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Tom Rodgers
Tom Rodgers Head of Research
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ETC Group Crypto Minutes Week #50

While markets are struggling for direction as we race towards the end of 2021, there’s been no let up in the rate of change, with a packed fortnight of news and regulatory updates. In a week when the United States Congress showed a remarkable level of understanding of tough technical concepts like Web 3, blockchains and smart contracts, we saw Coinbase launch yield-bearing stablecoin product everywhere but the US, Bitcoin Core lose a key developer and investors scrapping for $50m in lost assets from the collapse of a major Australian exchange.

US Congress gets crypto crash course courtesy of Brian Brooks

Brian Brooks has one of the best CVs in crypto. Once chief legal officer at Coinbase when the exchange was just a San Francisco startup, and before it became the $65bn market cap, NASDAQ-listed behemoth it is today, this poacher-turned-gamekeeper moved to lead the US banking regulator, the Office of the Comptroller of the Currency (OCC).

As acting head of the OCC he introduced some of the world’s most important crypto regulatory updates yet, effectively allowing federally-regulated banks to custody cryptoassets, settle payments in stablecoins, and act as nodes in blockchain Proof of Stake networks in order to earn yield for their customers. A rare mis-step saw him quit three months into leading the now-ailing US arm of Binance, but Brooks today is the CEO of Bitfury, the leading security and infrastructure provider for the Bitcoin blockchain.

Appearing in front of a bank of cross-party Representatives at the House Financial Services Committee on 8 December, Brooks laid out not only the state of the nation in terms of where cryptoassets are today, but the challenges policymakers should be focusing on when they screen out the noise to make real policy.

It’s worth reading Brooks’ testimony in full. But one quote highlights the importance of what lawmakers are facing.

Instead of focusing only on micro questions such as whether a particular token is a security or whether a particular exchange-traded fund may be offered, it would be worthwhile for the elected branches of government to grapple with the bigger questions: Do we believe a user-controlled decentralized Internet is better than an Internet largely controlled by five big companies? Do we believe that the financial services sector is any less subject to network effects than information and commerce were in earlier iterations of the Internet?

The EU has committed to MiCA, a full-service, cross-border regulatory framework to attract crypto businesses to their shores, and the US faces falling behind if they don’t do the same.

On 9 December, Coinbase launched a DeFi yield-bearing product based on the DAI stablecoin for crypto investors in 70 countries. The United States was not one of them. Evidently still spooked by the SEC effectively shutting down its Lend product in September before it came to market, Coinbase execs swerved a US launch.

As Republican Rep. Patrick McHenry, sitting to the side of Democratic Committee Chair Maxine Waters, astutely noted:

This is not simply about you on this panel. This is about trillions of dollars of assets that did not exist before Satoshi wrote his whitepaper 13 years ago. It’s about the development of a whole new suite of technologies that will be developed across the globe, whether the US embraces it and wants to compete, or whether it is pushed offshore.

Policymakers are at a crossroads. They can either regulate, and be at the forefront, leading a $2 trillion market to become a $20 trillion market, or waste years going back and forth while it grows to that stage without them.

Bitcoin Core loses key developer

The race to attract and retain talent in cryptoassets and blockchain is a headache that every project faces. None more so than Bitcoin.

We heard on 9 December that the original cryptocurrency would lose one of its core developers. Samuel Dobson, a final year PhD cryptography student at the University of Auckland, announced the news via Twitter.

It may come as a surprise to those on the outside looking in, that in effect a hobbyist student — and not a legion of programmers locked in a room in London, New York or Singapore — could be tasked with such an important job.

And it perhaps speaks to the future professionalisation of what was originally a fun cryptography project that existed almost entirely in the margins of society, on Usenet-style internet forums, but one with coins now worth around a trillion dollars, give or take, and which has spread its tendrils into almost every industry worldwide.

