21Shares Research Newsletter – Issue 138
The liquidation escalations of the past weeks has significantly reduced the speculative appetite across the board, to the lowest point since the China ban in May. The best way to gauge the current market condition is scrutinizing the open interest for Bitcoin perpetual swaps over market capitalization (OI vs Market Cap) indicator, which has reached the lowest value in the past 6 months, as you can see below. In other words, trading activity might stagnate at least in derivatives markets as we head towards the end of the year. The spot market usually tends to hold the fort when the derivatives market dries up.
However, the overall macro environment could change if China chose to pursue a lockdown in China after recording the first Omicron case. China has employed a strict COVID-zero approach and seems to only have lockdows in their toolbox, which would likely exacerbate shortages, one of the root causes of supply chain shocks many countries are experiencing. As such, another China lockdown could translate into relatively higher inflation rates in some areas such as manufacturing and freight costs. At 21Shares, we will closely monitor how the situation will evolve on that front.
To reiterate from last week's newsletter it is important to note that cryptoassets like Bitcoin are risk-on assets. These assets are likely impacted in the short-run by negative macro events — driving up volatility and correlation across asset classes. However, in the long run, such as a 5-year holding period, in addition to providing uncorrelated and outsized returns, Bitcoin has by orders of magnitude a better Sharpe ratio — close to 2 than Gold, the S&P 500 and Long US Bonds (TLT).
This long-term value proposition for Bitcoin disrupting gold as an emerging store of value and for smart contract-platform such as Ethereum, Solana and Avalanche building the settlement layers for the user-owned internet services — has started to resonate with value investors since March 2020 as they are looking to preserve their wealth, beat inflation and invest in innovation. The archetype of such investors has been Paul Tudor who publicly announced his investment in Bitcoin as the fastest horse to beat inflation. Ever since, a long tail of professional investors have participated in this space from university endowments, family offices, software companies and venture capital firms.
Source: The Case For Bitcoin
One of the other reasons we are optimistic about the future of this space, compared to the last cycles, is the pace of innovation and the financial support entrepreneurs receive not just from VC firms but also from a crowdsourced network of talents and resources with initiatives such as Braintrust. The good indication of this new era is the amount of VC investments made in this industry, which increased by more than 300% YoY. Despite the recent price developments, the fundamentals have not changed and this industry keeps moving forward to build largely a better Internet we know today ranging from financial services, eCommerce, media, music and more.
The returns of the top five crypto assets over the last week were as follows — BTC (-8.43%), ETH (-13.00%), BNB (-11.70%), SOL (-21.40%), and ADA (-13.40%).
The net Inflows of our ETPs amounted to $3.47 million in the past week. Find the breakdown of the inflows and outflows per ETP below.
We are happy to announce the listing of the largest mid-cap crypto ETP (ISIN: CH1130675676, Ticker: ALTS) on SIX Swiss Exchange. Our newest ETP tracks the investment results of an index capturing the mid-cap portion of the cryptoasset market by excluding the two top assets, which are currently Bitcoin and Ethereum.
“We are very excited to launch our first mid-cap crypto index ETP and expand our product range to 21 total ETPs by the end of 2021. This is an important milestone in our product roadmap, following the launch of the world's first crypto ETP on the regulated SIX Swiss Exchange in Switzerland in 2018,” said Hany Rashwan, CEO and co-founder of 21Shares.
Our last newsletter was featured on Trending Topics, where our Research Lead Eliezer Ndinga laid out his thesis on Bitcoin’s performance and the protocol emerging to fill Ethereum’s gaps. “It is too early to tell whether Ethereum will flip Bitcoin’s market value in the near future but the pace of innovation to solve Ethereum current issues such as market manipulation and high transaction fees are under significant progress,” wrote Eliezer.
In other news, AIThority reported on the news that 21Shares just hired Alex Pollak as head of our UK and Israeli markets. In this role, he will be responsible for developing the 21Shares footprint locally to meet growing investor appetite for cryptoassets across both markets.
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Highlights from the “Digital Assets and the Future of Finance” Hearing
Last week, six executives from the US crypto ecosystem testified before the Congress, explained their businesses, products, how they protect investors, and elaborated on why regulators have to change their approach towards crypto. The hearing heavily revolved around stablecoins, whether they should be a security or a commodity, however Stellar’s CEO Denelle Dixon had a different concern. Dixon expressed her concerns about the recommendations by the President’s Work Group on Financial Markets (PWG) to limit stablecoin issuance to insured depository institutions. Dixon explained that this targets the wrong risk of stablecoins, due to the fundamental difference between bank and stablecoin business models. Banks hold fractional reserves while stablecoin arrangements are predominantly intended to be fully reserved.
The hearing also concentrated on Web 3, a term coined in 2014 that refers to the idea of a new stage of the internet, built on public blockchains. Bitfury’s CEO Brian Brooks broke it down to the Congress, explaining the importance of having a network that is owned by its users as opposed to one that is controlled by a small number of companies such as Facebook and Google.
Why does it matter?
While Wednesday’s hearing drew no legally binding conclusions, it definitely foreshadowed the representation of the crypto community in the laws and regulations to come. With the increase of these conversations between players in the market and policymakers, more understanding will be cultivated, and better policies could be made.
At 21Shares, we are hopeful that such assemblies would add more pressure to look into proposals such as the Token Taxonomy Act and Token Safe Harbor. In the hearing, Congresswoman Ann Wagner made it a point to mention the latter, which was drafted by SEC Commissioner Hester Peirce. Alesia Jeanne Haas CFO of Coinbase Global Inc., agreed with the congresswoman about the necessity of having more clarity because these assets are a new asset class, and she believes that it would serve everyone in the ecosystem to have more agreed upon definitions. Haas explained that blockchain-based digital assets are either a new form of digital property or a new way to record ownership.
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