#mdj is a weekly journal covering developments within the global digital assets industry.
In this issue of #mdj, we cover:
Read Mint Disclaimer
Previous issues: Issue 1, Issue 2
EXECUTIVE SUMMARY
Crypto markets see volatile week, end on strong rally. BTC was up 11% over the week despite a drawdown last Monday. The past week saw a departure from the prior week’s trend of lowered volatility. ETH saw 10% gains in the week, another departure from the recent trend of ETH outperforming BTC. Solana rallied 19% last week.
Binance to convert USDC (among others) to BUSD. Binance announced that they would convert USDC, TUSD, and USDP to BUSD on the exchange while still allowing their withdrawals in an attempt to improve liquidity on their trading pairs. BUSD circulation increased by 2.9% last week and is expected to see a boost of 5% as USDC on the platform are converted to BUSD by 29th of September.
Ethereum Merge in view. ETH merge will be completed between 13th to 16th September this week as all preparations going into the merge were completed by the development teams. This is expected to be an exciting week as ETH completes its long awaited move to proof of stake. The merge is also expected to have other market effects.
MicroStrategy seeks to purchase more BTC. MicroStrategy filed with the SEC to sell $500M of its stock for corporate purposes and to buy more BTC, indicating that they remains unchanged in their strategy despite Michael Saylor stepping down from CEO.
Bitcoin Mining Pool Poolin suspends withdrawals. Poolin, one of the largest bitcoin mining pools, announced that they have been facing liquidity issues and have suspended withdrawals while they work out a strategy. The pool hashrate dropped by nearly 50% after the announcement despite incentives being offered to continue mining with them.
Crypto investing likely to remain lower for H2. In their recent report, KPMG noted that investment into crypto firms fell from $32B to $14B in 2022, although it remains higher than the years prior. They expect the slowdown to continue for the second half of the year.
Mysten Labs raises $300M. Mysten labs raised $300M at a $2B valuation, the funds will be used to build their highly scalable Sui blockchain and assist in its expansion and rollout.
WEEKLY MARKET ACTION
This week saw a shift from the past 2 week’s relative stability as crypto markets saw high volatility. After initially dropping 7% to below $19k last Monday.
BTC rallied sharply on Friday. BTC price gained 10% within 1 day and continued its rally over the weekend reaching above $22k. BTC had a VRVP price of $19,883. The past week also saw much higher liquidations for both longs and shorts.
ETH followed a similar price trajectory to BTC, however, the past week also saw another trend changing with ETH seeing relatively modest gains compared to BTC in contrast to the trend seen over the past month.
ETH dropped as low as $1,440 before rebounding to reach above $1,700. Unlike BTC, ETH saw some resistance in its rally which saw it underperforming compared to BTC. ETH had a VRVP price of $1,582.
LARGE CAP PRICE ACTION
TOP CRYPTO ASSETS PERFORMANCE
After initially dropping, crypto markets rebounded last week. BTC posted a weekly gain of 11.6% despite a 6% fall last Monday. ETH gained 10.9% while other altcoins underperformed compared to BTC. Notable exception was Solana which gained 19% over the past week with a 10% gain over the weekend.
STABLECOINS MARKET CAPITALISATION
BUSD continued to gain with another 2.9% increase in circulation the past week after a 1.5% increase the week prior. USDC and USDP saw supply going down slightly.
FRAX also saw a 1.4% reduction in supply despite a 2% increase over the past month.
Binance shifting from USDC, USDP, and TUSD pairs to BUSD over the next two weeks is likely to affect the stablecoin dominance for the rest of the month.
CRYPTO AND EQUITY MARKET SENTIMENTS
The past week saw market sentiment improving sharply and staying elevated. Although, crypto sentiment increased more than US equities after a 10% rally. BTC sentiment soon dropped off slightly despite the rally continuing over the next 3 days.
