21Shares Monthly Review

This Month in Crypto: Executive Summary

The market cap of the overall cryptoassets market is down by 16% since April 2 and dipped to as low as $1.39T on April 18 but quickly jumped back to hover currently at almost $1.82T. Bitcoin and Ethereum are down by 16.6% and 18.9% respectively since last month. April was not a ray of sunshine for the equity market either. The S&P 500 suffered its worst April in 52 years, plunging by 13.3% since the year to date. In this monthly review, we will delve deeper into the macroeconomic factors driving these drops and showcase some valuable onchain metrics indicating healthy fundamentals. We will also shed light on the month’s most significant developments on the regulatory landscape, DeFi, and the wider metaverse.

Figure1: Total Crypto Market Cap Over The Last 30 Days

Source: CoinMarketCap

Macro, Regulations; Spot, and Derivatives Markets

In an exciting turn of events, the Securities and Exchange Commission (SEC) approved the fourth Bitcoin futures ETF, however filed under the Securities Act of 1933 this time as opposed to the notorious Investment Company Act of 1940, which is argued to hold better investor protection. This counts as an essential development if the SEC were to ever approve of a Bitcoin spot ETF, since the previously rejected spot ETFs have been filed under the Securities Act of 1933.

US regulators have had a busy month drafting new policies and tweaking existing ones to meet the deadlines stipulated by President Joe Biden's Executive Order. On April 5, Congress introduced a new bill – the Stablecoin TRUST Act. The act involves regulating stablecoins, offering issuers the option of obtaining a state money transmitter license, a traditional bank charter, or a newly created OCC license for stablecoin issuers, which would also access the Federal Reserve's master account system.

To curtail the possible use of digital assets in circumventing sanctions, Rep. Gregory Meeks introduced the Russia Crypto Transparency Act, the first and only framework that addresses the matter.

Coin Center criticized the amendments proposed by the SEC in March, deeming them unconstitutional for breaching the first amendment. The Washington-based organization argues that changing the definition of exchanges from collecting orders to collecting “buyers and sellers” would be tantamount to coercion. In response, some members of the House Financial Services Committee expressed concerns about the proposed amendments in a letter on Monday to SEC Chairman Gary Gensler. They argued that the changes could stifle innovation in the digital asset ecosystem.

The US Treasury Department imposed sanctions on BitRiver, the Russian Bitcoin mining hosting firm whose parent company is based in Switzerland, along with its 10 subsidiaries. Tied to Russian oligarch Oleg Deripaska, BitRiver is one of the largest Bitcoin mining hosts in Europe and operates six data centers, with another three under construction.

Further in this effort, the European Union is forcing Binance to crack down on Russian users moving assets worth more than $10K.

Crypto scams often coined “rug pulls” could soon become an outright felony, as New York lawmakers lobby for new legislation that proposes limits on the ability for founding development teams to sell significant percentages of their token holdings within a five-year period. This comes shortly after the rug pull of Frosties, a fraudulent NFT project whose creators were charged last month for looting $1.3M in ETH. This could be a great victory for, not only US investors, but for the entire DeFi community.

German banking giant Commerzbank has applied for a crypto custodian license, making it the first major bank to move towards cryptocurrencies in the country. Similarly in the UAE, Kraken was granted the license to operate in the emirates, to become the first cryptocurrency exchange to offer direct funding and trading in UAE dirhams against Bitcoin, Ether, and a range of other virtual assets. Last but not least, Portugal's Central Bank granted Bison Bank the virtual asset service provider (VASP) license, making the bank the first in the country to offer its digital asset services to high net worth individuals.

Technical and Onchain Indicators

Large investors seized the opportunity shortly after Bitcoin fell below the $40K, however not enough to keep the digital commodity above the $40K mark. Bitcoin miners, on the other hand, appeared (see chart below) to have been selling their long-held Bitcoins in a significantly higher rate than anytime these past two years. Charts haven’t seen the Miners’ Position Index skyrocket like this since late December 2020. Moreover, high outflows of approximately $97M were made from crypto funds in reaction to the Federal Reserve’s plans to shrink bond holdings by $95B a month, as a hedge against inflation.

