Oct 31, 2022
October Overview
Your Monthly Brief into the World of Digital Assets
MARKET UPDATE
JKL GROUP INCUBATES LENA — WEB3 LIQUIDITY PROTOCOL
REGULATORS
- Drafts after drafts, The MiCA Law has finally been voted by the EU parliament
FINANCIAL INSTITUTIONS
- Even during the bear market, Wall Street is pouring into crypto
CRYPTO PROJECTS
- What happened to Mango Markets?
MINING
COMPANIES
CRYPTO PREVIEW & BITCOIN CALENDAR
- Macroeconomic events
-Crypto events
Market update
Market-wide sentiment appears to be improving with major central banks leaning towards a relatively dovish stance. Bank of Canada surprised markets with a 50 bps hike, which is lighter than expected. The European Central Bank announced a 75 bps hike as expected, but changed its guidance from saying last month that rates would rise “at the next several meetings”, to only saying that it “expects to raise rates further”.
The price of Bitcoin increased over two consecutive days for a total gain of 7.5%, before stabilizing above the $20K level. There was a liquidation cascade of short positions and fuelled momentum further to the upside. CryptoQuant recorded over 15K BTC short contracts liquidated on both days Oct 25 and Oct 26. A short squeeze of similar magnitude was last recorded on 16–17 Dec 2020, when BTC rallied 25% over 2 days.
Above all, there is anticipation of the Fed to potentially slow down towards a 50 bps hike in December. Investors’ optimism was reinforced after September’s Core PCE Index came in line with expectations at 6.2% YoY. US stock indices continued to rally, while the US Dollar Currency Index (DXY) showed weakness after consolidating several weeks near the previous high of 114 and dipped briefly below 110, representing a 3.6% retracement from October’s high.
As we might be entering a potential bounce in the shorter term, the 180-day MVRV Ratio could be an interesting on-chain indicator to consider. This is a measure of the average profitability of all Bitcoin bought in the past 180 days, currently sitting at -6.1%. In the present bear market, we note that values around zero served as significant resistance for Bitcoin — as shown in the figure below, the previous two touches of the horizontal line at zero soon preceded continuation of the price downtrend. If the 180-day MVRV Ratio nears zero again, it will be interesting to observe Bitcoin’s price action and see whether the Ratio could flip above zero.
JKL Group Incubates LENA — Web3 Liquidity Protocol
Did you know that JKL Capital runs a Venture Fund?
JKL’s VC arm is focused on supporting early-stage projects to power Web3 disruptive digital era. Our input goes beyond financial investments. We take on advisory role and handpick those with highest potential for our Incubation Program — and we are excited to introduce one of these projects to you today.
LENA — the newest Web3 liquidity provider
LENA protocol facilitates decentralized and permissionless borrowing & lending of all NFT collections, while also offering crypto liquidity pools for staking rewards, borrowing, lending, and more. We chose to incubate LENA in-house since we firmly believe that unlocking liquidity sealed in NFTs (think bluechips, lands, GameFi, SoFi, Art, and more!) will be a great catalyst for the next upcycle in the crypto space!
Here are some of the Project’s highlights:
1- LENA is backed by two veterans in digital asset investment, JKL Group (https://www.jkl.group) and Satori Research (https://satoriresearch.io). Thanks to our network in the APAC region and expertise in OTC, Asset Management and Venture Capital, together we can bring the highest value to this project.
2- LENA’s advisors are seasoned experts in the crypto industry, amongst which you’ll find:
- Hamzah Khan, Head of DeFi at Polygon;
- Tim Frost, CEO and founder of YIELD App;
- Andy Ann, CEO and co-founder of YAS Digital, and LABS Group.
3- The platform is close to completion, with public Beta testing available as of next week! As VC investors we understand how important it is to have the product delivered, rather than selling an idea in the future.
Regulators
Drafts after drafts, The MiCA Law has finally been voted by the EU parliament
The premises of MiCA’s story start during the ICO boom in 2017. Preliminary drafts were focused on issuers and wallet providers. However, regulators couldn’t keep up with the crypto ecosystem’s pace and the bill saw many revisions. Eventually, officials decided to focus mostly on stablecoins, money laundering and consumer protection, leaving behind the DeFi and NFT markets. In June, the EU parliament delivered the final provisions on illicit crypto transactions that sparked a heated debate in the crypto space. On the 5th of October, the EU Council approved the text. Finally, on the 10th, MiCA was voted 28 to 1 in favour by the EU Parliament.
The approval rate in the crypto community might not be as high as in the EU parliament, but most agree that having a regulatory unification at the European level is beneficial. Crypto-asset companies will be allowed to operate in 27 countries with a single license. While a regulatory gap will remain due to the wide spectrum of industries blockchain technology is trying to transform, now that the base rules have been set, the market will expand. Concentrating 35% of all crypto transactions, Europe, constitutes the largest crypto market in the world. MiCA should not be taken lightly as it is showing the way for all other regulatory cohorts worldwide.
