21Shares Monthly Review - June 2022, Survival of the Fittest

This Month in Crypto: Executive Summary

The overall cryptoasset market capitalization is standing at $895B, down by 35% from $1.38T recorded by the end of May. Bitcoin’s valuation shattered by almost 40% in June, its second-worst month ever, while Ethereum is down by 48%. The best winners of June’s rally are Cardano and XRP, who dipped by 22% and 25% since last month. As the war intensifies between Russia and Ukraine, the grip tightens on resources, and purchasing power dwindles and goes hand-in-hand with the global food crisis into another era. A pending recession may become a reality — affecting the public equity market. The S&P 500 and Eurostoxx 600 recorded their worst first half since 1970 and 2008 respectively. Regarding factors driving the market from within, there’s been a “contagious” liquidity crisis affecting various companies and funds in the aftermath of the Terra/Luna collapse, with bigger crypto companies like FTX stepping in as a buyer of last resort, and in some cases, walking away.

Come what may, the crypto industry is on build mode as it has always been during its past bear markets. However, this time the industry has the leverage of institutional recognition and backing. Onchain data indicates that investors may be taking on the opportunity of the market drawdown, Michael Saylor for instance bought $10M worth of Bitcoin over the past month.

Figure 1: Bitcoin Monthly Performance

Source: TradingView

Key takeaways from this report

• Grayscale takes the SEC to court
• Compass Mining’s CEO and CFO resign amid liquidity issues
• FTX buys BlockFi, walks out on Celsius
• KPMG sets up a collaboration hub on the metaverse
• Solana’s fifth outage this year, two companies step in

Macro, Regulations; Spot, and Derivatives Markets

US President Joe Biden blamed the waging financial crisis on the fact that nine foreign-owned shipping companies have been raising prices since the pandemic, making profits seven times higher than the year before. On June 15, the Federal Reserve raised interest rates by 75 basis points; the biggest rate hike in 28 years. A day after, Biden signed the “Ocean Shipping Reform Act of 2022” to crack down on industry fees. While this measure aims to reduce inflation, at least marginally, it’s a big indicator that the supply chain crisis is just getting started.

Elon Musk, SpaceX, and Tesla are being sued for an alleged Ponzi scheme to loot $258B in Dogecoin. The plaintiff is a Dogecoin investor seeking a class-action lawsuit in the Southern District of New York against Musk and his companies for at least $86B in damages. The Securities and Exchanges Commission (SEC) is reportedly investigating how major crypto exchanges are working to prevent insider trading on exchanges. Here are some crypto companies in court this month:

• Binance has been facing some regulatory scrutiny as reports revealed that it has served as a conduit for the laundering of at least $2.35B in 5 years. However, its CEO, published a transparency report to refute these claims. The SEC is allegedly probing Binance’s native token BNB for potential violation of securities regulation.
• Texas, Alabama, and New Jersey are investigating Celsius Network’s decision to halt customer withdrawals, signalling the lending protocol’s insolvency.
• In a turn of tables, Grayscale is suing the SEC after rejecting its application to convert its flagship Grayscale Bitcoin Trust product to an ETF.

However, there are still some wins in this risk-off environment. Illicit crypto activities between 2021 and the first quarter of 2022 have dropped from 0.6% to 0.1%, according to data gathered by a blockchain forensics company powered by Mastercard. CipherTrace estimates that in 2020, illicit activity was between 0.62% and 0.65% of overall crypto activity, and it has now fallen to between 0.10% and 0.15% of overall activity in 2021.

With regards to the adoption of cryptoassets, Crypto.com received a provisional approval of its Virtual Asset MVP license from Dubai’s Virtual Assets Regulatory Authority (VARA), giving the Singaporean crypto exchange the opportunity to scale in the region. Other vital regulatory steps taken this month include the following:

• Japan passed a bill limiting stablecoin issuers to licensed banks, registered money transfer agents and trust companies.
• Nigerian blockchain advocacy group, initiated by the president’s office, is introducing a code of conduct for VASPs with the purpose to make Nigeria ​​the world’s safest and biggest blockchain space with the largest blockchain solutions, investments, and adoption.
• The EU Parliament and Council negotiators reached a provisional deal on a new bill aiming to ensure that crypto transfers can always be traced and suspicious transactions blocked. The rules however don’t apply to peer-to-peer transactions.

