21Shares Research Newsletter - Issue 147

Market Outlook

The market is still struggling through this season, with Bitcoin falling by 9.3% since last week, pulling down Ethereum by 7.9%. Open interest is also declining, which indicates lower long risk-on strategies. In fact, for the first time in two years, investors that bought Bitcoin one to two years ago represent at least 14% of selling pressure. Furthermore, funding rates are mostly flat for Bitcoin perpetual swaps — implying a neutral market sentiment given the macroeconomic outlook with the lingering uncertainty with the Russo-Ukrainian conflict. On that account, prices will likely oscillate within a range in the next few months.

It’s important to note, however, that crypto is a narrative-driven industry, especially in the short to medium run – which causes discrepancies between valuations and fundamentals. DeFi was the archetype in 2021 with the rise of NFTs. One example of this differential is Curve, the largest DEX in the world with $18.85 billion in assets under management, up more than 1,000% from last year all the while its token was down by 90% from its all-time high. As our Director of Research, Eliézer Ndinga, elaborated here, 2022 onwards will be remembered as the return to the importance of fundamental metrics not just in crypto but also in the private equity market.

US Regulation

In other news, Chairman of the Securities and Exchange Commission, Gary Gensler is continuing to lobby against crypto. Last week, Gensler addressed Democratic members and legislative staff during an annual retreat, where he compared crypto advertisements flooding this month’s Super Bowl to the surge in subprime mortgages that led to the financial crisis of 2008.

More on that front, the Senate Committee on Foreign Relations introduced a bill titled the ‘‘Accountability for Cryptocurrency in El Salvador Act’’ requiring the State Department to work out a plan to mitigate potential risks of El Salvador’s adoption of Bitcoin as a legal tender to the U.S. financial system. Senator Jim Risch is afraid that with this move, El Salvador would be empowering “malign actors” as Bitcoin by its decentralized nature weakens the imposed US sanctions.

A massive leak broke out a few days ago revealing the hidden wealth of some of Credit Suisse’s clients involved in torture, drug trafficking, money laundering, corruption among others. The Credit Suisse scandal proves that financial crime is not exclusive to crypto, while in fact crypto is far more transparent and illicit use cases represent 0.15% of the total traded volume. There are several incidents that serve as a further testament that crypto isn’t anonymous and therefore traceable and accountable. For instance, a duo behind a $4.5B Bitcoin heist was arrested two weeks ago. More recently, an investigation by crypto-journalist Laura Shin points fingers at an Austrian programmer, and also a former CEO of a crypto project that went downhill, for stealing a whopping $11B worth of ETH back in 2016, an event that led Ethereum to do a hard fork.

NFTs

The non-fungibles are no longer out of the so-called “Crypto Winter”, as the market’s daily trading volume dropped by 76% compared to its peak in the beginning of February. Three days ago, $1.7M worth of NFTs were stolen from 32 users in a phishing attack on OpenSea, the world’s largest NFT marketplace valued at a little over $13B last month. OpenSea’s co-founder Devin Finzer announced on Twitter that some of the NFTs were returned.

This is not the first time NFTs get stolen from OpenSea, and it’s not the largest attack. In October 2021, OpenSea experienced an attack that snatched $2.7M worth of NFTs. Our thesis is that time will heal this pain point in the market on two fronts:

1. Scandals like these will either break OpenSea, and other marketplaces in the space, or make them more resilient against attacks.
2. Users will be able to identify the malicious from the genuine as this young market grows into maturity.

The Hardware that Never Forgets

Amid the ongoing war waging between Ukraine and Russia, a crypto project has been working to bring important documentation to the light. Describing itself as a global, permanent hard drive built on the blockchain, Arweave now has more than 2M files documenting the Ukraine-Russia crisis. By preserving history, Arweave prevents others from rewriting it, or so says the company’s press kit.

Arweave is a new type of technology that uses a form of database to store data that cannot be deleted or changed and uses economics to incentivize people to store the data – either publicly or privately – on the platform.

The New York Times reported back in November that around $8B worth of cryptocurrencies enters and exits Ukraine every year. The volume of cryptocurrency transactions each day, about $150M, exceeds the volume of interbank exchanges in fiat currency. A crypto-educated population has indeed helped put Arweave’s technology into effect. This use case goes in line with our thesis on Arweave, laid on our Web 3 Magazine, of which you can get a copy here, and shows how important crypto-native cloud storage will be especially in light of geopolitical conflicts.

Canada Freezes Crypto Wallets of Protestors

The case for Bitcoin as a true censorship-resistant medium has been challenged recently during the “Freedom Convoy” protest that chanted against COVID-19 vaccine mandates for truckers coming into the country, however, the protest was soon morphed into a larger one against Justin Trudeau’s regime altogether. The government threatened to freeze the bank accounts and crypto wallets of protestors and even went as far as confiscating their dogs.

