Data & Insights Recap - August 21, 2023

Don't hate, liquidate

Source: The Block

• It was the end of low volatility summer this week as the prices of many crypto assets bounced around to eventually end up in the red. 
  • It did not seem like there was any specific reason for the selloff, as multiple assets were impacted, but everyone’s favorite market mover, U.S. inflationary woes, seemed to play a part. While inflation in the United States has been coming down, it is still higher than the Fed’s 2% target, and a lot of economic data has continued to come in strong, causing the central bank to worry they haven’t done enough. 
  • With the raw inflation data showing vast improvements (prices only rose 3.2% in July compared to a year earlier, whereas in June 2022, prices were up over 9%), many people suspected that the 0.25 basis point hike in July would be the last one for the year. However, the minutes revealed a more hawkish tone, with officials still saying they saw significant inflation risks. With further rate increases looking more likely, we saw the prices of many stocks fumble (the S&P 500 is down over 2% for the past 5 days). Additionally, there are fears over the Chinese economy, the second largest in the world, which seems to be struggling to execute a post-pandemic recovery.
  • In more crypto-centric news that would move the market, SpaceX revealed that it wrote down the value of its bitcoin by $373 million and had also sold some of the asset. There was also some speculation we would get a ruling on the lawsuit that Grayscale brought against the SEC, but it looks more likely that it will come on Tuesday. The SEC got approval to, and subsequently did, appeal in the Ripple case. 
• The violent swings in prices caused many liquidations across the crypto industry. Over $1 billion of futures positions were liquidated in 24 hours across centralized exchanges. Since the price of many crypto assets dropped but then rebounded a bit, we saw both long and short positions being wiped out, but predominantly long since prices wound up net negative. 
  • It was the largest day of futures liquidations in U.S. dollars in over 3 months, on both the long and short side.
  • The other liquidations market that got hit was the lending market. There were over $62 million worth of liquidations in the Ethereum decentralized lending market on August 17th, primarily driven by those on Compound. It was the highest volume of liquidations we’ve seen since the collapse of FTX. It also pushed August to the highest month of lending liquidations we’ve seen this year. 
  • When prices drop, it can strain the value of collateral locked up in many of these decentralized lending protocols, forcing many loans to liquidate.

Exchange traded FUNds

Source: Grayscale

• It has been ages (roughly two months in crypto time) since we got the rush of BlackRock filing for a spot bitcoin ETF. 
  • For about two weeks, a spot bitcoin ETF was all anybody talked about. We had filings from Bitwise, WisdomTree, Invesco, Valkyrie, Vaneck, and Fidelity all piled in, drumming up a lot of hype about the potential for a new way that investors could tap the bitcoin market. 
  • The energy pushed bitcoin up to $30,000 at the end of June, where it hovered until the fallout from last week. 
  • But since all these initial filings to register (and a few filing updates that named Coinbase as a partner to help monitor for spot market manipulation), there has not been much news, as regulatory approval processes tend to take some time. 
  • Take, for instance, the spot bitcoin ETF application from ARK Invest and 21Shares. They initially filed back in April of this year, and updates were filed this summer, like with all the applications, as confirmations for agreements poured in. A decision was expected on August 13th, which was already over 3 months out from the first application, but then the SEC further delayed the decision by opening up a 21-day comment period. It is a testament to how much time can pass between an initial round of excitement and any actionable feedback from it. 
• Another example of a long-winded plot without resolution is Grayscale’s lawsuit against the SEC. Back in June 2022, Grayscale filed the suit after the SEC blocked an application for Grayscale to convert its signature Bitcoin Trust into a spot bitcoin ETF. 
  • Grayscale got its day in court in March 2023 and people perceived it as largely optimistic after the judge seemed to hone in on the fact that bitcoin futures ETFs exist and that futures tend to track the price of spot. 
  • This temporarily narrowed the discount that a GBTC share was trading at compared to the net asset value, but as time moved on with no concrete decision after the hearing, the gap began to widen again.
  • The primary reason the disparity exists right now is because there is no redemption mechanism for GBTC, so investors have no access to the underlying bitcoin. The conversion to a spot bitcoin ETF sets out to fix that. 
  • People got excited that a ruling would come last Friday, but the time came and went. Now, as mentioned before, it's supposed to come tomorrow. Grayscale also teased at hiring for its ETF team, furthering the commotion. 
  • The discount to the NAV of GBTC shares is still quite narrow after shrinking amidst optimism that one of the other spot bitcoin ETFs would get approved, paving a path for a GBTC conversion. It peaked around 23.9% mid-last week but began slightly widening into Friday. 

