DAR Q4 2022 Report: Digital Asset Ecosystem
INTRODUCTION
In Q4 2022, the digital asset market experienced a significant drawdown in comparison to Q3 2022. The total digital asset market capitalization went from approximately $1 trillion at the beginning of the quarter to ~$850 billion by the end of 2022. Bitcoin started the quarter on a relatively positive note with its price soaring north of $21,000 before retracing back to a low of $15,700. During the same time period, the US Federal Reserve raised interest rates by 125 basis points (bps) in total, with increases of 75 bps in November and 50 bps in December, to further combat inflation.
The biggest crypto event in Q4 was the implosion of FTX, which happened on November 11. As one of the world’s largest crypto exchanges with a peak private market valuation of $32 billion, the fallout from FTX’s collapse is an unprecedented event. Its bankruptcy proceedings include multiple entities and span across various jurisdictions. It also catalyzes conversations regarding the importance of due diligence and counterparty risks associated with centralized entities in the space.
As the “crypto winter” continues, digital asset market participants are also concerned by the possible contagion caused by FTX and other bankrupt entities. Centralized entities including crypto exchanges and prime brokerages have been under increasing scrutiny. Customers are demanding more clarity and transparency into these businesses’ operational control and financial health.
Regulators around the world are also continuing their efforts against bad actors in the digital asset space. Multiple bankruptcy proceedings, including those of Three Arrows Capital, FTX, Voyager, and Celsius, will set legal precedents for the broader digital asset industry.
In Digital Asset Research’s (DAR’s) quarterly report series, we break down the state of the digital asset market from the perspective of institutional market participants, highlight crucial events, and provide commentary on potential future developments. This report is meant for informational purposes only, and should not be construed as investment, financial, or legal advice.
TABLE OF CONTENTS
INTRODUCTION 1
TABLE OF CONTENTS 2
WHAT HAPPENED IN Q4 2022 3
FTX Exchange Collapse 4
FTX and Alameda Research Contagion 6
Regulatory Enforcement 7
DAR Q4 2022 BY THE NUMBERS 9
SEC Calls FTX Token (FTT) a Security 16
CFTC and DOJ vs Mango Markets 16
SEC vs LBRY 17
INSTITUTIONAL DIGITAL ASSET PRODUCT RECAP 18
Spot-Based Bitcoin ETF Applications 21
Futures-Based Bitcoin ETF Applications 22
WHAT HAPPENED IN Q4 2022
The fourth quarter of 2022 was eventful for the digital asset market. FTX’s problem in early November spooked the broader market as the prices of BTC and ETH fell to a low of approximately -20% compared to the beginning of the quarter. The fear was then further exacerbated by Genesis halting withdrawals on November 16, with the market dropping approximately another 10% on the news.
The charts above show that Bitcoin was trading relatively close to the broader market before the FTX trouble in November. The Nasdaq Composite, S&P 500, and gold all were positively correlated with Bitcoin in October when looking at a 30-day rolling correlation, but became uncorrelated and eventually negative correlated with Bitcoin in November after the FTX collapse.
FTX Exchange Collapse
The chart above shows that Bitcoin was trading relatively close to the broader market before the FTX trouble in November.
Here is the timeline of FTX’s trouble:
- November 2 — CoinDesk broke a story on Alameda Research’s (FTX sister company) balance sheet.
- Out of $14.6 billion, $5.82 billion was reportedly denominated in FTX’s own token, called FTT.
- This new information spooked market participants, including Binance, the largest crypto exchange in the world.
- November 6 — Changpeng Zhao, Binance’s CEO, stated that the exchange decided to sell its FTT tokens worth around $529M due to “recent revelations that came to light”.
- November 8 — FTX saw $6 billion in withdrawals in under 72 hours as customers worried about the exchange’s solvency.
- November 8 — Sam Bankman-Fried announced that Binance has signed a Letter of Intention (LOI) to acquire FTX.
- November 9 — Binance backed out of the deal, citing much larger than expected issues at FTX and alleged U.S. agency investigations.
- November 10 — FTX paused withdrawals and suspended the addition of new clients.
- November 11 — FTX filed for bankruptcy.
FTX Token’s (FTT) price dropped by more than 90% in the span of a few days.
FTX and Alameda Research Contagion
Unsurprisingly, the FTX situation caused contagion to spread across the broader digital asset market. On November 10, crypto lender BlockFi paused withdrawals and stated it was unable to continue operating its business due to FTX’s collapse. Another crypto lender and prime broker, Genesis, also paused withdrawals on November 16 after losing around $175M due to FTX’s collapse.
