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Executive Summary

• With the events of the past week, it was almost difficult to pin down topics for this week’s Enigma Spotlight, but we have chosen three particular areas of focus.
• The first is, naturally, the USDC depeg, and the outlook for Circle going forward.
• The second is the Signature Bank situation specifically, as it is both important in its own right and extremely revealing of the broader view for the crypto industry going forward.
• The third is a broader view of what comes next.

USDC and Circle

USDC faced its biggest crisis since the asset’s inception in late 2018 when it got caught in the crossfire of the Silicon Valley Bank collapse. To explain it as simply as possible: USDC is fully-backed, with its reserves currently split roughly 75-25. That larger number is a short-dated portfolio of treasuries, publically administered by BlackRock as the Circle Reserve Fund.

The other 25% is held as cash, distributed among six banks prior to last week. Three of those were SVB, Silvergate, and Signature, who need no introduction; the other three were Citizens Trust Bank, Customers Bank, and New York Community Bank. The distribution between those banks are unclear, but with the latter three all being smaller regional banks, and Circle having only been publically partnered with CTB since February 24th of this year, the assumption was that the vast majority of funds were within those three.

While most in the industry would have expected SVB to still probably take third place with respects to holdings – as we will discuss later, the settlement networks were the selling point for both Silvergate and Signature – the collapse of the bank still brought uncertainty, and that was confirmed on Saturday when Circle announced exposure of $3.3 billion to SVB – a substantial portion of the $8bn to $10bn that Circle should hold in cash given their treasury holdings and USDC’s market cap.

Coinbase (the first home of USDC) paused 1:1 conversions for USDC:USD, and other exchanges followed suit. In terms of the absolute severity, it depends where one looks, but for the same of argument we will use Kraken’s market (both Kraken and Gemini operate USDC-USD pairs as standards for liquidity rather than redemption; offshore exchanges often operate USDC-USDT instead, but the dislocation between them and Kraken/Gemini was minimal).

Data via Tradingview.

USDC traded as low as 87 cents on the dollar on Kraken; in a few places it was worse (brief wicks down to 82 and 84 cents on Gemini). How much was actually traded at those levels is unclear, but there was at the least a protracted period of several hours on Saturday where it traded at 90 to 91 cents on the dollar.

From a pure value perspective, this seemed to be pricing in almost a worst-case scenario where a) the company would see total loss of the SVB reserves and b) the company had no surplus whatsoever (43.5bn USDC were in circulation at the time which would price the 3.3bn impact at around a 7.5 cent shortfall). In truth, most of the discount (or premium on USDT, if you prefer) was likely pricing in the difficulty or impossibility of some holders in going through the redemption process legally if forced to do so.

In the end, things stabilised; USDC traded at around 95 cents on Sunday, and when it became clear that SVB depositors would be saved on Monday, it effectively returned to peg.

The big thought that seems worth articulating on the saga is this. Circle for the most part managed the process well (after some initially poor and unclear after-hour comms on Friday night and into Saturday morning), negotiated things operationally about as well as they could have, and everything came out fine in the end.

For everyone else, the scary part should now be over. For Circle, however, it may only be beginning. As much as we fixate on the quick blowups in crypto and in markets more generally, most deaths are slow; and particularly in crypto, particularly for assets, exchanges, and so on in strong or dominant positions, the pattern we generally see is that:

1) an event happens that is bad but ultimately not catastrophic,

2) it seems to have few short-term consequences, but,

3) the next wave of builders and users don’t trust building on it and choose different rails.

Concerns about USDC being a central point of failure for DeFi in particular have been quietly murmured for a while, but were largely overriden by the trust in it, which is why we see things like e.g. DeFi systems increasingly being built with faith in USDC holding a hard peg to $1, or DAI collateral changes that have made it more reliant on USDC and on firms such as Coinbase over time (albeit this being something that MakerDAO CEO Rune Christensen has signalled concern over) and which hence saw DAI trade at essential parity with USDC throughout the depeg.

USDC has survived the battle, but it remains unclear whether it will win the war.

Signature

It is always difficult to write in the wake of an event like Signature’s shuttering, because we don’t know what we don’t know, and it will be an extremely long time before we know what we don’t know. Hence, any analysis has to lead with that soft disclaimer (in addition to the usual disclaimers put on any research of this nature).

With that being said, what we do know paints an extremely ugly picture – not of Signature, but of regulators and politicians. If Silvergate was the face of crypto business banking in the US, Signature was the muscle, with the two firms making up an unknowable but extremely substantial portion of the US market. Why Silvergate and Signature? In both cases, it was because of their settlement networks; the Silvergate Exchange Network for the former, and Signet for the latter, with both allowing for easy, effectively instant on-ramping and off-ramping for large business in and out of digital assets.

When Silvergate was shuttered last week, it did not cause the panic within the industry that it perhaps should have, precisely because Signature existed – it seemed clear that some degree of pressure had been applied (concerns had very publically been raised about Silvergate’s relationship with FTX), and it would have operational consequences for the industry in the long-term, but if firms like Signature remained in place then the industry would adapt and move on.

However, just two days after Silvergate’s winding down, the SVB collapse happened, and sparked a wave of fear throughout the industry, culminating in an extremely panicked weekend and a Monday open that saw regional banking stocks across the board annihilated, and what for all intents and purposes is a bailout announced by the US government in order to prevent a bank run.

We won’t labour the point on explaining the crisis in general, but a key point here is that were no direct bailouts or takeovers, with the US government very keen to avoid being perceived as bailing out banks (which, again, the FDIC extension is a bailout at best, but we’ll skirt around that). Except for one – Signature. The bank had seen a modest run on deposits on Friday, but by most accounts was not in worse health than any number of regional banks, actually having more limited exposure than the likes of Wells Fargo and JPMorgan Chase to the impetus for the broader liquidity crisis re: unrealised losses on held-to-maturity securities:

Regulators have been unable to provide any particularly convincing justification for why Signature had to be taken over given the relief offered elsewhere (note that announcements of Signature’s takeover preceded the broader campaign), with the New York Department of Financial Services simply saying yesterday that “the bank failed to provide reliable and consistent data, creating a significant crisis of confidence in the bank’s leadership”, and Barney Frank – a board member at the bank and a co-author of the post-Great Recession Dodd-Frank laws – going on a media speaking tour over the last few days to defend the bank’s position in as strong of a set of terms as possible to do for someone in his position.