All about that Base

Source: The Block

• It has been an eventful first few days since the public launch of base on August 9th. We already talked about some of the hype it was getting pre-launch, so it only makes sense it would continue to grow. 
  • Big protocols like Uniswap and Compound have already deployed on the network. And newer platforms like friend.tech that have gained a lot of recent popularity have helped Base gain traction. Base is also currently running an “onchain summer” promotion, which consists of a month-long initiative to gain network traction. The main draw is daily NFT mints with many brand partners, one of which was Coca-Cola.
  • With the optimistic rollup being built on the familiar OP Stack and also being developed by Coinbase, it is not shocking we’d see such excitement around the new scaling solution.
• Base has already been posting crazy metrics. It has been generating revenue comparable to Arbitrum and Optimism, its much older competitors, even turning up profits more than both of them combined some days. And last week, the 7-day moving average of daily transactions on Base surpassed both Arbitum and Optimism. It has since come back down, but all three are hovering around the 600,000 mark as of late. 
  • The one metric Base lacks behind in is total value locked in escrow contracts, so basically, the amount of funds available to be used on the rollup. Arbitrum dominates the TVL field at over $4 billion and Optimism is a bit behind at $1.3 billion. Base so far has only accumulated $244 million. 
  • It is impressive that daily transactions on Base have surged up to be comparable to its main competitors while having much less locked in escrow. That being said, Base has surpassed all other existing optimistic rollup solutions, like Metis and Boba, which also existed before Base but have not garnered as much traction. 
• It has not been a completely smooth ride for Base so far. One thing that has been a point of contention that does point back to the developers is centralization fears. 
  • Coinbase is currently operating all of Base’s sequencers, which are nodes that help with transaction ordering and data availability. Jesse Pollak, protocols lead at Coinbase, clarified that Coinbase lacks unilateral control of the network and also said further decentralization plans would be shared soon.
  • This is the model that most other rollups have, but many also have a token. zkSync Era, a zero knowledge rollup, is waiting to launch its native token as a move to help decentralize its sequencer when it's ready. Arbitrum and Optimism both sport native tokens, which means they could start allowing sequencers to be spun up by users with enough stake in the network. Coinbase has been very clear that they will not be launching a token, making the path to decentralization less clear. 

Bringing it home

Source: The Block

• Volumes on Coinbase International, Coinbase’s Bermuda-licensed derivatives exchange, have been growing. 
  • We talked about a month ago in this newsletter about the relatively tepid volumes it had been putting up, which did make sense given the circumstances of the exchange. 
  • Last time we checked in, the exchange was only offering perpetuals on BTC and ETH, but they have now doubled their offerings to allow trading on XRP and LTC contracts, although neither is contributing too much volume. 
  • The exchange also still remains permissioned, with users looking to trade on it needing to fill out an application to gain approval. It is only meant for institutional investors not based in the U.S. 
  • The limiting factors of who can use the platform, as well as the very select few contracts it offers, have kept its volumes pretty low. Binance’s BTCUSDT perpetual put up over $5 billion in volume over the last 24 hours, but anyone is able to use the exchange in areas where it's licensed. 
• Coinbase International’s total volumes reached $287.38 million on August 18th, the highest they’ve been since The Block began tracking volumes in June. It does make sense that as Coinbase expands its offerings and also onboards more traders that we would see volumes rise.
  • The end of last week, as we’ve talked about already, was a period of high volatility and, thus, a more active trading period. 
  • Almost every weekday in August has surpassed $100 million in volume (weekends tend to show slower volumes). In July, volumes only surpassed the 8-digit threshold twice, indicative of the growth moving beyond just the recent cycle. 
• In other Coinbase futures news, and perhaps something that was a bit unexpected given the current crypto regulatory environment, the exchange got approval to offer crypto futures trading services to eligible customers in the United States.
  • It seems as though this offering will be separate from Coinbase International, but analysts are highlighting it as a move that shows the “staying power” of crypto in the U.S. 
  • It was a big deal since Coinbase is facing legal battles with the SEC over its core spot offering, putting crypto in a tough place. But the National Futures Association, which is a self-regulatory organization designated by the Commodity Futures Trading Commission, seems to be on the exchange’s side in bringing crypto offerings to more people. 

Now you SEC me

Source: SEC EDGAR Database

• We still have just over a week left in August, but blockchain-related mentions in SEC filings this month have already surpassed those in June and July.
  • There have been 1.93k mentions of blockchain-related terms so far, compared to 1.82k in June and 1.81k in July. 
  • It is common to see elevated numbers of blockchain-related forms in months where companies report quarterly earnings, which did happen this month for Q2 of 2023. The fact that the likes of Coinbase, Robinhood, Microstrategy, Block, Galaxy Digital, and more have had to give updates on their performance and business outlook in 10-Q filings since the start of August is a reason we are seeing slightly elevated numbers already. 
• The number of filings is still way down compared to February through May of this year, each of which saw over 3,300 filings with blockchain terms in them. In fact, the 1.81k mentions we saw in July was the fewest we had seen since January 2021. 
  • This is also not super surprising, given the fact that we are currently in a pretty slow market and an uncertain U.S. regulatory climate. Not many companies are starting up any new blockchain initiatives as of late (with the exception of PayPal, but they seem to have not filed anything with mention of PYUSD or stablecoins). 
  • But another reason for the slight uptick this month seems to have to do with filings surrounding the latest ETF excitement that has since emerged since the flurry of spot bitcoin ETFs. At the start of this month (and a little bit in late July), we saw an influx of Ethereum ETF applications from many of the same players who filed for bitcoin ETFs in June. ProShares and Bitwise also filed to start up ETFs with exposure to both bitcoin and ether. 
  • The SEC is also expected to greenlight ether futures ETFs as a step forward for crypto investment vehicles and further fueling the ETF hype. 
  • Overall, the amount of filings still remains low, but the number of filings for August can only go up. The fact that it has already surpassed the past two months is somewhat indicative of companies re-entering the space once again.