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*Ninepoint Digital Asset Group, is a division of Ninepoint Partners LP.
PRICE SNAPSHOT
(6 Day Change as of Oct 20, 2022 2:00PM ET)
Bitcoin Price: $19,091  ( 2.64%)
DeFi Total-Value-Locked: $52.75B
Ethereum Price: $1,284  (3.24%)
Crypto Market Cap: $917B
Bitcoin Range: $18,970 - $19,954
BITC.U Close: $5.79 (as of Oct 19, 2022)
Ethereum Range: $1,264 - $1,344
BITC.U NAV: $5.71
Bitcoin Dominance: 41.96% 0 .40%
BITC.U Premium:  1.40%
DIGITAL ASSET COMMENTARY
Mastercard is once again making moves in Web3, announcing on Monday that they would enable cryptoasset trading for banks. The Chief Digital Officer said “There’s a lot of consumers out there that are really interested in this, and intrigued by crypto, but would feel a lot more confident if those services were offered by their financial institutions.” We continue to see enterprise adoption of Web3 and cryptoassets accelerating into 2023.

Web3 has a new challenge: How to scale this technology to meet the demands of enterprises and onboard the next billion users, without trading away the very thing that makes blockchains a powerful tool—their decentralized, trustless, immutable nature. Alex wrote an op-ed for Fortune outlining a practical approach for how to bring 1 billion people to Web3.

Enterprise adoption continues to be a big theme in Web3. On November 8th to 9th, the Blockchain Research Institute, a frequent collaborator of the Ninepoint Digital Asset Group, is hosting its annual Web3 and Blockchain World Event in Toronto, with a focus on enterprise and government use-cases. Check it out here.

Meanwhile, Decentralized Finance (DeFi) continues to attract VC money: Uniswap Labs recently closed a $162 million funding round from brand-name VC firms, including Andreesen Horrowitz, Variant, Paradigm, and others.

Finally, The Case for Ethereum in Charts: Last week we did some analysis on Bitcoin’s core quantitative and technical metrics to determine if the price had found a floor. Our conclusion: for the patient investor, now is a great time to make an allocation to Bitcoin - read the full report here. This week, we look at the 2nd largest cryptoasset by market capitalization – Ethereum (ETH). How does Ethereum score? Is now a good time to buy? Check out this week’ Quantitative Analysis section for more.
STORY OF THE WEEK
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Reinventing Money for the Digital Age
By Alex Tapscott

Money, one of humanity’s greatest and most enduring creations, is once again on the brink of a historic transformation. Money, which has evolved through the millennia from cowrie shells to clay tablets to precious metals, bank notes and bank balances, is taking another great leap forward. Money is becoming digital. The next decade of innovation will prove decisive as state powers, global corporations, and an increasingly assertive digital civil society vie for control over the lifeblood of our economic lives.

There are three leading contenders for the future of money, all based on blockchain technology. The first are public cryptocurrencies like Bitcoin, which was designed from the outset to be a “peer-to-peer electronic cash system”—in other words, digital cash. The second are privately-issued digital dollars, backed by dollars or some other collateral. These stablecoins today are mostly backed 1:1 to the USD but could be designed to hold a peg to a basket of currencies, like Facebook’s ill-fated Libra project. The third are central bank digital currencies (CBDCs), created by governments and central banks. Each are radically different in their composition and their potential impact.

“The great majority of people in the Middle Ages never saw any money at all during their entire lives,” said James Burnham about the Feudal economy, which was based on subsistence farming and barter. Capitalism changed the role of money from mere medium of exchange (a convenient way to exchange for goods when barter was not an option), to capital more generally – something that by its nature could be used to earn more money by investing in physical plant like factories, lending to entrepreneurs and so forth.

As in ancient times, precious metals like gold served as the foundation for money during the early industrial era of capitalism. Why? Gold was non-perishable and had little useful purpose other than as a store of value. Money was something that people, “by mutual consent would take in exchange for the truly useful, but perishable supports of life.” In other word gold is useful as a store of value and medium of exchange because it is not truly useful.

Gold’s preeminent role as money began to gradually erode in the late 19th century, starting with the Civil War, when the Federal Government issued Greenbacks backed only by faith in the government itself and ending a century later when President Nixon finally closed the ‘gold window’ ending international convertibility of the US dollar into gold. Today, currencies float against each other. They are issued by government fiat.

If gold was the basis for the early industrial age and fiat currency the basis for our modern globalized economy, then some form of digital money will form the basis for the digital economy. Once again, we are on the brink of another epochal shift in money. But which one will succeed?

