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After several weeks of minimal movement on the cryptocurrency market, prices experienced a sudden drop last Friday. This decline coincided with the announcement of the bankruptcy of Chinese real estate giant Evergrande amidst a broader downturn in traditional markets. What was particularly striking was the speed of this movement, highlighting the current low liquidity for cryptocurrencies. Indeed, the liquidity of the bitcoin market has been declining on major exchanges like Binance and Coinbase for some time now. This means that when large holders want to move their assets, the rest of the market feels it. A glaring example occurred on Friday, with bitcoin losing 7% of its value in just 20 minutes.
Liquidity is a fundamental concept in any market. It refers to how easily an asset can be bought or sold without causing significant price fluctuations. In the context of cryptocurrencies, liquidity illustrates the ability to quickly convert a digital asset into cash or another asset. The measure of liquidity relies on the active presence of buyers and sellers and the depth of the order book. High liquidity indicates a balance between the number of buyers and sellers, resulting in smoother transactions and less impact on prices. Conversely, low liquidity can lead to increased price volatility. In a low liquidity market, even small transactions can cause significant price changes. In a highly liquid market, large transactions can occur with minimal impact on prices. The spread between buying and selling prices remains low, ensuring fair pricing for traders. Conversely, low liquidity markets are sensitive because large holders wield significant influence. On these markets, significant transactions can result in slippage, meaning a difference between the expected price and the price at which it’s executed, due to a lack of matching orders. The current low liquidity is related to a broader move of tokens out of exchanges into cold storage. If this resulted in a sudden drop last week, the opposite could be true in a bullish context, with buyers simply not finding enough sellers on exchanges.
Despite this price drop, Bitcoin’s fundamental network indicators remain strong. Recent data shows that network difficulty reached historical highs, increasing by 6.17% in its last bi-weekly automatic adjustment on August 22nd. This rise reflects competition among miners and the security of the Bitcoin network, suggesting that miners remain profitable. Moreover, the hash rate, representing the computing power allocated by miners to the Bitcoin network, is also nearing its all-time highs.
What are the chances of a spot Bitcoin ETF being approved in the U.S.? Fred Thiel, CEO of Marathon Digital, is optimistic. He believes the chances of approval exceed 50%. According to him, the SEC’s approval of an Ethereum futures ETF would also boost the chances of a spot Bitcoin ETF. Currently, there are about half a dozen requests for launching such an ETF, including BlackRock, the world’s largest asset manager, as well as other major players like Wisdom Tree, VanEck, and Fidelity. Thiel thinks that if one ETF is approved, several will be, although not all will necessarily get the nod. He believes the SEC cannot favor just one candidate. Moreover, Thiel feels the SEC is under pressure to deliver positive outcomes given the current institutional interest in Bitcoin ETFs.
How is Sam Bankman-Fried’s prison stay going? Pleading not guilty, his lawyers informed Federal Judge Sara Netburn that Bankman-Fried faces harsh conditions in prison, including deprivation of his medication, lack of support for his vegan diet, and limited access to a computer. He’s been reduced to eating bread, water, and peanut butter. Earlier this month, Judge Lewis Kaplan revoked his $250 million bail and placed him in the Metropolitan Detention Center in Brooklyn. Bankman-Fried had been under house arrest since his arrest in the Bahamas until his extradition to the U.S. Judge Kaplan also denied a regular release request to consult with his lawyers, but ordered limited release from his cell to meet with his legal team and use a laptop.
Coinbase acquired a minority stake in Circle Internet Financial, leading to the dissolution of the Centre Consortium that issues the USDC stablecoin. Following this acquisition, Circle will now be the sole issuer of USDC. Previously, Centre had been established by Coinbase and Circle in 2018 to govern the U.S. dollar-backed token. Despite this dissolution, revenues from interest on the dollar reserves supporting USDC tokens will continue to be shared between both companies. For a long time, USDC has been the second-largest stablecoin in terms of market cap, right behind Tether. Stablecoins are typically backed by fiat reserves, like the U.S. dollar in this case. Circle holds the dollar reserves necessary to exchange all circulating USDC tokens. These reserves aren’t only in cash; they can also be backed by government securities, such as Treasury bills.
Nodal Power, a startup specializing in Bitcoin mining, recently raised $13 million to transform methane produced by landfills into electricity. This electricity is then sold to local power grids as renewable energy. However, not all this energy will be sold. Some will be directly used by Nodal Power to secure the blockchain through its own Bitcoin mining. Methane, a potent greenhouse gas resulting from the decomposition of organic matter in landfills, significantly contributes to global warming. Studies suggest it’s 25 times more effective at trapping heat than carbon dioxide. Nodal Power’s project intends to turn this environmental liability into a double win for the environment by reducing methane emissions and generating renewable energy.
The cryptocurrency exchange, Gemini, facing legal challenges, has sought a federal judge to dismiss a complaint filed in January by the Securities and Exchange Commission. The latter alleges that Gemini sold unregistered securities. In a 15-page defense, Gemini’s lawyers contest the SEC’s accusation, arguing that it did not clearly establish that their « Gemini Earn » program and another lending program were sales of securities. The SEC had previously accused Gemini and crypto lender Genesis of selling these securities to investors. Gemini’s lawyers dismissed the notion that these programs were sold as securities, while highlighting inconsistencies in the SEC’s arguments. « A child running a lemonade stand knows that when something is sold, ownership of the item in question – the lemonade – is transferred from the seller to the buyer, in exchange for value, » the lawyers write. « Even if the Master Digital Asset Loan Agreement (MDALA) are securities, the SEC has not made plausible and non-conclusive allegations that they were sold or offered for sale. »
The technical analysis indicator, the Relative Strength Index (RSI), shows that Bitcoin is in extremely oversold conditions, reaching its lowest point since the coronavirus-induced crash in March 2020. The RSI, ranging from 0 to 100, assesses the recent price movement of an asset compared to its average price movement over a given period, typically 14 days. A value below 30 indicates an oversold condition, meaning the price has fallen too rapidly.
It remains to be seen whether this indicator will enable a short-term technical rebound, as the bitcoin price is now pointing below its 50- and 200-day moving averages.
Rivemont Investments, manager of the Rivemont Crypto Fund.
The presented information is as of August 23rd, 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.