The quote that has been particularly picked up is this one from the New York Times: “‘They shoot one man to encourage the others’. I think we were shot to encourage the others to stay away from crypto.”

Frank is the furthest thing from an enthusiast for crypto; he is broadly supportive of the present regulatory push, and his position on Signature’s board (since 2015) is because of his interest in and support for the company in its non-crypto dealings (bear in mind here that Signature, like Silvergate, was a traditional bank first, and it can be argued that even at its height, it was still traditional foremost).

As is standard after such a takeover, Signature has announced the opening of a bridge bank, headed up by former regional bank CEO Greg Carmichael; notably, while sounding a similar bullish tone to the SVB bridge bank, there is no mention of the continuity of Signet in its press releases and announcements, and Circle seem to be moving on from Signet as part of their USDC operational flow.

While relevant regulators have largely denied it – NYDFS head Adrienne Harris described the decisions as “not crypto related”, and stressed that “DFS has been facilitating well-regulated crypto activities for several years, and is a national model for regulating the space” – actions speak louder than words ultimately. Going after banks in this way – and specifically those banks offering the most effective settlement networks – seems like a clear signal to all but the largest crypto companies that they are unwelcome in the US banking system.

The reverberations of this over the coming months are unpredictable. There will be other banking solutions in the US no mater what – BNY Mellon and others are still around, and firms like Cross River are picking up the slack for the likes of Circle for now – but it seems likely that, at best, interfacing within the US banking system will be heavily and artificially restricted, and that businesses will either have to significantly reshape their flows or – more realistically – start to look for longer-term solutions outside of the US.

Where next?

The title of this piece rather reveals the core of our thesis on this, but it is nonetheless worth spelling out in a little more detail. To date, Tether has been possibly the single biggest ‘winner’ in the chaos of the last couple of weeks. It has not depegged – in fact, there were points where it traded above peg over the weekend and on Monday, even accounting for the most pronounced cases as such being functions of low liquidity. Its market cap has been steadily increasing since late January, having already been the major beneficiary of the BUSD shutdown over USDC, BTC, and any other assets on a simple flows basis.

Is this to say that all concerns over Tether are lifted and that it is an asset for the ages? Of course not, though there is a solid argument to be made that USDT’s long tail risk has been less than USDC’s since as long ago as November. That Tether has been resilient in this crisis does not, and should not, automagically eliminate all extant concerns over its lack of transparency, the fact that its obscure offshore banking relationships were its major weakness until a week or so ago, and so on.

However, it has survived – and, as far as anyone is concerned operationally, one USDT is still worth one dollar. As much we have concerns long-term over the trajectory of USDC as an asset, it too has quickly gone back to par after re-enabling redemptions. The perceived value of these assets has remained intact – and, while there was more than a little gum and paper stirrers involved in the plumbing with respects to how USDC depegs were treated, DeFi saw very little damage from the whole process.

When we talk about ‘hypertetherisation’, we mean it as much in the lower case as in the upper. What is the most natural response to on-ramping and off-ramping becoming more difficult, and in particular being aligned towards size? It is to accept that the value being held on-chain is real, and to reduce the frequency of use on those ramps, which in turn opens the door to more substantive construction and use of systems on-chain as a result – because more people are willing to retain on-chain wealth in larger and larger quantities.

This does not paint the rosiest of pictures in the medium term, because – as is easy to forget – the construction of systems that work along stable rails of any sort is still in its relative infancy overall. USDC launched in 2018, and essentially everything in the world of DeFi was at best a proof-of-concept up until at least the spring of 2020. The seeds have been in the ground for a while in some cases, and we are beginning to see them sprout in certain respects with relations to tokenised real-world assets at the like; however, overall, things remain in their infancy.

In terms of shorter-term narratives: what we have seen over the last few days is close to a perfect storm for BTC specifically – banks are not to be trusted, regulators too, hard assets are king, and so on, and so on. BTC has outperformed alts, and in traditional markets, gold has been one of the leaders, seeing a 6% trough-to-peak rise from last Wednesday to close on Monday. Markets currently find themselves back at resistance at roughly August 2022 levels of $25,000 BTC and $2000 ETH. BTC did briefly wick above those levels on Tuesday; ETH remains some distance short of them.

Despite all of this, our short-term view does still tend to skew negatively. The rush into BTC feels more based on relief than anything else, and it is telling that volumes on US-based venues like Coinbase are actually lower now than in January’s surge; that combined with desperate moves such as Binance’s announcement of conversion of its $1bn Industry Recovery Initiative fund into ‘native crypto’, and prices falling back significantly yesterday after what looked set to be a break of aforementioned resistance, leaves us sceptical that momentum will continue to carry through for now.

In any case, though, this does solidify a view towards a more sustained resurgence in crypto as early as Q4 or even late Q3 of this year. As easy as it is to roll one’s eyes at the usual hucksters proclaiming a ‘rebirth of crypto’, and bringing up the symmetry of Monday, March 13th, with the March 13th crash in 2020, the action and cadence of regulators seem to be inevitably pushing businesses and users, kicking and screaming, towards a more digitally situated way of operating economically, and that can ultimately only be to crypto’s benefit.

Executive summary

• GBTC and ETHE discounts have contracted somewhat – -46% to -35% on GBTC – on recent stories surrounding the trusts.
• The more significant of these was a positive hearing in Grayscale’s appeal against the SEC blocking conversion of GBTC into a spot ETF.
• Our view: we remain wary of false dawns in all things Grayscale, and we are still practically infinite length from anything resembling finality, but there may be opportunities within the discount variance.

On 8th February, we wrote that “resolution on the Grayscale trust situation has been slower than expected or desired over the last few months, and action since the start of 2023 has emphasised those issues.” The tale of the tape has been false dawns followed by long nights wrought over and over. However, in the last week in particular, we have seen some developments that at least merit consideration.

The GBTC premium itself has mostly remained fairly stubborn around 46% precisely, with data from YCharts showing a very tight range in that regard even by recent standards. However, as can be seen, recent days have seen a fairly significant upsurge, with the discount narrowing to a reported -36% at end of day.

Two main events can be identified here. The first, lesser one was on March 6th, with the announcement that Alameda Research would be filing a lawsuit against Grayscale “seeking injunctive relief to unlock $9 billion or more in value for shareholders of the Grayscale Bitcoin and Ethereum Trusts (the “Trusts”)”, targeting a recovery of approximately $250m for Alameda creditors.