WEEKLY NEWS HIGHLIGHTS
Source: Mint Finance Blog
KEY HIGHLIGHTS IN DIGITAL ASSETS INDUSTRY MACRO NEWS
Ethereum Merge
Ethereum activated its final Bellatrix upgrade as we head into the merge. This upgrade was the final step before Ethereum switches to Proof of Stake. With this upgrade, validators have started creating mainnet blocks (The Block).
Although the upgrade was successful, it saw 5% of validators temporarily drop offline contributing to a 10% missed block rate. Earlier, Ethernodes had indicated that 25% of validators may not be configured in order to be ready for the merge. (Cointelegraph)
Although the upgrade promises to bring many potential improvements through substantially lowered environmental impact, a supply reduction that could even turn deflationary at times, and an increased cost of attack on the network. It also raises concerns for the Ethereum mining industry and the future of its substantial hash rate. (Cointelegraph)
Miners have vowed to launch a proof of work fork of the network, leading many to accumulate more ETH as they hope to capture the airdropped tokens. This also led several people to borrow ETH from crypto lending platforms such as Aave and Compound which prompted Aave to temporarily stop loaning ETH and Compound to raise interest rates for borrowers as they hope to protect the platforms against liquidity issues (The Block).
Possibilities of the airdrop also led to stETH, a liquid staked version of ETH to widen its discount to ETH to 4.5% temporarily, as traders position to maximize their reward. stETH cannot be converted to ETH for a few months after the merge. (Coindesk)
Many of these miners already shifted their operations to mining Ethereum Classic as its hash-rate spiked 66% over the past month to an ATH but still remains a fraction of the total ETH capacity. Mining company Hive blockchain is testing other GPU mineable coins as well. Still other miners are hoping to shift to other applications such as Cloud Computing. (Coindesk)
New ETH staking services launched
Going into the merge, SEBA bank announced that they would be launching a new ETH staking service for institutions. (Cointelegraph)
Binance US also launched low-barrier ETH staking allowing users to stake as little as 0.001 ETH. (Cointelegraph)
Funds that are staked to the network are currently locked and are only expected to be available for redemption after a few months with the “Shanghai Upgrade”. Until then liquid staking remains an attractive option for investors as it allows them to use a token representing their staked ETH while the actual ETH remains locked.
The launch of new staking services seeks to create diversity in the market as the current ETH staking market is concentrated among few participants, with LIDO holding nearly 30% of the total stake, and centralized exchanges holding large portions as well.
Institutional interest in digital asset continues despite market rout
Investment management firm, Franklin Templeton, announced that they would begin offering digital asset strategies to wealth managers in partnership with Eaglebrook advisers from Mid-October. The Franklin Templeton Digital Assets Core strategy is market-cap weighted, investing in 10-15 of the largest digital assets. (Coindesk)
Meanwhile, Fidelity, which has been offering institutional clients Bitcoin services through their subsidiary Fidelity Digital Assets, announced that they would begin offering retail customers Bitcoin trading services from November. Fidelity continues to show interest in the asset class, after having launched a Physical Bitcoin ETP in Europe in February. (Cryptoslate)
MicroStrategy has filed with the SEC to sell $500M of its stock to fund further Bitcoin purchases. This points to the firms continued commitment to its Bitcoin strategy despite chairman Michael Saylor stepping down from CEO. MicroStrategy has acquired nearly 130,000 BTC (>$2B) since 2020 essentially turning its stock into a Bitcoin Proxy. (Coindesk)
Singapore based family office Whampoa Group, announced that they would be pivoting their asset management business towards digital assets. They announced a raise of $50M for a crypto-focused hedge fund and have allocated nearly $100M for a venture capital fund. (The Block)
KEY DEVELOPMENTS IN STABLECOINS AND CBDC
Binance to convert USDC, other Stablecoins to BUSD after September
Binance, announced that they would remove USDC, TUSD, USDP as tradeable assets from their platform and convert all balances from these stablecoins to their BUSD stablecoin by September 29th. Users would still be able to deposit and withdraw these stablecoins on the exchange. (Cryptoslate)
They expect the move to improve liquidity and capital efficiency for users by aggregating liquidity into a single base asset. The move notably excludes USDT which is the dominant stablecoin with the majority of trading activity routed through it. This is similar to the model followed by its competitor FTX, although FTX does not have its own proprietary token and only represents USD balances on-exchange.
