The cryptocurrency market feels the heat as investors carefully assess the ongoing debt ceiling debate and liquidity concerns.
How has it affected Bitcoin? Let’s take a closer look at the market in the third week of May.
The Crypto Macro Scene
Binance grabbed attention by announcing its withdrawal from Canada, citing the ever-changing regulatory environment in the country. On another note, the European Union has revealed its plans to impose taxes on NFTs and crypto firms.
The EU plans to force crypto companies to give tax authorities details of clients' holdings.
Controversially, the law still includes platforms for trading certain NFTs and providers from outside the bloc with EU clients.https://t.co/Pqe2E2JHy7 pic.twitter.com/b0r7Whsin3
— CoinDesk (@CoinDesk) May 12, 2023
While relocating some of its operations overseas, Coinbase maintains its commitment to equip itself for the ongoing regulatory hurdles in the United States. Interestingly, some US government organizations have aligned with Coinbase in their fight against the SEC, injecting an intriguing twist into the situation.
Also, this week we witnessed industry participants submitting their comments on the proposed change to the custody rule by the US Securities and Exchange Commission (SEC).
On the other hand, prominent players such as Andreessen Horowitz, Paradigm, the Blockchain Association, Coinbase, and Grayscale criticized the rule and accused the SEC of exceeding its statutory authority. To provide some context, around two months ago, the SEC proposed several alterations to the existing custody rule. Currently, registered investment advisers (RIAs) must hold clients’ funds and securities with a “qualified custodian” in separate accounts under the client’s name.
The SEC intends to expand this rule to cover “all client assets,” including cryptocurrencies, which means RIAs would need to ensure that everything they manage on behalf of their clients is ‘custodied’ with a qualified custodian. This proposed change will impact the operations of 15,000 RIAs significantly.
JUST IN – 🇺🇸 US Congressman sent SEC Chair Gensler a letter regarding 850k investors who are trapped in Grayscale #Bitcoin Trust, citing "investors stand to lose tens of billions of dollars" pic.twitter.com/qeBLUzlwta
— P2P (@P___2___P) May 12, 2023
While the SEC claims the rule changes aim to enhance investor protection, industry participants, particularly those managing crypto assets, argue that the intended changes would have the opposite effect.
They say these changes effectively impose a “shadow ban” on crypto assets by discouraging digital asset-native custodians from offering custodial services, thereby reducing client protections.
Comment letters addressing the proposed rules highlight three instances where the changes negatively affect RIAs, custodians, and investors.
DeFi Under Threat?
DeFi is on the verge of experiencing a potential explosion, presenting positive and negative outcomes.
a) Let’s Begin with the Positive Aspect.
The Uniswap community is discussing a proposal to allocate a portion of trading fees from the decentralized exchange to the community treasury. This proposal hints at a subsequent plan that could utilize some of these fees to buy back and burn the UNI token. If approved, other DeFi protocols will likely follow suit.
The Uni fee switch is a dormant DAO-controlled parameter in Uniswap that allows a portion of trading fees to be routed to a DAO specified address. The cut is taken at the expense of liquidity providers.
-In UNI V2, a flat 1/6 fee.
-In UNI V3, 1/n fee, where 10≥n≥4 pic.twitter.com/Gy3J7f53ub
— Matt 🟪 (@MattFiebach) May 15, 2023
DeFi protocols generate substantial fees, trailing only behind BTC and ETH. Introducing new tokenomics that leverage even a tiny fraction of these fees to enhance the value of governance tokens could lead to a significant surge.
However, it is crucial to consider that the demand and fees for DeFi protocols have been low due to the bear market. Introducing such tokenomics could also introduce unforeseen regulatory risks and scrutiny.
b) Let’s Begin with the Negative Aspect.
The US government is currently deliberating whether to raise the debt ceiling, and failure to reach an agreement by June 1st could result in a potential default on the US government’s debt. Treasury Secretary Janet Yellen has recently cautioned that this could create turmoil in global markets and pose significant issues for stablecoins and, by extension, DeFi.
