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*Ninepoint Digital Asset Group, is a division of Ninepoint Partners LP.
PRICE SNAPSHOT
(6 Day Change as of Nov 10, 2022 2:30PM ET)
Bitcoin Price: $17,352 (16.56%)
DeFi Total-Value-Locked: $45B
Ethereum Price: $1,278  (20.76%)
Crypto Market Cap: $872B
Bitcoin Range: $15,512 - $21,479
BITC.U Close: $4.83 (as of Nov 09, 2022)
Ethereum Range: $1,100 - $1,677
BITC.U NAV: $4.95
Bitcoin Dominance: 40.01% (0.37%)
BITC.U Discount: 0.0024
DIGITAL ASSET COMMENTARY
  • Crypto Carnage: FTX, a top global exchange that counts supermodel Giselle Bundchen as a spokesperson, and was once valued at over $30 billion USD, is on the brink of bankruptcy following a historic liquidity crunch that has the company scrambling for a bail-out from investors or competitors. Founder SBF, who has been compared to J. Pierpont Morgan and is the face of crypto in D.C., has himself succumbed to the hubris and poor risk management that sent the industry into turmoil earlier this year. Today, we stand on the brink of a long, bleak crypto winter. Will crypto emerge from FTX's collapse with a renewed commitment to trustless, decentralized tools?  Or will we end up with an effective monopoly with one too-big-to-fail business in Binance dominating the market? We recorded a special double episode of DeFi Decoded where we break it down.

  • Accounting Changes for Crypto Incoming: A proposed change to how cryptoassets are treated on financial statements may open the doors to wider corporate ownership and adoption. Alex discusses in detail in his latest op-ed for Fortune Magazine.

  • U.S. Midterms and Web3 Policy: The much anticipated “Red Wave” was more of a pink sprinkle as Republicans made some gains but fell far short of a clean sweep. These were the first U.S. elections where Web3 and crypto was a major issue, partly because crypto firms and their executives have donated an impressive $73 million to candidates, according to the Wall Street Journal. Web3 is a rare issue in American politics with bipartisan support. Read Alex’s section for more analysis.

  • Silk Road Redux: On Monday, U.S. authorities announced the seizure of $3.4 billion worth of Bitcoin that was stolen from the darknet website Silk Road in 2012. "For almost ten years, the whereabouts of this massive chunk of missing Bitcoin had ballooned into an over $3.3 billion mystery," the Department of Justice said. The Bitcoin was found in an underground safe and "on a single-board computer that was submerged under blankets in a popcorn tin stored in a bathroom closet." (Read more in this article from The Block).

  • Dry Powder Hits Record High: Stablecoin balances on exchanges hit an all-time high of $40 billion USD this week, just as Bitcoin balances on exchanges declined to levels not seen since 2018. All that dry powder ‘sitting on the sidelines’ in a supply-constrained environment is a recipe for a melt-up when sentiment changes. See our Quantitative Analysis section for more.

STORY OF THE WEEK
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In the Wake of a Divisive Midterm Election and the Stunning Collapse of FTX, Web3 Faces Daunting Policy Challenges. But there is Hope!

By Alex Tapscott

Despite the cliché that Web3 is dominated by affluent libertarian-leaning white men, it turns out that it is in fact broadly popular across a wide swathe of the population in the U.S., Canada and elsewhere. This makes sense: the foundational technologies of Web3 such as blockchains, digital assets and smart contracts are neutral and apolitical. A blockchain is about as “right wing” or “left wing” as a refrigerator. Just as everyone deserves access to cold milk and fresh vegetables regardless of their politics, Republican and Democrats alike deserve and indeed want more access to Web3 tools.

This is supported by the data: 44 percent of digital asset holders in the United States are people of color, according to a survey by the University of Chicago’s National Opinion Research Center conducted earlier this year.i Furthermore, another survey conducted by Morning Star in the United States revealed that while 10 percent of the fully banked owned digital assets, 37 percent of the underbanked own themii, using digital assets to make payments and store value, as well as invest and trade.iii

Web3 offers something for every political stripe. Those on the left should like that it lowers barriers for financial inclusion and creates more avenues for the unbanked to save and move money. It also creates new ways for working people in the gig economy to earn extra income, for example in the play-2-earn gaming space. By decentralizing financial services, it reduces the relative power of Wall Street banks, a long-time bogeyman, and gives internet users more privacy over their virtual selves, which may loosen the grip of Web2 companies, who have come under scrutiny for their monopolistic practices, especially by Democrats.

For those on the right worried about censorship and the marginalisation of conservative viewpoints by the mainstream media, Web3 applications could offer a respite. They are apolitical, censorship resistant and difficult to shut down. Bitcoin specifically is seen as an off-ramp from government-controlled money. Cryptoassets can also be directed towards political and charitable causes privately, anonymously and peer to peer, a boon to those on the right and left. Finally, Americans of all stripes are willing to try out new technology tools. Their culture of innovation and experimentation is essential to America’s economic model and success.

It is no wonder, then, that on the eve of the Midterm elections, a recent poll found more than half of Americans surveyed (53%) agree that “cryptocurrencies are the future of finance,” including 59% of Democrats and 52% of Republicans, with 44% of Americans noting that they expect to have crypto as part of their investment portfolio in the future.”

