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*Ninepoint Digital Asset Group, is a division of Ninepoint Partners LP.

PRICE SNAPSHOT

(7 Day Change as of Jan 20, 2022 9:45AM ET)

Bitcoin Price: $21,097 10 .95%		DeFi Total-Value-Locked: $45.17B
Ethereum Price: $1,559 10.48%		Crypto Market Cap: $980B
Bitcoin Range: $18,999 - $21,650		BITC.U Close: $6.26 (as of Jan 19, 2023)
Ethereum Range: $1,409 - $1,612		BITC.U NAV: $6.26
Bitcoin Dominance: 43.43% 2 .47%		BITC.U Premium: 0.00%

DIGITAL ASSET COMMENTARY

Breaking the Fear Barrier: Bitcoin Market Sentiment on the Rise

The Bitcoin Fear and Greed Index, a market sentiment indicator, moved into neutral territory for the first time in nine months over the weekend with an index score of 52. This marks a change in sentiment as it had been in the "extreme fear" category since June 2022, when it reached a multi-year low of 9. The index uses data from various sources, including volatility, market momentum, and social media trends, to gauge the emotional state of the crypto market. Although there was a dip back to 45, the index's move into neutral territory, in conjunction with a series of gains for Bitcoin, suggests a potential shift towards a more bullish sentiment.

Ethereum Net Issuance Drops Below Zero, aka ETH goes “Ultra-Sound”

Since the Merge, Ethereum's supply has decreased by over 600 Ether, as per Ultrasound. Money's website, compared to a simulated Proof-of-Work system in which 1.4 million Ethereum would have been added to the supply in the same timeframe. The dual combination of the Merge plus a recent network upgrade has reduced the new supply by 90% while contribution a portion of network fees to burning ETH, effectively taking it out of circulation.

Volcano Bonds: El Salvador Deepens its Commitment to Bitcoin Amidst Criticism

El Salvador has enacted legislation establishing a regulatory framework for digital assets and a legal foundation for creating a Bitcoin-backed bond named the "Volcano Bond." The bond will be used to pay down sovereign debt and finance the construction of the proposed "Bitcoin City." The bill, which passed with 62 votes in favor and 16 against and is set to become law upon ratification by President Bukele, also establishes a new regulatory body to enforce securities laws and safeguard against malpractice. The technology provider for the bonds, Bitfinex, estimates that the bonds will raise $1 billion for the country, with half of the proceeds allocated towards Bitcoin City’s development.

Spotlight: The Global Push for Crypto Regulations: Japan’s Role in the Financial Stability Board

Japan's Financial Services Agency (FSA) is calling on regulators in the US, Europe, and the rest of the world to impose the same level of stringent regulations on the crypto industry as those applied to traditional banks. The FSA's call for tighter regulations is aimed at ensuring investor protection and curbing future fraudulent activities in the crypto space. The agency is promoting global regulations through its participation in the international Financial Stability Board and has proposed measures such as on-site inspections and a "multi-national resolution mechanism" for when companies fail. Despite the call for stricter regulations, Japan remains a crypto-friendly nation, with minimal restrictions and government investment in the metaverse and NFT-related projects. The crypto industry is moving towards a more secure, transparent, and regulated environment, and it's exciting to see Japan leading the charge in this development.

STORY OF THE WEEK

Ethereum Makes the Case as “Ultra-Sound Money” for Web3

By Alex Tapscott

Last week we wrote about the fee structure of blockchains. Blockchains are distributed ledgers of transactions maintained by networks rather than intermediaries like banks. They enable the fast, frictionless peer to peer exchange of value. But they are not free to use. Network participants need an incentive to contribute their time, money and assets to securing the network.

For example, Bitcoin users pay a fee to miners in the form of block rewards that steadily increase the number of Bitcoins outstanding, which is dilutive to existing holders. Users of proof-of-stake networks like Cosmos and Cardano incur some dilution in the form of staking rewards paid to nodes who tie up their assets to help secure the network. Applications built on top of these kinds of networks like Uniswap (a decentralized exchange) or Compound ( a decentralized lending product) also issue tokens that over time increase the ‘float’ of tokens outstanding. Token issuance is a strong incentive to use a platform or service, and in the case of Bitcoin, is essential to maintaining its high degree of security.

But what if a protocol was able to maintain a steady token distribution, thereby incentivizing holders to stake their coins, while also extracting just enough fees from transactions so that the net issuance remained flat or even declined? At that point, all future fees would be accretive to existing tokenholders, even if they remained flat as “earnings per token” increased steadily. On a recent DeFi Decoded episode, my co-host Andrew Young argued that protocol revenue (aka earnings) was the key to long-term viability of many projets. Hard to argue with that. And we joked last week that Crypto likes to reinvent or riff off existing financial concepts, like interest and earnings. Well, Ethereum is disrupting another common concept – share buybacks!