Fluctuation in price action is speculated to persist in the coming few months, as the Fed expects to raise interest rates by 50 BPS in May. Another macro factor that might be driving the red candle wicks on the chart below is the fall of Chinese stocks, commodities and yuan. The country’s strict Covid Zero policy intensified on April 25, halting industrial production, disrupting supply chains, and very likely selling BTC holdings.

One metric our research team is looking closely at is Bitcoin’s Network-Value-Transaction (NVT) pricing model. It takes the two-year median of the NVT ratio – determined by dividing the network’s total value by its daily transaction volume – then multiplies it by the current transaction volume. Looking at the 28 and 90-day periods, it can be argued that both models are starting to show signs of bottoming. This has historically preceded phases where Bitcoin began initiating a rally, as indicated through the several blue circles on the chart below, during January 2019, May 2020, and September 2021. It will still take some time to confirm the continuing crossover of the 28-day above the 90-day period, so it is a development we’ll be monitoring closely.

Figure 2: Bitcoin Miners' Position Index in April

Source: CryptoQuant

Fluctuation in price action is speculated to persist in the coming few months, as the Fed expects to raise interest rates by 50 BPS in May. Another macro factor that might be driving the red candle wicks on the chart below is the fall of Chinese stocks, commodities and yuan. The country’s strict Covid Zero policy intensified on April 25, halting industrial production, disrupting supply chains, and very likely selling BTC holdings.

Figure 3: Bitcoin's Buying and Selling in Year-to-Date

Source: TradingView

One metric our Research Team is looking closely at is Bitcoin’s Network-Value-Transaction (NVT) pricing model. It takes the two-year median of the NVT ratio – determined by dividing the network’s total value by its daily transaction volume – then multiplies it by the current transaction volume. Looking at the 28 and 90-day periods, it can be argued that both models are starting to show signs of bottoming. This has historically preceded phases where Bitcoin began initiating a rally, as indicated through the several blue circles on the chart below, during January 2019, May 2020, and September 2021. It will still take some time to confirm the continuing crossover of the 28-day above the 90-day period, so it is a development we’ll be watching closely.

Figure 4: Network-Value-Transaction Pricing Model (2017-2022)

Source: Glassnode

DeFi

The noteworthy moment characterizing the month of April has been the resurgence of algorithmic stablecoins, this time hoping to capitalize on the model that Luna has pioneered with its respective UST currency. This should be expected to create a new incentive for investors’ capital rotation as alternative L1s hoping to attract new users and liquidity will adopt a similar principle to what Terra’s Anchor has offered, evident by Near’s USN mainnet launch complemented with an expected range of 10-20% APY in staking yields through its money market protocol. Tron’s announcement of launching their own variation called USDD was yet another example showcasing how alternative L1s see this as an opportunity to attract new users and demand for the network as the later is expected to offer 30% APY with the plan to boost the stable’s reserved with $10B worth of crypto collateral a la Terra’s treasury reserve.

The stablecoins vertical was not only eclipsed by the excitement surrounding the news of the new algorithmic currencies and their lucrative APYs, as the firm behind USDC had its fair share of attention. First, it was revealed that Circle closed a funding round of $400M led by the examples of Blackrock, Fidelity management, Fin capital and Marshall wace. The fresh round of bankrolling is expected to help the issuer bolster its growth efforts and facilitate reducing its market gap with the leading stablecoin, USDT.

Another part of the deal should see Blackrock become the primary asset manager of USDC’s cash reserves, in addition to examining further use cases for how USDC can be taken advantage of as a streamlined resource within traditional finance. It was also revealed that Circle is considering launching a sterling-backed stablecoin to complement its burgeoning ecosystem, shortly after they’ve announced their plans to expand into the UK.