Veteran open-source Bitcoin developer John Newbery followed Dobson out of the door a matter of days later. It is only a month or two since highly-respected Bitcoin Core maintainer Jonas Schnelli quit the project, citing increased legal risks for developers.

Bitcoin market dominance has steadily fallen over time. When data provider Coinmarketcap started tracking such metrics in May 2013, Bitcoin’s $1.2bn market cap as a proportion of the total market cap was 95%. These numbers have crumbled as more altcoins have come to market to extract value from DeFi and NFT markets.

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Despite the growth of Bitcoin’s Layer 2 payments protocol, the Lightning Network , Bitcoin has largely been left standing by while newer blockchains grab market share, eyeballs and crucially, developer talent.

There’s a wider split at play here too: between newer blockchains like Tezos and Polkadot and the old guard: those that utilise on chain governance to swiftly upgrade the blockchain in response to new technical developments — as opposed to the off-chain governance of older protocols like Bitcoin and Ethereum, where community members can still propose upgrades and additions, but only the core developers can enact changes.

And with the epic rise of smart contract platforms like Solana, Polkadot and Cardano, it’s likely that Bitcoin will struggle to differentiate itself as the markets continue to expand. The addition of the Taproot upgrade at Bitcoin’s block 709,362 in November 2021 is testament to how important additional layers of programmability to these blockchains really are.

If Solana can grow from a $83m project into one worth $49bn in under a year, what does that say about how markets feel about which blockchains will survive when crypto is not just in the hands of 220 million users, but 2 billion?

ACX exchange collapse: not your keys, not your crypto?

There’s a debate that’s raged on and on since the birth of crypto: not your keys, not your crypto. The question, of course is this: If you don’t custody your own private keys, do you really own the cryptocurrency you have purchased?

cryptocurrency ownership. But individuals face a tricky set of trade-offs when choosing where to convert their fiat.

There are ongoing complaints over a lack of customer service from the likes of the largest player by trading volume, Binance, and earlier this year traders went as far as seeking damages for the loss of millions of dollars when the market dropped, Binance’s interface crashed and they could not sell out at the price they wanted. This was no idle threat, with New York law firm White & Case taking up the suit. Binance, for all its claims to be the world’s leading cryptocurrency exchange, still suggests it has no official head office, making it difficult for those filing suit to figure out in which jurisdiction it resides.

The slow-bleed collapse of the ACX Exchange in Australia, a drama that has been unfolding for over two years, raises a wider point about how investors are supposed to deal with the thorny issue of custody, and perhaps the reason why more secure, better-regulated, passive crypto investment vehicles like ETFs and ETPs have taken off in such a big way.

ETC Group’s flagship BTCE Bitcoin ETP trades around $40m daily, and has the standard market infrastructure that gives traders the confidence that they can get in and out at the price they require, precisely when they make that decision. There is regulated market infrastructure. Everyone involved has obligations. Unlike Binance, or Coinbase, they can’t just fail to pick up the phone.

Not only is BTCE listed on regulated stock exchanges like the Deutsche Börse XETRA, it’s simple to trade through a standard share-dealing account.

And in order to offer the spread and size that institutions want to trade at, market makers and authorised participants are accessing collective liquidity across a whole host of underlying exchanges and venues. That makes ETPs like BTCE not just a regulatory wrapper — but a liquidity aggregator.

ACX creditors are reportedly seeking to recover $50m in lost assets, while traders claim that at least $9m in Bitcoin is still locked in a password-protected hard drive. At the time, the Blockchain Global-owned outfit claimed to be the most liquid cryptoexchange in the country with the largest order book available in Australia.

Markets

BTC/USD

Bitcoin has been searching for direction in the past fortnight, with seemingly softening demand leading to the flagship cryptocurrency struggling to recapture the $50,000 level it first crossed in February, and retook in early October. Starting at $58,124, Bitcoin edged up 1.8%, right to the brink of $60,000, before tumbling down into the early 50’s. A sharp drop down to two-week low of $42,354 lasted less than an hour, before BTC climbed 9.9% to end the fortnight at $46,770.83. All told, Bitcoin lost 19.9% across the two-week trading session.