Circle stated that they expect the move to increase utility for its USDC token as it would shift trading activity from its main competitor USDT to BUSD. (Cryptoslate)
BoA noted that the move will benefit Binance’s proprietary stablecoin BUSD by increasing its supply by upto $908M (nearly 5%) as significant supply of these stablecoins is currently held by the exchange. The increased supply will allow Binance to earn more interest through the securities that back the stablecoin. They also noted that 86% of all BUSD is currently held on exchange indicating that the token currently does not have much utility in the wider crypto ecosystem. (Coindesk)
Russia to Use Stablecoins for Cross-Border Payments
Deputy Finance Minister of Russia announced that Russia is working on developing a clearing platform that will allow it to settle cross-border trade transactions with friendly countries using commodity-backed Stablecoins.
Sanctions placed on Russia, including exclusion of many of its banks from the SWIFT payment network have made it challenging for the nation to conduct trade, this has led to a shift in the government’s attitude towards cryptocurrencies. Russia had prohibited the use of cryptocurrencies for digital payments in July, but now argue that cryptocurrency settlement may be necessary.
Notably, Russia is also working on its own CBDC, a digital Ruble.
Coinbase proposes custody agreement for MakerDAO’s USDC
Coinbase submitted a proposal to MakerDAO offering to take custody of 33% of MakerDAOs Peg Stability Module USDC, worth ~$1.6B in a Coinbase Prime custody account and provide 1.5% annual yield ($24M) for the same.
This comes as MakerDAO has indicated intentions to shift away from collateralizing its stablecoin DAI with a majority of USDC. (Blockworks)
Currently, USDC comprises nearly 34% of the collateral for DAI as it is the main token used in a Peg Stability Module that is used to keep the price of DAI stable at $1 by balancing collateral used for lending and borrowing activities. USDC can be used to instantly mint DAI at the price of $1 offering enhanced price stability to DAI in the form of an arbitrage opportunity.
The recent handling of the Tornado Cash sanctions by Circle, issuer of USDC, has raised existential questions over the regulatory risks facing DAI. MakerDAO has recently proposed plans of shifting away from the USD peg and instead rely on ETH for its collateral backing.
Coinbase’s offer also offers the DAO a better way to invest its PSM funds while still allowing the necessary arbitrage through Coinbase. Currently, MakerDAOs PSM is underinvested and earns no yield, raising concerns for its balance sheet. On the other hand, this also raises concerns over centralization for the DAO that presents decentralization as its main value.
NEWS AND UPDATES FROM DIGITAL ASSET COMPANIES
Poolin, one of the largest Bitcoin Mining pool, suspends withdrawals:
Poolin, one of the largest bitcoin mining pools, last Monday announced that it would be suspending withdrawals citing liquidity issues. They are working on finding “strategic alternatives” with other parties in an effort to preserve assets.
Poolin also announced that they would be waiving mining fees until December for all users and for a year for users with >1BTC or >5ETH on their pool account. The move is likely expected to incentivize users to continue mining with Poolin while it resolves liquidity issues. However, over the week, Poolin’s hashrate dropped by nearly half.
LUNA Surges with new supply burn proposal
Months after the collapse of the Luna ecosystem, the Luna-classic token has recently surged to a marketcap >$1B as the community approved a proposal that would introduce a 1.2% tax rate on each transaction in an attempt to reduce the astronomical 6.3T supply of the token. (Coindesk)
The collapse of the ecosystem in May had evaporated billions of dollars in a few days with the depegging of its algorithmic stablecoin. At its peak the LUNA token (now LUNC) had a marketcap of nearly $41B. After the collapse, trillions of LUNA were minted as part of the price stabilization protocol.
