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Crypto & Market Commentary
Our hope for a recovery was dashed last week thanks to China intensifying it’s crackdown on crypto mining. This caused BTC to slide back to $32K. Aside from that major headwind, news seems to be mixed. The SEC has delayed more ETFs from coming to market, South African brothers vanished with $3.2B BTC, and banks are banning crypto transactions. However, we also have the front runner of the largest financial hub in the world saying how he wants to make NYC the ‘Center of Bitcoin.’ We are covering that and more below:
Did The Bubble Pop:
It is hard to say if the bubble “popped,” given crypto is different than traditional markets. If we simplify it, a bubble pops when there are no more buyers willing to pay the current price for an asset. Thus, leaving those who are left holding the asset to panic sell at whatever price they can get for it - driving the value down. So, did the sell off occur because there was no one left who thought the value of BTC was worth $60K? I would say not entirely. The main catalyst seems to be China’s crackdown on crypto within their borders. It all started with them shutting mining operations down, thus miners liquidated some of their BTC. Then last Monday, the People’s Bank of China said to major institutions to stop facilitating crypto transactions.
If we look at who is selling, according to metrics from glassnode it is coming from short term holders while the long term holders continue to acquire. According to CIO Nathan Cox of Two Prime, Institutions are still hungry for crypto too but are proceeding with caution due to the volatility. The magic break right now seems to be $30K, if it drops below momentum players might throw in the towel and cause it to go back to the teens - according to Matt Maley of Miller Tabak + Co.
The FMA Opinion:
Our opinion is that long term, this is just a one off unfortunate event. While we don’t believe BTC will hit $100K by the end of the year, we also don’t see it dropping below $30K. As miners move to new locations and restart, we believe BTC will continue to climb. We also have to look at the generation who is most open to investing in crypto, Gen Z. As they continue to age and accumulate wealth, most of them seem open to continuing to invest in crypto. As of right now, nearly half of millennial millionaires have 25% of their wealth in cryptocurrencies. If the trend continues, they will be a driving force in the space.
China Intensifies:
The situation in China worsened for crypto this past week. Miners are starting to realize the logistical headaches of moving operations out of China are have been liquidating some of their positions. Additional mining operations in Sichuan have been ordered to shut down as well, following Inner Mongolia and Yunnan. So far this accounts for 90% of BTC mining capacity, 75% of the WORLD’S capacity. The day after they cracked down on Sichuan, the government reiterated a ban on crypto services to officials from Alipay and the largest banks in China. Basically OTC transactions are no longer legitimate. These moves have both driven the price of BTC down and slashed the BTC hashrate by almost 50%. This time the ban in China seems different than before, is it because the government is rolling out its own digital currency?
The FMA Opinion:
The situation does not look good for the future of crypto in China. As the government continues to clamp down on cryptocurrencies, it even seems taboo to talk about them there. Social media accounts devoted to crypto are even being shutdown. Although BTC maximalists will tell you that this crackdown is a long-term good, because it will force diversification across countries which will result less country risk. We continue to be positive about the future of BTC, it is becoming too intertwined to be dismantled by one country. Obviously, the second largest economy and most populous country banning BTC does not bode well, we can see that BTC has weathered it pretty well. We also believe that most of the miners will set up shop abroad and continue their operations. As the story further develops, we will keep you updated.
ETFs Abound:
Yes, we cover crypto ETFs A LOT. However, we think it is important. First, it shows you that even though governments, economists, and traditional money managers continue to raise the alarm of a potential bubble, the demand is still there. Two, perhaps we are not in a bubble. A few emails back we showed you that crypto basically has a major crash every year - it has become normalized that investors aren’t worried (or uneducated). Three, there are legitimate reasons for wanting to own an ETF over BTC directly.
So what is happening in the world of crypto ETFs? Well, the Brazil stock exchange has listed the first crypto ETF in Latin America. The QBTC11 was launched by QR Capital as a BTC ETF. The Canadian digital asset investment fund manager, 3iQ, rolled out its BTC fund, QBTC, on Nasdaq Dubai Wednesday. The first in the Middle East. Here in the US, we saw the SEC delay another BTC ETF. The SEC pushed back the decision of the Valkyrie BTC ETF to August. VanEck is taking a different approach it seems after having their ETF pushed back a week prior to Valkyrie’s. They have filed a prospectus for a BTC futures mutual fund that will have no direct investment in digital assets. Will this work? Who knows.