Here are a few highlights of what the bill includes:
· A discussion on whether cryptocurrencies should be considered as commodities or securities. The paper classifies digital assets into four categories: crypto-assets, utility tokens, asset-referenced tokens and electronic money tokens (e-money). They each have their own set of rules.
· A call for all stablecoin providers to cap transaction per day at €200m. For info, USDT 24h volume is currently sitting at $46b.
· A call to the European Banking Authority (EBA) to keep record of all crypto service providers not complying with MiCA’s new regulations.
The new law will take effect in 2024 to give companies time to adapt to the new set of rules. Meanwhile, designing their own framework, regulators around the world will surely take a closer look on what might be the biggest milestone in the cryptocurrencies’ regulatory journey.
Read More
· EU Puts Crypto at Top of List for IMF Meetings, McGuinness Says (Read More)
· Middle East and North Africa are fastest-growing crypto markets (Read More)
· Lawmakers Overwhelmingly Back EU’s MiCA Crypto Law in Committee Vote (Read More)
· OECD presents new transparency framework for crypto-assets to G20 (Read More)
· Portugal Plans to Impose 28% Tax (currently at 0%) on Crypto Gains (Read More)
· Brazil’s Rio de Janeiro will accept crypto-payments for property taxes (Read More)
· Coinbase Gets Singapore Digital Payment Token License (Read More)
· Bitcoin Could ‘Double in Price’ Under CFTC Regulation, Chairman Behnam Says (Read More)
· FASB Settles on Fair-Value Accounting for Measuring Crypto Assets (Read More)
Financial institutions
Even during the bear market, Wall Street is pouring into crypto
Bitcoin is down 72% from ATH, it has seen only one green monthly candle since April and FED’s monetary policy shows no sign of relief. Yet, institutional adoption from TradFi is going strong.
The world largest custodian bank who currently oversees $46.7 trillion in assets made its first move into the crypto space. Created 238 years ago by Alexander Hamilton to facilitate the shipping industry, BNY Mellon will now secure their client’s decentralised peer to peer online cryptocurrencies. Banks evolved just like the cryptocurrency space. Bear markets used to be times of backlash for BTC and now, Wall Street settles quietly during the downcycle to be prepared for the next bull run.
BNY’s crypto market penetration comes after a survey showing that 91% of their institutional customers would be interested in investing in tokenised products and 75% already held crypto in their portfolio or were strongly considering it. The current bear market is characterised by ever-growing institutional adoption. They’re looking to set robust infrastructures to take advantage of what seems inevitable to them: the next bull run. Their objective is to build institutional-grade solutions to reduce risks often associated to crypto.
Nasdaq, operator of the second largest stock exchange in the world, also started offering crypto custody services to its client since end of September. They are even looking at launching a crypto exchange once regulations’ gaps will be bridged.
In March, Larry Fink, CEO of BlackRock, the world’s largest asset manager, hinted its company would explore offering crypto services following high demand from customers. As promised, in August, even if BTC’s price was near half of its March’s value, BlackRock announced a partnership with Coinbase to offer crypto trading, custody, prime brokerage and reporting capabilities to their clients. For such a highly respected institution, managing $8.5 trillion, to get exposure to the crypto market, it greatly legitimises BTC as a top tier investment vehicle. The crypto ecosystem is standing far from the usual “Bitcoin Bubble” narrative we’ve seen during each previous bear markets.
Finally, the last milestone laid by Wall street in the previous months was the work of Depository Trust & Clearing Corporation (DTCC). The post trade financial services company, who settles the vast majority of stock transactions in the US, created its own blockchain to process around 100,000 transactions per day. It becomes more and more evident that TradFi sees value in distributed ledger technologies applications.
Read More
· SWIFT Says It’s Proved It Can Be the Way Forward for Global CBDCs (Read More)
· FTX partners with Visa to roll out crypto debit cards in 40 countries. (Read More)
· BNY Mellon, oldest US Bank, Starts Crypto Custody Service (Read More)
· J.P. Morgan And Visa Bridge Their Private Blockchain Networks To Streamline Global Payments (Read More)
· $4.5T asset manager Fidelity offers ETH custody and trading to clients (Read More)
· Silvergate Capital’s crypto-to-fiat transfers decrease by $50B compared with Q3 2021 (Read More)
Crypto projects
What happened to Mango Markets?
Mango Markets (MNGO) is a decentralized trading platform built on the Solana (SOL) blockchain. With $106 million Total Value Locked (TVL), Mango was ranked #6 amongst all Solana DApps at the beginning of October. On 16th October, however, Mango suffered a momentous exploit that caused losses around $114 million.
A breakdown of the exploit showed that the attacker started with $10 million, equally split into two and sent to two Solana wallets, which we shall denote as Wallet A and Wallet B. A further amount of around $3 million was reserved to trade spot MNGO tokens on major Solana DEXes including Jupiter, Raydium and Serum.
Wallet A was first funded with $5m and placed an order on the Mango platform to short 483 million perpetual contracts at $0.0382. Later, the order was matched by the equally funded Wallet B, going long. The attacker then started to manipulate the MNGO spot price that traded as high as $0.91, which leaves account B with an unrealized profit of $423 million. Because the platform allowed utilizing the highly illiquid MNGO token as collateral, and permitted borrowing against unrealized profit, account B was able to withdraw $116 million across several tokens including USDC, MNGO, SOL and BTC. This effectively drained all liquidity from the platform.