Technical and Onchain Indicators

Given the current environment, our team put together a simple analysis to visualize volatility through a Shewhart Chart, which uses three-sigma (3-sigma) to set upper and lower control limits in daily percent price changes.

Market participants often try to make sense of price movements on a daily basis by developing specific narratives, without realizing that the asset is just behaving normally according to its volatility profile. By establishing lower and upper control limits, we can actually distinguish “special causes” from mere noise. Since 2020, we’ve had 12 daily moves above 3-sigma — or three standard deviations from the mean; 5 of them to the upside and 7 of them to the downside. Furthermore, the current lower and upper control limits are set at -16% and 13%, indicating that a daily BTC move within this range shouldn’t come as a surprise.

Figure 2: BTC Shewhart Chart - MA 30 Implied Volatility

Source: 21Shares

As energy prices skyrocket – on the back of the Russo-Ukrainian conflict – and Bitcoin becomes less profitable for miners, selling off holdings would be a better option as opposed to shutting down the mining facilities. Data collected by Bitcoin mining services company, Compass Mining, indicate that Bitcoin held by miners are being sold off to the open market and has in fact reached an all-time high. Despite the slump in valuation, it’s important to note that current daily miners’ revenue accounts for $20M back to levels from the last bear market. However, today’s price for Bitcoin is twice as much as it was trading for at that time — $10K. As a result, we may expect significant miners' capitulation should the price of Bitcoin drop to $10K.

Figure 3: Bitcoin miners selling off their holdings

Source: Compass Mining

It’s also worth noting that Compass Mining’s CEO and CFO resigned on June 28 after the company’s hosting firm Dynamics Mining claimed it terminated its contract due to overdue bills amounting to more than $600K.

Figure 4: Bitcoin Production Cost

Source: TradingView

As shown in Figure 4, the cost of producing 1 BTC ranges between $20K and $34K, so price needs to hover over $20K in order for new miners and those with weak in cash management practices to remain solvent and endure their operations without incurring annual losses.

Soaring inflation and potential insolvency for some companies sent Bitcoin briefly dipping below $18K and Ethereum below $900. Jumping back to above the $20K and $1,000 marks boosted some confidence in the market, with thousands of wallets most likely “buying the dip” over the past month.

Figure 4: The Increase of Wallet Addresses Holding 1 BTC or More

Source: 21Shares, Glassnode

As shown in Figure 5, the Market Value to Realized Value Ratio (MVRV) suggests that while Bitcoin may still experience price drops, it is may also indicate from a valuation perspective that the worst has passed. Over the past four years, Bitcoin’s MVRV ratio was above 1, with the exception of March 2020 when the MVRV ratio was 0.85 for seven days, in addition to the period between 2018 to 2019 which saw the MVRV ratio stay at 0.69 for 133 days. As shown, the current MVRV stands at 0.97.

Figure 5: Bitcoin MVRV Ratio

Source: 21Shares, Glassnode

DeFi

The downfall of prices that took a sharp turn in May had a domino effect on crypto exchanges and DeFi platform, namely BlockFi, which lost almost 80% of its valuation. On June 21st, BlockFi’s CEO Zac Prince announced on Twitter that his company signed a term sheet with crypto exchange FTX to secure a $250M revolving credit facility to provide access to capital that further bolsters the crypto lender’s balance sheet and platform strength. The proceeds of the credit facility were intended to be contractually subordinate to all client balances across all account types (BIA, BPY and loan collateral) and will be used as needed. On June 30, news broke with the deal being sealed, on July 1st Prince announced that they amended the agreement to secure a $400M revolving credit facility which is subordinate to all client funds. The deal also comes FTX’s optional acquisition of BlockFi at a variable price of up to $240M based on performance triggers.

