21Shares Research Newsletter - Issue 145

Market Outlook

The market is back on track for recovery with Bitcoin picking up by 12.6% since last week, jumping above the $40K mark and reaching nearly 40% of the total crypto market for the first time in 6 months. Ethereum on the other hand was up 14.4% since last week, sustaining its position above the $3K mark while XRP and Cardano outperformed the rest of the altcoins, ranked respectively at #6 and #7 by market capitalization.

Kazakhstan’s Crackdown on Miners

The crackdown on Bitcoin miners continues in Kazakhstan as regulators look into increasing the tax on electricity for cryptocurrency miners by 500% to make it $0.012. Miners may also have to pay a monthly tax on equipment, regardless of whether they earn block rewards or leave their ASICs on, as suggested by Marat Sultangaziev, Kazakhstan’s first vice-minister of finance who compared the concept to a similar tax that casino operators pay on their machines. For most of January, the government turned the lights off on miners as the country faced widespread energy shortages and massive protests over rising fuel prices. To control those protests the government imposed a nationwide blackout, taking a toll on the hashrate for major pools with exposure.

As predicted in our previous newsletters, miners based in Kazakhstan are eyeing new homes for their facilities. Some reported that they’re considering Russia after Vladimir Putin pulled the brakes on the crypto ban saying that the country has “competitive advantages” especially in mining cryptocurrencies given the “surplus of electricity”. Putin told Russia’s Central Bank, which called for the ban, not to neglect the leverage that Russia has in the area, being the third-largest source of Bitcoin’s hashrate after the US and Kazakhstan.

Web 3 The Largest Beneficiary of The Great Resignation

The US unemployment rate is expected to fall below 3%, a rate last witnessed in the 1950s towards the end of the Korean War. The reason behind this prediction, made by St. Louis Federal Reserve Bank President James Bullard, is that in only the last two months the unemployment rate dropped by 0.7 percentage points to 3.9%. On the back of America’s “Great Resignation”, a wave of talents are leaving tech giants and traditional finance (the Federal Reserve itself saw an economist walk away with an offer from Uniswap Labs) to join projects in the wider Web 3 hemisphere, the largest beneficiary of this phenomenon, as our Research Lead puts it. The total value of tech stocks is $9.5T as of writing, as opposed to crypto market’s $1.6T. Remember those numbers because at 21Shares, we believe that in the future the Great Resignation will reflect in the valuation of many crypto projects disrupting industries, such as financial services, eCommerce, media, and art.

On another note, as shown in the image below, investors who purchased Bitcoin 1 to 2 years ago are starting to sell at a high frequency. This group represents circa 12% of the selling pressure since December 2020. Historically this metric was around 5 to 8% over the past few months.

On Tuesday morning, two individuals were arrested in the US for trying to launder cryptocurrencies (worth $3.6 billion) that were stolen during the 2016 hack of Bitfinex, a cryptocurrency exchange. This is another living proof that cryptocurrencies and blockchain are not synonymous with money laundry and financial crime, the blockchain technology is the most secure innovation that ever existed to disrupt traditional finance.

We’ve also come across some positive patterns to boost more confidence in the ecosystem. KPMG in Canada completed an allocation of Bitcoin and Ethereum to its corporate treasury, which marks the first crypto investment for the full-service Audit, Tax, and Advisory firm.

Sequoia – arguably the most respected VC firm in the world who invested early in Apple, Google, and more — led a $450 million investment in Polygon, which aligns with our thesis on Polygon as the largest beneficiary in the L2 vertical until L2 matures.

Product Announcements

It’s been a busy time here at 21Shares as we follow through a fierce product roadmap for 2022. We are thrilled to announce that 21Shares has issued three ETPs last week on the BX Swiss:

• Aave (ISIN: CH1135202120, Ticker: AAVE BW) – Through its open-source, non-custodial liquidity market protocol, Aave is at the forefront of DeFi to allows users to seamlessly interact with an API or directly with smart contracts on the Ethereum network, ensuring greater transparency and efficiency.
• Chainlink (ISIN: CH1100083471, Ticker: LINK BW) – One of the most sophisticated oracle networks in the world enabling smart contracts to create efficient blockchains for real-time data and computation.
• Uniswap (ISIN: CH1135202096, Ticker: AUNI BW) – One of the largest decentralized exchanges in the world operating on the Uniswap protocol, which delivers liquidity and trading for tokens on the Ethereum blockchain.