The arguments trotted out by the estate (as part of the broader John Ray-led FTX receivership) are the familiar ones – the 2% management fee is exorbitant, redemption should have been available long ago, and “if Grayscale reduced its fees and stopped improperly preventing redemptions, the FTX Debtors’ shares would be worth at least $550 million” (for reference, pegging the current market value of Alameda-held shares at $300 million, or about 2.5% of the total float of GBTC and ETHE combined).

While always good for grabbing a headline, the lawsuit seems like something of a non-story overall; it is the exact sort of lawsuit that will not proceed anywhere meaningful and is simply being done to cover bases on the bankruptcy experts’ side.

The somewhat more interesting story centred around the appeals court hearing with regards to Grayscale’s attempted ETF conversion and the SEC’s denial of it. To refresh on this: Grayscale has long pushed to convert the trust to an open ETF in order to increase its potential addressable market, stating that ‘this vision has been present from the beginning of our firm’. While questions can be raised on how precisely true that is – they pulled out of the conversion process before rejection in 2017 for instance – by most accounts, it is at least substantially true.

It can be argued that the current situation presents a powerful disincentive for Grayscale to convert and allow redemptions, because it would mean giving up on substantial management fees. We would, in fact, argue that. However, the scenario of opening redemptions being a net negative, or more importantly, actively and totally potentially destructive to Grayscale’s products has only really become the most probable one in the past year or so; up until that point, losses from redemptions would have likely been more than made up for by gains from greater market access. Hence, the company continues its processes in pushing for conversion, even though in the current climate it will likely make sense for them to delay said conversion.

In any case, the interesting thing was this: by most accounts, the SEC did not come off well in the proceedings. In particular, Judge Neomi Rao said what many within crypto have been saying for a long time:

“It seems to me that [what] the Commission really needs to explain is how it understands the relationship between bitcoin futures and the spot price of bitcoin…it seems to me that…one is just essentially a derivative. They move together 99.9% of the time. So where’s the gap, in the Commission’s view?”

The core of the SEC’s case in denying Grayscale – and all other spot-based ETPs – while permitting products like the Proshares Bitcoin Strategy ETF is that spot crypto markets are unregulated and can be manipulated, while futures markets are regulated (the US derivatives ETFs generally trade on the basis of CME futures) and cannot.

This stance has always been absurd on multiple levels, but for all the complaints that can be made on it from within the crypto industry (as we have done several times previously), in the words of Dwayne Johnson, “it doesn’t matter what you think” – what matters here is whether the legal and traditional financial world start seeing it as so.

For the most part, said legal observers have leaned towards Grayscale having won the battle with respects to the oral arguments. The most widely-circulated note in that regard came from Elliott Stein of Bloomberg Intelligence, who increased his estimated probability of Grayscale winning the case in some form from 40% previously to 70%.

If we took this totally literally, the reduction in premium compression from 46% to 35% may actually underprice things. We would not go that far; as we have said previously, it is both the underlying volatility of the asset and the open-ended nature of any Grayscale-related trade that accounts for the premium, and the latter would remain open-ended even in the case of a total Grayscale victory and the former is a bigger concern than ever (BTC has slipped back to $22,000 at the time of writing, and probabilities favour further downside over the coming weeks and months).

Nonetheless, it will be interesting to see if the premium continues to compress. The high water mark last year (in April) was -21%, and it seems not unrealistic that we could see the discount pegged back to a similar point in coming weeks, which would create both as solid of an exit point as is likely to be found in the next few months for existing GBTC-based trades, and potential opportunities to take advantage of said exists in order to short said discount ‘bounces’.

Weekly Spotlights and Updates

UK cryptoasset regulation, February 1st
No significant updates; consultation is ongoing.

Grayscale GBTC and ETHE outlook, February 8th
GBTC discount fell to lows of 47% on February 13th, not coincidentally at the same time as Bitcoin itself hit monthly lows just under $22,000; as we said at the time, we will see some degree of variance here that is driven purely by the overall faith in the underlying asset itself rather than the trust. Few developments on the Genesis restructuring proposals. The atmosphere around restructuring at the likes of Voyager and Celsius is a little concerning (particularly the possibility that Voyager’s deal with Binance US may be rejected by authorities), since it suggests that regulators will continue to prevent any quick dissolution of any sort from occurring under any circumstances.

Are stablecoins securities?, February 15th
Gensler’s remarks were less inflammatory than expected, but BUSD redemptions have stepped up significantly since February 13th, with market cap going from $16.4bn to $10.5bn at the time of writing. Tether has gained around $3bn, while USDC has gained $1.5bn, albeit this is in the context of $4bn of redemptions from mid-December on. Coinbase announced on Monday that they would be delisting BUSD as of March 13th; it should be noted that the exchange only said that it “does not currently meet our standards from trading support”, rather than any reference to securities status (compare to XRP’s delisting in December 2020, where Coinbase explicitly said it was because of the SEC lawsuit).

Polygon, layoffs, and layer 2s, February 22nd
MATIC is down a further 11% against both USD and ETH since February 22nd. Regarding our discussion of new layer 2s: Coinbase announced on Thursday the launch of a testnet for their own layer 2, build on Optimism’s OP Stack. OP initially jumped by 13% in the days following, although is back at even now (albeit this being in the context of recent overperformance at a time where most altcoin surges have been followed by significant pullbacks in very short order).

Markets

Bitcoin and Ethereum

BTC ends the month of February almost literally flat (+0.07%), with ETH (+1.26%) not much more remarkable. Volatility on the month as a whole was muted, but not historically so; the 15.51% high-low range on BTC is only the 13th-lowest since 2015, and a higher mark than December or October of last year, pegging very closely in fact to the stagnant price action of the summer of 2020.

There is an argument that there should be some solace taken for bulls in the overall muted price action on the month; firstly, because it was a terrible month with respects to headline impetuses for the most part (plenty of negative stories surrounding US regulation and Gary Gensler in particular) and markets for the most part remained steady (-5.07% on BTC and -6.37% on ETH on February 9th constituting the worst day for both); secondly because, however marginally, the month did at least close green in what remains a very challenging climate for risk assets across the board.

The difficulty is that markets have seemed to run out of momentum across the board at the exact points where it is easy to write them off as an echo rather than as a indication of genuine strength. ETH topped out below its August and September bounces; BTC did better than in September, but ultimately faltered above the $25,000 level that it very briefly wicked above in August. Volumes in February were miniscule; by our estimates, the week beginning February 6th saw the lowest exchange volumes since October 2020 on most major venues.