• Celsius also took a hit, with allegedly a $2B hole in its balance sheets. Earlier in June, the lending protocol froze withdrawals and transfers, citing "extreme" market conditions, leaving its 1.7 million customers unable to redeem their assets. FTX was eyeing Celsius for acquisition but decided to walk away after examining its financial records.
• Given the market downturn, investors are leaning more towards fully-collateralized and fiat-backed stablecoins, especially after the collapse of UST, Terra’s algorithmic stablecoin. Top-tier stablecoin issuers, Circle and Tether continue expanding their offerings to gain market share. For their existing dollar-pegged stablecoins, USDT will expand to Tezos and USDC will expand to Polygon. Tether will launch a new stablecoin GBPT, which is pegged to the British Pound Sterling. On the other hand, Circle also introduced a new Euro-backed stablecoin, EUROC to compete with Tether’s EURt. While Tether’s reserves have been the key concern for USDT critics, they have recently announced MHA will be auditing their reserves to increase transparency. Furthermore, they also announced they’ll decrease the amount of commercial paper for backing USDT from $20B to $8.4B by the end of June and eventually to zero.

Figure 6: Circulating supply of USDT vs USDC

Source: 21Shares, Glassnode

Despite all the positive announcements by Tether, USDT’s dominance continues to drop compared to USDC. The difference in circulating supply was 37B a year ago. As of June 23, the difference has shrunk to 11B. USDC’s volume on Ethereum has even flipped USDT. With the weakening signal of USDT compared to USDC, we might see USDC flipping USDT to become the largest stablecoin in the future. Aside from the threat from USDC, the launch of USDD, an algorithmic stablecoin on Tron, has also eaten up USDT’s market share. However, USDD has been trading slightly away from the $1 peg. Moreover, Tron DAO received 500M USDC to back its algorithmic stablecoin, USDD, which started losing its peg to the dollar since June 13. Another algorithmic stablecoin MIM also depegged during the market downturn. It was once traded at $0.935 but its peg has been restored shortly after.

• Ethereum’s Gray Glacier went live on June 30, at block 15,050,000, to essentially change the parameters of the Ice Age/Difficulty Bomb, pushing it back by 700,000 blocks, or roughly 100 days.
• The largest liquid staking platform Lido is an integral part of Ethereum’s ecosystem as it accounts for almost 32% of total staked ETH in the Beacon Chain (ETH2) and 10% of the total value locked on Ethereum’s DeFi market. Even though Lido’s success has helped Ethereum to grow rapidly, it also poses a centralization risk for Ethereum. Therefore, the Lido community has proposed to launch dual governance, which will be using both Lido’s liquid staked ETH token, stETH, and Lido’s governance token, LDO, for the new mechanism. The new proposal will allow stETH holders to veto proposals that are not in favor of the Ethereum stakers but approved by LDO holders.
• In a DeFi’s first, a lending protocol built on the Solana blockchain named Solend tried to gain control of the account of a large investor, or “whale” which it said was putting the protocol at risk. Solend passed a proposal granting it emergency powers to take over the whale account, which had deposited 5.7M SOL tokens into Solend, accounting for more than 95% of deposits. Against that, the account was borrowing $108M in USDC and ETH. The measure would have allowed Solend to liquidate the whale’s assets via “over-the-counter” transactions — as opposed to on-exchanges trades — to avoid a possible cascade of liquidations. After a backlash on Twitter, questioning Solend’s decentralization, the lending protocol asked its users to vote on a new proposal to overturn the earlier vote, 99.8% voted yes. This is another testament to the many perks of decentralization, had this happened in traditional finance, no one would have had the power to bat an eye.

