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*Ninepoint Digital Asset Group, is a division of Ninepoint Partners LP.
PRICE SNAPSHOT
(7 Day Change as of Sept 15, 2022 2:30PM ET)
Bitcoin Price: $19,808  0.77%
DeFi Total-Value-Locked: $54.6B
Ethereum Price: $1,504  (2.01%)
Crypto Market Cap: $968B
Bitcoin Range: $19,201 - $21,398
BITC.U Close: $5.97  (as of Sept 14, 2022)
Ethereum Range: $1,488 - $1,790
BITC.U NAV: $5.92
Bitcoin Dominance: 40.62% 1.83%
BITC.U Premium: 0.83%
DIGITAL ASSET COMMENTARY
  • The Ethereum Merge occurred yesterday minutes before midnight Pacific Time.  This is a significant milestone for the Ethereum community and entire blockchain space. See our "Story of the Week" section below for a full breakdown.
  • Bitcoin prices hit a three-week high ahead of Tuesday’s CPI print, before pulling back violently along with other risk assets. Inflation came in hotter than expected causing risk-off sentiment to grip markets. Bitcoin’s correlation to the NASDAQ hit a 4-month high on Tuesday of 0.9 as central bank policy and inflation dominate the crypto story. Bitcoin’s correlation to the Gold also hit a 2 year high of 0.89, as another ‘inflation hedge’ got caught up in an old-fashioned liquidity crunch. Long term, we continue to see both gold and Bitcoin as key diversifiers and hedge assets in a portfolio.
  • BTC turned positive relative to ETH, following weeks of underperformance, as investors hedged their exposure and took profits going into the Ethereum Merge.
  • Enterprise Web3 adoption accelerates: Starbucks announced its first leap into Web3: Starbucks Odyssey, as its called, will “offer members the ability to earn and buy digital collectible stamps (NFTs) that will unlock access to new, immersive coffee experiences. The release also states: “As one of the first companies to integrate NFTs with an industry-leading loyalty program at scale, Starbucks will create an accessible Web3 community that will enable new ways to engage with members and partners.” 
  • Charles Schwab, Citadel and Fidelity Digital (a wholly owned subsidiary of Fidelity) are launching a digital asset exchange known as EDX Markets. This followed a report in the Wall Street Journal that Fidelity was mulling adding Bitcoin trading to its brokerage platform. That move would make it possible for 34 million customers to buy and sell Bitcoin directly. Fidelity would join Robinhood, Square, WealthSimple and others who have strengthened their cryptoasset offering in recent years. Despite the pullback in prices, traditional financial firms clearly continue to forge ahead on their digital asset plans.
STORY OF THE WEEK
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MERGED!

By Alex Tapscott

The Ethereum Network (known as Mainnet), which until now has used the energy-intensive proof-of-work consensus mechanism to validate transactions and secure the Ethereum blockchain, has officially merged with the proof-of-stake “beacon chain,” becoming a proof-of-stake network. This is a remarkable achievement for the Ethereum community and a watershed moment for Web3. Ethereum is a $200 billion juggernaut with millions of users, thousands of supported assets, and billions of dollars in transactions daily. As we wrote before:

The Merge is roughly the equivalent of swapping out the jet engines of a 747 for all electric motors mid trans-Atlantic flight without changing the flight plan, upsetting the drink cart or pausing the in-flight entertainment system.

Naturally, miners who earn billions a year from proof of work (mining rewards last month were over $600 million) are not happy. This has led to months of speculation that the Ethereum network will ‘fork’ at the merge into two chains- one that adopts proof-of-stake and another that maintains the existing proof-of-work consensus mechanism. The group backing the proof of work ETH (known as ETHW) have signaled they will launch their mainnet within a day of the merge and as of writing, the ETHW token is being priced on FTX, a cryptocurrency exchange, at around $20, implying a value of approximately 1.5-2.0% of Ethereum.

With this fork, Ethereum-based assets, such as stablecoins, governance tokens, digital art (NFTs) and all other tokens, could theoretically exist on both chains. In reality, it will be up to the communities of developers and users who’ve built and who use those products to decide which chain to adopt. Most key stakeholders have signalled they will go with the proof-of-stake chain. This includes stablecoin issuers like Circle, NFT marketplaces like OpenSea, NFT platform Yuga Labs, creator of the Bored Ape Yacht Club NFT community, node operators like Infura (who we spoke to on a recent episode of DeFi Decoded) and many more. The small relative value being ascribed to ETHW suggests the market doesn't see it as a viable alternative.