The Three Kinds of Digital Money

Bitcoin has been a remarkable success story. It is worth nearly half a billion dollars and is used by people all around the world as a store of value and a medium of exchange. It is a lifeline to the world’s unbanked. It is permissionless and censorship resistant which makes it a favourite of freedom fighters as well as alt-right groups. It is also energy-intensive and volatile, much like gold and other commodities. It will likely grow in importance as a store of value and hedge against fiat currency devaluation, but it may not succeed as the dominant medium of exchange for the digital economy.

Central Bank Digital Currencies are touted by governments and central bankers as a better alternative that can make the economy more inclusive, reduce volatility and improve the responsiveness of central banks to crises. CBDC boosters must answer some tough questions. For example, how exactly do we protect privacy rights when the government can see in real time how every dollar is being spent in the economy? Because of the worrying impact on civil liberties, CBDCs are likely to find more success in authoritarian regimes like China than in the U.S. or Canada where I expect they’ll be met with fierce resistance by some.

This brings us to the final main category: privately issued stablecoins, which are the synthesis of CBDCs and cryptoassets - digital assets issues by companies backed by fiat currencies held in financial institutions. The leading versions, USDC and UDSDT, are worth more than $100 billion combined. Facebook attempted its own stablecoin, called Libra, which was originally based on a basket of assets. This was met with fierce resistance by the U.S. government who saw it as an afront to the U.S. dollar system, revealing the risks to any company trying to reinvent money.

There is a final nascent category of synthetic ‘decentralized’ stablecoins, which are backed by assets held in smart contracts (like a piece of software with a bank account). DAI is an example, though even it is somewhat centralized as much of its collateral is in USDC and now, treasuries. A decentralized stablecoin is the synthesis of privately issued money and public cryptoassets. They are pegged to the U.S. dollar but are permissionless and do not rely on a third party to work. They are hard to shut down, and free to use by anyone. Though small in comparison to others (DAI outstanding is worth about $6 billion USD) but they are the frontier of money and we should all be paying attention.
DEFI & DIGITAL ASSETS
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A Conversation with Crypto VC Aryan Sheikhalian, Head of Research at CMT Digital
On today’s episode, Alex and Andrew speak with Aryan Sheikhalian, Head of Research at CMT Digital, one of the world’s leading digital asset venture capital firms. Aryan walks through CMT Digital’s investment philosophy, its core focus areas within crypto, and he makes a few predictions for 2023. Aryan is interested first and foremost in infrastructure - ways to make Web3 work better. For example, he talks about the need for better sources of off-chain data (so-called “Oracles”) to input into smart contracts and how to invest in it as a theme. You won’t want to miss it!
QUANTITATIVE ANALYSIS
The Case for Ethereum- In Charts
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Source: glassnode
Chart #1: Ethereum: Number of Addresses with Non-Zero Balances On pace for 100 million by Year-End
There are currently more than 80 million Ethereum wallets with a non-zero balance. Though this is not a pure comparison to “number of users,” as one user (or even a machine/thing) can have more than one wallet, it is a good indicator of broadening use of Ethereum. Worth noting the rate of growth has accelerated in the past month.
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Source: glassnode
Chart #2: Ethereum Balance on Exchanges Declining
The balance on exchanges continues to steadily decline over time from a high experience in 2020. The current balance is roughly equivalent to mid-2018. A declining exchange balance means users are removing ETH from centralized exchanges. This can mean two things: They are either putting those assets into cold storage and are thus long-term holders. Or they are removing ETH to deploy it in smart contracts, buy NFTs, and so forth – in other words using ETH for its intended purpose. Either way, this is bullish.
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Source: glassnode
Chart #3: Total Number of Contract Calls Hits All-Time Highs
This chart shows the number of daily contract calls made from Ethereum wallet addresses to Ethereum smart contracts, aka the number of successful daily transactions between users and smart contracts. Remarkably, this number recently hit an all-time high and continues to however near that level.
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Source: glassnode
Chart #4: Read-Through to DeFi on Ethereum
Uniswap transaction volumes have steadily ticked higher since hitting a local low point in May 2022. Uniswap is only one decentralized exchange among many, but the increase in volumes is a sign that DeFi exchanges are drawing back users after the mid-year correction. Still, the volumes remain well below the highs.
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Source: glassnode
Chart #5: Finally, The “Greening” of Ethereum in One Chart
With the move to proof-of-stake (known as “The Merge”), Ethereum’s carbon footprint declined by 99%. Mining difficulty, which is correlated to computing power and thus energy usage, plummeted to zero following The Merge, as miners’ business model became obsolete overnight.
COMMENTARY & INSIGHTS