NFTs, DAOs, and the Metaverse

• With Mckinsey and Company predicting that the metaverse could reach $5 trillion by 2030, June saw ceaseless adoption carried out by some of the biggest names in the fashion and entertainment industries. First was Prada’s latest initiative to launch a collection of NFTs freely available for those who purchase the Timecapsule apparel release. In a similar manner, Warner Bros company publicized their newest push to get into the NFT industry with the tokenization of the Looney Tunes story in the form of a 10K collection of the Tweety character. NFT holders should expect to enjoy an exclusive set of perks such as virtual meet and greet, special deals on physical collections and more.
• The controversy surrounding Bored Ape Yacht Club continued at the beginning of June as their discord server got hacked for the third time in 2 months leading to the loss of 200 ETH.
• And finally, the move-to-earn game StepN, which amplified the gaming frenzy on the Solana network, faced a cyber attack at the beginning of the week. The game was stormed by a DDOS attack following the introduction of a new anti-cheating system dubbed SMAC, or STEPN’s Model for Anti-Cheating. The upgrade was designed to eliminate fake users as well as prevent fraudulent motion data from gaming the system through amending real walking/running data, attributed to their ML algorithm.

Last month we’ve seen big brands bet their money on the metaverse, as we saw Gucci invest $25K worth of RARE in SuperRare DAO to start its “Vault Art Space,” an exhibition that will include a selection of NFT artworks by 29 artists. More developments and investments on the metaverse last month include:

• Merit Circle bought out the seed fund from YGG with $1.75M.
• Opensea is migrating to Seaport, which can reduce gas costs by 35%.
• IOTA announced the establishment of a DAO, with a community treasury of about $18.5M.
• Solana’s NFT marketplace Magic Eden raised $130M at a $1.6B valuation.
• Uniswap Labs acquired NFT marketplace aggregator Genie.
• eBay acquired NFT marketplace KnownOrigin.

One of the Big Four accounting companies, KPMG, is launching a collaboration hub in the metaverse to help its clients to develop strategies in that space. In a new trend dubbed as “tokengated” commerce, e-commerce platform Shopify is hoping to gain customer loyalty by allowing merchants to add utility to NFTs. More corporate NFT adoption in June include:

• YSL Beauty will launch social tokens and NFTs.
• Swiss luxury watchmaker TAG Heuer introduced an NFT-enabled smartwatch.
• Lacoste will launch an NFT collection.
• American rapper Pharrell Williams was appointed as Chief Brand Officer of the NFT collection, Doodles, which is also preparing to launch a new edition.
• Cristiano Ronaldo and Binance teamed up for an NFT partnership.
• Eminem and Snoop Dogg made a Bored Ape Yacht Club music video.
• Bentley Motors announced they’ll launch NFTs on Polygon.

Crypto Infrastructure

Solana waltzed into June with the fifth outage this year. This time, the network breakdown was triggered by the processing of offline transactions called durable transaction nonces; one of which was mistakenly processed like a normal one, instigating the user to resubmit it again and triggering the network’s double-spending issue as validators failed to reach consensus due to the runtime bug. As a result, developers have disabled the feature altogether to avert any future problems.

Figure 7: Market cap reactions towards developments in the industry

In response, the total crypto market cap dipped by 6%, and on the flip side, two companies stepped in:

• The infrastructure provider Alchemy announced it’ll expand its support to the troubled network a day following the network halt. The integration should provide Solana with a well-needed boost in its reliability, as exemplified by the superior scalability performance of heavy dApps Aave and Opensea, who are both dependent on the solution.
• The oracle network Chainlink unveiled its integration into the Solana ecosystem, allowing protocols to take advantage of one of the seven price feeds the protocol has made available on top of the network.
• The developments within the infrastructure vertical didn’t stop there as the BNB network unveiled its latest technical roadmap, which should see improvements on multiple fronts. The upgrade includes fostering the capacity for launching sidechains to host NFT-based dApps, growing the total number of validators to 41 from 21, and increasing the block gas capacity to 200M to match the increased demand on the network.
• Zcash was no stranger either, as the privacy-focused blockchain enjoyed its most significant update in two years. Dubbed NU5, the upgrade should introduce critical features such as orchard shielded payment protocol to remove the dependency on complex setup ceremonies, as well as make it easier to execute private transactions on mobile phones thanks to the new format of unified addresses.
• dYdX, the biggest and most successful rollup on Ethereum, has decided to build their own L1 with the Cosmos SDK, potentially joining the Cosmos Hub in the process. The reasons for the departure were stated to be the difficulty of decentralizing the rollup sequencer – the part of a rollup that gathers and batches transactions for submission to the L1 – and generic scaling issues. This is a major blow to the Ethereum ecosystem, and raises questions about whether the rollup ecosystem is ready for prime time.