In the meantime, wallet B’s short position also went into-the-money with MNGO price that quickly dumped to $0.02. Nevertheless, the Mango platform is now short of funds to repay this position.
Surprisingly, the exploit also evolved into a DAO governance attack. Perhaps due to concerns of legal consequences, the hacker proposed to return approximately $67 million worth of tokens and keep the remaining $47 million as a bug bounty. The hacker was able to boost his voting power due to the large amount of MNGO tokens that he had secured. This proposal was eventually passed with an overwhelming majority.
FTX founder and CEO Sam Bankman-Fried, who is a huge supporter of the Solana ecosystem, wrote on Twitter to express his views. He analyzed the roles of the oracle and risk engine, the two main components of decentralized trading and borrowing platforms, in relation to the Mango exploit. While the oracle did accurately report the ‘current price’ of MNGO, it had far exceeded the ‘fair price’. Adding to this, rules for risk management were ill-defined and the exploiter was able to artificially inflate his borrowing power.
Sam Bankman-Fried highlighted some measures that FTX uses to control risk. Firstly, the exchange’s oracles do not directly consume raw price data. Instead, price feeds are bounded so that they cannot move more than 20% over a five-minute period, the reasoning being that sudden spikes in price are likely due to bad data or temporary wicks. Secondly, FTX requires a greater margin as position size increases, especially for large positions in illiquid tokens. For instance, the trader is required to be fully funded if he or she wants to establish a position of 500 million MNGO perpetual contracts. Lastly, even if illiquid tokens like MNGO were allowed as collateral, there would have been a significant haircut applied.
Read More
· DeFi Protocol MakerDAO Puts $500 Million in Treasuries, Bonds (Read More)
· BNB Chain Halts After ‘Potential Exploit’ Drained Estimated $100M in Crypto (Read More)
· Solana-Based Decentralized Finance Platform Mango Hit by $100 Million Exploit (Read More)
· It’s Lonely in the Metaverse: DappRadar Data Suggests Decentraland Has 38 ‘Daily Active’ Users in $1.3B Ecosystem (Read More)
· Tether Eliminates Commercial Paper From Reserves in Transparency Push (Read More)
Mining
· Biggest mining difficulty spike in 14 months (Read More)
· Bitcoin Mining Is Cool Again; We Can Thank Africa, Prudence and Growing Hashrate for That (Read More)
· Bitcoin Miner Core Scientific’s Shares Plummet After Bankruptcy Warning (Read More)
· What Is Fueling The Dramatic Rise In Bitcoin Hashrate? (Read More)
Companies
· McDonald’s starts to accept Bitcoin and Tether in Swiss town (Read More)
· Google selects Coinbase to take cloud payments with cryptocurrencies and will use its custody tool (Read More)
· CNN to shut down its NFT marketplace and issue 20% refund (Read More)
· Formula One files ‘F1’ trademarks covering crypto, NFTs and Metaverse (Read More)
· Why crypto remittance companies are flocking to Mexico (Read More)
· Why 137-Year-Old Brand Bicycle is Making Bored Ape NFT Playing Cards (Read More)
Crypto preview
November will kick-off with the FOMC Meeting as traders watch closely to whether there will be any hints of a Fed pivot, before shifting attention to the US mid-term elections. Inflation will stay under the limelight post-FOMC as bulls desperately await evidence that consumer prices are finally coming under control. Besides, while recent US economic data remains buoyant, any deterioration in upcoming numbers such as unemployment and core retail sales could present new headwind to markets.
Bitcoin performance calendar
After a somewhat lackluster display in October, crypto bulls have a reason to remain optimistic. This is because historically speaking, November has also been a positive month for Bitcoin. Over the past ten years, Bitcoin closed November seven times in green, and the median return was 12.6%.
Macroeconomic events
Crypto events
DISCLAIMER
This material is strictly confidential and is intended for use solely by professional investors (as defined in the Cayman Islands Monetary Authority from time to time). It should not be reproduced, redistributed, passed on to any other person or published, in whole or in part, for any purpose without the written consent of JKL Digital Capital Limited (‘JKL’). Although information contained in this material has been compiled from sources believed to be reliable, JKL does not represent or warrant the accuracy, completeness or reliability of the information contained in this material.
The contents of this material have not been reviewed by any regulatory authorities. You are advised to exercise caution in relation to the contents of this material. If you have any doubt about any of the contents of this material, you should obtain independent professional advice. Neither JKL nor any of its affiliates, nor any of its or their respective directors, officers, employees, and representatives will accept any responsibility or liability whatsoever for any direct, indirect, or consequential loss arising from the use of or the reliance upon any information contained in this material. This material does not constitute an offer or an invitation to subscribe for or purchase any financial product. It is not intended to provide the basis of any credit or other evaluation and should not be considered as a recommendation to purchase any financial product.
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