Your Monthly Brief into the World of Digital Assets
- Macro Environment
- The FED & Recession
- US treasury bans Tornado cash
- AVAX defamation, SEC’s antipathy for non-PoW blockchains and The Merge
- Crypto Top of Mind
- The Merge Trades
- JKL Mining
- Financial Institutions
The Fed & Recession
Top of everyone’s mind is whether the Fed’s tightening will end in a long-lasting recession.
Technically, GDP (down .6% annualised in q2) shows the U.S. economy had two consecutive quarters of negative growth. Conversely, other key U.S. growth indicators hint at a healthy economic environment (GDI is up 1.4% in q2; payroll growth, though slowing, continues to be positive; personal consumptions continue to expand).
The final word on this matter belongs to the National Bureau of Economic Research (NBER)’s Business Cycle Dating Committee, that calculates an average of quarterly GDP and GNI to state a recession. Given the average of the two measures remains positive this year, recession calls have officially been rejected so far.
Wikipedia definition of recession now states:
In the United States, a recession is defined by the National Bureau of Economic Research (NBER) as “a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”.
European Union’s PPI and CPI data has been consistently growing this year, outpacing expectations and raising concerns around global inflation.
On Aug 19, German producer prices print caused calamity in the markets, hitting risk-on assets with particular severity. BTC sold off sharply loosing over 10% of its value in one day; ETH was down 12.9%; SPX down 1.29% on Aug 19.
After the U.S. consumer price index decelerated in July, curbed inflation started to get priced in. However, the latest German print shows relief was premature. German PPI announcement indicates at two things: (1) the probability of the U.S. Federal Reserve raising the federal funds rate 75 basis points increases (2) further headwinds for risk-on assets.
AVAX defamation, SEC’s antipathy for non-PoW blockchains and The Merge
Between the 26th and 29th of August AVAX lost 30% of its value while Bitcoin price only decreased by 8.5%. Ava Labs, the team behind Avalanche, was accused of unethical competition behaviours in a series of leaks from anonymous self-proclaimed whistle-blowers. According to their investigation, Ava Labs is employing Roche Freedman law firm, to sue competitors like Solana with the aim of pushing them under the SEC scrutiny and keeping regulators’ eyes off Avalanche.
While this conspiracy theory should be treated cautiously, one thing is for sure: the SEC is actively trying to regulate the cryptocurrency ecosystem. Its primary focus is to identify cryptocurrencies that should be regulated as securities rather than utility tokens. To do so, the SEC uses the Howey test described below:
The first 3 criteria are common to almost every cryptocurrency. However, the fourth evaluation of the Howey test — return of investment generated by a third identifiable party — is not necessarily true for all cryptocurrencies. If a cryptocurrency is decentralised enough, it shouldn’t fall under the SEC scrutiny. The sufficient extent of decentralisation to disregard a cryptocurrency as a security has never been clearly identified by the SEC.
The most notable example of clash between the SEC and a cryptocurrency on security classification is the ongoing Ripple trial. In December 2020, the SEC sued Ripple founders, Chris Larsen, Brad Garlinghouse, for selling illegally XRP tokens. According to the SEC, the XRP token is a security that requires an authorisation to be issued to the public. On the one hand, the SEC claims that Larsen and Garlinghouse marketed the XRP token as a security, making them an identifiable party that promised expectation of profits. On the other hand, Ripple founders’ case is that XRP is decentralised enough to be classified as a commodity or a currency. Being sued by the SEC is not a positive outlook. When the SEC filed the lawsuit against Ripple founders, XRP price was significantly suppressed, losing almost 70% of its value in one month. XRP example is not the only one and many other cryptocurrencies are under the SEC’s radar.
End of last month, the SEC filed a complaint against a Coinbase employee for insider trading on 25 soon to be listed cryptocurrencies. In this document, SEC officials classified 9 of the 25 cryptocurrencies as securities: AMP, RLY, DDX, XYO, RGT, LCX, POWR, DFX and KROM. What do they all have in common? They are all secured by non-PoW consensus mechanisms.
In 2018, at the Fin-Tech Week Conference, Bill Hinman - ex corporate finance director at the SEC - famously stated that Ethereum couldn’t be considered as a security due to its high level of decentralisation. Actualising this statement, traders should consider the implications of The Merge over ETH’s decentralisation to analyse to which extent the flippening is conceivable.