Unfortunately, the crypto censorship-free utopia would be threatened especially when crypto-assets interact with centralized services like exchanges. In fact, the founder of Kraken, Jesse Powell, advised Canadians to move their crypto assets from the platform, however, the Bitcoin protocol design is akin to Internet protocols and this is what makes it truly accessible and censorship-free for recipients as long as there is an Internet or Satellite connection. The Canadian government can tell centralized exchanges like Kraken to flag wallet addresses and prevent them from cashing out for example. However, they can’t prevent anyone from receiving or sending Bitcoin.

The Canadian police rationalized their violation by tying 34 crypto wallets to accusations of financial crimes. Emphasizing our thesis mentioned above, Chainalysis found in its Crypto Crime Report 2022 that the share of illicit transactions in crypto went from small to nonexistent in the past year.

Source: Chainalysis

A Change of Heart

Leaving you on a more positive note – specifically on the value proposition of Bitcoin — skeptics like David Heinemeier Hansson and Warren Buffet have started to look at Bitcoin in a different light. The Canadian draconian response to the protests was one of the factors that changed Hansson’s mind and got him to write "I still can't believe that this is the protest that would prove every Bitcoin crank a prophet. And for me to have to slice a piece of humble pie, and admit that I was wrong on crypto's fundamental necessity in Western democracies."

After years of ridiculing crypto and calling Bitcoin “rat poison squared”, Berkshire Hathaway’s CEO Warren Buffet pumped $1B in Nubank, a Brazilian neobank known for its crypto-friendliness. Despite Buffet’s views, this investment is a testament to our thesis that big investors – even those devoted to traditional finance – will not shy away for long from crypto assets or investing in institutions affiliated with them, that is if they want a share of the $1.7T crypto industry. This testament intensifies especially upon knowing that this investment was made at the expense of a portion of Buffet’s Visa and MasterCard holdings.

Media Coverage

Our newly appointed US Head of Sales, Kayle Watson, was featured in an article on Business Insider, delving into the rich background that Kayle enjoys; from studying mechanical engineering at the Navy Academy, training for three years to become US Navy SEAL, all the way through deciding leave to New York to kickstart his financial career in Wall Street. With zero financial background, but a hunger for knowledge, Kayle joined Bear Stearns, Guggenheim Securities, and most recently BlackRock before he joined us at 21Shares.

"Most people looked at crypto and thought it's not going to be around or it's bitcoin and we missed it. If you didn't buy it five years ago, it's too late," Business Insider quoted Kayle saying. "I lived through Bear Stearns and the internet boom. We are just now seeing some of the true impacts to companies that can utilize the internet. We are going to see the same thing with Web 3.0."

On the same note, Blockworks also featured the new hires in Kayle’s team; Aram Babikian, who will lead US west coast and Latin America business development, and Ches Snider as US head of research sales.

“21Shares, the largest issuer of cryptocurrency ETPs, has hired three senior sales professionals to boost US growth. The executives combined have decades of traditional finance experience at firms such as BlackRock, Bear Stearns, Goldman Sachs, and Guggenheim Securities,” wrote Blockworks.

Our Head of Tokens James Wang was also featured in an article about how index trading can help spread out the risk. “For most investors, dollar-cost averaging is the most sensible way to allocate capital. DCA is a way of spreading out risk over time. Index investing is a way of spreading out risk over space. By employing both, investors can gain crypto exposure without the headache of deciding when or what to buy,” James explained to NewsBTC.com.

Also on Blockworks, our newly issued three DeFi products were featured in an article comparing between the US and European markets when it comes to crypto ETPs. 21Shares’ co-founder and CEO Hany Rashwan explained that it’s often against the rules in Europe to have an ETF on a single asset. “In Europe, they’re classified as either exchange-traded commodities or exchange-traded products. What investors are ultimately looking for is physically-backed access to crypto in vehicles and wrappers that make the most sense for that,” Hany explained to Blockworks, elaborating that all of 21Shares’ ETPs trading in Europe are physically backed, allowing for the products to more closely track the price of the underlying assets.

In other news, is Web 3 flooding your news feed and you’re wondering what the fuss is all about? Make yourselves available on March 2nd at 12:00 CET and our team will get you up to speed with the metaverse and crypto-assets market.

While you’re at it, did you get a copy of our latest issue of State of Crypto?

In this exhaustive 72-page magazine, we at the research team present our thesis on Web 3, the future of the internet. We have spent the past several months learning about new technologies, market patterns, and testing out the multiverse of DeFi protocols and apps to bring you a report that explains the next generation of internet services and why we have blockchain technology to thank for this innovation.

Ultimately, we hope that in the coming decades our work will serve as a reference, akin to how younger generations seek books to learn about the internet of the mid-1980s and the Web of the early 1990s. Enjoy the read!