A monthly review of what's happening in the crypto markets enriched with institutional research on key industry topics in collaboration with Swiss digital asset specialist, 21Shares AG.
The first month of the year 2021 was filled with unforgettable events, which set the tone for the year’s remainder. It would be an understatement to say that this past month didn’t feel like an eventful year akin to 2020.
Starting on January 6th with the capitol’s storming carried out by a mob of Trump supporters incentivised by former President Trump himself, they attempted to protest against the wildly-proven and accepted US election results. This moment led the US to a security crisis before the inauguration of the then President-elect Joe Biden scheduled for January 20th. Mr Trump effectively became the first and only president in US history to be impeached a second time.
OCC Authorised Banks to Use Blockchains as Payment Infrastructures
In the crypto world, the OCC, the US regulatory body serving to charter, supervise and all national banks released a guideline allowing the integration of public blockchains and stablecoins into the US financial system. This crypto-infrastructure integration is a significant milestone in the adoption cycle of Bitcoin alongside stablecoins — putting public blockchains in the same pedestal as other payment networks such as Fedwire, CHIPS and SWIFT if not better.
After Reaching New Highs, Bitcoin Experienced Its first Correction
As Bitcoin broke the $30K mark for the first time on January 2nd the rise to $40K was short-lived as Finland announced on Thursday, January 7th, their right to sell over $69 million worth Bitcoin which was seized from drug traders. Although there is no publicly-available evidence to this sale, we suspect it became part of the bearish sentiment over the following weekend for short-term traders. On January 11th, the crypto market experienced its first correction of as much as 26%, which started on Sunday, January 10th as a derivative-driven flash crash probably due to weekend traders on unregulated crypto exchanges becoming too levered on the way up to $40K and cascading liquidations of over $2 billion.
This has been exacerbated by issues with some other crypto exchanges like Coinbase which were experiencing service outages preventing some users' bids from going through — making the sell pressure even more noticeable due to price discrepancies against other exchanges. On top of that, the issue with Coinbase played an essential role in fueling the market downtrend in the futures markets as exchanges rely on Coinbase’s price feed for the rate calculations.
For the record, although past performances are not always an accurate indication of future results, on January 5th, 2017 Bitcoin’s price dumped 20% after recently making new all-time highs of over $1K after a 3-year bear market Bitcoin then appreciated 2,500% by the end of that year. On January 11th 2021, Bitcoin dropped by more than 20% after recently breaking a new all-time high of $30K after a 3-year bear market. While the previous bull run of 2017 was mostly retail-driven, it is organic demand and institutional driven and most importantly based on macroeconomic circumstances.
Gary Gensler, the New Face of the SEC
The crypto industry’s excellent news is Gary Gensler’s nomination as his crypto-friendly stance and in-depth knowledge of Bitcoin and its underlying technology, the blockchain — could potentially be opening the door for a US Bitcoin ETF. At 21shares, we anticipate Gensler’s tenure to provide greater regulatory clarity specifically in the United States through pragmatic regulatory proposals and actions similar to Ripple’s lawsuit leading Grayscale and Kraken to dissolve XRP from their product suite in the US. For the record, in the past years, Gensler was teaching a course called “Blockchain and Money” at MIT, as a review of Bitcoin and understanding the commercial, technical, and public policy fundamentals of blockchain technology, distributed ledgers, and smart contracts.
Gensler’s designation occurs at the perfect time as the crypto market, valued at over $1 trillion, has significantly matured over the past three years since the ICO craze. As a testament to this maturity, Anchorage became the first federally-chartered digital asset bank. Simultaneously, the NYC-based crypto exchange, Gemini led by early Bitcoin investors, the Winklevoss brothers might go public going forward becoming the second crypto-centric business to IPO alongside its competitor Coinbase.
Additional Institutional Recognition of Bitcoin & The Continued Rise of Ethereum
As part of our governance on transparency with our ETPs, for the first time Ether has overtaken Bitcoin in the allocation of the 21Shares composition of HODL ETP — our basket of the top 5 crypto assets ranked by market cap. Bespoke crypto indices are a great way to diversify in the industry given that extra performance, witnessed on Ether in the last two weeks. In four weeks since the start of the year 2021, Ethereum has almost doubled in value with a YTD performance of 93.8% — while Bitcoin has returned 20.2% so far. Nonetheless, Bitcoin is the premier asset presented to investors.