As Ethereum is moving away from PoW, anyone staking over 32 ETH becomes a validator of the network. As often repeated at Mining Disrupt conference panels, energy consumption is the way to decentralisation, not the consequence. Ethereum’s new consensus mechanism will boost centralisation by facilitating network takeover.
Accumulating staked ETH is much more straightforward than scaling mining capacity. For example, in 2017, 58 major actors of the space, including major exchanges, wanted to increase Bitcoin on chain scalability by increasing block size. Named the New York agreement, this initiative didn’t go forward as the majority of Bitcoin nodes refused the proposal. According to the scalability trilemma, increasing transaction per second impacts security and decentralisation. If Bitcoin would have been a PoS blockchain, these 58 institutions would have just bought the necessary stake in BTC to go forward with their proposal. Ethereum’s transition to PoS in September is a dangerous bet on decentralisation that could attract the eyes of regulators. Negative price implication of potential regulatory scrutiny should be taken in consideration when critically analysing the extensively covered ‘flippening’ trend.
US treasury bans Tornado cash
In March, Ronin - the blockchain tied to Axie Infinity - was hacked for $625 million. It was the biggest hack in crypto history. According to the US Treasury, Lazarus Group, a state official North Korean hacking group, was responsible for the attack. After the hack, funds stolen were deposited on Tornado Cash to erase all traces. According to Nansen, in April, following Ronin hack, ETH deposited on Tornado Cash almost doubled. 18% of all ETH on the platform were deposits made by Ronin hackers.
Tornado Cash breaks the on-chain link between the two parties of a transaction to anonymise the fund owners. In an attempt to limit crypto hacks and facilitate fund recovery, the Office of Foreign Assets Control (OFAC), added Tornado Cash to its blacklist. All US individuals are now prohibited from interacting with Tornado Cash smart contract or may face criminal charges. US regulatory crackdown on crypto mixing services started in May. The US treasury banned Blender.io, also presumedly used by north Korean hackers in Ronin attack. Technically, Tornado Cash is still usable. Since the service is decentralised, it cannot be shut down. Still, US sanctions turned Tornado Cash in a ghost town with deposits down almost 80% this week. The platform’ Git Hub and website have been shut down and its discord deleted.
The Merge Trades
The Merge is imminent and top of everyone’s mind. A few things to know on the progress:
- There has been a movement in the mining community to hard-fork the main Ethereum chain, keeping the existing PoW consensus mechanism alive. Prominent miner Chandler Guo is leading the process. Post-merge, both ETH 2.0 tokens, as well as ETHW (PoW) will be available. A number of exchanges have already volunteered to provide a swap version for hard fork supporters. Yet, market participants are largely sceptical about the success of the hard fork in the long run and warn ETH holders to beware of scams during the transition period.
- Markets are currently implying ETH PoW to be priced ~$30, which is ~1.5% of ETH market cap.
- Market participants only receive ETH PoW if they hold spot ETH, and receive nothing if they hold ETH futures. The typical trade is to buy spot ETH, and sell futures against it. Due to the uncertainty of the Merge date, ETH holders have been selling both the September and December futures contracts.
- The fork is also creating distortions in DeFi borrow markets, where market participants are borrowing ETH in order to receive ETH PoW. As long as the borrow rates paid is lower than the value of the ETH PoW received, it’s profitable to borrow more, pushing up borrow rates further.
Last month at the Mining Disrupt conference, JKL Mining announced the launch of the group’s first mining facility operating in Texas, U.S. Our Data Center currently has a power capacity of 35MW, ready to host over 10,000 miners.
JKL Group has already established itself as an institutional digital asset management firm. Its financial arm — JKL Capital — is broadly diversified across multiple business lines: OTC, Asset Management, Lending and Venture Capital (Read More).
So how does the group’s new mining business complement the established financial operation, and vice versa?
“There are clear synergies between JKL Capital and JKL Mining. JKL Capital’s clients include crypto miners, investors, lenders and borrowers. Having JKL Mining in place, our immediate clients are the miners we host, who may require financing or management of their assets. On the other hand, we have a network of institutional investors with appetite for Bitcoin mining”, commented Xiaoxi Yang, JKL Group’s Head of Mining.
At the moment, JKL Mining operates exclusively as a hosting provider, offering its Data Center facilities to Bitcoin miners and vertically integrated mining firms. However, our expansion plan for 2022 includes building out 4 more mining facilities with a total power capacity of 82MW, split between hosting and self-mining.
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