FIVE MINUTE FINANCE: BTC ORDINALS, NFTS AS SECURITIES, CHINA BEHIND CRYPTO’S NEXT BULL RUN?

Five Minute Finance

Published in

Coinmonks

12 min readFeb 24, 2023

The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.

Let’s see what’s going on this week:

Bitcoin Ordinals: Rock.jpg v.2 — or Something More?
Are NFTs Securities? Federal Court to Take a Closer Look
Coinbase Q4 Earnings and the New ‘Base’ Network
Takeaways from Fed Minutes Meeting
Crypto’s Next Bull Run is Coming From… China?

What’s all this Buzz with Bitcoin Ordinals?

Deep Dive Into Ordinals: Should NFTs Exist On the Bitcoin Blockchain? (link)
First NFT Minted on Litecoin: Ordinals Ported to LTC Blockchain (link)

Satoshi Inscriptions Akin to Stone Tablets of Old

It’s 2023 and NFTs are a new thing — again?

Kind of sounds like groundhog day. But on the Bitcoin blockchain, yes — NFTs are new again, thanks to ordinals.

Bitcoin is known for a lot of things — rat poison squared, a ponzi scheme, and paying for (a now very expensive) pizza to name a few — but the maxis will tell you it’s known for securing sound money with vast amounts of computing power.

Thousands of Bitcoin miners around the world verify each transaction, which are grouped into blocks, and these data blocks are then added to Bitcoin’s decentralized ledger for posterity.

In a way, each BTC is an energy receipt issued by a decentralized computing powerhouse.

Some would say that this energy receipt is too much of a cost for storing value. But in the grander scheme of things, the relative impact is not as large as you might think.

Quantitative carbon emission comparison of various industries. Image credit: University of Cambridge CCAF 2022 Report

But what if Bitcoin mining can be used for more than just securing transactions?

This is where Bitcoin ordinals come into play. Software engineer Casey Rodarmor created a mini-revolution in January after having launched the Bitcoin ordinals protocol.

Without getting too technical, Casey took advantage of the ordinal theory in computer science to inscribe media content onto Bitcoin transactions.

In short, he created Bitcoin NFTs called ordinals. But unlike ‘traditional’ NFTs on Ethereum and other chains that store the actual content (image/video/audio/text) off-chain, such as the IPFS network, Bitcoin ordinals are fully stored on the Bitcoin network.

This has profound implications.

If the Bitcoin network lives forever — or at least for a very long time — the same applies to ordinals as well.

And this may be even more important than you think. Case in point, ebooks as NFTs, or Bitcoin ordinals, could be archived for future generations in their original form, with easy access and transfer of ownership.

For example, controversial censorship or edits to an author’s work — even after their death — wouldn’t be so easy to implement by publishers. Why? The original, unedited version would always be accessible.

In pure textual format, literary works consisting of 400 pages could be made into ordinal blocks of around 2–4 megabytes (MB).

Since Bitcoin ordinals gained traction in January, Bitcoin’s average block size nearly doubled, going from 1.5–2 MB to 3–3.5 MB range.

Image credit: Glassnode.

In less than two months, over 168,000 Bitcoin ordinals, or inscriptions, have been minted, vying for supremacy between text vs. images.

Ordinals by media type. Image credit: Dune analytics

As a side effect, Taproot adoption has also been skyrocketing. This was a major Bitcoin upgrade in November 2021 that made Bitcoin ordinals possible with extra smart contract capability and reduced transaction fees.

Users have already spent $1.2 million in BTC fees for inscribing ordinals, further incentivizing Bitcoin miners. Although this brand new Bitcoin frontier puts a strain on the chain, layer-2 Lightning Network is there to help, with a capacity that recently notched an all-time high.

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Wait, NFTs are Securities Now, Too?

Dapper Labs Must Face Class Action Alleging its NBA NFTs Are Securities (link)

New Securities Legal Battle Stirred

We all know of the ongoing tension between US financial regulators and the digital asset space. Recently, this tension has specifically applied to digital assets hosted on proof-of-stake blockchains, as their regulatory status as a security, commodity, or other, has come into question.

The difference between a security and a commodity is quite drastic. If a digital asset is deemed a security, a wide range of restrictions are imposed: how it can be initially offered, who can buy and sell it, how it is traded, legal compliance costs, etc.

In this week’s ‘looming threat of becoming a security’ edition, Dapper Labs is in the crosshairs. The Web3 company is best known for its NBA Top Shots lineup of NFTs called ‘Moments’. As the name suggests, these NFTs immortalize NBA highlights, such as players’ dunks or game-winning shots, in blockchain form.