Interestingly, most stablecoins in circulation are backed by US government debt, commonly known as US bonds, making them vulnerable to such a situation. It is essential to clarify that the likelihood of a US government default is extremely low. However, the volatility in the bond market could pose challenges for stablecoins like USDC, which are predominantly crucial in DeFi.
🚨 #DeFi Wild West is OVER!
US about to regulate stablecoins 👇
If you issue an unlicensed stable anywhere, you go to prison for 5 years.
Stables backed by the same project will be illegal (UST & Luna)
USDC to pump & ETH will likely censor a lot of tokens.
Buy #BTC instead. pic.twitter.com/bjHEPNGmAR
— Duo Nine ⚡ discord.gg/ycc (@DU09BTC) April 16, 2023
Thankfully, Circle, the issuer of USDC, has adjusted the composition of its reserves to prepare for the possibility of the debt ceiling not being raised by the June 1st deadline.
Are There Any Risks to this DeFi Threat?
Unfortunately, USDT (Tether) faces a certain level of risk in this context. Tether recently disclosed funds held in money market funds back nearly 10% of the circulating USDT. Money market funds typically invest in low-risk interest-rate products, including US government debt.
Jared Dillian, a former Lehman Brothers trader, warned that money market funds could restrict withdrawals if volatility in the bond market persists. It could create challenges for stablecoins with significant reserves in money market funds.
Today #tether announces its Q1 2023 Assurance Report (attestation) 👀
– Net profit for this quarter of $1.48bn leading to a surplus over reserves of $2.44B- an all time high!! 🤯
– This report adds new explicit separate categories for our #Bitcoin and Gold 🪙 holdings,… https://t.co/3ZzrhtJ8PB
— Paolo Ardoino 🍐 (@paoloardoino) May 10, 2023
While a de-pegging of USDC could cause chaos in DeFi, a de-pegging of USDT would have broader repercussions in the overall crypto market, given its extensive usage for trading. However, it is essential to note that the chances of USDT de-pegging are still slim. Tether has likely adjusted its reserves accordingly. Nevertheless, the ongoing debt ceiling debate could introduce volatility for USDT and USDC.
If the US government were to default on its debt, the implications would go far beyond crypto, becoming a concern of utmost significance.
Tether Buying BTC?
Like many established crypto firms, Tether has endured its fair share of scrutiny and controversy. However, it now seems to be charting a new course.
In its Q1 2023 assurance report, Tether proudly announces that its reserves have reached an all-time high of $2.44 billion, marking an impressive increase of $1.48 billion in the first quarter of 2023. This achievement emphasizes Tether’s commitment to maintaining a reserve ratio exceeding 1:1. They have truly excelled! Nevertheless, for most crypto enthusiasts, the real excitement lies elsewhere – Tether’s foray into Bitcoin.
According to the report, Tether holds approximately $1.5 billion worth of Bitcoin, accounting for 2% of its total reserves. This milestone holds symbolic significance. It not only signifies Tether’s shift away from riskier reserves like commercial paper but also showcases the growing maturity of cryptocurrencies in the financial landscape.
Tether seems to be successfully treading a path others have struggled to navigate. Additionally, Tether has decided to reduce risk by investing in the repo market, precious metals, and corporate bonds.
Fascinatingly, Tether’s recent achievements owe much to the Federal Reserve. The substantial profits Tether has generated can be primarily attributed to the high yields available in the bond market, thanks to the monetary policy implemented by the Fed.
While discussions on yield curve rates may have faded from the spotlight recently, they continue to present lucrative opportunities, as evidenced below.
Derivatives Trading Market Share Hit ATH
April witnessed a significant downturn in trading volume on centralized exchanges, with both spot and derivatives trading experiencing a substantial decline. The combined trading volume fell by 27.9% to $2.77 trillion, marking the first month-on-month decrease in trading volume this year and reaching the lowest monthly volume recorded since December 2022.