On the pair, ETH/BTC closed the month at a hair under 0.07, again showing some of the lowest volatility we’ve seen in a while; a brief spike to open the month was almost entirely eroded over the course of the month. To be fair: there may be something more substantive to the solace of ‘headlines not eroding the position’ here, just because of how many things targeted staking (and one might as well be the other with respects to Ethereum and staking as far as many larger investors are concerned).

Our expectation would be for price action to remain depressed over most short time horizons, with potential resistance/invalidation at BTC $26,000 and ETH $1800, with some downside threat on the pair as a result purely on account of ETH’s higher overall beta.

Mid- and small-caps

While BTC and ETH has been stagnant, this has been something of a banner month for mid-caps, with more overall showing upside than downside despite a ranging market that tends to punish them normally.

Standouts on the month to the upside:

• YFI, MKR, LIDO, OP – Liquid staking solutions have been a relatively safe harbour in the overall staking storm; LIDO continues its outperformance, while YFI has also benefited from a teaser released indicating its own liquid staking-related product (yETH, a liquid staking basket product). Elsewhere, OP gained as mentioned earlier from Coinbase’s layer 2 announcement, while MKR gained in the wake of both the BUSD action and the announcement on February 8th of a potential new lending protocol (Spark Protocol).
• NEO, FIL – Both coins among others saw gains this week specifically, linked to an announcement of moves towards a more permissive regulatory regime in Hong Kong; both assets are in the group known colloquially as ‘China coins’ due to their links with the area. We tend to think continued momentum on these and other associated coins will mostly be event-driven rather than a fundamental trend like liquid staking, but it remains to be seen.
• STX – The success of STX is an odd one. The ‘ordinals’ system for creating Bitcoin-based NFTs has caught more attention than anything that has happened in Bitcoin development for years now, but BTC itself is almost too big to be responsive in price terms to such developments, and STX has gained despite having very little to do with ordinals itself just on account of being a token associated with Bitcoin smart contracts in general.

Standouts on the month to the downside:

• APT – While APT still remains well clear of the $3-$4 depths of post-FTX, momentum on it (which was mostly derivative-driven) has mostly cooled over the past month, falling back to the last leg of its January surge at around $12; it will be interesting to see if the current level provides support, since the graph is oddly similar to pre-bubble SOL in early 2021 so far.
• MANA, AXS, APE, GALA – Little luck this month for most metaverse and gaming-connected tokens, with enthusiasm quickly deflating on the likes of APE as the froth around the ‘Dookie Dash’ beta died down.

Executive Summary  Polygon announced layoffs of around 100 staff on Tuesday out of a total headcount of 500. The Polygon chain (Matic) has always been particularly reliant on centrally-originated business development and partnerships for growth compared to certain compatriots; the layoffs likely point towards an attempted shift towards a more technically-oriented framework. Said shift comes during a moment of significant competition for Polygon by other layer 2 providers. Our view: it feels likely that MATIC has put in a short-term peak relative to the rest of the market, and time will tell how it can perform in a market where BD/marketing/acquisition funding is limited.

May you live in interesting times. News broke yesterday that Polygon Labs – the company behind the Ethereum-based Polygon scaling system, which in turn is the source of the MATIC token – would be laying off around 20% of their workforce, totalling about 100 jobs in all. Price action in the last few days point to the news being not a shock, but perhaps a surprise; MATIC has been in a steady uptrend since the start of the year, and on Friday reached its highest close ever against ETH, beating its previous peak on 10th November last year by around 4% and its May 2021 high water mark by nearly 15%.

Of course, one thing that does have to be noted here is that both of those moments came at points of crisis for ETH and the market as a whole; May 2021 came with ETH still down 50% from its highs earlier in the month (and with more to come), while November was of course at the height of the post-FTX panic; last week’s close in USD terms positioned MATIC merely at roughly support levels from late 2021 and early 2022, and it remains over 50% off its all-time high in December. Short-term price action asides, Polygon’s situation is an interesting one. Launched in early 2019, and rising from relative obscurity over the course of the last bull market, the value proposition behind Polygon is in theory simple: Ethereum’s capacity is limited, development towards internal scaling solutions will be at best slow and in reality may never quite get there considering how long even the proof-of-stake push took, therefore other solutions are needed. Polygon is often described as an Ethereum ‘layer 2’ – that is, a layer that sits on top of Ethereum and takes pressure off of it in favour of itself. This is true in a functional sense, but not entirely true in a technical one; to put it briefly, a true layer 2 sits on top of the network and essentially reprocesses transactions in a way that ends up reducing the overall burden, while with Polygon, it instead operates as more of a side-chain, validating transactions through its own proof-of-stake mechanism and not posting its data to the Ethereum chain itself except on entry and exit. This technicality, for the most part, has not mattered; what has mattered is that Polygon is here, and has been here, to provide some description of scaling solution with total Ethereum interoperability over the last four years. Correspondingly, it has tended to have its best moments when interest on Ethereum was highest, and – crucially – when interest on alternative layer 1s, the other ‘really existing’ scaling solution, has been lowest, hence the peaks in absolute terms in early 2022, and in relative terms in May 2021 and November 2022. This, in theory, places them well going forward. As much as many have seen relief bounces lately, overall enthusiasm for layer 1s is at a low; the funding from foundations is drying up, the stink of FTX is all over Solana among others, and layer 1s suffer disproportionately in stagnant situations because they need those incentives to attract development and developers and therefore make even nominal progress. However, the secret sauce of Polygon has been on the business development side, with the company finding partnerships like no other company in the space – and in the sense of partnerships with some actual deliverables, the recurrent example given over the last few months being their linkup on a NFT-based partnership program with Starbucks (an eye-catching one given the long-standing crypto memetics of ‘buying a cup of coffee with [X]’ as a symbol of mass adoption). This fact puts the layoffs in a particular light. Given how most crypto companies are structured, it is likely that Polygon’s 500-strong headcount overwhelmingly is slanted towards sales and business development by number, and it is likely that they were disproportionately those affected by the layoffs. In addition, many have read between the lines with respects to one part of co-founder Sandeep Nailwal’s statements on the layoffs. Sandeep stated on Twitter that “our treasury remains healthy with a balance of over $250 million and over 1.9 billion MATIC”. Given that this comes after a February 2022 round advertised at $450 million, this would seem to imply an extremely aggressive burn rate of $200 million in a single calendar year. While there are myriad complicating factors that make the strict reading there likely misleading, it does seem very believable that Polygon’s burn rate is into nine digits, and that the layoffs – and spending associated with them – are being done in order to achieve a material extension in runway, and especially runway as it concerns the sorts of agreements that Polygon have been notable for in the last year or two. Given that, again, the secret sauce of Polygon has long been BD, this does matter. While Polygon is in a nominally better position right now than arguably at any point before, there are potential assassins lurking just around the corner. Layer-2 development has accelerated significantly as of late, with both optimistic and zero-knowledge rollups receiving a great degree of attention; both Optimism (optimistic) and Arbitrum (zero-knowledge) have been on upswings in almost all metrics. To name just one, DeFi TVL is up significantly on both Optimism and Arbitrum, but down on Polygon:

The one place that we cannot judge is on token price for the most part; the way that ‘true’ layer 2s work generally mean that they do not necessarily need a token in the same way as Polygon does. However, the Optimism governance token (OP) is up from a yearly open of $0.91 to $2.40 today (and over $3.20 before an airdrop announcement a few weeks ago), almost doubling the gains of even a resurgent MATIC. For their part, Polygon are looking to take advantage of new developments too, with the launch of their zkEVM (zero-knowledge Ethereum Virtual Machine) solution incoming on March 27th; however, their strength has not previously been on the technical cutting edge, and they face competition in the sphere of zkEVM solutions from zkSync and smaller Ethereum Foundation-funded projects. The question here, broadly, is not what happens in the short term. There will naturally be a lag on any broader effects from the layoffs, given the nature of how deals tend to be done by now in crypto. It feels not unlikely that MATIC/ETH may have already seen its medium-term peak (implying overall underperformance going forward), but there will probably be more swings to come (MATIC has tended to trade as almost an elevator-up stairs-down asset in many cases in the past, its infamous December 2019 flash crash not withstanding). In the longer term, the headline read here is that MATIC seems likely to generally underperform; whether it does, and to what extent it will do so, will be interesting to track, because it seems likely that we are in the process of a broader slowdown in spending by crypto companies. In particular, there may be clues as to the future of Binance (one of Polygon’s closer collaborators); like Polygon, Binance have been big spenders on business development and marketing, have put off layoffs and are hiring for new positions, but are likely to inevitably be forced to at least realign away from a free-spending BD-at-any-cost approach to something different in the next 12 months. It may be a myth that sharks stop breathing when they stop moving, but it is not so for SDRs. We have seen a lot of BD-reliant companies and assets fail to realign and slowly wind down over the course of multiple cycles in the past; it will be interesting to see if the big spenders (albeit survivors) of 2021-2 will find a route out.

Executive Summary 

• The SEC served a Wells notice to Paxos last week labelling the BUSD stablecoin as a security, prompting concerns over the regulatory status of other stablecoins and issuers.
• The fundamental problem is that, under US law, the scope of what could be considered a potential security is extremely broad, and could include stablecoins as ‘notes’ with security status assumed.
• Gensler will speak on client asset rules today (Wednesday 15th February); initial remarks suggest that ‘qualified custodian’ rules will be applied to all firms that hold crypto client assets, though state-chartered trusts like Coinbase will not be precluded from serving in that role by their status.
• Our view: recent SEC actions have clearly been motivated by a broader attack on crypto ‘shadow banks’, which suggests Gensler’s recent regulatory blitz has more to come, auguring ill for all assets. There may be some short-term fluctuations in USDC liquidity if Circle were to become a target of said missives.

May you live in interesting times. 

Note: the substance of this note was written with expectation of, but not full detail of, the SEC’s February 15th meeting on safeguarding advisory client assets, and specific language by SEC chair Gary Gensler within that process targeting institutional custody of crypto.

Are stablecoins securities? On the face of it, the question seems absurd; no major stablecoin is yield-generating on an asset level, and nobody buys stablecoins with an expectation of profit from that act alone. It is absurd that we have to even consider the question. Unfortunately, due to the SEC, and in particular due to the SEC issuing a notice to Paxos last week ordering it to stop issuance of Binance’s BUSD stablecoin on that basis, we do in fact have to.

There have generally been two viewpoints when it comes to stablecoin regulation and the US regulatory approach to it. One is that stablecoins ultimately represent a threat to government authority as a money controller and hence, while other jurisdictions may accept the situation out of expediency, there can be no permanent peace between US regulators and USD stablecoins. The other, more pragmatic, view has been to look at what stablecoins represent in real terms. Even at an over $100bn combined market cap, stables are a drop in the ocean of overall money supply, and in practical terms, they are a tool for and demonstration of US soft power, especially given that their main real-world uses are primarily in trade in the global south and international remittances.

The pragmatic approach has always seemed to ring truer; partially, of course, because it represents an easier path forward for the industry in general, and few in crypto are anything but optimists at heart, but also because it generally has been borne out by the flow of events. The relatively soft penalties given to Tether, the rise of USDC and Circle as the de facto currency of on-chain activities (remember that even DAI is now essentially an USDC proxy), and many other things have pointed towards a relaxed approach overall.

The problem is that, as many a Chinese OTC desk will be able to tell you, a pragmatic governmental approach can turn on you in a matter of months or even days. We don’t even need to think about this in terms of FTX and Terra and the collapsed CeDeFi platforms; we can instead just think of it in terms of the macro environment that we now find ourselves in.

There has been a tendency in crypto to hold onto the Howey test – which conveniently pegs the worst of the worst of the 2015-7 ICO boom as securities, but leaves Bitcoin, (under most interpretations) Ethereum, and crucially stablecoins, untouched – as a Rumplestiltskinian object of focus. We know the true name of ‘no expectation of profit’, therefore we render the regulator powerless!

This is fine as a rallying cry, even fine as an operating principle, but it has never been totally bulletproof. US securities law, as in truth with most stress-tested systems, has almost infinite scope for regulators to call an audible and assign something that dreaded ‘security’ label. To give one example: the Reves test (via Reves v. Ernst & Young, 494 U.S. 56 (1990)) covers notes (i.e. a commitment to pay a specific sum) instead of investment contracts, and starts from the position that all notes are securities. Reves actually postdates and supersedes Howey. A fuller explanation of Reves in relation to stablecoins can be found in a Congressional Research Service paper from last year, linked here.

In any case, though, the particulars of whether or not a stablecoin as an asset can or should be considered a security seems almost secondary here to the aforementioned environment shift. There is an argument to be made that stablecoin issuers were tolerated in a low-rates environment precisely because their operations carried risk and because they couldn’t exist on the straightest and narrowest path with money markets where they were; this of course rather exposes the lie that stablecoin regulation is about consumer regulation, but still.