With very little network activity on-chain, the attempted revival remains unlikely to successfully reduce the supply in a substantial manner. Additionally, although a 300% price rally may look impressive, it remains unsubstantial when comparing it to the exponential crash.
MERGERS, ACQUISITIONS AND PARTNERSHIPS IN DIGITAL ASSET INDUSTRY
KPMG Expects Crypto Investment Slowdown to Continue for H2
According to their Pulse of Fintech report, KPMG noted that global investment into cryptocurrency firms reduced in 2022 to $14.2B from $32.1B last year. They expect this slowdown to continue for the second half of the year. Still, they noted that even with the sharp drawdown in crypto markets as a result of internal and macro factors, the investment into the space remained higher than years prior to 2021, highlighting the maturity of the space.
They also expect a shift from investment into tokens and NFT’s towards blockchain infrastructure providers including compliance-related transaction tracking.
Last week saw the announcement of major funding rounds totaling nearly $750M The most notable was Mysten Lab announcing a $300M funding round at a valuation of $2B to build out and expand their Sui blockchain (Coindesk).
FTX’s acquisition of 30% of SkyBridge capital also stood out, although details of the deal are private, it is greater than $40M as SkyBridge also announced they would be using a portion of the funds to add cryptocurrency worth $40M to its long-term balance sheet. (Coindesk)
Additionally, Bessemer Venture Partners unveiled their $3.5B early stage fund targeting fintech companies among others, Bessemer has previously also launched a $250M fund focusing investment towards decentralized technology, including consumer crypto (The Block).
Additionally, Bloccelerate also announced plans to raise $100M for a new digital asset investment fund, they also noted that they had already raised $30M since it launched in the beginning of August. (The Block)
DIGITAL ASSETS REGULATORY UPDATES
Past week saw increased calls for regulation of Crypto assets
The IMF suggested that crypto assets were no longer a niche asset class and required regulation following the collapse of recent industry players. IMF noted that developing a regulatory framework for crypto assets is an uphill battle pointing to the rapid evolution of the space and its uniquely global nature. They also called for a coordinated approach for regulation across nations (Cointelegraph).
One potential framework could come from international watchdog IOSCO, which is working on crypto-specific policy that it is expected to be published by the end of next year. (The Block)
Fed Vice Chair Brainard also stated that more regulation was needed in the space, pointing to risks that mirrored those seen in traditional finance. She noted the importance of establishing clear guardrails through regulation. (Coindesk)
Fed Chair Powell also noted that stablecoins need greater regulatory oversight, noting that “If people are going to think something is money it needs to have the qualities of money.” (The Block)
Six (6) Crypto Engineers and investors have brought a lawsuit against the US Treasury Department over its sanctions against Tornado Cash
They are claiming that the department’s sanctions watchdog overstepped its authority in prohibiting all Americans from interacting with the privacy tool. They also suggested that sanctions could not be placed against Tornado Cash as it was not an entity, person, or organization but rather a decentralized tool. (Coindesk)
The lawsuit was funded by Coinbase stating their support for the tool outlining its use for protecting consumer rights and enhancing privacy protections. (Coinbase)
In other regulatory updates from the week:
Revolut Audit flawed – UK Regulators (The Block)
ByBit barred from brokering securities in Brazil, only stock exchange B3 allowed to intermediate securities in the country (Coindesk)
Woo network, 24 others approved by Taiwan for ensuring AML compliance (Coindesk)
Hybrid Bridge Holdings is the first company to receive permanent license in Israel (Coindesk)
Blockchain.com opens office in Dubai after preliminary regulatory approval (Coindesk)
Huobi granted license to provide crypto derivatives, trading in British Virgin Islands (Cointelegraph)
Spotlight on Brevan Howard Digital
This week we showcase Brevan Howard Digital - a subsidiary of alternative investment management firm Brevan Howard.
BH Digital was launched in September 2021, with the goal of providing institutional investors diversified and risk-managed exposure to digital assets. In addition to providing clients with investment services, they also hold cryptocurrencies on their balance sheet (Blockworks).