Dapper Labs mints NBA Top Shots NFTs on its own Flow blockchain as high-quality video reels. Image credit: NBATopShot.com

As licensed digital collectibles attached to such a popular sport, Moments have been a consistently high-performing NFT enterprise, generating $2.4 million in sales in February alone.

So, what’s the problem, isn’t this just like collecting or trading vintage cardboard basketball cards?

The story gets a bit complicated. Dapper Labs first received a class-action lawsuit in May 2021, wherein Momento buyers accused the company of minting the NFTs as unregistered securities.

“Moments are securities because they constitute an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others,”

The reasoning was that Moments’ value relies on the success of Dapper Labs’ Flow blockchain that hosts them. In other words, the value of the proprietary Flow blockchain, powered by its native FLOW token, is itself boosted by the sales of the NFTs it hosts.

In return, last September, Dapper Labs moved to dismiss the lawsuit because plaintiffs can’t “make a federal securities case over basketball cards”.

“Basketball cards are not securities. Pokémon cards are not securities. Baseball cards are not securities. Common sense says so. The law says so. And, courts say so,”

But the New York court dismissed the motion to dismiss the lawsuit this past Wednesday. Apparently, the court is seeking further nuance on whether Moments are commodities, which should be decided in a trial.

“In the most general terms, the Court is asked to assess whether Moments are more like cardboard basketball cards, i.e., commodities, or more like crypto tokens. As the ICO Cases reveal, tokens offered as part of ICOs often bear the hallmarks of a security. Here, it is a close call and the Court’s decision is narrow.”

This trial may become the new Ripple Labs vs. the SEC saga, but for NFTs. On face value, NFTs are collectibles, but they could also be construed as ‘investment contracts’ if there is expectation of profit on secondary markets.

Further, Dapper Labs gets a cut when users make certain transfers. It is then a question of whether Moments NFTs come with a reasonable expectation of profits. When Dapper Labs describes their NFTs as “objects of play”, they are effectively invoking the United Housing Foundation, Inc. v. Forman Supreme Court case.

In that case, the Supreme Court said that an investment is “where one parts with his money in the hope of receiving profits from the efforts of others, and not where he purchases a commodity for personal consumption or living quarters for personal use.”

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Coinbase Earnings: Crypto Winter Still Cold

Coinbase Fails to Rally Despite Improving Numbers (link)

Coinbase Beats Revenue Estimates, but Userbase Declines

Favored by BlackRock and Visa, Coinbase has been building itself up as the ultimate US-based crypto exchange. As the first exchange that went public, Coinbase (COIN) took its institution-embedding very seriously, going as far as selling its blockchain analytics tools to federal law enforcement agencies.

Yet, Coinbase maintains only a fraction of the market share (4.31%) compared to Binance (61.31%). Reliant on crypto flows, Coinbase fared poorly over a one-year period, with COIN shares down by -64%. However, since the start of the year, COIN stock is up +85%.

Year-over-year Coinbase (COIN) performance. Image credit: Trading View

The latest Coinbase earnings Q4 ’22 report sheds some light on what we can expect from the US’ largest crypto platform. In Q4, Coinbase:

Beat revenue estimates of $590 million with $629 million.
Beat the estimated loss per share of $2.55 (via Refinitiv) with $2.46.
Reported a non-adjusted net loss of -$557 million, a far cry from Q4 ’21 bullrun peak of +840 million.

Overall, Coinbase aligned its year-over-year -75% revenue downturn with its stock price drop, as the crypto cycle turned from bullish to bearish.

Yet, the discount only spurred Cathie Wood’s ARK fund to buy an extra $13.2 million worth of Coinbase shares, accounting for $30 million invested in February.

Although the COIN discount was to be expected, the worrying part is the falling user base. Compared to Q3, Coinbase’s monthly transacting users (MTUs) fell from 8.5 million to 8.3 million in Q4.

But, there are several remedies Coinbase is deploying to get lean and profitable:

Since mid-2022, Coinbase laid off 18% of its workforce, at 1,100, not ruling out additional layoff waves this year.
As transaction revenue declined by 12% in Q4, the exchange is looking for subscription-based services. Staking, Earn and Custody products have generated just over $200 million in Q4.

Most importantly, Coinbase announced a major stepping stone in the crypto space with the launch of its own Base network.

Base testnet went live yesterday. This layer-2 network will use coding from Ethereum’s Optimism L2 scaling solution, with the goal to onboard +1 billion users to decentralized finance.

Base will use the existing ETH token instead of a native one for paying network fees.

Additionally, Base will serve as a bridge to non-Ethereum ecosystems, such as Bitcoin, Solana, and others.

