21Shares Research Newsletter - Issue 92

Market Outlook

For the first time, Ether has overtaken Bitcoin in the allocation of the 21Shares composition of HODL ETP — our basket of the top 5 cryptoassets ranked by market cap. Bespoke crypto indices are a great way to diversify in the industry given the market-beating performance witnessed in Ether in the last 2 weeks. In the four weeks since the start of the year 2021, Ethereum has almost doubled in value with a YTD performance of 76% while Bitcoin has returned 9% so far. Nonetheless, Bitcoin continues to be the premier digital asset chosen by professional investors.

The industry has significantly matured this past decade to pave the way for smart money to view cryptoassets with brighter lenses. For example, there have been lots of talk around the illicit use cases of cryptoassets, which have historically put a strain on the reputation of Bitcoin. The leading blockchain analytics firm Chainalysis Inc. published its annual report and discovered that only 0.34% of all economic activity in the crypto space is linked to criminal activities. These findings will alleviate the aforementioned concerns related to Bitcoin.

In addition, the largest asset manager in the world with over $7 trillion in assets under management, BlackRock filed last week two prospectuses with the U.S. Securities and Exchange Commission (SEC) to rightfully invest in Bitcoin's futures through two of its funds — BlackRock Funds V and BlackRock Global Allocation Fund, Inc. In the same vein, prestigious universities’ endowments with tens of billions of dollars such as Harvard and Yale — $41.9 billion and $30.3 billion respectively — purchased the cryptoasset this past year. We also see corporates, such as Marathon Patent Group and MicroStrategy, continue to allocate over the last quarter.

The chart below shows the net inflows from holders (versus their potential net outflows), as we see the last year has been a period of intense inflows into Bitcoin and we expect this trend to continue for a long period.

Weekly Returns

The returns of the top five cryptoassets over the last week were as follows — BTC (-10.57%), ETH (-4.36%), DOT (4.92%), XRP (-9.32%), and ADA (-7.36%).

Monthly ETP Returns

The performance of our line of ETPs over the last 30 days is as follows: ABTC (26.2%), AETH (91.6%), ABCH (22.1%), AXRP (-4.2%), ABNB (21.4%), AXTZ (53.6%), HODL (58.3%), ABBA (34.1%), KEYS (35.6%), and SBTC (-36.2%).

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Media Coverage

In light of the efforts by Craig Wright, the controversial and unlikely but self-proclaimed creator of Bitcoin, attempting to force several websites to take down their hosting of the Bitcoin whitepaper, we have decided to upload the 9-page Bitcoin whitepaper in our website as an act of support to the crypto community that benefited greatly from open-source knowledge. Many businesses in the crypto space have followed suit such as Coin Center, Paradigm, and Square to name a few. You can read the whitepaper here.

The leading crypto data analytics firm, CryptoCompare, published its Digital Asset Management Review, shedding light on the adoption of institutional-grade products including 21Shares product suite. According to their report, AUM across all ETPs increased by 95% to a record $35.9 billion while aggregate ETP volumes almost tripled in January to $837 million per day. You can read the full report here.

News - The Bitcoin Double-Spend That Never Happened | CoinDesk

What Happened?

Last week, journalists raised concerns about an alleged double spend on the Bitcoin blockchain due to a chain re-organization — which initiated panic and led to a 10%+ market correction. In midst of confusion and an alarming amount of misinformation, the majority (~53%) of the market participants selling their Bitcoin were new entrants that bought the cryptoasset over the last 3 months. Preventing double-spending is a quintessential feature of Bitcoin due to the fact that such an exploit could threaten the scarcity of the asset. In other words, spending as many bitcoins as one would want as such, more bitcoins than one initially had.

Why Does It Matter?

To respond to the rumours, no double spend happened. A market participant simply tried to speed up the time of her unconfirmed transaction (ie, not added in the blockchain yet) by increasing significantly the fee of her transaction after a day of waiting, as her first transaction — worth approximately $25 — including a fee that was too small to be accepted by miners. As miners are incentivized to win the block reward of 6.25 BTC in addition to the collected transaction fees within the block, they’ll prioritize the transactions with the highest fees. Therefore, it’s a common practice to increase the fee of an unconfirmed transaction to speed up the confirmation process.

In addition, in decentralized networks, a chain split is a common occurrence as bitcoin transactions are fundamentally not final but probabilistic up until a certain point — which is the rationale behind the rule of thumb of waiting for an hour to make sure a transaction is confirmed. This is a rule that is applied by crypto exchanges such as Coinbase for example. In other instances, the confirmation time could be even greater as the amount transferred exceeds the hundreds-of-thousands and the million-dollar mark (an hour is 6 blocks of transactions, as one block gets added every 10 minutes approximately to determine the winning chain with the highest amount of computer capacity/difficulty).

The creator of Bitcoin, Satoshi Nakamoto delved into this matter in the Cryptography Mailing List on November 10, 2008: *"Instant non-*reputability is not a feature, but it's still much faster than existing systems. Paper cheques can bounce up to a week or two later. Credit card transactions can be contested up to 60 to 180 days later. Bitcoin transactions can be sufficiently irreversible in an hour or two.”

However, within an hour of waiting, there’s a rare possibility that two miners win the same mining competition (ie, concurrently add their respective block to the blockchain at the same time). This is exactly what happened in the Bitcoin network, as both mining pools — SlushPool and F2Pool found block 666833 at the same time. The tie was broken after Binance’s mining pool found block 666834 and F2Pool’s block became stale as their block of transactions were reversed and as such became unconfirmed in the winning chain led by SlushPool and Binance. Find more details on the subject in this article published by Deribit Insights.

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