Media Coverage

“[Last week’s] launch increases accessibility for investors and allows them to easily be part of the unique, innovative, and fast-growing crypto ecosystem,” 21Shares’ CEO and co-founder Hany Rashwan commented on this occasion. “This is another exciting addition for us as we continue to expand our massive product suite.”

Hany was also featured on Bloomberg’s podcast “What Goes Up” to talk about how 21Shares is expanding despite the “Crypto Winter,” you can listen to the podcast here.

“We still have all of these hiring plans, we have 40 - 50 open positions, we’re 125 people now, up from 20 from a year ago. We’ve been an intelligent squirrel during the bull market and really stored up and made sure that we, not only are safe now but can be opportunistic in case something comes up. We were widely profitable, we remain pretty profitable, but I think the extra attention to detail is something that I certainly miss during the bull markets where everyone’s a genius, and I wish the prices were higher, I always do, but I know that they’ll be higher a year from now and I would much rather be in this position than anything else.” – Hany Rashwan, CEO at 21Shares.

Our co-founder and president Ophelia Snyder was also featured on Bloomberg in a report that describes her as “a rising crypto star” that has the SEC and volatile markets in her way. “We really want to make people feel confident when they enter the space,” she said to Bloomberg. “That’s the whole game for us — lowering the barriers to entry and making people feel excited about what we feel is a revolutionary technology.”

In other news, our very own Research Lead Eliezer Ndinga was featured on Money in a report about whether investors should buy the dip during this “Crypto Winter”. Eliezer spoke about where the market is headed and how representative the charts are to the potential of Bitcoin. “Historically, what market watchers call “capitulation” — the final, cathartic selloff that marks the definitive end of a bear market — occurs when that ratio rises even further to more than eight out of 10,” the article reads, quoting Eliezer.

Börse München also featured our January monthly review which delved into the factors driving the market’s dip, the crypto regulations that were discussed at Congress, and the crackdown on DeFi founders and Bitcoin miners in the US. Ending on a high note, we also gave an analysis of how NFTs found their way out of the red charts this month.

News - Decentraland’s Casino Made $7.5M in Revenue in the Last Three Months

What happened?

At any given moment, you’ll find over a thousand players playing poker in the metaverse, that’s a significant number for that embryonic space. In the past three months, Decentraland’s ICE Poker virtual casino has generated more than $7.5 million in revenue through its various income streams, according to Decentral Games founder Miles Anthony. The play-to-earn poker platform from Decentral Games is host to around 6,000 unique players each day, which makes up more than 30% of Decentraland's daily users.

Why does it matter?

As mentioned in our monthly review, NFTs have found their way to keep themselves warm during this so-called Crypto Winter; with OpenSea being valued at over $13 billion in a $300 million funding round last month and Decentraland enjoying a market cap well over $5 billion as of writing.

Price performance of Decentraland in comparison to other assets. Source: IntoTheBlock

Reasons behind this butterfly effect could include that the innovation is still above the law. Regulators in the US for example have agreed upon the verdict that NFTs should not be considered securities, unlike their crypto counterparts that are still debatable between halls.

On another note, the Department of Treasury released a report on Friday describing how the NFT art market fits into money laundering schemes. “The ability to transfer some NFTs via the internet without concern for geographic distance and across borders nearly instantaneously makes digital art susceptible to exploitation by those seeking to launder illicit proceeds of crime, because the movement of value can be accomplished without incurring potential financial, regulatory, or investigative costs of physical shipment,” the Treasury wrote in the 35-page report published Friday.

The rise of AML tools tailored for projects on the blockchain is inevitable, especially in the bull case of Decentraland and OpenSea. Last August, Russia announced that it’s piloting an AI tool to link illicit crypto transactions to their users. At 21Shares, we can see a future with metaverse projects like Decentraland integrating forensics to their platform just like Uniswap back in October 2021, when it contracted with a blockchain-intelligence company, TRM Labs, to conduct forensic research on wallet addresses for compliance purposes.