The FMA Opinion:
Is the SEC trying to prevent the American people from investing in crypto? No. Are they trying to protect traditional finance? Doubtful. Is the crypto space so new that they have no idea to really go about making rules and regulations? Probably. What would you do? You might be thinking “bro, just download Coinbase or Binance and buy some.” Yes, that is definitely an option. However, we said above there are legitimate reasons for wanting an ETF. Some may be worried about losing their key, easier for tax purposes, and ETFs are regulated. Pensions and other investment plans do not have access to crypto and this would change that. According to Statista, as of 2020 there is about $12.2 trillion in US retirement accounts. Think about the impact of just 3% of that entering into crypto. It could be more. You should want a regulated ETF entering the market.
What else we are reading:
Bank TSB Bank To Ban Its Customers From Buying Crypto (thetimes)
ECB Board Member: CBDC Euro Would Respect Privacy (decrypt)
US Government to Auction Off Seized Litecoin Alongside Bitcoin (coindesk)
BlackRock Wants a Blockchain Strategy for Aladdin (coindesk)
Bank of France completes CBDC settlement experiment with SEBA Bank (theblockcrypto)
China’s crackdown means Bitcoin is working, says crypto miner (cointelegraph)
Norway’s FSA Says Legal Framework Needed in Crypto (coindesk)
Coinbase Approved to Enter Japanese Cryptocurrency Market (bitcoin)
Peter Thiel-Backed Exchange Bullish Is in Talks to Go Public in SPAC (coindesk)
NYC Mayoral Front Runner Says City Will Become ‘Center of Bitcoins’ (coindesk)
El Salvador's U.S. Bitcoin Partner Lacks Key Licenses (decrypt)
South African Brothers Vanish With $3.6B BTC (bloomberg)
Wisdom of the Crowds:
Please note, the responses are not apples-to-apples with prior polls and we have no means to verify accuracy of the responses.
You asked, we listened. In this weeks poll we included a hold option. It is hard to tell if this had a large impact on whether the assets are a buy vs sell given the current environment. With the current situation in China, we saw a large sell off in crypto markets and looking at glassnodes weekly analysis, new entrants were shaken out. As we have seen weekly, besides the two major coins (BTC & ETH), ADA, LINK, and DASH are majority hold/sell. Given the resilience of BTC and ETH, we believe the results show that most see these two as rebounding in the future.
Data:
BTC: 1,552 total votes; 522 buy, 513 hold, 517 sell
ETH: 1,486 total votes; 744 buy, 350 hold, 392 sell
ADA: 1,222 total votes; 291 buy, 467 hold, 464 sell
LINK: 1,241 total votes; 235 buy, 376 hold, 630 sell
DASH: 1,104 total votes; 145 buy, 433 hold, 526 sell
In regards to the other questions we typically ask, crypto ownership has stayed steady at 64% even in the face of this sell off. HODL amirite? Well, sort of, we asked whether you are buying/selling/holding and the majority is actually buying (47%) even though they are bearish about the market (58%). The secret is to buy throughout the dip instead of trying to time the bottom.
FMA People’s Crypto Portfolio:
We have decided to hold on to our Dash position. We will see how the market plays out over the next week and then bring it up for discussion again.
Our portfolio is down to $790 from our initial $1,000, a 21% decline. We continue to see crypto struggle amidst the China crackdown and this drawdown is causing a lot of short-term investors to reconsider the viability of investing in crypto.
Looking into the crystal ball:
However, just because an asset declines doesn’t mean that it isn’t worth more than the publicly quoted price. We aren’t saying that’s the case here, but who knows? Maybe this is a buying opportunity for longer term investors. At the same time, this is an inherently volatile asset class. Drawdowns like this are common and this likely won’t be the last large decline in crypto. Yes, right now the portfolio is struggling and we aren’t sure how much further we have to fall. But we see opportunity in blockchain and smart contracts. They are largely underutilized and can potentially provide a huge benefit to companies who choose to use them. Over the long term, this is likely a small blip on the radar. Thanks for sticking along with us for the ride, we hope that we can report some more positive news soon.
If you would like to see a live view of the portfolio, you can do that on CryptoCompare.
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We look forward to doing this all again next week, take care!