INERTIA Advisory - Weekly Newsletter - 05/04/2022
Welcome to INERTIA Advisory’s weekly newsletter, where you will receive updates on the most remarkable things happening in the cryptocurrency space.
Enjoy!
State of the Market
I started writing this newsletter almost two months ago now, and believe me when I tell you that I could not wait to begin a newsletter like this but… Markets are going up!!
To be fair, prices pumped a bit during last week too, however, this week ended up confirming a trend reversal, at least when looking at the market sentiments. The Fear & Greed Index came back to Neutral, which is in my opinion pretty bullish compared to prior weeks when Extreme Fear was raining all over the place.
In a nutshell, that is the narrative in crypto. Just when everything seems potentially bad, the trend reverses and starts climbing back the charts, liquidating bears and bringing optimism to crypto degens.
But to be fair it does not surprise me that much. Looking at the Bitcoin exchange balances, which were the lowest since November 2008, and the Bitcoin illiquid supply almost at all-time highs, hitting 63.15% (the Bitcoin illiquid supply is the supply that has not moved in at least 1 year), it made sense to see a supply shock once Bitcoin demand raised and volumes were back.
Sovereign States & Regulation
Setting a proper cryptocurrency regulatory framework could be crucial to the growth of entire countries and economic zones. Similar to what happened back in the day with the internet visionaries, cryptocurrency companies could lead economies in the next decade. However, It is now up to politicians and regulators if they are willing to embrace and potentiate this revolutionary technology or be left behind and try to catch it up once it is too late. History does not repeat itself but it often rhymes and overregulation (as it is happening currently with the banking industry) does not tend to be, in my opinion, the best solution.
European Union
The General Board of the European Systemic Risk Board held its 45th regular meeting last week. Cryptocurrencies were one of the main topics on the agenda. The general board agreed that a quick adoption and implementation of the Markets in Crypto-Assets Regulation (MiCA) was needed. This regulatory framework aims to address financial stability risks that could arise if digital assets and DTL (Distributed Ledger Technology) based solutions in financial markets were used. I am sure that a public blockchain that is fully transparent and allows traceability of every transaction that has ever been made is more dangerous than for example, a cash-based society where payments cannot be traced which could easily lead to corruption, Money Laundering, and Terrorism financing.
However, the European Parliament on March 31st voted to approve amendments to its Transfer of Funds Regulation that would require crypto service providers (mostly exchanges) to verify the identities of the owners of unhosted wallets (AKA, Non-Custodial wallets) with which they transact in advance of a transaction. Something similar happens for people located in Canada, Singapore, or Japan. For anyone who is willing to send cryptocurrencies out of the exchange, additional information regarding the type of wallet and the recipient will be required.
This decision honestly does not make sense at all. Having custody of your own cryptocurrencies and being responsible for your private keys and transaction are the main reasons why many people get into crypto. I mean, that is the nature of cryptocurrencies. The main and only point of crypto is disintermediation, crypto native users only use exchanges because that is the easiest way to bridge from fiat currencies to cryptocurrencies.
As a matter of fact, using Non-Custodial wallets is the most secure way to have custody of cryptocurrencies.
To put this number into perspective, 2^256 is equivalent to the number of atoms that are in the observable universe. Therefore, it is less than probable that someone puts their hand on your cryptocurrencies if you are able to make good custody of the private key.
There is still a chance that the decision taken by the European Parliament is taken down by the European Council and Commission in mid-April.
On the other hand, Fabio Panetta, a leading member of the European Central Bank stated that they are working to implement anonymity in small transactions for the Central Bank Digital Currency (Digital Euro) that the ECB is working on right now.
It is still not clear what will be the approach taken at the time of creating the Digital Euro. However, after China released its CBDC, the ECB is pushing to release its digital currency as soon as possible, which could potentially threaten the financial stability more than cryptocurrencies if they miss at the time of building it.
United States
SEC chair, Gary Gensler, is back to action with cryptocurrencies. The Securities and Exchange Commission is considering new firewalls for custody and market-making businesses at crypto firms and pushing for more SEC oversight of stablecoins that are normally issued by centralized exchanges. The two biggest stablecoins by market capitalization are USDT (US $82B) and USDC (US $51B) which enter the category of cash and cash equivalent collateralized stablecoins.
However, I wonder what has Gary Gensler in his mind for an algorithmic stablecoin like UST (The third biggest stablecoin by market capitalization, US $16B) that uses a mathematical formula as a stability mechanism. Moreover, this stablecoin is even in the process of purchasing US $10B worth of Bitcoin to put it as a reserve in case the stability algorithm fails. Elizabeth Warren and he might be freaking out right now haha!
U.K.
It seems that the United Kingdom is taking a whole different approach to the European Union and the United States.
The government announced a series of measures to make the UK a global hub for crypto-asset technology and investment. One of the measures includes the introduction of legislation for a “financial market infrastructure sandbox” to help firms innovate and experiment with the technology. A Cryptoasset Engagement Group that will be created to have key figures from the regulatory authorities work more closely with the industry experts on advising the government on issues facing the cryptocurrency industry.
Secondly, the UK is considering enhancing the competitiveness of the UK tax system to encourage the development of the digital asset market in the UK, including the review of DeFi loans to be treated for tax purposes. They will also proactively explore the potentially transformative benefits of Distributed Ledger Technology (DLT) in UK financial markets, which enables data to be synchronized and shared in a decentralised way to potentially achieve greater efficiency, transparency and resilience. This the exact opposite of what the European Union is proposing!