Circle is envisioned to keep eating at the Tether’s market dominance as it has successfully redeployed all their cash assets towards cash and cash equivalent, a vital requirement needed to be on the regulator's good side. On the account of this systematic shift that the issuer has been progressively adopting last year, it has now been disclosed that Circle is inching closer to operating as a full-reserve federal bank after making good progress in the process to obtaining a federal chartered banking license. Finally, it was reported that WorldPay’s parent company FIS — responsible for processing more than $2 trillion annually, will now enable merchants to receive settlements in USDC. Twitter followed in Worldpay’s footsteps with its announcement of capacitating content creators to be paid in USDC on Polygon.

Looking beyond the stables vertical, the sheer sums of money lost to DeFi hacks continue to draw scrutiny, and rightfully so, as more than $1.2B have already been siphoned as a result of smart-contracts bugs. To make matters worse, this figure only covers the first quarter of this year as per the bug bounty platform ImmuneFi’s latest report, marking almost a 700% increase since this time of 2021. Of these latest incidents was the Beanstalk's attack that saw a hacker drain the stablecoin protocol of more than $70M via exploiting a flash loan vulnerability, and withdrew it via Tornado Cash, a decentralized protocol used to obfuscate the trail of transactions for privacy. Although the acclaimed privacy-preserving app has been previously utilized to launder stolen funds, Tornado Cash is now taking concrete steps to debilitate the concealing of looted funds as it has now integrated the Chainalysis oracle. Any addresses linked to the Office of Foreign Assets Control (OFAC) sanctioned entities will now be blocked from interacting with Tornado Cash, which is a timely development when considering that hackers involved in the Ronin bridge hack from last month were linked to the prominent North Korean blackhat group, Lazarus group.

NFTs, DAOs, and the Metaverse

Figure 5: 1-Year Total Volume of NFTs Traded

Source: IntoTheBlock

The NFT market saw 14.5% increase in total volume traded in April, with addresses holding NFTs inching closer to 4M. Moreover, the rise of institutional adoption continues, as Hyundai collaborated with Meta Kongz, an NFT project with more than $20M in traded volume, to release 30 NFTs on OpenSea. In other news, the US talent show American Idol partnered with Theta Labs to release their set of NFT collections. In addition, the infamous video game company Sega reported their aim to include NFT technology into their new supergame initiative.

Unsurprisingly, Meta's consecutive announcements dominated the news cycle of the emerging sector. The company is reportedly considering in-app and social tokens for their closed permissioned metaverse. The disclosure came shortly after Zuckerburg hinted at his plan towards integrating NFTs into Instagram. The news didn’t stop there as they reported their intent on charging 47.5% for NFT sales within its closed immersive world. Meta then ended the month confirming that they will open a physical store in California on May 9 which will focus on a depository of hardware products suited for the metaverse, like the Quest 2 VR headset along with their newly released Rayban AR glasses.

eToro also announced they’ll be launching eToro.art, a $20M fund that will be used to support some of different flavors of NFT projects, be they blue-chip NFT collections, or games incorporating the technology. The firm made it clear their focus will extend beyond Ethereum to probe further into the Avalanche and Solana ecosystems. Looking at firms improving the accessibility to the proliferating ecosystem, we first saw that Coinbase launched the beta version of their NFT marketplace, allowing only a select few customers to test out the platform. The new Amazon CEO, Andy Jassy, also hinted that the company is mulling over selling NFTs in a bid to eat some of the market share dominated by Opensea and Looksrare. Regarding the former, Opensea finally added support for the long-anticipated, Solana-based NFT collections in its beta mode

Data & Crypto Infrastructure

The noteworthy scoop emerging out of the infrastructure layer has been Polygon’s latest addition to its arsenal of scalability solutions, dubbed Supernets. The network’s latest feature, which is designed to complement their vision of enabling an internet of blockchains, will draw influence from Avalanche’s scaling solution. Akin to the AVAX subnets, which aid developers in building application-specific blockchains that emerge in a permissionless and a permissioned flavor, Polygon’s Supernets tackle the same issue by enabling the creation of four different types of customizable networks - sovereign, shared security, rollups and validium supernets. More details can be found here regarding the envisioned architecture of the project.