Brevan Howard has $25B in AUM as of July 2022, while the subsidiary BH Digital has launched a crypto investment vehicle with $1-1.5B in AUM. In January, Bloomberg reported that Brevan Howard had committed $250M to the subsidiary and started prop trading (Bloomberg).
The firm reported losing 4-5% until June, despite a >50% drawdown in crypto markets highlighting their risk management expertise. (Blockworks)
Since January, BH Digital has stepped up fundraising and reportedly raised ~$1B across several sub-entities. Their sub-entity, Digital Asset Multi-Strategy Fund raised $185M since launching in April 2022 with capital coming from 4 investors, another entity Brevan Howard Digital Asset Multi-Strategy Fund has raised $29.7M. These two sub-entities are a part of several that the firm has set up in order to satisfy tax jurisdictions.
External investment into BH Digital’s funds has a minimum limit of $5-10M (Depending on the region and fund). The firm has not set a maximum cap for their fund indicating that they could keep raising money indefinitely.
The firm has noted that there isn’t enough liquidity to deploy their raised capital in the market at the moment, aside from long-only strategies. As a result, they have significant capital available to deploy as they explore new investment strategies.
BH Digital’s approach of offering tailored services across regions follows in their operational structure. BH Digital has members working in 8 of their parent company’s 10 worldwide offices in order to provide 24x7 trading, risk, and operational support.
Their team of 60+ comprises of portfolio managers, quant analysts, data scientists, business operations, as well as 20 external blockchain engineers on full-time retainer. BH Digital is headed by Natalie Faye Smith.
BH Digital allocates 10% of their assets towards venture investment activities which are headed by Colleen Sullivan. They have already directed investment towards several firms, some of which are mentioned below:
Financial Times reports that Alan Howard of Brevan Howard has been investing broadly in the #crypto market.
In a report on 15th July 2022, Financial Times compiled a list of 43 investments based on information from venture capital databases Crunchbase, PitchBook Data and Dealroom.co and public announcements. “It looks incredibly random until you put it on a map and then it looks incredibly strategic,” said a crypto company executive who had worked with Howard. “He wants to be involved in all facets of the industry.”
2013: One River Asset Management
2015: Coinshares
2017: Iconic Holdings, Numbrs, O(1) Labs
2018: Nextmarkets, Omniex, Bakkt, Block.one, Elwood
2020: 10T, Lunar
2021: Copper, Iron Fish, Polysynth, Bitpanda, Bottlepay, Ledn, BitDAO, Makor, Kikitrade, Fintech Collective, Satori Research, Bullish Global, FTX, Voltz Lab, Komainu
2022: Nested, Atmos Lab, ScienceMagic.Studios, IndiGG, Salad Ventures, Hal, Near Protocol Project, Polygon, Livepeer, Plotx, Derby Stars, Colexion, Geometry, Mina Foundation, Lightening Labs
Industry executives say the breadth of Howard’s investment portfolio puts him alongside Galaxy and the Connecticut-based crypto conglomerate Digital Currency Group as a major force in the sector.
In an email interview published by crypto news website The Block in May, Howard said crypto is “an important macro trend” but that because digital assets are still rather a new asset class “it’s most prudent to invest across the entire crypto ecosystem in a highly diversified manner”.
Disclaimer
Mint Publications are for informational purposes only and does not constitute financial, investment, risk management, accounting, or tax advice. Nothing stated in this document is to be construed as a recommendation, solicitation, endorsement or offer to buy or to deal in any financial products.
Trading and investment in any financial products are exposed to risk. There are no such thing as risk-free returns. This material has been published for general education purposes only. It does not address specific investment or risk management objectives, financial situation, or needs of any person.
Advice should be sought from a financial advisor regarding the suitability of any investment or risk management product before investing or adopting any investment or hedging strategies. Past performance is not indicative of future performance.
Questions and/or feedback, please write to learnmore@mintfinance.xyz