Many Web3 users and companies also want elected officials take action to clarify and when necessary, create new policies for this new asset class and technology. As such, there is a rare window for politicians on both sides of the aisle to work together towards a new framework for Web3, as they did for Web1 when the Telecommunications Act was overhauled.

So far, many in government across the political spectrum have kept an open-mind. Joe Biden’s White House released a comprehensive executive memo earlier this year that struck a reasonable balance between the need for sensible regulation and a recognition that this new technology holds immense promise for the country. In Congress, Democrat Kirsten Gillibrand and Republican Cynthis Lummis worked together on the Responsible Financial Innovation Act Bill, which sought to clarify rules around digital assets. Some governors and mayors, seeing the potential for jobs and investment in their state, have opened their arms to the industry, such as Governor Gregory Abbott of Texas and Mayor Suarez of Miami (both Republican). In New York, Democratic Mayor Eric Adams has said he wants to make the city a leader in DeFi and Web3, even volunteering to take the first three months of his salary in Bitcoin.

Still, there have been no new policies, and still much confusion, leading to a process of ‘regulation by enforcement,’ by the SEC and CFTC, which is politically contentious as it is less “democratic” than creating laws in congress in a transparent and deliberative process. Still, in the absence of new policy, one can hardly fault most regulators for doing their jobs. The recent collapse of FTX and stunning fall from grace of founder Sam Bankman Fried, who was the face of the industry in D.C., will certainly accelerate enforcement action. Centralized companies that custody assets for customers clearly need better regulation, including full disclosures and audits of customer deposits and corporate financials. Differentiating between crypto ‘banks’ like exchanges and the open source technologies of Web3 will be the definitive policy challenge for this new industry.

Ultimately, Web3 is now a big business, and the industry has recognized the need to engage with policymakers and is lobbying aggressively for its interests. As long-time crypto entrepreneur Eric Voorhees said recently, “if you’re not at the table, you’re on the menu.” So far, Web3 businesses and executives have spent $73 million to influence the outcome of the election and they are lobbying their own users to make the case for crypto with their local elected officials. Coinbase, a popular exchange, even created a dashboard that gives congresspeople a ‘grade’ based on their comments and actions towards the industry. Ultimately, the maturation of Web3 lobbying is an inevitable sign of the times that the industry has hit the big leagues. Time for elected officials to treat it that way.

DEFI & DIGITAL ASSETS
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Crypto on the Precipice Following Spectacular FTX Collapse
FTX, a top global exchange that counts supermodel Giselle Bundchen as a spokesperson, and was once valued at over $30 billion USD, is on the brink of collapse following a historic liquidity and solvency crisis that left the company scrambling to raise capital or sell itself to rivals. Founder SBF, who we once compared to J. Pierpont Morgan for his role as lender of last resort during the Summer 2022 lending crisis, has himself succumbed to the hubris and poor risk management that sent the industry into turmoil this year. Today, we stand on the brink of a long, bleak crypto winter. Will crypto emerge from FTX's collapse with a renewed commitment to trustless, decentralized tools? Or will we end up with an effective monopoly with one too-big-to-fail business in Binance dominating the market? Andrew and Alex give their best shot at predicting where we go from here.
QUANTITATIVE ANALYSIS
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Source: glassnode
Chart 1: Stablecoin Balances on Exchange Hit Record Highs
There is a record $40 billion USD equivalent of US dollar-denominated stablecoins on exchanges, led by BUSD, the native stablecoin of Binance. Stablecoin balances could be growing as investors sell risk assets and park their money in a stable store of value, waiting for an opportunity to pounce. Either way, $40 billion of potential buying power on a $1 trillion market is significant. A chance in sentiment could see holders deploying that into Bitcoin and other assets.
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Source: glassnode
Chart 2: Meanwhile, Bitcoin Balances on Exchange Continue to Decline
This is probably a bearish signal for the short term. Traders may be selling Bitcoin into USDC and other stablecoins, waiting for a turn in the market, or for longer-term holders they may be removing Bitcoin off exchange into cold-storage. Medium-long term this is a positive for the price as a lack of supply paired with enormous buying power in stablecoins (see chart #1) could mean a price squeeze when sentiment changes.
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Source: glassnode
Chart 3: Bitcoin Hash Rate at All Time High
Hash rate is a measure of computing power miners need to validate blocks in the Bitcoin blockchain. Conventional logic is that the higher the hash rate the more difficult the process and thus the more secure the network. However, the surge in hash rate has put a strain on many miners’ finances. Core Scientific, a major publicly listed Bitcoin miner warned it might go bankrupt soon. Inevitably, high-cost miners will fail and go offline and when that does the hash rate should decline, resetting the network to a new equilibrium state. For now, it’s all pain for Bitcoin miners.
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Source: glassnode
Chart 4: Slow and Steady Wins the Race? Bitcoin Addresses with Non-Zero Balance Hits All-Time High
So far during this bear market, Bitcoin continues to see slow and steady adoption, which is different from prior cycles such as 2017 when interest dropped materially.
COMMENTARY & INSIGHTS