Load the China FUD
31 May 2021
Market Recap
Two main things: China FUD and environmental concerns of bitcoin mining. Market took the signal that restricting bitcoin activities (trading and mining) was now really on the high-level agenda of the Chinese government, with several firms such as Huobi and BTC.TOP stating they were moving their businesses overseas, especially to North America. It appears inevitable that there would be migration of hashpower from China to rest of the world just like in 2017 when Chinese exchanges moved their operations overseas. Marathon Digital also announced plans to build a new facility in Texas that will house 73,000 bitcoin miners that will be 70% carbon-neutral. Environmental concerns of Bitcoin mining also came under radar, with Elon Musk and Michael Saylor forming Bitcoin Mining Council to provide data on the energy usage of bitcoin mining, and digital asset hedge fund One River filing to create a carbon-neutral bitcoin ETF. The main ethos of Bitcoin is decentralization, but above developments show that complete decentralization is a myth, and as bitcoin garners greater institutional adoption, the level of centralization, whether it be in the form of ownership, production, or censorship, would likely increase.
Despite the poor price action, digital assets continue to be on the investment radar with Ray Dalio confirming bitcoin holdings, Carl Icahn saying he is considering digital assets investments, and a16z’s crypto fund expected to attract ~US$ 2bn, at 2.5% management fee and 25% carry. Whales in fact bought 77,000 bitcoin last week (Chainalysis), with amount of Bitcoin wallets holding 1,000+ bitcoin seeing largest increase since 2/4/2021 (Chart 1).
Total stablecoin supply has also increased to top US$ 100bn this week (+US$ 2.7bn week-on-week), driven by increase in the USDC circulating supply (+US$ 1.5bn), hinting there is substantial dry powder waiting to be deployed. However, the average on-chain cost of investors acquiring bitcoin in the last 12 months is ~US$ 37,800 (Chart 2) and with price under this level in the past 4 days, the amount of pain in the market is increasing. Average cost of acquiring ether is at $1,700 (Chart 3).
On the macro side, it was relatively quiet for most of the week with lack of directional drivers. Stocks recorded solid gains for the week amidst light trading volume, bringing S&P500 close to ATH on 5/7/2021. Overall economic data further drove economic recovery narrative, as April core personal consumption expenditure showed biggest monthly gain (+3.1%, Est. +2.9%, Prior +1.9%) since October 2001. Biden also released 2022 budget, detailing more than US$ 6 trillion in spending, with focus on infrastructure and fighting climate change, over the coming fiscal year. With Democrats in control of both chambers of Congress, Biden has good odds for passing his agenda.
What is Happening?
WisdomTree became the 2nd firm to file for an ETH ETF in the US, following VanEck’s submission earlier this month. The SEC has yet to approve any crypto ETF offering, but four ETH ETFs have already gone live in Canada. The four Canadian ETH ETF has combined asset under management (AUM) of CAD$ 776mio, with the two largest being CI Galaxy Ethereum ETF (AUM: CAD$ 329mio) and 3iQ CoinShare Ether ETF (AUM: CAD$ 246mio).
US Treasury wants to expand crypto reporting to fight offshore tax evasion. Alongside the Biden budget proposal for 2022, the Treasury released explanations for the administration’s revenue proposals. Notably, the Treasury spotlighted new goals of expanding crypto reporting requirements for crypto brokers, including exchanges and custodial wallets, to report the beneficial owners of accounts, which would then go into the automated international reporting networks to which the US is already a party. The proposal aims to make this mandatory for tax returns filed starting in 2023.
Conclusion
For now FUD news is dominating the market and there appears to be no clear catalyst as to what may propel the market to the upside. It is not unrealistic to have another test to the downside of $30,000, at which we will likely see another liquidation cascade further lower; sometimes the best time to buy is when there is blood on the streets and the street is too fearful to be greedy. We do not spot that opportunity for now nor any convincing positive driver. We are waiting patiently for better entry levels to meaningfully re-engage the market on the long side again.
Good Luck!