Ethereum's recent upgrade, known as the Merge, was a watershed for Web3. In addition to reducing the carbon footprint of Ethereum by more than 99%, the upgrade also reduced the inflation rate of ETH by 90% through the implementation of an upgrade known as EIP-1559, whereby a portion of the Ether used to pay for transaction fees is burned (effectively eliminated forever), making the remaining ETH scarcer and theoretically more valuable. Stakers are still getting paid in new ETH, but as the network demand has steadied, the amount being burned has begun to match the amount issued. Now that number has switched. Tim Beiko, a core contributor to Ethereum and one of the lead architects of the Ethereum Merge, breaks the process down: “If you give validators issuance, and part of transaction fees, but burn the rest of transaction fees, when the burn offsets issuance, you get both rewards and deflation, along with a sustainable security budget.” The key driver of this process is that there is sustained, and generally growing interest in using the Ethereum network. If nobody wants to transact on the network, than there will be no fees to offset the issuance of new tokens. This unsustainable dilution spiral has weighed on many would-be competitors to Ethereum. Perhaps as Ethereum goes “ultra-sound” it will further solidify its lead as the dominant blockchain for building Web3 applications. This would not be the worst thing in the world.

DEFI & DIGITAL ASSETS

Ethereum goes Ultra-Sound! Is ETH the New Digital Gold?

On today’s episode, Andrew and Alex talk about crypto’s stellar start to 2023. Since the beginning of the year, Bitcoin and Ethereum are up more than 20% while some smaller names like Solana have fared even better. Is this a dead cat bounce? Short covering? A macro-driven rally lifting all risk-on boats? Or is this the start of a new bull market? Next they talk about how Ethereum is becoming ‘ultra-sound’ meaning net new-issuance of tokens is flat or declining. How does Ethereum compare to other big profitable enterprises like Apple who use excess profit to buy back stock much in the same way the Ethereum network uses excess network fees to retire ETH (a process known as ‘burning’). As always, a little knowledge of traditional finance is helpful to understanding Web3!

WATCH

QUANTITATIVE ANALYSIS

Source: glassnode

#1 – Ethereum Goes “Ultra-Sound”

Since the Merge, Ethereum's supply has decreased by over 600 Ether, as per Ultrasound. Money's website, compared to a simulated Proof-of-Work system in which 1.4 million Ethereum would have been added to the supply in the same timeframe. A portion of transaction fees are burned, effectively eliminating them from circulation. Contrast that to Bitcoin, which has seen more than $2 billion in new Bitcoin created in the same time period.

Source: glassnode

#2 – Smart Money Dominates: Insights from the Bitcoin Realized HODL Ratio

The Bitcoin Realized HODL Ratio is a metric that sheds light on the distribution of wealth between seasoned investors and newer market participants. Recently, it has entered the green zone, indicating the dominance of long-term investors, referred to as "smart money" in the crypto market. This is a positive development, as historical data has shown that such shifts have preceded upward price trends in the past, particularly in 2019, where the ratio remained at these levels for four months before Bitcoin's price experienced a significant rally.

Source: glassnode

#3 – Tracking the Tide: Analyzing Bitcoin's Transfer Volume Momentum

The Bitcoin Transfer Volume Momentum (Change-Adjusted) metric is a valuable tool for gauging the activity and adoption of the network. It compares the monthly average transfer volume (red) to the yearly average (blue) to identify shifts in sentiment and changes in network activity. Currently, the metric is showing a contraction in on-chain activity, indicating potential deterioration in network fundamentals and declining usage. However, it's worth noting that this negative trend has recently stagnated after a sharp fall since September 2022. This could signify a turning point in the network activity, and it's important to keep an eye on this metric to see if the tide will turn soon.

Source: The Block

#4 – The Resurgence: Bitcoin Dominance Hits 40%

Bitcoin has seen a resurgence in dominance, reaching 40%, a level not seen since August 2022. This spike in Bitcoin's market capitalization relative to the total market capitalization of all crypto assets, following a year of relative stagnation with a high of 45.63% and a low of 35.95%, can be attributed to a variety of factors. Given the recent challenges the space has faced, many have sought refuge in stablecoins; however, with the recent rally in Bitcoin price, there may be a shift towards converting to Bitcoin to capitalize and not miss out on its potential returns.

COMMENTARY & INSIGHTS

		Solana Survived! Plus: 2023 Crypto Predictions (Part 2)!

		Is Blockchain Eating Wall Street Or Is Wall Street Eating Blockchain? \| Alex Tapscott

		Webinar Recording - The Blockchain Revolution: A discussion with Alex Tapscott

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