In a high-interest environment, where there is more incentive for governments and regulators to bring and keep cash flowing within systems that they can monitor, and where the financial plumbing involved in profiting as an issuer is much more accessible, it probably should not come as a huge shock that US regulators in particular are now changing tack, and coming after the ‘shadow banks’ of stablecoins by any means possible.

How far this reverberates, and where it ultimately ends, is at this point unclear, but in our view, the key thing to monitor will be the fate of Circle and USDC specifically. The winding down of BUSD is less important than it may seem to the industry as a whole, because as we quickly saw, uses and volumes quickly flowed back primarily to Tether, and with little friction at that; the value proposition of BUSD and USDT alike has always been less as ‘programmable money’ in real terms and more about the simple economic value that they represent.

USDC has always been different in two regards; first, with respects to its focus on doing things ‘the right way’ (first recipient of the BitLicense, headquartered in Boston, always kept everything explicitly onshore), and second, with respects to it very quickly becoming the de jure stable of DeFi over USDT, to the point of the ‘OG’ decentralised stablecoin DAI shifting its reserves last year in such a way that it became little more than an USDC proxy.

Incidentally, the motive behind that aforementioned shift was, in fact, to take advantage of Circle’s yield program; the company was quite aggressive in 2021 and early 2022 in pushing a 4.5% rate offering to corporate entities. This may seem like a lifetime ago, and it is worth noting that this a) predates even the first domino in the CeDeFi collapses, and b) that 4% dwarved the general 1% risk-free rate, even if it couldn’t hold a candle to Celsius and co.’s 20% rates.

It should be emphasised here that, in spite of some reports on Tuesday night, Circle have denied having received a Wells notice (essentially a warning of charges over possible security status). Nonetheless, it remains something to keep an eye on, because while Circle may be more transparent and hence presumably cleaner operationally than a Binance or Tether, its fundamental business model – provide stablecoin, earn yield from treasury – is the same as its competitors, and the big threat here is that Gensler essentially puts such firms in the same bucket as lenders and the like with respects to being ‘shadow banks’.

If USDC were to be targeted, the next steps are unclear. As has happened many times before, we would expect the crypto industry to adapt. Binance CEO Changpeng Zhao’s talk of non-USD stablecoins should probably not be taken all that seriously; said stables are always going to be a part of the crypto landscape, but there is no real alternative in terms of a different unit of account in general, and a variety of base pairs is fanciful when most major exchanges (including Binance) tend to struggle to even maintain liquidity on pairs like BTC/EUR and BTC/GBP, let alone non-G10 currencies.

The short-term move, then, would be towards Tether; however, this would likely not be the smoothest of transitions, given that so much infrastructure has been deliberately build on an explicitly USDC-connected basis over the last few years. The Y2K metaphor feels apt here – the kneejerk reaction is to assume disaster, said reaction is probably not accurate and any genuine disorder within the industry would be short-lived and isolated, but a lot of resources would end up being spent on the transition and it would slow absolutely everything down for a while as a result.

While warning against crises, this nonetheless does still paint a bleak short-term picture for the industry as a whole, and breath does need to be held in places with respects to seeing how far Gensler’s blitz will extend over the next few weeks.

Executive Summary 

• Discounts on GBTC and ETHE remain elevated after prospects of a quick dissolution/resolution have slowed over the last few weeks.
• The main problem is the trusts’ 2% performance fee; there remains strong incentive to keep it closed as long as Digital Currency Group remains healthy.
• Our view: negative market sentiment accounts for an outsized share of the effective discount calculation here, which creates potential opportunities on a value basis, but no resolution is likely any time soon.

May you live in interesting times. 

Resolution on the Grayscale trust situation has been slower than expected or desired over the last few months, and action since the start of 2023 has emphasised those issues. The filing for bankruptcy by lender and fellow DCG portco Genesis looked to be something of a ray of hope for holders, but it has not been so; while the discount has not deepened since early December’s -50% low, it has not substantially rallied either, staying stubbornly below -30% and sitting at -42% at the time of writing.

The overriding problem here is that the general expectation is, for redemptions to ever happen, Digital Currency Group as a whole would have to be existentially threatened. The structure of GBTC, and in particular the dual pillars of no redemption and a 2% management fee, heavily incentivise the company to maintain the trust indefinitely, no matter how bad the premium gets; the net effect that any of the bad publicity around the trust creates for the market at large (thus reducing the principal) is for the most part outweighed by the management fees collected.

Activist efforts around the fund have hence centred on those two points, and in particular the point of redemption. In practical terms, redemption would mean total dissolution of the fund, since it is hard to see almost any current holders retaining holding in the fund or funds; GBTC and ETHE in particular are relics of a time when market access was much poorer for would-be participants in the US than it currently is, even after the collapse of FTX and several CeFi platforms. Valkyrie, an asset manager principally involved in the issuance of crypto-correlated funds such as its strategy and mining ETFs, has lead the charge on this, proposing to take over the trust and allow redemptions (as well as reducing fees).

However, these efforts have gained little traction overall, and stakeholders received some bad news earlier this week when it came to light that Genesis were selling off some quantity of their held GBTC and ETHE shares at the current discount. This is hard to take as anything other than an indicator that the trust is definitely not considering an unforced dissolution – something that was generally presumed, but where the one route towards them doing so would have been around paying down Genesis’ debtors. The door remains open on a forced dissolution, but at the very least, it seems that any winding down may be painfully slow, which was the opposite of what was hoped for when relative prices rallied in late December.

For GBTC, ETHE, and other Grayscale trusts, this leaves things in a somewhat odd state. The first thing to say is that the potential for a broader market impact through any activity taken on the trusts is usually overstated in both directions; while dissolution would have cash settlement as a default, it would be suicidal for all involved to not look to steer towards in–kind instead, and liquidations following on from that would probably be a smaller portion of assets than is generally judged.

On the trusts themselves, and the current discount: especially given that it has gotten more expensive and more difficult (especially for regulated participants) to partially or fully hedge, the discount as it exists is possibly more of a reflection of sentiment on cryptocurrency as a whole than anything else, as opposed to when it was in the -5% to -20% range and could be understood as pricing of a broad guess at time towards a possible exit.

