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Tom Rodgers
Tom Rodgers Head of Research
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ETC Group Crypto Minutes Week #38

Institutions flood cryptoasset ETPs with cash for the fifth straight week against a backdrop of nervy equity markets, expected central bank QE tapering and the $300bn China Evergrande debt scandal, while a disastrous network crash for ‘Ethereum-killer’ Solana shows the fragility of backing much-hyped newer blockchain protocols.

Crypto ETPs see inflows for fifth straight week

Digital asset investment products saw positive inflows for a fifth straight week, suggesting that sentiment is turning for the better for the asset class. In total $42m was drawn into ETP and ETF products, with Bitcoin and multi-asset investment products seeing the highest gains across the week.

Inflows were seen across all digital assets and signals what we believe to be continued improving sentiment amongst investors. James Butterfill, Investment Strategist, Coinshares

Digital currency inflows for 2021 are a vigorous $5.96 billion, despite several weeks of outflows in August this year, the numbers show.

The data from CoinShares demonstrates increased appetite for exposure across the sector and sentiment not confined to any one asset. It’s clear that investors are broadening their market focus and entering more sophisticated positions using secure, centrally-cleared ETP products like that offered by ETC Group.

Share of total transaction volume by transaction size for DeFi cryptocurrency activity

Bitcoin has fallen around 11.4% from its recent high of $48,700 but there remains increasing demand for cryptoassets at historic peak price points.

So, institutional investors are again flooding cryptoasset investment products with millions of dollars of cash on a weekly basis. This is perhaps recognition of the asymmetric investment returns made possible by cryptoasset investment products.

It is interesting to note that gold ETPs remain among the most-traded investment products in the UK, for example, despite the failure of such products to provide a consistent store of value.

In the year to date, spot gold has returned -5.69%, and a S&P 500 which set two straight all-time-highs in August has returned a respectable 18.1%. Litecoin, by contrast, is up 57.27%, Bitcoin has climbed by 86.52% and standout performer Ethereum has gained 423.21%.

If investors are able to see through the volatility, where else are they able to attain such risk-to-reward?

YTD returns: Gold vs S&P500 vs BTC vs ETH vs LTC

Share of total transaction volume by transaction size for DeFi cryptocurrency activity

YTD returns: Gold vs S&P500 vs BTC vs ETH vs LTC

All of this comes against the backdrop of nervy times for equity markets. On 20 September, Wall Street posted its largest one-day drop since May on the back of concerns over a single company. China’s Evergrande scandal has roiled markets this week, with the real estate developer suddenly unable to pay its $300bn debts and fears of contagion spreading through markets from Beijing to New York. The Hang Seng, already down 16% in the year to date, fell a further 8% across the week.

The South China Morning Post, the pre-eminent business outlet in the region, noted in an opinion piece:

Chaotic scenes of hundreds of angry creditors outside the offices of China Evergrande demanding their money back have made for surreal viewing. After all, the property developer looks quite solid on paper, with billions of dollars worth of assets that outweigh liabilities, and years of reported profits. Chinese authorities will not bail out the embattled [firm] but will be keen to prevent a complete collapse. Zhou Xin, SCMP, 20 September 2021

Business papers from Nikkei Asia to CBS and The Guardian are going as far as to call the crisis China’s Lehman Brothers moment, akin to when the ‘too-big-to-fail’ US investment bank filed to bankruptcy in September 2008, and the US crossed the Rubicon in the subprime mortgage crisis that engulfed the world in the Great Financial Crisis.

The US Federal Reserve leads a host of central bank meetings this week with investors laser-focused on the timeline for ‘tapering’. The Fed is widely expected to begin pulling back on its gargantuan bond buying programme that has seen it double the size of its balance sheet to more than $4 trillion and slash benchmark interest rates to zero. These first steps to normalise monetary policy as the Covid-19 emergency fades will have seismic effects on investors worldwide.

The Bank of England began buying government bonds in March 2009 and after more than a decade of quantitative easing, now has almost £900bn of government bonds on its balance sheet.

According to research group The Atlantic Council, central banks globally have pumped more than $25 trillion into the global economy, with $9 trillion since the advent of Covid-19 alone.

Share of total transaction volume by transaction size for DeFi cryptocurrency activity
To address the economic shock triggered by COVID-19, the world's four major central banks have expanded their QE programs by a total of $9.1 trillion to support their economies and the functioning of global financial markets. The four banks' new asset purchases have increased the size of their cumulative balance sheet by roughly 60 percent since the beginning of 2020. The Atlantic Council, 2021 research

Unwinding such purchases will have far-reaching effects. Pre-Covid, the big four central banks: the Federal Reserve, the Bank of Japan, the European Central Bank and the Bank of England were each beginning to pull back on their bond-buying programmes.

But the unprecedented economic shock of lockdowns and the pandemic mean that debt as a percentage of GDP has rocketed across these regions. Japanese debt has now reached 129% of GDP, and it remains to be seen how long markets will allow formerly cautious central banks to get away with paying lip-service to historic monetary standards.

