In our most recent communication, we were just hours away from the Shanghai update of the Ethereum network. Recall that the latter allows investors with staked tokens on the proof-of-stake chain to withdraw their assets. This upgrade was completed without any technical problems and most importantly, without massive selling pressure leading to a price drop.

Indeed, this success was particularly well received by the markets. The price have climbed to $2,100 per Ether this week, its highest level since May 2022. According to CryptoQuant, crypto trading saw a net increase of 179,500 ETH, worth $375 million, in the four days following the Ethereum Shanghai update. Speculators deposited 1,101,079 ETH on exchanges between April 13 and 16, while withdrawing only 921,579 tokens. This is the largest four-day net inflow in a month. On April 18, the ETH/BTC pair reached 0.0709 BTC, up about 15% from its low of 0.0602 BTC a week ago.

Until last night, in fact, this is essentially what was observed on the markets, i.e. an internal rotation in the crypto market. Indeed, the rise of Ether was accompanied by a fall in the price of BTC, without the total capital exposed to the whole market changing significantly. Then, the opposite trend manifested itself yesterday, with many taking profit in their ETH position leading to a return to BTC.

This was before the very sudden overnight correction, with the price of BTC losing 3% in the space of just fifteen minutes. This drop – with no immediate apparent catalyst – resulted in millions of dollars worth of futures market positions disappearing. Despite the lack of an immediate fundamental reason, the sell-off in bitcoin futures may have been influenced by an unexpected 10%+ inflation rate in the UK in March, as well as a “long squeeze.” It must be said that gold is also down significantly, having lost the important $2,000 threshold reached in recent weeks.

As of this writing, total crypto long liquidations for April 19 stand at about $175 million on platforms monitored by Coinglass.

This comes after a painful day for short positions yesterday as bitcoin had reclaimed the $30,000 mark. In short, volatility seems to be back on the markets, at least in the short term.

In terms of news, it’s mainly the regulatory efforts in the U.S. – not to mention the lack of regulatory clarity – that have been getting attention. On Friday, the SEC announced in a press release that it would review plans to change the definition of what is considered an exchange. This would include decentralized finance (DeFi) protocols, such as decentralized exchanges.  “Make no mistake: many cryptocurrency exchange platforms already fall under the current definition of an exchange and therefore have an existing obligation to comply with securities laws,” Gensler said in a statement Friday. “Investors in cryptocurrency markets should receive the same time-tested protections that securities laws provide in all other markets.” The idea did not go over well with all regulators, however: SEC Commissioner Hester Peirce said in a meeting Friday that the announcement “sends a message that we are not interested in facilitating innovation and competition in the financial markets and instead seek to protect incumbents.” Peirce also criticized the Commission’s plan as overly broad and said its “ambiguity undermines fundamental First Amendment protections.” The commissioner elaborated: because the release makes everyone involved in the blockchain ecosystem part of a “class” it creates significant ambiguity about speech that requires prior government approval, which will inevitably chill constitutionally protected speech.

Then on Monday, the SEC filed a complaint against Bittrex, alleging that the Seattle-based exchange failed to comply with securities laws by not registering with the financial watchdog in several areas. According to the complaint, Bittrex took in at least $1.3 billion in illicit revenue between 2017 and 2022. The action comes after Bittrex announced its closure late last month, asking users to withdraw their funds from the platform by the end of this month. “Today’s action, once again, makes clear that crypto markets are suffering from a lack of regulatory compliance, not a lack of regulatory clarity,” SEC Chairman Gary Gensler said in a press release. “Today, we hold Bittrex accountable for its non-compliance.”

The SEC similarly classified six cryptocurrencies as securities in its complaint against Bittrex. The tokens listed as examples of “crypto asset securities” are OMG Network (OMG), Dash (DASH), Monolith (TKN), Naga (NGC), Real Estate Protocol (IHT) and Algorand (ALGO). The agency even states that there will likely be more, describing the list as non-exhaustive. Observers have been quick to point out that Gensler has already called the Algorand network “great technology” that could support a ride-sharing service like Uber. Once again, the debate over which crypto assets represent securities was suddenly reignited.

It didn’t take 24 hours for Gensler to be publicly confronted with this issue. First, a letter of condemnation was filed by Republican lawmakers ahead of Gensler’s testimony before the House Financial Services Committee yesterday. According to the document, the perceived lack of compliance in the cryptocurrency industry is largely the fault of the SEC and its chairman. The letter accuses the SEC of not having clear rules and a proper registration process in place for crypto trading companies, making it difficult for them to comply with regulations. The letter also denounces the current regulatory framework as incompatible and unworkable for digital assets, and accuses the SEC of forcing the industry into this regulatory framework without good reason.

The letter certainly must have served as a warning of what was to come at the hearing. Pressed to respond multiple times, Gensler refused to say whether Ether, the second-largest cryptocurrency by market capitalization, was a security during a nearly five-hour hearing. It didn’t go over too well for Gensler, to say the least (video). “Congress needs to provide clear rules for the digital asset ecosystem because regulators can’t get their act together,” said committee chairman Patrick McHenry in his opening remarks. “Regulation by enforcement is neither sufficient nor sustainable. Your approach pushes innovation overseas and puts American competitiveness at risk.”

If the attempt by U.S. regulators is to curb market development on the territory, however, it seems to be working just fine. Even Brian Armstrong, CEO of Coinbase, seems to be looking toward Europe. “The UK is moving quickly on sensible regulation of cryptocurrencies to drive both economic growth AND consumer protection,” he said in a tweet in which he depicts himself alongside UK Business Secretary and City Minister Andrew Griffith. “I am delighted to continue investing in the UK.” Let’s just say that the message being sent couldn’t be clearer.

The regulatory environment in Hong Kong also appears to have improved after state-affiliated Chinese banks began incorporating cryptocurrency companies. In addition to Bank of Communications, ZA Bank – the largest virtual bank in Hong Kong controlled by a Chinese internet insurer – will also act as a settlement bank for some cryptocurrency companies. According to a Wall Street Journal report, these banks will serve as settlement banks to allow token deposits on authorized exchanges to be withdrawn in Hong Kong dollars, Chinese yuan and U.S. dollars.

The collapse of FTX was the catalyst for a new bull run in the cryptocurrency markets, brokerage Bernstein said in a research report Monday. According to the latter, the collapse of the cryptocurrency exchange removed the last of the toxic leverage that existed in the industry, while offering a lesson to digital asset investors on the importance of decentralization and self-holding wallets. According to the note, the macro catalysts are coming together for bitcoin. The report cites continued weakness at U.S. regional banks as well as deposit outflows to money market funds and the Big Four U.S. banks, all of which reflect concerns about money centralization. These factors could drive increased adoption of bitcoin as a decentralized, self-sustaining alternative. “Any potential disruption, whether on the bank credit side or the sovereign side, perfectly positions bitcoin as a safe haven on par with gold,” wrote analysts Gautam Chhugani and Manas Agrawal. “The opportunity to build a new institutional financial pillar on blockchain remains a laudable goal, and serious participants remain focused on the long term,” the analysts wrote, adding that this will be the “first crypto cycle that will see the participation of top institutional investors.”

In the short term, the 30-day moving average is possibly a hoped-for level for many investors looking to enter the market. The order book is moving in that direction. Should the downward pressure continue, then it is this support at $28,700 that we will be looking at. On the contrary, if bitcoin were to rebound and regain $30,000 quickly, it is the breaking of the resistance at $31,000 that could allow another leg up to $32,500.

Rivemont Investments, manager of the Rivemont Crypto Fund.

The presented information is as of April 19th, 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.