21Shares Monthly Review

Executive Summary

January was a tough month, not only for crypto, but the entire capital market. Bitcoin dipped to $33K January 24 and picked up again, inching closer to the $40K mark as of writing of this report. From $3,257 to $2,219 in just four days, Ethereum also took a sharp dip starting January 20, and is currently on its way for slow recovery. In this monthly review, we’ll delve into the factors that drove 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’ll provide you with an analysis on how NFTs found their way out of the red charts this month.

Factors of Bitcoin’s Dip

Throughout history, Bitcoin and the wider crypto market has maintained a lower correlation to the equities and bonds market. However, the current turbulent macroeconomic landscape had instilled uncertainty across all markets with a higher risk-appetite, causing BTC’s correlation against the tech-heavy NASDAQ index to reach a new all time high on the back of several developments.

The increasing border tensions between Russia and Ukraine have reinstated agitations around a resurgence of the regional conflict triggered by Russia’s escalating aggression for one. Russia’s central bank proposed a sweeping ban on the mining and use of cryptocurrencies as it echoed fears pertaining to how potential capital flight possesses a systemic risk for the stability of the country’s financial system. Whereas it is realistically argued that it could be a strategic move to quash opposition as they were able to crowdfund donations through BTC after having their bank accounts subdued. As miners started fleeing from Russia to Georgia over the past months due to regulatory uncertainty, a Russian ban was one macro event our research team expected at 21Shares.

January ended with the Fed leaving interest rates untouched, but with the possibility of increasing soon above 2%, Bitcoin was up 2.5% after the decision. Bank of America, however, expects the Feds to raise rates seven times this year to curb inflation, drawing further widespread skepticism towards risk-on asset classes and evidenced by the already-increasing US Treasuries interest rates which signifies a shift to safer value stocks.This risk-off shift could benefit stablecoins including USDC, which reached an all-time high in market value of $50 billion.

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All factors considered, it is difficult to tell as to what degree Bitcoin will dip. The Net Unrealized Profit and Loss metric has served as a great market sentiment gauge in history. When it dips below the 0.2, it could trigger greater fear and capitulation, right now it stands above 0.3. We’ve seen the market crash in the wake of the pandemic and spring back up, breaking new records. At 21Shares, we’re confident in the market’s resilience given the pace of innovation and the major macroeconomic factors that attract talents in this industry:

65% of all active developers came in 2021
The Great Resignation wave we see in the US shift from tech giants and traditional banks to crypto / Web 3

Regulations Discussed in Capitol Hill

Congressman Tom Emmer introduced a bill on January 12, prohibiting the Federal Reserve from issuing a central bank digital currency (CBDC) directly to individuals. This comes promptly after China announced it will be piloting its digital yuan in the Beijing Winter Olympics. Emmer argued that a CBDC issued by the Federal Reserve would not only centralize Americans’ financial information, leaving it vulnerable to attack, but it could also be used as a surveillance tool. For the Fed to issue a CBDC, they’ll need authorization from the Congress. Emmer argues that having to open up an account at the Fed to access a US CBDC would put the Fed on an insidious path akin to China’s digital authoritarianism.

The Federal Reserve has been evaluating CBDCs for some time now and has been cautiously releasing statements on the matter without giving away any substantial verdict. On January 20, the Federal Reserve Board released a long-anticipated paper that dissects CBDCs and lists down a handful of pros and cons for CBDCs based on the Fed’s perspective. The paper, that can be found here, doesn’t reveal any decisions taken by the Fed nor rushes into any political conclusions, however invites the US public to give feedback on more than 20 items of discussion.

On January 26, the Securities and Exchange Commission (SEC) announced proposed rules that are aimed to better protect investors and enhance cybersecurity by bringing more Alternative Trading Systems (ATS) that trade Treasuries and other government securities under the regulatory umbrella. The SEC wants to propose a set of amendments to a 2020 proposal along with the public comments received in response to that proposal. This would essentially extend Regulation ATS to include systems that offer the use of non-firm trading interest and provide protocols to bring together buyers and sellers for trading any type of security. These Communication Protocol Systems would be required to either register as exchanges or register as broker-dealers and comply with Regulation ATS.

SEC Commissioner Hester Peirce, however, begged to differ. She raised concerns in a dissenting statement published on the same date of the SEC’s announcement that the 30-day comment period given to the public would be very limiting considering the fundamental changes debated to take place to the $22 trillion Treasury market. She argued that 90 days would have been a more reasonable period. Peirce, who is known to be a champion of the crypto community at the SEC, also raised concerns over the request to amend or rather expand definition of “exchanges”; which, according to Peirce, could deter innovation and dissuade new entrants from entering into the market for trading venues and execution services.