Share of total transaction volume by transaction size for DeFi cryptocurrency activity

‘Ethereum-killer’ Solana fails its first major test

The rate of competition has increased against smart contract blockchain Ethereum, perhaps because the much-vaunted EIP-1559 code upgrade has done little to move the needle on improving transaction fees. Much more is needed to make DeFi and NFT transactions palatable to the general public if Ethereum is to continue its stellar growth record. And yet its nearest rivals are struggling to replicate the kind of robust security that has seen developers and institutions flock to build enterprise-grade products using the programmable money blockchain.

Solana is one much-discussed competitor and since its launch in April 2020 has rocketed into the top-10 cryptoassets by market cap. On 26 January 2021 the smart contract platform first topped a $1bn market cap, and since then has grown more than 40x to reach a total valuation of $42.2bn.

Solana’s transaction blocks came to a full stop on 14 September 2021. After an hours-long outage, developers managed to wrestle the blockchain back under control, but not before a PR disaster recounting the details of the network crash had rippled through the market.

Developers later said that Solana's mainnet "encountered a large increase in transaction load which peaked at 400,000 TPS. These transactions flooded the transaction processing queue, and lack of prioritization of network-critical messaging caused the network to start forking. Michael McSweeney, TheBlockCrypto, 15 September 2021

Solana is home to a growing NFT ecosystem, and on 11 September recorded its first $1m art sale with the buyer blockchain advisory firm Moonrock Capital.

In the hours after the crash, Solana wallet developer Phantom noted that the platform was suffering from “intermittent instability”. In a tweet posted by @SolanaStatus, developers discovered that the fork in the Solana mainnet had forced nodes to go offline and despite their efforts, engineers had failed to bring it back to its previous state.

And according to a 20 September post-mortem by the Solana Foundation, in total the network was down for almost 24 hours. Validators voted for an unplanned hark fork of the blockchain to restore its state.

Solana is designed for adversarial conditions,” the Foundation said, blaming the outage on an effective DDoS attack caused when an IDO — Initial DEX Offering — overloaded the network with fake transactions. At 12:00 UTC Grape Protocol launched their IDO on Raydium, and bots generated transactions which flooded the network. These transactions created a memory overflow, which caused many validators to crash forcing the network to slow down and eventually stall. The network went offline when the validator network could not come to agreement on the current state of the blockchain, which prevented the network from confirming new blocks. Solana Foundation, statement, 20 September 2021

Solana had become the recent darling of Wall Street, but such fragility displayed in a routine launch has knocked confidence. As reported in Forbes, the Wall Street Journal and others, the startup raised $314m in June 2021 in a funding round led by Andressen Horowitz.

At the same time, the Ethereum hashrate, a measure of the computing power securing the network from attacks of this kind, has hit an all time high of 708,298 GH/s.

Share of total transaction volume by transaction size for DeFi cryptocurrency activity

Blockchains that cannot manage near-100% uptime cannot have the confidence of investors or product builders. And we have seen many pretender protocols shoot up into the top 10 cryptoassets by market cap over the years.

12 months ago today, for example, the total crypto market cap was $351bn, compared to the near-$2 trillion today.

At the time, aside from Bitcoin, Ethereum and Litecoin, among the list of the ten largest projects by market value were the Justin Sun-founded TRON (TRX), the Crypto.com exchange coin CRO, EOS, and the Bitcoin Cash fork Bitcoin SV (BSV). TRX has fallen out of favour, now 26th largest, CRO and EOS have cratered to 35th and 36th, and BSV has been overtaken by 40 other projects to sit in 50th spot.

Markets

BTC/USD

Bitcoin had a relatively strong week before the ‘crash’ that sunk the largest cryptoasset by market cap from a high of $48,774.16 to a low teetering on the brink of $40,000. That’s a price level that — we must recall — was only crossed for the first time some nine months previously, on 8 January 2021. Beginning at $44,686.67, BTC climbed some 9.1% before tripping and falling by 17.6% to that low, where it remained for a handful of hours. BTC had regained most of what it lost against the US dollar by the end of 21 September to finish the week 4.2% off the pace, at $42,765.56.

BTC/USD graph
Data as of 21 Sept 2021| Source: TradingView.com

ETH/USD

Ethereum’s assault on $4,000 appears to be over, for now. A high of $3,674.54 early in the trading week could not be sustained, despite the network’s strength in hashrate numbers. Bearish traders did manage something they have not achieved since 19 August: to push the currency down below the key $3,000 level. This 21 September rout lasted only for a matter of hours as the seemingly irrepressible strength in ETH won out. Ether then climbed 8.9% to settle at $3,053.50 by the end of the trading session.

ETH/USD graph
Data as of 21 Sept 2021| Source: TradingView.com

LTC/USD

There was relatively little drama to be found in Litecoin’s march against the US dollar this week, beginning at a confident $176.88. That is, until the payments blockchain sought the safety of $200 only to be rejected some 2.5% short at $195.22. Further trading sessions revealed little appetite to march back to those highs, as LTC slipped another 17.9% from its peak, to end the week nursing a total 9.8% loss at $160.27.

LTC/USD graph
Data as of 21 Sept 2021 | Source: TradingView.com

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