The trusts in that regard become somewhat interesting when the underlying assets are trading at close to a market low; after all, looking from the perspective of Grayscale themselves, and assuming that the discount will never shift back into an outright premium again, dissolution would make most sense when the underlying assets are at cycle highs in a year or two. The problem, of course, is that there is still ultimately no guarantee whatsoever that redemption is necessarily ever possible, and current prices to current cycle lows alone would represent a -30% drop in the base asset valuation.

Hence, while the trusts are interesting in terms of potential buys for the long-term (especially in jurisdictions where capital gains regimes etc. are more favourable towards OTC trusts than base assets), any arbitrage-based interaction with them at this time is risky at best.

Executive Summary

• UK regulators today (February 1st) unveiled a set of proposals for consultation on the future of cryptoassets in the UK.
• The draft guidance mostly concerns the financial services regime, covering exchanges, custodians, and lender and yield platforms among others.
• Our view: the proposals do not represent a significant change of tack, but continue to signal intent to pursue a ‘minarchist plus’ approach to regulation by the UK as it attempts to outmanoeuvre EU regulations in providing a flexible framework.

May you live in interesting times.

The British Treasury today published a number of proposals as part of a consultation that “sets out proposals for the UK’s financial services regime for cryptoassets, and marks the next stage of the UK’s phased approach”. The consultation is open until the morning of 30th April, 2023, and has received significant coverage as a potential milestone in the development of a British regulatory approach. The generally reactive tenor of British regulation towards new financial activities have led to London being one of the stronger centres of crypto business activity in Western Europe alongside Switzerland and Portugal in particular, and the sector has at times been held up as a potential area in which the country can lead in the post-Brexit period, particularly since the accession to the premiership of Rishi Sunak (and the movement of Grant Shapps, arguably the most outspokenly pro-crypto and pro-digital business voice within the Conservative Party, to the Business, Energy and Industrial Strategy brief).

What can we make of these proposals? The first thing to emphasise is that while they have been commonly referred to as the framework for a ‘cryptoasset regulatory regime’, the omission of the ‘financial services’ precursor unfortunately misleads. While there are references to not ruling out things in the future, the guidance is quick to make clear that the concern here is specificially financial services – “The proposed regulatory framework for cryptoassets is not intended to impose regulation on any underlying non-financial services activity which a cryptoasset might be used for.”

In particular, DeFi activities only merit a ‘call for evidence’ and four pages that can be boiled down to ‘in theory, yes, but in reality, no’. The primary point of concern here, as has consistently been the case across British government and legal missives over the past couple of years, is with respects to indicating that they are aware that DAOs and decentralised organisations exist within crypto, and that they are monitoring the development of the space but crucially see them as a potential legitimate form of organisation going forward (whereas EU and particularly US regulators have tended to take a view that anchors them to existing entities and/or categorises them as ‘unincorporated associations’ with the associated liability questions it brings up).

The key excerpt here (section 11.5) is:

“HM Treasury is of the view that the regulatory outcomes and objectives described in the preceding chapters should apply to cryptoasset activities regardless of the underlying technology, infrastructure, or governance mechanisms. However, due to the challenges outlined above, including the rapidly evolving nature of the sector, the way this is achieved may well differ and take longer to clarify…we are not intending to front run this by developing a prescriptive framework for the UK that would need to be fundamentally re-shaped once international approaches and standards crystalise.”

While leaving the door ajar for a potential future shift, the messaging here generally indicates towards an essentially minarchist approach to regulation of underlying assets. The one exception to this is with respects to initial offerings – while “in line with the approach applied to securities, HM Treasury does not intend to directly regulate the “creation” of unbacked cryptoassets under financial services regulation”, “under the intended reforms there will be a general prohibition on public offerings of securities, subject to certain exemptions.” As has tended to be the case worldwide, the definition of a security as it relates to crypto is left deliberately ambiguous – one thing worth noting is that in cases where there is no apparent central entity, “the trading venue would be required to take on the responsibilities of the issuer if they wish to admit the asset to trading”.

The more substantial part of the guidance here hence is with regards to a financial services framework for a set of entities that ultimately comprise ‘an exchange by any other name’ in real terms. Most of this is in actuality fairly standard for any financial business operating in the UK, and will be familiar to any British financial firm – stringent KYC/AML at point of contact, general anti-financial crimes rhetoric, and close collaboration with the FCA on ‘prudential requirements’ on an ongoing basis. Multilateral trading facilities (MTFs) are one of the key focuses here, with proposals to formalise bringing them under a framework derived from the existing MTF framework, in terms derived from powers granted under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.

Two other points in particular seem worth highlighting. One is that the proposals explicitly propose to capture all activities involving either a provider or a customer in the UK as in scope. The other is with respects to crypto lending platforms, which are identified specifically as a category of interest (that will come under the same authorisation regime as exchanges and custodians will). Interestingly, the discussion there mentions the Celsius and FTX collapses, and is keen to emphasise a view of seeing the collapse of those platforms as due to “significant liquidity mismatches”.

Of course, we would expect diplomatic language in a government proposal, but it is nonetheless interesting that in spite of what those platforms were doing, and the fact that they are arguably more of a pain point for low-information consumers than derivatives exchanges and the like could ever be, there still seems to be something of a soft-touch approach with regards to regulation – there are some additional authorisation rules regarding business plan at point of registration, but ongoing compliance is phrased in such a way to imply them as not a fundamentally high-risk business compared to MTFs. It will be interesting to see if this stance shifts with the developing situation within the sector.

In closing, the proposals here do not represent any sort of sea change in the UK approach to cryptoassets, which is on the whole likely a good thing for professional entities operating in the space – the UK’s approach has been permissive compared to its European neighbours, after all. It will provide little solace to retail, who are likely to remain restricted in their trading options. The one thing to keep an eye on will be what it means for retail exchange operations, particularly for Coinbase, who dissolved their UK entity last month, and Binance, whose Binance UK platform has been inaccessible for the better part of three years but have constantly made overtures towards reentering the jurisdiction; the focus on transparency to the FCA above all else may ultimately be of benefit here in the longer term.

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The FTX bank run and collapse created illiquid conditions that unevenly impacted digital asset returns. However, the crisis did not change fundamental value drivers for some digital protocols. Assets hit especially hard by illiquidity and produce fundamental value will improve compared to assets that fared better over the last few weeks.

Protocol user fees demonstrate protocol usage and potentially token demand. The market-cap-to-annualized-protocol-fees ratio makes fees comparable across assets. Total fees over the last 30 days indicate protocol usage through the FTX collapse. Protocols that earned fees after the FTX venue disappeared demonstrate usefulness, at least, and strong user retention, at best.