In other news, Luna’s Foundation Guard has continued their buying spree by accumulating around 11.8K Bitcoin throughout the month of April, as part of their pledge to bolster the protocol’s reserve with $10B of the emerging store of value. Foundation’s top-up was complemented with another $200M purchase worth of the Avalanche token. Even if not immediately apparent, Terra’s decision to strengthen its reserves with BTC might be a bullish catalyst that encourages other native ecosystem stablecoins to follow suit and stack the global reserve asset over a medium time horizon. A case in point is Frax Finance decided on adopting the same strategy to back its stablecoin reserve and stabilize its peg in times of extreme disruption. As it has already been touched upon in this report, Terra’s decision has inspired other base layer protocols such as Near and Tron to adopt the same strategy by fortifying the their rising stablecoin’s reserves with native assets from other chains.

On the other hand, Ethereum was dealt a setback as the highly-anticipated merge to Proof of Stake is now shelved to land roughly around Q3 rather than July — despite the successful shadow fork implementation last week. That said, traders are still withdrawing significant amounts of ETH off centralized exchanges and depositing them into DeFi protocols including Lido Finance, implying conviction that the asset still has more potential for an upside movement.

Bitcoin’s Lightning Network received new major support following Strike’s integration with Shopify and the Point-of-Sale supplier, NCR. The partnership should now see an exhaustive list of almost 35K merchants worldwide having access to Bitcoin’s Lightning Network in conjecture with Visa and Mastercard as an alternative payment option - marking a significant step towards the adoption of crypto. The new coalition between the three companies has also enabled CashApp to allow its customers to convert their paychecks to Bitcoin on-the-spot automatically. In addition, Robinhood launched its newly-anticipated crypto wallet enabling more than 2 million users to withdraw their crypto away from the platform

What We Expect

In the coming few days, we’re expecting the crypto market to take another hit in response to the Fed’s next scheduled interest rate hike, accompanied with the repercussions of the supply chain crisis. Ultra hawkish policies spearheaded by Jerome Powell could spell another turbulent month for crypto, so it’ll be a development worth closely monitoring. Even though traders are pricing in near-even odds for a 75BPS hike in the next meeting, it still remains to be seen if the market has fully priced a series of rapid consecutive rate hikes within a short time-frame. Data released before the next meeting should help clarify how aggressive of a route the FED will take.

However, given the heavy adoption of crypto, on the governmental level as well as the corporate, the cryptoassets with the highest market caps will persevere. Looking into this vertical, it’ll also be exciting to observe how Terra’s inspiring models will catalyze other L1s to adopt comparable mechanisms to liquidity mining programs that serve to attract heaps of liquidity and new users. It’ll be compelling to see how sustainable some of these proposals will be starting with Tron’s newest product launching on May 5. It is of paramount significance as the market’s state of affairs that led to UST triumph was dependent on the bullish rally the crypto market was experiencing, and accordingly the high demand for borrowing. Considering the risk-off sentiment that the equities are headed towards, it’ll be curious to see how stablecoin projects will sustain their advertised APYs with lessened demand.

Furthermore, we’re also expecting Ranking Member Patrick Toomey to lobby for his proposed bill, the Stablecoin TRUST Act, before his term ends by 2023. Toomey said he won’t be seeking re-election after his term expires, and will retire from politics altogether. The Ranking Member, who has been in office for 11 years now, has seven months to champion the innovation of stablecoins and turn this proposal into a law.