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Tom Rodgers
Tom Rodgers Head of Research
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ETC Group Crypto Minutes Week #22

Markets flirt with two-year lows before a relief rally, ETC Group research shows why crypto futures are the future for crypto trading, eBay follows Instagram with Ethereum NFTs, crypto is now JP Morgan’s preferred alternative asset, and a16z debuts the biggest blockchain fund in history.

Markets seek bottom after bruising month

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Data as of 31 May 2022

It has been a vexing month for crypto buyers and HODLers, but the bleed-out appears to have slowed at least for the moment. From a 16-month low of $1.2 trillion on 28 May markets added around $110bn in total market cap.

With the macro picture highly charged and uncertainty everywhere, underpinned by central bank rate hikes; war in Ukraine; and soaring prices for staple foods and commodities, investor sentiment has been relentlessly bearish in May. But when everyone is following the market down, and with no respite, this sets up the potential for a squeeze to the upside.

Over the past two weeks traders have demonstrated a clear preference for those blockchains that have stayed live and secure the longest. Certainly, in the wake of the destructive collapse of Terra, those newer blockchains drawing in hype and speculators have suffered the most.

Ethereum disappointed: because of its dominant position in NFT and DeFi markets, ETH tends to rebound more quickly from lows than the rest of the market. Ethereum's Merge - its long-awaited switch to Proof of Stake - is now due in August , but an uncharacteristic block reorganisation on the Beacon chain dampened spirits somewhat.

Smart contract chain Tezos (XTZ) had the best of the last fortnight, with markets repricing it 17.3% higher. Cardano (ADA) claimed second place with a 16.7% rise.

The rapid collapse of Terra (LUNA) and its now-abandoned algorithmic stablecoin UST shows the need to ‘go slow' in crypto, said Cardano founder Charles Hoskinson in a Coindesk interview.

Hoskinson has faced years of criticism for insisting on formal verification methods - rigorous testing techniques usually reserved for high-stakes applications such as space flight - in developing the Cardano blockchain. That opened the door to faster-moving rivals to pull in users and market share.

However.

If you move too quickly, as we've seen with LUNA, you actually get it to work until it doesn't, and then when it doesn't it's a catastrophic failure and everybody loses their money,

Hoskinson said.

Despite early headlines claiming a hack against Terra as the reason for the $40bn blockchain's failure, recent research shows the model was critically flawed from the beginning, and in fact worked exactly as intended, with large holders arbitraging away mispricing.

Terra's demise has renewed regulator focus on stablecoins in particular.

The UK Treasury department published a consultation paper on Tuesday 31 May suggesting it should fold stablecoins into existing legislation, while giving powers to the Bank of England to manage failed issuers “ of systemic importance ”.

a16z debuts $4.5bn Crypto Fund 4

Testament to the idea that the underlying technology is moving ahead undaunted by spot market weakness was the 25 May launch of a gargantuan $4.5bn crypto fund by Andreessen Horowitz (a16z).

$1.3bn will be earmarked for seed funding startups, with $3bn for venture investments, a16z said .

That brings the total the Silicon Valley VC giant has invested in crypto and blockchain to more than $7.6bn. Crypto Fund 4 is more than double the size of the $2.2bn Crypto Fund 3 , launched in June 2021.

This move is less surprising when you look at the history of a16z. Co-founder Marc Andreessen invented the first graphical web browser, Mosaic, at age 19 , arguably doing more than anyone else to bring the internet into hundreds of millions of homes worldwide. As an early investor in the most impactful Web2 companies: Facebook, Airbnb, Instagram and Twitter, Andreessen has been at the forefront of tech for decades.

In its recent State of Crypto report , a16z researchers flagged up Ethereum as the outstanding blockchain from a technical perspective, drawing in by far the largest number of monthly active developers since its launch.

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General Partner Arianna Simpson announced the Crypto Fund 4 first investment : blockchain-based carbon credit tokenisation platform Flowcarbon. Buyers can purchase Ethereum-based ERC-20 tokens backed by certified carbon credits issued in the last five years, she explained. Flowtoken's GNT token can be used as collateral for lending, as an asset for treasury, as stablecoin reserves or as an on-chain offset.

On-chain carbon credits represent an innovative primitive that can be integrated into the existing DeFi ecosystem as a composable financial instrument and used creatively by web3 builders to come up with new ways to incentivise climate-positive behaviours.
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In March 2022, Electric Capital - they of the influential Developer Report - closed a pair of funds totalling $1bn to invest in crypto tokens and web3 architecture.