The maturity of this industry has paved the way for smart money to view crypto assets with brighter lenses. For example, there have been lots of talks around the illicit use cases of crypto assets, which have historically put a strain on the reputation of Bitcoin. The leading blockchain analytics firm Chainalysis Inc. published its annual report and discovered that only 0.34% of all economic activity in the crypto space is linked to criminal activities. These findings will alleviate the concerns mentioned above related to Bitcoin.
Also, the largest asset manager in the world with over $7 trillion in assets under management, BlackRock filed last week two prospectuses with the U.S. Securities and Exchange Commission (SEC) to rightfully invest in Bitcoin's futures through two of its funds — BlackRock Funds V and BlackRock Global Allocation Fund, Inc. Ray Dalio, long-time Bitcoin sceptic and founder of the largest hedge fund in the world, Bridgewater — has had a somewhat more positive tone towards Bitcoin calling it a “hell of an invention” in his newsletter. In the same vein, prestigious universities’ endowments with tens of billions of dollars such as Harvard and Yale — $41.9 billion and $30.3 billion respectively purchased the crypto asset this past year. We also see corporates such as Marathon Patent Group and MicroStrategy who have continued to allocate over the last quarter — all of those investments are a testament to the increased smart-money adoption.
To that end, politicians such as the former Canadian prime minister named Bitcoin as a potential reserve currency, while professional investors such as UK fund manager, Ruffer, praised the cryptoasset in their investor letter — despite the FCA’s ban and a controversial but for the moment irrelevant petition to ban crypto-related transactions in the UK:
“We have done much work on assessing the danger that bitcoin is a wrong’un. We have been watching it for a longish time, and our judgement is that it is a unique beast as an emerging store of value, blending some of the benefits of technology and gold.”
The Misinformation on Bitcoin’s Double Spend
In the week of January 18th, journalists raised concerns about an alleged double-spend on the Bitcoin blockchain due to a chain re-organization — which initiated panic and led to a 10%+ market correction. During the confusion and an alarming amount of misinformation, the majority (~53%) of the market participants selling their Bitcoin were new entrants that bought the crypto asset over the last three months and predominantly in-the-money. Preventing double-spending is a quintessential feature of Bitcoin because such an exploit could threaten the asset’s scarcity. In other words, spending as many bitcoins as one would want by creating more bitcoins than one initially had.
To respond to rumours, no double spend happened — a market participant simply tried to speed up the time of her unconfirmed transaction (i.e., not added in the blockchain yet) by increasing the fee of her transaction significantly — after a day of waiting as her first transaction, worth approximately $25, including a fee that was too small to be accepted by miners. As miners are incentivised to win the block reward of 6.25 BTC in addition to the collected transaction fees within the block, they’ll prioritise the transactions with the highest fees. Therefore, it’s common to increase the fee of an unconfirmed transaction to speed up the confirmation process. Find more details on the subject in this article published by Deribit Insights.
WallStreetBets, The Perfect Marketing Campaign for Bitcoin and Decentralized Finance
Over the last few days of this past month, we saw a large focus around a particular online Reddit community, Wall Street Bets, and the community’s attempts to fight back at the short-selling of a once-beloved stock, Gamestop. Since the start of the year, as users within the Wall Street Bets community have tried to incite a gamma and short squeeze against short sellers and market makers, Gamestop’s stock returned as much as 2000% at one point since the start of the year. There have been many takes on this topic, but please look at the following Guardian article if you are out of the loop.
A decentralised community’s ability to coordinate and attempt to “fight back” at the establishment hints at the appeal of decentralised finance, which can be quickly shut down on a whim unlike services such as Robinhood. We expect the success and failures of the WallStreetBets movement to act as an impetus behind the further interest in decentralised finance and protocols.
As evidenced by the recent comments in the aftermath of this incident, Elon Musk admitted in an interview on Clubhouse to regret not having bought Bitcoin in 2013 while showing strong support for the crypto asset and recognition for its growing acceptance amongst conventional finance. And finally, in the main Bitcoin subreddit, a participant admitted to understanding the potential of Bitcoin fully:
"All the years I talked trash about bitcoin, I apologise, now I genuinely understand the value of having a system not controlled by the government, where they can not on a whim decide to inflate the money supply and bail out their friends, while you carry the load in the form of additional taxes and inflation."
