Carbono Insights #86 | A Positive Shift in Fortune

Is this the onset of a bull trend, or is it simply a fortunate streak? The indicators advise caution because, even though prices are rising (with BTC taking the lead and ETH recently following suit), liquidity remains somewhat hesitant.

Many are banking big on the approval of an ETF, which seems reasonable given its potential impact. An ETF could serve as our four-leaf clover, ushering in liquidity, clear regulatory frameworks, enhancing the retail user experience, and bolstering marketing efforts in the crypto space.

While the market may not be unequivocally bullish just yet, this newsletter certainly is. The verdict in SBF’s case is seen as a victory for the crypto industry. Moreover, the SEC is engaged in discussions with PayPal regarding their stablecoin. Data from digital asset funds and insights from on-chain data provide reasons for optimism. Even Musk’s critique of NFTs carries a hint of praise.

1. BTC | What the ETF brings

One of the main narratives lifting the price of bitcoin and the spirits of all of crypto is the likely approval, with an undefined date, of a spot bitcoin ETF. As we’ll see in a minute, this is not the only explanation, but it certainly is making the most buzz.

The expectation of a BTC ETF bears a bunch of promises:

• The first and most apparent is liquidity. Investors will flood to bitcoin and, paraphrasing a hypothetical crypto bro, buy our bags high. But liquidity is a consequence of three other factors.
• Regulation is one of them. Approving an ETF would give crypto a regulated avenue for retail investors. Everyone in finance knows, or at least suspects, that crypto is here to stay and that they’d better hop on board, or they’ll miss the train. An ETF would give the much-expected regulatory clarity.
• User experience. An ETF travels through the usual financial channels. No wallets, no seed phrases, no sketchy centralized exchanges, no WTF is DeFi. Humans speaking to bank clerks can do.
• Marketing. Once ETFs are on, it will be like if Bitcoin had hired the marketing and sales departments of half a dozen massive financial firms.

2. Bitcoin | Other reasons to believe

Some argue that the recent surge in BTC price is driven by factors beyond the speculative buzz surrounding the approval of an ETF. Notably, two authoritative voices have steered the conversation in a different direction, emphasizing a broader and more substantial trend linking this surge to macroeconomic forces.

QCP Capital, a respected Asian cryptocurrency trading firm, attributes this rally to macroeconomic dynamics. They said, “This recent rally is less tied to spot ETF developments and more closely connected to macroeconomic forces. A smaller-than-expected Treasury Q1 supply estimate and a dovish FOMC statement resulted in a decline in bond yields, subsequently propelling risk assets to new heights.”

Meanwhile, Arthur Hayes, co-founder and former CEO of the cryptocurrency exchange BitMEX and author of (very) extensive essays on crypto, takes his analysis a step further. He speculates on the influence of the ongoing armed conflicts in the crypto world. He suggests that the bearish trend has ended, stating, “A proxy conflict in Israel evolving into a global conflict and a Federal Reserve that has adopted a cautious stance spell trouble for treasuries.”

Source: Arthur Hayes on X

3. Regulation | PayPal subpoenaed

PayPal has been served with a subpoena by the U.S. Securities and Exchange Commission (SEC). Although the specific details of the subpoena’s content remain undisclosed, a PayPal spokesperson stated: “The subpoena requests the production of documents, and we are actively cooperating with the SEC in fulfilling this request.”

Recently, PayPal recently introduced PYUSD, a stablecoin pegged to the U.S. dollar and backed by dollar deposits, U.S. treasuries, and cash equivalents. PYUSD can be both minted and redeemed via the PayPal platform. Although it does not generate income for its holders, it does for PayPal itself.

It is worth highlighting that PYUSD does not meet the criteria of the Howey Test, the legal rule of thumb used to determine whether an asset qualifies as a security. Therefore, the issuance of the subpoena is rooted in regulatory concerns regarding stablecoins in general.

Regulators have strongly expressed their concerns about stablecoins serving as potential sources of contagion for traditional financial markets. We should add, too, that stablecoins pose a systemic challenge to their authority in the financial sphere.

4. SBF Trial | Guilty

Sam Bankman-Fried has been found guilty of all seven charges against him, including wire fraud and conspiracy to commit wire fraud against FTX customers and Alameda Research lenders, conspiracy to commit securities fraud, conspiracy to commit commodities fraud against FTX investors, and conspiracy to commit money laundering. The jury’s verdict holds him accountable for all offenses after an unrelenting trial.

Hopefully, in the future, people will come to acknowledge that the cryptocurrency industry played a more significant role in exposing SBF’s misconduct than regulators. It was not the Securities and Exchange Commission (SEC) but rather the dynamics of the market, pressure from his industry competitors, and the inherent transparency of the cryptocurrency space that showed that the emperor had no clothes. In the eyes of politicians and regulators, FTX was once viewed as a reputable entity within the crypto industry.

5. Market trends | Fund inflows and on-chain data

For the sixth week in a row, digital asset funds have been pouring capital into crypto, according to the weekly report shared by James Butterfill from Coinshares. In the last two days, in record amounts unseen since the end of December 2021, in the last days of the last bull market.

Bitcoin takes the lion’s share of the inflows, but Ethereum seems to be slowly catching up.

Fund inflows match the general sentiment and the on-chain data. Bitcoin is on the rise. We’ll need to see this solidify before we claim it’s the end of the bear market, but the numbers are showing optimism.

DeFi TVL and NFT sales are also greener than in the latest months. But be aware that this could respond to a dose of hopium from within the lines of crypto. The pump could come from crypto-natives getting more playful with their funds now that their dollar value is recovering. Other metrics, like stablecoin market cap, remain more stable (no pun intended).

We’ll need more weeks of inflows like this before claiming our victory.

6. NFTs | Musk’s reasonable critique

You can have your opinions about Elon Musk, but you can’t deny his knowledge of cryptocurrency. During a recent appearance on Joe Rogan’s podcast, the former CEO of X stated:

“The interesting thing is that the NFT isn’t even on the blockchain; it’s merely a URL linking to the JPEG,” Musk explained. “Ideally, you should encode the JPEG on the blockchain. If the company hosting the image goes out of business, you’ll still have access to the image.”

This may come as news to many people in the cryptocurrency community, but he’s right. Despite the elevator pitch, NFTs are only sometimes as secure and immutable as they claim. While they are indeed records kept on a safe and immutable ledger -the blockchain- the information they contain can sometimes be fragile. Many NFTs in the market are essentially claims to content stored on a centralized URL. If the company managing the servers behind that URL were to fail, the content of said NFT would be lost.

However, this is not always the case, and that’s why Musk’s critique has a silver lining: many NFTs are as safe and immutable as he’d want them to be. In many collections, all the information within an NFT, including the image, is contained or encoded within the publicly shared message on the blockchain. In such instances, your ownership is unquestionable.