21Shares Research Newsletter - Issue 143

Market Outlook

The crypto industry underwent a brutal meltdown where a trillion dollars had been wiped out from its aggregate market capitalization, triggered by the worsening market’s sentiment shift occurring last week and aggravated by cumulative $1.5 billions of liquidations triggered over the week, combined with increasing selling pressure stemming from the short-term-holders cohort.

Crypto hasn’t been alone in experiencing this doom and gloom scenario as the Nasdaq 100 stock index, representing the cut of risk-on tech stocks – equally experienced an alarming 20% sell-off over the past few days. Even though Bitcoin and the wider crypto market had maintained a lower correlation to the equities and bonds market throughout its history, 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 ATH 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. The Russian ban is a macro event we expected in the research team as miners started to flee to Georgia over the past months due to regulatory uncertainty.

Looking to the other side of the aisle, the US Federal Reserve is envisaged to drive up four interest rate hikes throughout 2022 to decrease its $9 trillion balance sheet, with the FOMC’s 1st meeting of the year scheduled for tomorrow to determine if the first rate hike would come about in March or earlier. However, the surging inflation could entice them to push for more, as per JP Morgan’s report, drawing further widespread skepticism towards risk-on asset classes and evidenced by the already-increasing US Treasuries interest rates which signify a shift to safer value stocks.

Despite the current timid picture, the turn of events materializing within the crypto sphere isn’t showing any signs of stalling growth. Web 3 is continuing to drive retail and institutional interest as Twitter has implemented their latest feature allowing verifiably owned NFTs to be used as the platform integrated profile pictures. Another pertains to the partnership inked between MasterCard and Coinbase where users will be allowed to buy NFTs on the institutional platform using their traditional credit and debit cards. And that is not to speak of Meta’s decision to dive into the NFT craze by building their own platform.

DeFi had its fairly eventful week as DEXs such as Uniswap and DyDx had lowered their trading fees in a bidding war, while a proposal to launch Aave’s institutional-grade ARC dApp on Arbitrum and Optimism was put forward. That is in conjunction with Curve’s deployment on the scalable L2, Optimism.

The flow of money and resources into the space hasn’t stopped either when assessing Andreessen Horowitz’ ploy to raise $4.5 billion for investing into new crypto funds, or SBF’s announcement of launching a new $2 billion FTX ventures fund focused on advancing web 3 adoption. The anticipated explosion of NFT gaming over the coming years was also reasserted as the infamous software company and VC Animoca brands led another fundraising round for ~$400M, meanwhile Microsoft had secured its $69B acquisition of Activision in what is seen by many as a bet on the metaverse. When it comes to talent acquisition, crypto continues to attract some of the brightest minds from TradFi and other industries as the number of Web 3 developers skyrocketed to a new ATH.

Weekly Returns

The returns of the top five crypto assets over the last week were as follows — BTC (-13.2%), ETH (-22.69%), BNB (-21.02%), SOL (-35.09%), and ADA (-27.2%).

Net Inflows per 21Shares ETP

The net inflows of our ETPs amounted to $12.67M in the past week. Find the breakdown of the inflows and outflows per ETP below.

Media Coverage

We are very excited to have launched the world’s first Cosmos ETP last week, you can read our primer here written by our very own Research Associates Adrian Fritz and Leena ElDeeb. The news was picked up and featured on ETF Stream, Börse Express (link in German), and Finanza Online (link in Italian).

“Cosmos has built a top platform that can empower everything from finance to the metaverse. We are thrilled to launch this product as we continue building widely accessible bridges into the crypto world,” says 21Shares’ CEO and co-founder Hany Rashwan.

Our very own Research Lead Eliezer Ndinga took part earlier today in Ernst & Young’s Blockchain EMEIA Virtual Meet-Up, in a panel discussing DeFi and tokenization trends. The panel was moderated by Mark Selvarajan from EY and included the following: Jan Rosam, Financial Services Consulting Capital Markets and Emerging Technology Leader, EY Germany; Benjamin Duve – Director, Digital Assets and Blockchain, BNY Mellon; Luc Froehlich, Global Head of Investment Directing, Fidelity Int. Stay tuned to EY’s YouTube channel for the recorded webinar!

In other news, our Head of Switzerland Sina Meier also took part in Fundplat’s 14th “Expert Roundtable” in Zurich on January 18. “The rapidly increasing demand from institutional investors is increasingly leading to the question of diversification options. Very often, however, we find that there is still a lack of in-depth specialist knowledge of blockchain technology, tokenomics and the dynamic growth drivers,” Sina said at the roundtable. “This is where we start with our in-house research. Our team of five crypto research experts analyze the global crypto market and provide freely available institutional research on a weekly, monthly and quarterly basis.”

Our Year In Review was also featured on Godmode Trader (link in German), you can find the original report here.

News - The Fed Finally Releases Long-Awaited Report on CBDCs

What happened?

On January 20, the Federal Reserve Board released a paper, which was expected to see the light during summer of last year, that dissects Central Bank Digital Coins (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.

Pros:

1. Better domestic payment options
2. Better international payments
3. Stronger international role for the dollar
4. More financial inclusion for lower-income households
5. More public access to safe central bank money

Cons:

1. Change in the structure of financial markets
2. Less stable financial system
3. Less effective monetary policy
4. More financial crimes
5. More operational disruptions

The Fed also asked the public for feedback, namely on 22 items, where US citizens have 120 days to submit their comments using this form.

Why does it matter?

Although the report doesn’t necessarily announce any plans to launch a digital dollar, this news still marks the first tangible step towards a US CBDC. This comes a week after the introduction of a bill to prohibit the Federal Reserve from issuing a CBDC directly to individuals since it would place the US in a position akin to the digital authoritarianism of China, which has already piloted its digital yuan to potentially compete against US-pegged stablecoins.

This also comes at a very sensitive time, when Congress together with financial regulators explore regulation mechanisms to further control stablecoins or even ban them altogether, as per conversations in the last crypto hearing at Capitol Hill. At 21Shares, our thesis has been that stablecoins play a fundamental role in financial inclusion; namely in the Bolivarian Republic of Venezuela where Circle partnered with Airtm to deliver aid to Venezuelans using USDC, as discussed in a previous newsletter. While more regulatory oversight on stablecoins will provide more clarity, a concern would be that stablecoins would struggle with the emergence of a favored CBDC.