In December, the broader digital asset industry was hit with a crisis of confidence, particularly as related to centralized entities, as Grayscale’s Bitcoin Trust (GBTC) hit a record discount of -50% and Binance’s outflows hit $6 billion in three days.
Another second-order effect of FTX and Alameda Research’s collapse is the state of their numerous investments. While there is no court decision yet regarding potential clawbacks, FTX’s influence spans various crypto protocols and even non-crypto companies. The Financial Times broke the story of Alameda’s venture capital portfolio, which amounted to more than $5 billion.
Alameda reportedly invested more than $5.2 billion across 400+ deals. The types of deals range between investments in equities, notes, tokens, or even as a Limited Partner in funds, including:
- $2.79 billion in equity investments
- $1.13 billion in fund investments
- $380M in token investments
The largest investments are in:
- Genesis Digital Assets ($1.15 billion), a crypto mining company.
- Anthropic ($500M), an AI safety and research company.
- Digital Assets DA AG ($320M), a tokenization infrastructure company.
- K5 ($300M), a venture capital firm.
- IEX ($270M), an equity exchange and trading technology firm.
As FTX bankruptcy proceedings continue, more information will come to light regarding the nature of these deals. Creditors might be seeking clawbacks, which will add to the ongoing contagion.
Regulatory Enforcement
Another theme of Q4 2022 was regulatory enforcement. Regulators in the U.S., including the SEC, CFTC, and the DOJ, ramped up their crypto enforcement actions on various types of cases including market manipulation, bankruptcy, fraud, money laundering, and alleged unregistered securities offerings. This creates the need for an enhanced risk management framework and proper planning before launching new digital assets.
Some regulatory actions included:
- The DOJ arrested and charged Mango Market’s exploiter, Avraham Eisenberg, with market manipulation and commodities fraud.
- The SEC won its case against LBRY, with a federal judge ruling that LBRY’s sale of its native LBC token was an unregistered securities offering.
- The SEC charged FTX founder, Sam Bankman-Fried, with defrauding FTX investors.
- The US Justice Department is reportedly considering charging Binance and its executives with possible money laundering violations.
- The SEC is probing crypto lender Genesis for potential securities and accounting violations.
The outcomes of these cases will set numerous legal precedents, which will have a non-trivial impact on shaping the future of the digital asset market.
To learn more about DAR’s market data offerings, including prices for 10,000+ digital assets and verifiable volumes from hundreds of exchanges, click here.
DAR Q4 2022 BY THE NUMBERS
Trading Volume
Bitcoin and Ethereum’s combined share of relative USD trading volume on Vetted Exchanges stayed relatively consistent in Q4 2022 with the exception of late October when Dogecoin surged significantly in trading volume.
Ethereum’s share of trading volume against Bitcoin saw a significant increase in early Q4 2022, reaching a high of 55% in late December.
Exchange Dynamics
Bitcoin trading activities across select DAR Vetted Exchanges spiked in early November 2022, coinciding with the collapse of FTX. Overall, volume stayed relatively stable in Q4 2022, with a slight decrease towards the end of the year.
Coinbase saw its percentage of total Bitcoin trading volume increase from approximately 50% to above 60% in Q4 2022 amongst select DAR Vetted Exchanges. Additionally, itBit saw a substantial increase in Bitcoin trading volume whereas OKCoin saw a significant decrease.
Ethereum trading activities across select DAR Vetted Exchanges spiked in early November 2022, coinciding with the collapse of FTX. Overall, volume stayed relatively stable in Q4 2022.
Binance.US saw its percentage of total Ethereum trading volume increase in December 2022, hitting a high of approximately 20% amongst selected DAR Vetted Exchanges. Additionally, itBit saw a substantial increase in its Ethereum trading volume, whereas OKCoin saw a significant decrease.
The Digital Asset Taxonomy System (DATS), developed in partnership with the Wilshire Digital Assets Advisory Group, was designed from the bottom up to capture the nuances of the digital landscape.
In Q4 2022, digital assets classified under DATS’ Notarization and Supply Chain sector generated the best performance whereas the Protocol Interoperability sector was the most significant laggard. All eight sectors generated negative returns in Q4 2022.
To learn more about the different classifications of more than 1,400 digital assets, click here.
REGULATORY HIGHLIGHTS
There were multiple notable regulatory developments in Q4 2022 that might affect the broader digital asset space moving forward. The most notable ones include an argument that FTT is a security, the Mango Market exploiter indictment, and the SEC case against LBRY.
To stay on top of digital asset regulatory developments, subscribe to DAR’s monthly regulatory recap newsletter here.