Matt Huang's VC firm Paradigm held the previous record for fund size with its $2.5bn Paradigm One , launched in November 2021.

Investing in the infrastructure around technological innovation waves is huge business - no matter what current market price of cryptoassets may suggest. In the 1950s, the computer mainframe arrived to change the world. In the 1960s it was the microchip, in the 1980s the personal computer and in the 1990s it was the early version of the internet, or Web1. The 2000s brought us Web2, and the 2010s ushered in the age of mobile internet.

The 2020s are clearly the era of the blockchain, and the winners will be the operating systems of the future.

eBay debuts NFTs with Ethereum and Polygon

Just weeks after Instagram launched NFTs with Ethereum and Polygon, $27bn market cap eBay has moved to bring the unique, collectible tokens to its marketplace using the same blockchains.

You don't have to be a crypto expert to buy, sell and collect NFTs,

said OneOf CEO Lin Dai.

[We] are bringing transformative Web3 technology to the next 100 million non-crypto-native mass consumers.

Florida-headquartered tech firm OneOf works with the Tezos (XTZ) and Ethereum/Polygon (ETH/MATIC) blockchains to produce music and art-based NFTs.

Despite headlines of a ‘collapse' in NFT sales, weekly sales data actually shows the industry in rude health. And so, reports of the death of an industry which only appeared in January 2021 appear now to be premature.

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eBay's move to follow Instagram, TikTok and global brands like Formula 1 into NFTs reinforces the idea of Ethereum as the infrastructural base of Web3, with add-on Polygon allowing cheaper fees and faster settlement precisely the type of improvement that apes the stature of the early internet.

The protocols that formed the base layer of the internet, like TCP/IP, were not the be-all and end-all. It was the interesting tech built on top of them that really changed the world.

JP Morgan: Crypto our 'preferred alternative asset class', replaces real estate

What a difference a few years makes. In 2017, readers may recall seeing the CEO of Wall Street giant JP Morgan dismiss Bitcoin and crypto as “a fraud that will eventually blow up…it's worse than tulip bulbs”.

But in a May 2022 report, the Wall Street giant said cryptoassets had leapfrogged real estate to become its preferred alternative asset class.

Analysts reaffirmed Bitcoin's current ‘fair value' at $38,000, some 26.5% below current spot prices. Public markets have already priced in significant risks of a recession in the US and Western Europe, and crypto markets have repriced significantly lower since the collapse of Terra, the bank's analysts wrote.

A potential lagged repricing keeps us more cautious on private equity, private debt and real estate over the coming quarters,

JP Morgan analysts said.

We thus replace real estate with digital assets as our preferred alternative asset class along with hedge funds.

In recent days, JP Morgan has begun using blockchain for collateral settlement, Bloomberg's Yueqi Yang reported , with its in-house platform eventually serving as a bridge to DeFi protocols like Uniswap.

Tokenised equities or fixed income assets represented on blockchains can greatly improve settlement speeds from the current T+2 standard. Crypto markets also trade 24/7/365, in stark contrast to the five-day weeks and stock market holiday closures common across financial markets.

The bank's first such transaction came on 20 May, when two of its entities transferred the token representation of BlackRock money market fund shares as collateral on its private blockchain. The effort will allow investors to pledge a wider range of assets as collateral and use them outside of market operating hours,

Yang explained.

Venture funding is a key metric to watch to gain a sense of the future moves likely from crypto markets, JP Morgan added.

If VC funding dries up from here…then a return to the long winter of 2018/19 would look more likely. Thus far there is little evidence of VC funding drying up post-Terra's collapse.

The best of the rest

31 May 2022: Paraguay bill regulating crypto trading and mining moves forward

27 May 2022: ETC Group research shows why crypto futures are the future of crypto

25 May 2022: LATAM's largest exchange Mercado Bitcoin offers USDC stablecoin on Stellar

24 May 2022: Decentralised exchange Uniswap (UNI) crosses $1 trillion trading volume

24 May 2022: One in 10 Eurozone households now owns crypto, says European Central Bank

24 May 2022: Federal Reserve survey says 12% of US households hold crypto

18 May 2022: SEC Chair uses crypto as justification for budget increases

18 May 2022: German regulator BaFin calls for EU-wide DeFi legislation

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