Bitcoin's Surge, Retrace, and DeFi's Rising Momentum

Market Outlook

After several weeks of outstanding Bitcoin performance which culminated in a new all-time-high price of $34,684.90 on Jan 3 before a noticeable retracement which saw Bitcoin briefly dip below $30,000 — as a noticeable amount of leveraged has flushed out of the market. Bitcoin long liquidations reached $500M on Monday in response to the retracement, with the asset now hovering around the $32,000 mark.

As has often been the case, following a brief consolidation in the performance of Bitcoin, we normally expect the outperformance of the long-tail of the crypto asset market as Bitcoin holders rebalance parts of their portfolios to cryptoassets such as Ethereum (AETH) and the rest of the Decentralized Finance ecosystem. This has been particularly driven by the news of the Office of the Comptroller of the Currency (OCC) releasing a guideline allowing the integration of public blockchains and stablecoins into the US financial system.

In between the newfound role of Bitcoin as an institutional digital gold, as well as the notable innovation within Ethereum and the decentralized finance ecosystem, there are significant drivers of growth for the space within 2021. The chart below shows how the amount of addresses holding 1 ETH has consistently increased since the previous bull market of 2017, a signal that user interest in the platform and DeFi is on a constant upward trend.

Weekly Returns

The returns of the top five cryptoassets over the last week were as follows — BTC (16.78%), ETH (40.77%), XRP (8.11%), LTC (20.26%), and BCH (14.72%).

Monthly ETP Returns

The performance of our line of ETPs over the last 30 days is as follows: ABTC (48.8%), AETH (81.9%), ABCH (26.7%), AXRP (-62.2%), ABNB (31.9%), AXTZ (-11.9%), HODL (98.4%), ABBA (44.3%), KEYS (40.2%), and SBTC (-37.1%).

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Media Coverage

Our Managing Director, Laurent Kssis, was quoted in CoinDesk as saying: “Bitcoin price is being driven by institutional money and there is not enough supply. The number of family offices asking to invest in our ETP is just staggering. I’ve never seen this before. In 2017 it was just retail knocking at the door now it’s only institutional.”

The chart below shows Bitcoin’s performance compared to the S&P500 since the start of 2020. Bitcoin has returned 358% as of yesterday compared to 14% for the S&P500, off the back of strong institutional demand for the cryptoasset.

News - OCC Says Banks Can Issue Payments Using Stablecoins | The Office of the Comptroller of the Currency

What Happened?

The Office of the Comptroller of the Currency (OCC), the US regulatory body serving to charter and supervise all national banks, released a guideline allowing the integration of public blockchains and stablecoins into the US financial system. In other words, this endeavor translates crypto-financial infrastructure such as stablecoins and bitcoin into additional payment networks for traditional financial activities within the United States. This means US national banks will be able by law to run nodes for Ethereum and Bitcoin to verify, validate, and broadcast transactions.

Why Does It Matter?

The amount of economic activity happening atop stablecoins such as USDC and Bitcoin has not gone unnoticed by US regulators. To put this into perspective, USDC, the most regulated and audited USD-pegged stablecoins in the market, has crossed the $4 billion market in circulation in the span of two years, while trillions of dollars of transactions have been settled on the Bitcoin network.

This crypto-infrastructure integration is a major milestone in the adoption cycle of Bitcoin alongside stablecoins — opening the possibility of putting public blockchains in the same pedestal as other payment networks such as Fedwire, CHIPS, and SWIFT. In fact, in the document, the regulator affirmed that public blockchains are significantly more resilient than current payment networks thanks to their decentralized nature. Their decentralized nature removes the problem of a single point of failure in downtimes and enables financial activities to keep running as other nodes will verify and validate transactions.

While this is great news, on the regulatory front in the US, there is another hasty pending law under the Trump administration released as the “Notice of Proposed Rulemaking on Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets (the “Proposal”)”. This Proposal would effectively allow the Financial Crimes Enforcement Network (FinCEN) to expand reporting and Know Your Customer (“KYC”) type obligations to parties who are not the customers of service providers such as crypto payment services and exchanges.

This proposal has been broadly contested and commented on by the crypto community, including the likes of the renowned VC firm a16z, as well as Twitter and Square’s CEO Jack Dorsey. While the comment period is shorter than traditionally 60 days, it is important to note that the current administration will end on January 20th which will bring with it a totally new approach to cryptoasset regulation.

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