Critics however point out that 50% of the token is held by insiders and the team, and the move to their own L1 essentially transfers the fees dYdX was paying to Ethereum to the team; characterizing this as the main motivation for the move.

Figure 8: Ethereum’s Relative Unrealized Profit

Source: 21Shares, Glassnode

In the meantime, the Ethereum Relative Unrealized Profit, which estimates the average profit position of all the addresses on the chain, sharply declined, reaching levels last seen in 2020.

The L1 BNB Beacon Chain announced it’s going open-source, allowing developers to build on it. The network will also open its validator set, inviting external parties to become validators and play an important role in governance. Users interested in contributing as delegators will also have an avenue to contribute through staking. As the BNB Beacon Chain is rolled out, different components will be reviewed to identify opportunities for more prospective validators and delegators to contribute and play an active role.

The L2 zkSync will have a major version 2 update on testnet, featuring “forward-looking structural changes that necessitate a regenesis.” Immutable X is also launching Arch version 1.0, an NFT bridging protocol between L1 Ethereum and L2 StarkNet. Immutable is also launching a $500M fund to accelerate the adoption of Web 3 games and projects.

After a $400M liquidation by top-tier lenders on prop fund, Three Arrows Capital (3AC), it is speculated that 3AC is the next in line to be facing insolvency issues with failure to meet margin calls on BlockFi. With BlockFi and Deribit in its portfolio, 3AC has hired legal and financial advisers to help reclaim its position with lenders and other parties. However, a court in the British Virgin Islands ordered 3AC liquidation.

Moonbeam, a major destination for multi-chain applications on Polkadot, has integrated Chainlink Price Feeds into its smart contract platform. The availability of Chainlink’s price feeds helps enable builders to reliably source aggregated price information from many exchanges, helping ensure price accuracy. With the integration, developers can build even more sophisticated dApps to launch on the Moonbeam network.

What We Expect

The SEC’s Gary Gensler is lobbying for one rule book on crypto exchanges that would essentially grant the SEC more jurisdiction over the industry. The mechanics of this rule book would be that if a token that represents a commodity is listed on a platform overseen by the SEC, they would notify the CFTC, which oversees commodities.

Ever since Gensler’s appointment, the Congress has been avoiding giving all the reigns to the SEC. There’s a bill that somewhat challenges Gensler’s lobbying and expands the CFTC’s oversight over the industry. Senator Cynthia Lummis posted the bill on Github for public feedback; the Lummis-Gillibrand Responsible Financial Innovation Act needs yet to be passed by both the Senate and the House before it’s passed on to the President and signed into law.

On the regulatory front in the EU, after years of consultation and negotiation, institutions reached an agreement on the markets in crypto assets (MiCA) law expected to come into effect in late 2023. The law will represent the first unified regulatory framework for cryptoassets in Europe with the mandate to protect consumers and combat market manipulation and financial crimes. The silver lining is that the MiCA law won’t impose any ban on Bitcoin mining but would rather require disclosure on energy consumption.
The realm of DeFi is being brutally battle tested. We can expect more companies following the steps of FTX, but most of all we expect surviving projects to set their sails for the next bear market. Having a roadmap, hiring and spending strategies that are tailored for risk-off environments would protect emerging companies against extreme market conditions and attract investors.

We’re starting to see more practical utility in NFTs beyond the hype of expensive JPEGs, like customer loyalty and retention. We might see new nonfungible trends getting propagated by the market conditions; like non fungible airdrops (NFA) for example, initiated by Arken Finance. Similar to futures contracts, NFAs would represent the true value of an airdrop reward when an initial DEX offering happens, however, the project owner would be the one promising to deliver the token or other digital assets on a future launch date.

Despite the liquidity crisis accumulating on crypto lenders and shaking some crypto infrastructure layers, we’ve seen progressive steps across the board indicating a healthy environment for growth amid uncertainty.