What’s the investment opportunity?

We believe the Proof of Stake Ethereum fork is likely to win out. So, from an investment perspective, the merge could impact the supply and demand dynamics of Ethereum, which could in turn be good for the price of ETH. While the rate of inflation (meaning new ETH that gets created) will not decline, at least in the short-term, it’s very likely those who stake ETH will be more likely to hold on and not sell than miners. Mining requires capital investments in equipment and can sometimes have high energy costs. To fund their operations, miners sell a large part of the ETH they earn into the market. Stakers will not have any of those demands. They may decide to sell to earn a return in fiat, but it’s more likely they’ll retain the new ETH and re-stake it. This is roughly the same as implementing a dividend reinvestment plan (DRIP) for a stock.

Also, if miners and others go a different route and decide to continue on with a proof-of-work version of Ethereum, holders could benefit. The strange alchemy of forks sometimes leads to a ‘breakup’ value worth more than the sum of the parts. Holders might find themselves with ETH worth ‘X’ – the same as before the merge – plus another token worth…something (roughly $20 as of writing). Also, miners have turned their attention to other proof-of-work blockchains where they can still be useful, including Ethereum Classic and Ravencoin, leading to those coins outperforming in the short term, though it remains to be seen how this will play out over time.

What’s the big picture opportunity?

Big picture, The Merge is good for Ethereum users, developers, cryptoasset investors, and the broader ecosystem. It will, by some estimates, reduce the carbon footprint of Ethereum by 99%. It will clear the deck for the Ethereum core developers to focus on other network upgrades including improvements to scaling, security and usability. It will remove a major overhang that has been a source of angst for investors, users and other community members since Ethereum’s founding. It will solidify proof-of-stake as one of the two primary consensus mechanisms for blockchains, along with proof-of-work which we continue to believe will play a critical role. It will give certainty to the growing number of enterprises who use Ethereum and the Layer2 platforms that are helping Ethereum scale (most recently, Starbucks, which announced a major push into Web3). Enterprise adoption of Ethereum and Web3 is just getting started. The spark has been set and the move to proof-of-stake will be an accelerant.

DEFI & DIGITAL ASSETS
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On September 15th, 2022, Ethereum became a proof-of-stake network. On today's episode Andrew and Alex break down what happened, how it changes the investment case for Ethereum and what it means for the future of Web3. The significance is hard to overstate: by some estimates this will reduce Ethereum's carbon footprint by 99%. It will clear the deck for future upgrades to make Ethereum more scalable and useful. It will radically alter the supply and demand dynamics and may make Ethereum a high-yielding deflationary asset, attracting new kinds of financial investors. It will provide clarity to enterprises who want to build on public Web3 infrastructure. It could even improve the image of blockchain technology, easing pressure from policymakers. They also discuss the impact on cryptoassets as a whole, how it could impact Bitcoin and what it means for alt-L1s.
QUANTITATIVE ANALYSIS
1 On Eve of Ethereum Merge, Bitcoin Hash Rate Hits All Time High.png
Source: glassnote
On Eve of Ethereum Merge, Bitcoin Hash Rate Hits All Time High
With the Merge, Bitcoin becomes the undisputed king of proof-of-work. Quite fittingly, the week Ethereum migrates to proof-of-stake, Bitcoin’s hash rate hits an all-time-high. Hashrate is a good indicator of network strength.
2 Exchange Volumes Continue to Decline.png
Source: The Block
Exchange Volumes Continue to Decline
After hitting a high-water mark in April 2021, exchange volumes have dropped notably as retail investors shy away from heavy trading. Despite the pullback, major financial players like Fidelity Digital Assets, Citadel and Charles Schwab are redoubling their efforts in this space (see Digital Asset Commentary section).
3 Where is Bitcoin mined, anyway.png
Source: Cambridge Centre for Alternative Finance
Where is Bitcoin Mined, Anyway?
Geographic dispersion is one of the best protections against Bitcoin getting co-opted by any single country. Yet for much of its history, China accounted for the majority of Bitcoin’s hashing power. This changed last year. Today,  Bitcoin is geographically distributed with no country controlling more than half the hash rate. The United States is by far the largest contributor to the network, by hash rate.
COMMENTARY & INSIGHTS