BTC/USD graph
Data as of 15 December 2021 | Source: TradingView.com

ETH/USD

Ether’s tumble back below $4,000 marked softer conditions in crypto markets more generally, but while the loss of this key level may be a concern for those who bought at the recent top, prices have bounced hard off this lower limit seven times in the past two months. Ethereum’s status as the smart contract top dog won’t be diminished any time soon, and investors with a longer time horizon than a couple of weeks will likely lean in hard to buy the dip. Starting at $4,499.42, ETH slipped a total of 18.8% against the US dollar across the fortnight.

ETH/USD graph
Data as of 15 December 2021 | Source: TradingView.com

LTC/USD

Litecoin is well beyond its heady run up to $300 in early November. The currency protocol started the two-week session at $211.27, giving up an eye-watering 32.5% to end up hovering around the $140-mark. But LTC has been here many times before – since 2011, in fact -- as hype and excitement pours into newer chains, only to return afresh and recapture market share. It’s also a clear positive that Litecoin held the line against the US dollar over the past seven days, neatly sidestepping the wider volatility suffered elsewhere in the market.

LTC/USD graph
Data as of 15 December 2021 | Source: TradingView.com

BCH/USD

Bitcoin Cash traders faced a tough fortnight, with a meagre 1.3% rise to $586.39 proving the high point of a largely disappointing two-week trading session. A hard and fast bounce back from the sharp 4 December drop to $367.08 may be their silver lining, as traders showed considerable appetite for Bitcoin Cash at these levels. Many missed the rise earlier this year, and BCH has not been available to scoop up at those kinds of prices since January 2021.

BCH/USD graph
Data as of 15 December 2021 | Source: TradingView.com

XTZ/USD

Macro news, including the launch of ETC’s Tezos ETP on Deutsche Börse, and the addition of in-game NFTs courtesy of Ubisoft, helped Tezos power to beyond $6.18 per Tez. The fact remained in evidence throughout the two-week session that there was still considerable work to do to stabilise prices on the Proof of Stake pioneer, and Tezos still posted a 28.8% loss for the session. But as a yield-bearing product, it is insulated somewhat from day-to-day dips, especially in this highly inflationary environment. $3.1460 proved to be the low of the fortnight, and a relatively strong finish took Tezos to $4.1459 against the dollar.

XTZ/USD graph
Data as of 15 December 2021 | Source: TradingView.com

SOL/USD

Solana’s rapid rise with starry-eyed bulls trickled to a halt this session, with some distinctly Ethereum-like slowdowns affecting sentiment on the top-10 smart contract platform. Solana has been a victim of its own considerable success and so it is not too surprising that the volatility SOL showed on its climb to $200+ has been repeated as the tables turned. Starting at $206.17, the DeFi developer’s favourite added as much as 18.09% to climb to $243.48, before falling to a low of $148.05. Traders found a lot to like with this discount, buying the dip and putting another 13.4% on the price to finish out the fortnight.

SOL/USD graph
Data as of 15 December 2021 | Source: TradingView.com

ADA/USD

Cardano has struggled to replicate the success it reached earlier this year, when in May it broke $2 for the first time, then powered past that ceiling to make all time highs in August. Since then the smart contract blockchain has been on a steady march south, making today’s prices a bargain by comparison. Beginning at $1.59, ADA climbed by a healthy 10.7% to reach $1.76 but couldn’t hold that pace for long. A steady slide into the trading doldrums ensued, with $1.19 marking the lowest point of the fortnight, and Charles Hoskinson’s chain posting a drop of 23.9% for the two-week session. One bright spot was the uptick from around $1.20, and as we head deeper into December, Cardano is looking to break back into the $1.30 range.

ADA/USD graph
Data as of 15 December 2021 | Source: TradingView.com

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