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The largest cryptocurrencies by market cap, bitcoin and ethereum, have recorded their first bearish week of 2023. After an explosive start to the year, such a decline is hardly surprising. Much of the bearish sentiment this week came from U.S. regulators, who kept a stern eye on cryptocurrencies. More on that later in this letter. As for the inflation data released yesterday, it was pretty uneventful. January’s U.S. CPI rose 0.5% compared to 0.1% a month earlier. On a yearly basis, inflation was stronger than expected, rising to a 6.4% pace from 6.5% in December and above forecasts of 6.2%. Markets initially reacted poorly to this data, but then quickly rebounded, shrugging off the news. Bitcoin ultimately rose slightly, regaining support above $22,000.
We last week announced an agreement between Gemini and Genesis regarding the Earn program. This week, Genesis went a step further and released details of its creditor repayment plan. A document filed Friday shows that Digital Currency Group (DCG) plans to sell its shares of Genesis Global Trading to Genesis Global Holdco in order to sell both companies and repay customers. Derar Islim, acting CEO of Genesis, said in a statement, “Genesis today took another step toward a resolution for our lending business that maximizes value for all customers and stakeholders. We have filed with the court our previously announced agreement in principle with DCG and key creditor groups.”
Presumably, Sam Bankman-Fried lives in a different reality than the average human, assuming that the rules being imposed on him are mere proposals. A federal judge ordered SBF back into court this week after learning that the founder of cryptocurrency exchange FTX accessed the Internet in a way the government cannot track. The latter has indeed used a VPN twice in the last month, which could allow him to communicate anonymously in relation to the charges against him. The man’s lawyers had the nerve to respond that the VPN was only for watching the Super Bowl. The judge noted that Bankman-Fried had used a VPN at least once after being ordered to refrain from using encrypted messaging applications, adding, “The defendant’s use of a VPN presents many of the same risks associated with his use of an encrypted messaging or calling application.” It remains to be seen whether SBF will receive a simple new warning or whether his release pending his trial is in jeopardy.
In related news, FTX’s bankruptcy proceedings took another turn after the company’s insiders were all hit with new subpoenas. The bankruptcy court issued an order requiring former Alameda CEO Sam Bankman-Fried, former CEO Caroline Ellison, former FTX CTO Gary Wang and former FTX Digital Markets co-CEO Nishad Singh to produce a series of documents related to the company’s operations. Court documents filed Tuesday in the U.S. Bankruptcy Court for the District of Delaware also list Bankman-Fried’s parents, Joseph Bankman and Barbara Fried, among those subpoenaed.
The SEC fined Kraken $30 million and ordered the exchange to cease its U.S. staking offering. In a statement issued Thursday, the regulator announced that the company had failed to register the offering of its cryptocurrency asset staking program as a service. Kraken agreed to discontinue its staking service for U.S. customers, but neither admitted nor denied the allegations in the SEC’s complaint. Gary Gensler, chairman of the SEC, by his own admission wants to crack down on all tokens that he says are unregistered securities.
Coinbase, which also offers such a service, does not intend to accept such an approach without fighting back. Coinbase CEO Brian Armstrong tweeted Sunday that the company’s staking services are not securities. “We will be happy to defend this in court if necessary,” he said. Coinbase General Counsel Paul Grewal said Coinbase’s staking services are fundamentally different and are not securities. In a blog post Friday, Grewal backed up that claim by pointing out that staking fails the Howey test, which is a key tool used by the SEC to evaluate what counts as a security. Grewal argued that staking fails all four elements of the test, including investment of money, common enterprise, reasonable expectation of profits, and efforts of others. He pointed out that staking was not an investment and that the rewards were simply payments for validation services provided to the blockchain, not a return on investment. Furthermore, according to Grewal, there is no information imbalance in staking because all participants are connected on the blockchain and are able to validate transactions through a community of users with equal access to the same information.
In this debate, an important distinction appears crucial. Staking as a service is when exchanges or other third parties take over your cryptocurrency and stake it on your behalf. They take a commission for their services and give you a share of your staking profits. This practice is particularly attractive to a centralized exchange, as it allows them to generate a risk-free return using user funds. It is this type of service that seems to be targeted by the authorities and not decentralized staking as such, as via the ETH network for example.
Is Craig Wright Satoshi Nakamoto? In his attempt to make the world believe so – a mission lost in advance – he has sued the Bitcoin developers for copyright infringement on 3 subjects: The Bitcoin Whitepaper, the blockchain, and the Bitcoin File Format. On Thursday, a judge ruled “there is no serious issue to be tried. I see no reason why any of the defendants should be charged with this particular complaint.” In short, the judge ruled that Wright could not serve the defendants out of jurisdiction with the third complaint, since he was unable to provide evidence that the “Bitcoin File Format” was ever registered. In short, Wright will not be able to clutter up the courts with his superfluous legal attempts, at least on this particular issue.
Binance CEO Changpeng Zhao confirmed that his company will have to give up using the BUSD to consolidate liquidity for stablecoins. Paxos, the company behind the token, confirmed that it would stop minting new units of the stablecoin starting next week, following orders from the New York Department of Financial Services. While many stablecoins are fading, Tether continues to grow. The giant has seen its flagship token, USDT, increase by nearly $1 billion in capitalization following the regulatory crackdown on BUSD. The token’s capitalization started at $68.47 billion on Tuesday, before skyrocketing to about $69.23 billion around 9:10 a.m.
As for the Ethereum network’s migration to proof-of-stake consensus mode, it is having the expected effects on the supply of tokens on the network. Ether has seen a steady decline in supply. According to on-chain data shared by analytics firm Santiment, the amount of ETH available on exchanges also continues to decline. Since the merger, there is 37% less ETH on them. A steady decline in supply on the exchanges is considered a bullish sign, as there are fewer ETH available for investors. Currently, 16 million ETH, or 14% of the total supply, are placed on the Beacon chain, which is about $25 billion at current prices – a considerable amount that will gradually become liquid after the Shanghai hard fork. In addition to a steady decline in the supply of ETH held on exchanges, the overall supply of the Ether market has also declined since it became deflationary after the London upgrade. A total of 2.9 million ETH have been burned since the London upgrade in August 2021, with an estimated value of $4.5 billion in present value.
The U.S. dollar’s strength index, the DXY, will be interesting to watch over the next few weeks. After a decline that began last fall, a real rebound seems to be taking shape. Will it continue? Historically, DXY and bitcoin have been inversely correlated.
The Rivemont Crypto Fund had placed large amounts of capital in cash following the rejection of the $24,000 level, which partially allowed to avoid the week’s decline. We have re-exposed a portion of it, which will certainly provide a higher return than bitcoin for the last seven days for the fund’s investors.
Rivemont Investments, manager of the Rivemont Crypto Fund.
The presented information is as of February 15th, 2023, unless otherwise indicated and is provided for information purposes only. The information comes from sources that we believe are reliable, but not guaranteed. This statement does not provide financial, legal or tax advice. Rivemont Investments are not responsible for any errors or omissions in the information or for any loss or damage suffered.