Derivatives trading volume on centralized exchanges took a hit, dropping by 23.3% to $2.15 trillion. At the same time, spot trading experienced an even more pronounced decline, falling by 40.2% to $621 billion. Interestingly, the market share of derivatives trading saw an upward trend for the second consecutive month, reaching an all-time high of 77.6%.
Among the derivatives trading platforms, Binance retained its position as the largest, with a trading volume of $1.32 trillion, representing a 61.4% market share. Following closely behind were OKX and Bybit, occupying the second and third place, respectively, with market shares of 15.0% and 14.6%.
Blockchain analysis reveals a noteworthy trend in the Bitcoin market: owners hold onto their coins for extended periods. The percentage and absolute number of coins that have remained dormant for a year or longer are reaching or surpassing all-time highs.
In fact, over two-thirds of the total Bitcoin supply, which amounts to 13.1 million out of the existing 19.4 million Bitcoins, have yet to be moved.
This growing inclination towards holding Bitcoin signifies a shift in the perception of Bitcoin ownership. While media attention often focuses on short-term price fluctuations and trading activities, the data from the blockchain indicates an increasing utilization of Bitcoin as a long-term investment asset.
Besides, this trend carries significant second-order implications. As people hold more Bitcoins for extended periods, the available supply for short-term trading diminishes. It could potentially lead to heightened volatility or increased trading costs due to wider spreads.
Moreover, with fewer Bitcoins accessible for purchase by others, increasing demand for Bitcoin may exert upward pressure on prices.
Long-Term Holder Coins Held At A Loss
Presently, a significant number of (~4.3 million) Long-Term Holder coins are held at a loss, accounting for approximately 22.2% of the circulating supply.
Despite facing substantial unrealized losses, the resolve of these HODLers remains unwavering, as the majority of these underwater coins remain stationary without being moved or sold.
BTC – ETH Correlation Hits Lowest Since 2021
The rolling correlation between BTC and ETH has declined from 96% to 77% since mid-March, marking its lowest level since November 2021.
This weakening correlation coincides with a loss of momentum for ETH following the Shapella upgrade, resulting in a decrease of nearly 14%.
On the other hand, BTC experienced a decline of approximately 11% during the same period. These developments suggest that both BTC and ETH are increasingly influenced by distinct individual factors, indicating a divergence in their respective market dynamics.
Digital Asset Investment Products Sees 4th Consecutive Week of Outflows
Investment products in the digital asset space experienced their fourth consecutive week of outflows, with US$54 million being withdrawn.
It brings the cumulative outflow to US$200 million, which accounts for 0.6% of the total assets under management (AuM). The recent price decline has contributed to a 13% reduction in total AuM since reaching its peak in mid-April. Moreover, Bitcoin witnessed outflows amounting to US$38 million, representing 80% of the total outflows.
When combined with outflows from short-bitcoin positions, it becomes apparent that investor activity has predominantly focused on this particular asset. While multi-asset investments saw outflows of US$7 million last week, inflows across eight altcoin assets were unusual.
The data suggests that investors are becoming more adventurous and discerning in their investment choices, seeking opportunities beyond traditional assets.
Miner Revenue From Fees Hits 2-Year High
In the wake of a substantial surge in ordinal transactions, transaction fees paid to miners have experienced an explosion. This fee surge now accounts for approximately 32% of mining revenue, a pattern typically observable during bull market peaks rather than bear markets- defying current market sentiment.
This shift is primarily due to the increased utilization of the taproot update It has facilitated the integration of NFTs and BRC-20 tokens into the Bitcoin blockchain.
While this may pose challenges for individuals seeking to conduct regular transactions. It has generated positive implications for mining revenue and economic incentives within the mining sector. Moreover, this phenomenon has triggered changes in other on-chain metrics, including a notable increase in active addresses and transactions.
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