Cryptocurrencies supported on Base. Image credit: Coinbase

Since July 2022, ETH has outperformed BTC, up 61% since that time, compared to BTC’s 29% climb. With ETH pushed further by Base, it could go on to outperform Bitcoin even more than it already has.

Fed’s Goal Post Moving Up?

Fed Minutes Show Members Resolved to Keep Fighting Inflation with Rate Hikes (link)

More Fed Hikes Incoming, but With One Caveat

Another month, another deliberation by the money committee. The dollar’s global reserve status gives the Federal Reserve the de facto world bank status. And the 12 Fed governors are listened to closely as they set the price of money and its creation rate.

Wednesday’s released FOMC minutes pointed to concerns of inflation being stickier than initially thought. With the labor market still remaining “very tight”, the rate of inflation going down might not be enough.

To that effect, FOMC members plan for ongoing interest rate hikes this year to get to the coveted 2% inflation rate.

“The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,”

Governor Bullard repeated his conviction that the Fed should up its hiking game with 50 bps bumps, increasing the rate to its 5.375% peak sooner from the present 4.5–4.75% range.

Presently, the market consensus for the next hike on March 22nd is 25 bps, with a probability of 76%.

Interestingly, the 2% inflation target could shift in the future. The White House is considering two candidates for the Fed Vice Chair position. One of them is Janice Eberly.

In 2019, she published a paper stating that a 3% inflation target would have led to a faster recovery from the 2008 Great Recession.

LSAPs refers to large-scale asset purchases that contribute to Fed’s policy creation.

If Eberly becomes the next Fed Vice Chair and nudges the new goal post, that would certainly give the central bank a much-needed leeway between soft and hard landing.

Crypto’s Next Bull Run Will Come From… China?

HK Allocates $6.4M to Web3, Seeks to Unlock Potential of “Third Generation Internet” (link)

A Wedge Between the US Regulatory Hammer and a China-Based Oasis

A fresh crypto narrative is in the works.

It may be strange, but the next crypt bull run may come from the most crypto-hostile nation in the world — China.

Last Sunday, Cameron Winklevoss of Gemini exchange first floated the notion.

Image courtesy of Twitter.

This was after another exchange boss, Brain Armstrong of Coinbase, said the emerging crypto crackdown in the US (which some have deemed Operation Choke Point 2.0) would lead to a blockchain exodus from the US, and into Hong Kong, the EU, and the UK.

Image courtesy of Twitter.

Indeed, on Tuesday, Bloomberg reported that Hong Kong’s crypto hub ambition is ‘quietly backed from Beijing’, the political capital of China.

The HK’s equivalent to the US SEC, the SFC, proposed a new set of rules on Monday that have a “regulate to protect” approach, as opposed to the SEC’s notorious ‘arbitrary sanction by legislative void’ approach.

When new HK rules go into effect, retail investors will have access to licensed crypto exchanges, but with some restrictions, such as derivatives trading.

The China-bull trigger narrative is further boosted by the People’s Bank of China injecting $92 billion to stimulate the economy. Just as we saw in the US during 2020/21, the monetary flooding appears to have boosted digital assets based in China: Conflux, Neo, and Flamingo all entered double-digit gains territory.

Chinese coins mimick the crypto performance following the Fed’s unprecedented stimulatory injections. Image credit: Trading View

But as you can see, the boost was short lived.

Nonetheless, if China indeed nurtures a regulated crypto oasis in Hong Kong, pulling investors from the US, this may be a foreshadowing of China-driven crypto resurgence.

Image courtesy of Twitter.

Tweets of the Week

Microsoft still has a higher market cap than the entire Energy sector in the S&P 500 today.
Keep in mind:
Exxon *alone* produces just as much annual free cash flow as $MSFT today.
And no, this is not just a specific case with $XOM.
All the energy companies in the S&P 500 are profitable on a free-cash-flow basis today.
Either tech companies are still too expensive, or energy stocks remain a bargain… or both.

@TaviCosta

At a time like this, when earnings are falling and hopes for an imminent Fed pivot are fading fast, the market is in a tough spot. History illustrates the challenge: 🧵

@TimmerFidelity

Subprime car loans in delinquency have hit a 13-year high. Another sign that lower income consumers are struggling with debt.

@Mayhem4Markets

Who needs dividend stocks when a 100% risk-free savings account is paying 4.75% yield?
The going rate for a Goldman Sachs Marcus savings account is now 3.75%. I have received a 1% boost through Jan 2025 due to referrals.
4.75% is the highest savings yield in my adult life 🔥.

@cperruna