Thirdly, the government sees a huge opportunity and benefits within stablecoins. Thus, it intends to create optimous conditions for stablecoin issuers and service providers to operate and invest in the UK. The idea is to pave the regulatory framework to potentially introduce them as a recognized form of payment. Would this make regulated stablecoins legal tender then?
Last but not least, Chancellor of the Exchequer, Rishi Sunak, asked the RoyalMint to start working in a NFT collection to be released this summer. This sounds kind of weird but, I will take it haha.
Ukraine
The Ukrainian government also released an NFT collection and they will use the funds to rebuild cultural heritage sites like museums and theatres that were destroyed by the Russian attacks.
The Ukrainian MetaHistory NFT collection sold 1,282 NFTs for a total of 190 Ethereum tokens, which is approximately US $655,000 at the current market prices. I wonder if they are thinking of keeping some Ethereum instead of converting it.
Hacks in Crypto
If you are into crypto or at least trying to keep up the pace of everything that is happening in the industry, you probably noticed that there are “hacks” and scams all over the place.
Ronin Network
Axie Infinity’s Ronin Network, an Ethereum-linked sidechain developed by Axie Infinity creator Sky Mavis, suffered what could be one of the largest “hacks” in the DeFi space. The project lost around 173,600 Ethereum tokens and 25.5 million USDC tokens, which is equivalent to US $625 million.
Please note that the hacker did not hack the technology itself, but he was able to create a fake transaction with the help of compromised private keys. Long story short, this was a multi-sig wallet (a multi-signature wallet is a wallet that needs more than one person/sub-wallet to sign a transaction so the transaction confirms) that needed at least 5 signatures out of the 9 wallets that had the permission to sign the transaction. In a nutshell, there was poor private key management by the team that enabled the hacker to stole those private keys and make transactions.
However, what I feel more impressed with is that it took the community almost a week to realize that the funds were stolen.
Sky Mavis said that the players whose funds were compromised and lost their funds, due to the fatal mistake by the team, will be reimbursed. Generally, I am not a fan of bailouts, however, I see the point of discussing a potential reimbursement for players’ stolen funds.
The good thing about crypto is that all transactions are transparent and traceable by making use of crypto analytic tools. This means, that it will be more difficult for the hacker to liquidate the stolen positions or move them somewhere else than actually stealing the funds. This is true power in crypto regulators should look at this stuff when discussing DTL (Distributed Ledger Technology) and the potential benefits that it carries.
Bored Ape Yacht Club Discord
The Bored Ape Yacht Club Discord server was compromised. An unknown hacker gained access to the official Discord meant to host members of Bored Ape Yacht Club, Mutant Ape Yacht Club, and Mutant Ape Kennel Club, three NFT collections from Yuga Labs.
Trezor
The cryptocurrency hardware wallet provider, Trezor, could have potentially suffered a data breach that may have compromised users’ email addresses and other personal information.
Users were receiving emails about downloading an application from the “trezor.us” domain when Trezor’s official domain is “trezor.io”.
Scammers are getting better as days pass by. So for those of you that are entering the space, always keep in mind that if someone is offering something too good to be true, it really is.
Crypto Adoption
According to a survey made by StarkWare, a blockchain-based entity, about their views of the cryptocurrency and what role will it play in the future. Although the conducted poll may be a bit biased, 53% of the participants said that cryptocurrencies are the “future of finance”. In addition, 68% of the people between 25 and 34 years old that took part in the surveillance thought had the same thoughts.
We could say that 2021 was a great year for crypto. Not only because many projects gained in market capitalization and popularity, but the number of users, which leads to the network effects that normally bring value to networks, had tremendous growth.
According to a survey made by Gemini, crypto adoption skyrocketed in 2021 in countries like India, Brazil, and Hong Kong, as more than half of the respondents started investing in crypto 2021.
Here is a table of cryptocurrency ownership by country that is pretty interesting.
My take with these numbers is that I am extremely bullish on what is about to come next. Barriers of entry for people are high and still, the percentages of crypto adoption that we are seeing look really well.
Moreover, VISA and Mastercard have both said in 2022 that they want to onboard millions of people into NFTs, and VISA in particular is taking this to the next level. The payment company just released a “Creator Program” oriented to business owners that want to create new business models around NFTs by providing technical mentorship from VISA’s team of digital asset experts, access to cutting-edge research, and exposure to VISA’s clients and partners.
Opensea, the largest NFT marketplace by traded volume and a valuation of US $13B, is also enables NFT purchases via credit and debit cards. This initiative is a partnership made with MoonPay, a company oriented to unlock ownership and onboard the world to Web3.
The Metaverse
Citibank, one of the largest financial institutions on the planet just released a 184-page document talking about “The Metaverse”.
The company states that even though the metaverse concept has been around for a long long time, the interest in virtual worlds spiked exponentially at the end of 2021, mostly driven by Meta’s (formerly Facebook) announcement and the tremendous increase in the interest of NFTs.
The perspective the company is showing towards an open metaverse is insane.
“Today, the most popular way to experience the Metaverse is via a video game played on a virtual reality (VR) headset. But in the report that follows, we discuss the possibility that the Metaverse is moving towards becoming the next iteration of the internet, or Web3. This “Open Metaverse” would be community-owned, community-governed, and a freely interoperable version that ensures privacy by design.
Users should increasingly be able to access a host of use cases, including commerce, art, media, advertising, healthcare, and social collaboration. A device-agnostic Metaverse would be accessible via personal computers, game consoles, and smartphones, resulting in a large ecosystem. Using this broad definition, the total addressable market for the Metaverse could be between $8 trillion and $13 trillion by 2030, with total Metaverse users numbering around five billion.”
That is all for this week!