SEC Calls FTX Token (FTT) a Security
Overview: As part of a complaint filed on December 21, the SEC stated that the FTX token (FTT) was sold as an investment contract, thus classifying it as a security. The complaint highlights that proceeds from FTT sales would be utilized to fund development, marketing, and business operations of FTX. The complaint also notes FTX also used language that emphasized the profit potential of FTT.
FTT’s buy-and-burn mechanism was also mentioned in the complaint. This process whereby FTX would utilize its revenue to repurchase and burn FTT is akin to a stock buyback and contributed to the argument that FTT is a security.
The outcome of this complaint could have a significant impact on other digital assets that implement similar buy-and-burn mechanisms, as well as digital asset projects that have previously stated that their token sale was made to help fund the development of their protocol.
The Takeaway: Tokenomic designs that are closer to how equities work, such as buy-and-burn, governance vote, and revenue share, will be under increasing scrutiny as the SEC makes a case that such tokens should be considered securities.
CFTC and DOJ vs Mango Markets
Overview: Mango Markets, a DeFi protocol built on Solana that facilitates perpetual swaps trading and crypto lending, was exploited for more than $110M in October 2022. Avraham Eisenberg, the person who led the operation behind the exploit, took to Twitter to explain and justify his actions, stating that he merely utilized the Mango protocol as intended, exploiting a weakness in its design.
Eisenberg was arrested in Puerto Rico in December 2022. The U.S. Department of Justice announced Eisenberg’s arrest and charged him with offenses related to market-manipulation. A second filing signed by Assistant U.S. Attorneys Thomas S. Burnett and Noah Solowiejczyk charged Eisenberg with commodities fraud and manipulation.
Eisenberg allegedly executed the exploit by selling MNGO token perpetual contracts from one account under his control to another account that was also under his control. This action raised the price of the MNGO tokens significantly, achieving a large unrealized profit. The unrealized profits were then used as collateral to borrow funds, which drained funds from Mango Markets.
The Takeaway: In his explanation, Eisenberg argued that “code is law” and that the exploit was legal open market action. Regulators seem to think otherwise. While there’s no regulatory clarity for on-chain markets because they span countries and jurisdictions, the outcome of this case will set a precedent for the future of on-chain activities.
SEC vs LBRY
Overview: LBRY Inc., a blockchain-based publishing platform, was served by the SEC in March 2021 over its LBRY Credit (LBC) tokens, with the SEC alleging that LBRY Inc. had been selling unregistered securities offerings. On November 7, 2022, the SEC won the legal battle after a judge decided that LBRY’s tokens were securities.
The judge in the case reasoned that even if the LBRY team was completely silent about promises, contracts, or efforts, the action of pre-mining LBC tokens alone created a sufficient expectation of profits, motivating the LBRY team to “work tirelessly to improve the value of its blockchain for itself and any LBC purchasers”.
The Takeaway: The process of launching a new digital asset will become increasingly regulated. At the same time, the lack of regulatory clarity in the U.S. may push founders and innovation abroad to emerging markets with weaker regulatory agencies or to jurisdictions with friendlier crypto rules.
INSTITUTIONAL DIGITAL ASSET PRODUCT RECAP
Every month, DAR publishes a recap report that highlights developments related to institutional-grade digital asset products globally. In Q4 2022, the AUM of institutional digital asset products decreased alongside the broader digital asset market but has remained relatively high across multiple assets.
Highlights:
- The AUM of Grayscale’s Bitcoin and Ethereum trusts decreased by more than $3.3 billion in Q4 2022 and the discount for Grayscale Bitcoin Trust (GBTC) hit -51%.
- Excluding Grayscale, the top digital asset product issuers by AUM were XBT Provider and 21 Shares.
- Spot Bitcoin ETF applications continue to be rejected in the US. Grayscale stated that it will explore returning a portion of investor capital if the SEC refuses to approve its spot Bitcoin ETF.
The top digital asset product issuers by total AUM, excluding Grayscale, continue to be XBT Provider and 21Shares. Total AUM across providers decreased substantially in Q4 2022, which primarily happened in November after the FTX collapse.
ProShares and XBT Provider continue to have the largest average AUM across all of their products. Average AUM across top providers decreased in Q4 2022 as the broader digital asset market continued to experience a downturn.
Excluding products with less than $500,000 in AUM, Cosmos (ATOM), and Litecoin (LTC) saw considerable increases in their AUM in institutional products, whereas FTX Token (FTT) and Solana (SOL) saw the most significant decrease in AUM.
Spot-Based Bitcoin ETF Applications
Futures-Based Bitcoin ETF Applications