On January 25, the White House introduced a bill to the Congress titled COMPETES act, that is, as US President Joe Biden described, aimed to make the supply chains of the United States stronger and reinvigorate the innovation engine of the country’s economy to outcompete China and “the rest of the world” in the future. Coin Center, a US-based think tank, flagged that a provision included in the act should be reconsidered since it would “hand Treasury blank check to ban crypto at exchanges.” Coin Center’s Executive Director Jerry Brito took to Twitter and argued that the provisions would add "certain transmittal of funds" to the list of things that can be banned by the Treasury Secretary, eliminate all public notice and comment requirements along with the 120-day limitation for measures imposed without regulation.

On January 31, Brito reported that Congressman Jim Himes agreed to remove the provision and a decision will be made later this week. Although the amendment is still up for consideration, this continues to back our thesis at 21Shares that community initiatives like Coin Center are vital to guide regulators and rectify their misjudgements to protect the crypto industry and help it thrive.

Continued Crackdown in the US

On January 23, Uniswap’s founder Hayden Adams announced that his banker, JPMorgan Chase, closed his accounts without giving notice or a reason for the closure. Adams reported that he knows others also working in the crypto industry who experienced the same ordeal. In reply to Adams’ tweet, Brian Quintenz, the former chairman of the US Commodity Futures Trading Commission (CFTC), explained that it is probably a “shadow de-banking of crypto” by the Federal Reserve or the Office of the Comptroller of the Currency bank examiners. Quintenz, who now works as an advisory partner at Andreessen Horowitz, elaborated that if a bank ended a relationship with a client upon the recommendation of a bank examiner, the bank is contractually obligated to not inform the given client of the reason.

In other news, there have been a few early signs of a crackdown on Bitcoin mining in the US. On January 29, New York State Department of Environmental Conservation notified Greenidge Generation, a Bitcoin mining facility, that it has delayed its decision on whether it will allow them to continue to use its power plant in the town of Dresden for Bitcoin mining. The decision is now expected to be made by March 31, two months later than originally planned. This comes after Senator Elizabeth Warren questioned the environmental impact of Greenidge in a letter back in December. In response, the company promised that as of June 1, it will counteract the emissions that its rigs produce with carbon offset credit purchases starting on June 1.

On January 28, the Senator targeted six other Bitcoin miners, namely Riot Blockchain, Marathon Digital Holdings, Stronghold Digital Mining, Bitdeer Group, Bitfury Group and Bit Digital, questioning their “extraordinarily high energy usage.” Our thesis at 21Shares has been that the problem is not in how environment-friendly Bitcoin mining is, we’ve seen how Bitcoin miners were also attacked for consuming renewable energy in Europe. The problem unfortunately remains highly ideological. As the situation stands, we see an exodus of miners to crypto-friendlier countries such as Canada, El Salvador or Switzerland and Iceland.

NFTs on the Rise

A series of macroeconomic events have shook the markets in recent weeks and months and the correlation between crypto and traditional asset classes, especially the tech sector, has been on an all-time high during the recent sell-off. Even though most of the asset prices are down, there is one sector that keeps on thriving - NFTs!

The number of Google Searches for the keyword ‘NFT’ recently surpassed ‘Crypto’ for the first time, showing the continued interest and mainstream appeal of this asset class. Moreover, it seems that individuals may consider the current downtrend of Ethereum as a buying opportunity for NFTs, as the number of unique buyers continues to rise.

There have been several positive developments with Twitter starting their NFT integration of verifiable profile pictures, Walmart’s recent trademark application and stars like Justin Bieber, Kevin Hart, Neymar Jr. and other celebrities joining the Bored Ape Yacht Club (BAYC). Interestingly, the floor price of the avatar project BAYC rose significantly throughout the month of January - almost 70% from 65 ETH to over 110 ETH. Although the underlying cryptoasset ETH is down -25% YTD, the collection's floor price has increased by 20% in US Dollar terms. This ultimately suggests that blue-chip NFT projects could become an asset class acting as an emerging store of value akin to art. Further proof for that was the news that Genesis, a digital asset trading firm, has begun accepting NFTs as collateral for loans and derivatives indicating that digital art has found its way into the burgeoning market for sophisticated crypto financial products.

Lastly, LooksRare, the decentralized NFT marketplace directly competing with OpenSea, keeps on attracting users from OpenSea onto their platform. As the data suggest, LooksRare was able to capture almost 70% of the total market share within four weeks.

In conclusion, the NFT sector keeps on innovating and attracting new users, content creators and companies and is most likely to continue its growth throughout the year. In order to learn more about the upcoming trends and our predictions for the NFT space, stay tuned for our upcoming Web 3 magazine.