt instruments on-chain in a way that now allows for legacy assets to be traded on private blockchains. We remain of the view that the market is big enough for both public and private chain assets.

Author: Kevin Loo, Managing Director, IDEG

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