Not every project with low valuation multiples represents a value opportunity, even if impacted by illiquidity. Fees are unrelated to projects with low usage or that do not accrue value to token holders, stakers, or community participants.

Platforms with established communities, developers, and provide novel solutions can be priced relative to their protocol fees. Among the top assets, Lido, GMX, Convex, LooksRare, and Synapse fit the criteria. These token returns were impacted by illiquidity and their tokens are undervalued relative to other top assets like BTC, ETH, and others.

Each of these projects accrue value from protocol usage with unique or defensible market positions:

• Lido earns 5% of all rewards earned via the liquid staking protocol. Lido built the largest concentration of staked Ether because Lido users mint liquid tokens that represent their staked assets and accrue staking rewards across several L1s. Participants, like Lido validator operators, govern the Lido protocol with LDO tokens. New liquid staking derivatives projects threaten Lido’s L1 staking market share.
• GMX earns 30% of trading fees on its decentralized perpetual swaps protocol. On a weekly basis, the protocol automatically converts trading fees to ETH/AVAX to distribute to GMX stakers. November trading volume more than doubled from October on the GMX protocol. Centralized exchange competitors with lower swap fees maintain perpetual futures market dominance.
• Convex aggregates and optimizes Curve and other decentralized exchange staking rewards. DEX liquidity providers use Convex to pool their LP and governance tokens with others to gain DEX governance influence and maximize any rewards. Convex competes with other yield-optimizers that can devise more efficient strategies.
• LooksRare rewards LOOKS token stakers with platform fees, including 100% of NFT trading fees. The protocol issues new LOOKS tokens to NFT traders to align incentives among the community. NFT exchange leader OpenSea facilitates nearly 8x LooksRare volume to dominate the consolidating industry segment.
• Synapse bridges assets across different blockchain networks through AMM DEX pools. Users pay fees according to the type of cross-chain asset swaps performed via Synapse. Governance participants stake SYN to earn 60% of all swaps fees. Innovations like zero-knowledge proofs and state proofs are disrupting the interoperability segment that faced hacks and technology risks over the last two years.

These projects demonstrate value resilient to market risks. However, each has specific risks, like development quality. Competition in digital assets is uniquely risky because the industry’s open-source structure compounds innovation. Projects that innovate and mitigate idiosyncratic risks will perform through market cycles. These projects are starting points to find opportunities as the market moves past the FTX crisis.

Though FTX was not the largest exchange by volume, its collapse evaporated market liquidity and the full effects are yet to be determined. Exchange data shows the FTX collapse drove the volume impact on returns. While assets with market caps lower than BTC and ETH were more sensitive to illiquidity, the impact was inconsistent across them. This data says nothing of OTC markets where many of the largest participants disappeared in the second half of the year. Whether on exchange or OTC, illiquid markets create inefficiency and opportunity.

Adapted for digital asset markets, the illiquidity ratio measures the one-day price change divided by volume over the same time, averaged over the trailing 30 days and scaled to $1M. As Amihud noted in his 2002 paper on illiquidity and stock returns, microstructure liquidity is measured by the bid-ask spread, while the illiquidity ratio generalizes liquidity as the price impact per unit of volume.

The Messari Real Volume and price data provide a macro view of digital asset liquidity across verified exchanges. The data cannot be applied to OTC markets, where bid-ask spreads can vary from exchanges for long periods of time. This year wiped out 3AC, Celsius, Alameda, and many other large OTC participants. Until others step in to fill their space, OTC illiquidity will continue to diverge from public exchanges.

A first glance at the adapted illiquidity ratio demonstrates illiquidity impacts affected lower market cap assets, like SOL, more than BTC and ETH. As sellers drove the market cap off a cliff after FTX, daily returns became more sensitive to volume. SOL has never been more illiquid without its largest exchange, yet it remains among the top 20 assets by market cap with a captive and active developer community. As illiquidity effects subside, fundamental catalysts like new projects and development will present opportunities among long-tail assets that suffered the most from this year’s liquidity shocks.

Though BTC prices support last week’s view that digital asset markets remain in a downward trending regime, macro and fundamentals suggest changes are in the wind. Sunday marked the lowest close in two years at $16.3k BTC. Though it ended the free-fall, last week continued a negative trend for BTC price. Short term return trends moved up but remain below the long-term trend. Though prices could go marginally lower, we expect returns to incrementally climb in the short-term. Though prices support our view from last week that better entries lie ahead, returns suggest waiting has low utility.

Macro Catalysts

The US Fed released November FOMC minutes today to a second consecutive positive day for risk markets. The minutes listed signs of domestic and international economic weakness. Consumer and business spending growth decreased in October while energy costs rose across the world. They expected these conditions to put near-term GDP growth below trend and weaken inflation by balancing aggregate demand with supply.

The committee conveyed confidence that monetary and interest rate policies would be effective to reduce inflation. Jay Powell’s message from the meetings press conference echoed these sentiments with emphasis on the commitment to lower inflation.

Continuing and initial jobless claims today exceeded consensus expectations and the previous month’s levels to confirm slower US growth. Tighter financial conditions are slowing hiring, as designed. While equity returns caused concern over market expectations out of sync with the economy, merely stable inflation would be enough to ease recession expectations and stablize growth expectations. Recognition that a soft landing could materialize may be enough to encourage risk-taking after last quarter’s sell-off. The macro picture is supportive for risk and digital assets.

Industry Catalysts

Genesis flirting with bankruptcy would shock markets again. However, every day they can resolve their liquidity and solvency issues out of court is positive for digital assets.

Fear of the Grayscale BTC holdings getting re-hypothecated, sold, or even Grayscale’s opacity have subsided. The FTX collapse proved no firm is beyond scrutiny. However, Coinbase is a publicly-traded firm with an audit and multiple SEC filings each year. They are as secure a custodian can be.

Fundamentals

Bitcoin 30D hash rate stalled at 262 PH/s today.
From here, lower hash rate would be the final stage of miner capitulation and consolidation. Miners are likely to sell BTC holdings before machines to raise cash. The worst-performing miners sold BTC all summer as energy prices increased.

Stable hash rate would indicate consolidation and support long-term BTC mining growth. However, liquidated machines will not get turned on unless BTC price exceeds energy cost to mine it. The most efficient miners are profitable above $10k BTC, and potentially lower. One and two generation old machines are nearing breakeven at $15k BTC. After unprofitable miners closed operations this year, we expect miners to consolidate and build over the long term.