The crypto market continued to soften over the weekend, with the price of Bitcoin falling into the mid $9k area, while Ethereum continued to flirt with the $200 level. Interestingly, front month futures contracts for both Bitcoin and Ethereum fell below their respective spot (perpetual) levels. As pointed out last week, with contango slowly getting crushed, there is a risk of panic selling, not just by retail but also mining entities that failed to make the most of the over-extended contango curve and hedge their exposure. It is also worth pointing out that even as the cryptocurrency market continues to undergo further correction, Bitfinex’s LEO is proving to be overly stable. One theory would suggest that large accounts are using LEO as margin collateral to buy BTC on leverage and then sell off their super-longs on other derivative venues.
The talking heads continue to focus on the speculative side of the market, while at the same time trying to appeal to institutional money by pointing out the travesty that the world is about to endure as the European Central Bank (ECB) hints on further policy easing. It seems that irrespective of whether policymakers are trying to combat inflationary or deflationary forces, there is always a reason for Bitcoin to rise. The problem remains the same: lack of adoption/lack of transactions, and in their absence, the market has become a “safe haven” for speculation. Fundamentals are being overlooked, for one the total number of unique addresses used on the Bitcoin blockchain has failed to maintain its upward momentum and is back in the range that started in March 2019 and carried on through to April/May 2019. Similarly, the number of daily confirmed Bitcoin transactions has also petered out, having topped out in early May 2019.
What the recent rally has achieved is nothing but prolong the life span of many altcoins. It is no secret that majority of the projects are nothing but zombie shells. Instead of trying to re-invent the wheel, a sensible move would be to consolidate with your competitor or a peer and, with combined forces, attempt to penetrate the market. But of course, common sense isn’t actually common and instead the very same projects will continue to determinedly prove the benefits of decentralization, even if it means facing extinction.
Still, the immediate concern for crypto market participants is the upcoming hearing relating to the Bitfinex/Tether case which is scheduled to take place on July 29. As a reminder, a new affirmation by Bitfinex and Tether general counsel Stuart Hoegner highlighted that the previous filing by the New York Attorney General’s office claiming that Empire State residents used the companies’ platforms for far longer than previously stated “contain(s) a number of inaccurate and misleading assertions.” In addition to that, attorneys for Bitfinex and Tether claim that the decision to extend the line of credit was made independently, although the companies share executives and owners. At the same time, in the Memorandum of Law in Opposition, the NYAG also took aim at Bitfinex’s recent issuance of the LEO exchange platform token. The NYAG stated that “respondents’ recent ‘initial exchange offering,’ has every indicia of a securities issuance subject to the Martin Act, and there is reason to believe that the issuance is related to the matters under investigation”.
Earlier this year lawyers confirmed, in documents released on April 30, that the company behind USD stablecoin Tether (USDT) only has enough cash to back three-quarters of its increasing supply. As reported by Cointelegraph - “In fact, Tether’s reserves of cash and cash equivalents alone (without the line of credit) would cover approximately 74% of the outstanding amount of Tether”. Ironically, according to official world gold council statistics, gold accounts for around 75% of the United States’ total foreign reserves.
Given the attention surrounding trade wars, geopolitical tensions and the inauguration of Boris Johnson as prime minister in the UK, it was all too easy to miss the news that the European Central Banks have ditched a 20- year-old agreement to coordinate their gold sales. The so-called Central Bank Gold Agreement (CBGA) was originally signed in 1999 to limit gold sales and help stabilize the market for the precious metal. In a statement, the ECB said that the signatories confirm that gold remains an important element of global monetary reserves, as it continues to provide asset diversification benefits, and none of them currently has plans to sell significant amounts of gold. The deal, originally between 15 central banks, capped the amount signatories could sell each year, and, in the years following, prices surged from less than $300 to a high of almost $2,000 in 2011 ($1,400 now). Now of course, in spite of suggesting that there is no desire at the moment to sell significant amounts, only time will tell whether this is indeed the case. But who would blame them for wanting to capitalize on price appreciation, especially in the face of slowing economic growth and deteriorating finances.
According to the World Gold Council (WGC), central bank net purchases totaled 145.5t in Q1, the strongest first quarter of its kind since 2013. A diverse breadth of central banks continued to buy gold: 9 central banks added more than a tonne to their reserves in Q1. Russia was again the largest buyer, adding 55.3t in Q1. This brought gold reserves to 2,168.3t (19% of total reserves). Shortly after the end of Q1, Sergey Shvetsov, deputy head of the central bank, stated that it is necessary to “increase forex and gold reserves even more” in the face of “persisting sanction risks”. China reported net purchases of 33t in Q1, having begun buying gold again in December after a 25-month pause. Monthly net purchases by the PBOC have averaged 11t over the last four months. Total gold reserves now stand at 1,885.5t, less than 3% of total reserves.
At this stage, the gold bugs will come out in full force and call out loudly for tightening of monetary policy and such. However, it is worth considering the implications should economies adopt the Modern Monetary Theory (MMT), which states (among other things) that a government that can create its own money, such as the United States, cannot default on debt denominated in its own currency, it can also pay for goods, services, and financial assets without a need to collect money in the form of taxes or debt issuance in advance of such purchases, is limited in its money creation and purchases by inflation…
Getting back to crypto-specific developments, the Internal Revenue Service (IRS) is said to be sending letters to 10,000 digital currency holders who potentially failed to pay the necessary taxes or improperly reported taxes on their digital assets last year. As per the statement by IRS Commissioner Chuck Rettig - “taxpayers should take these letters very seriously by reviewing their tax filings and, when appropriate, amend past returns and pay back taxes, interest and penalties.”
In other news, Galaxy Digital is now a licensed underwriter for registered public offerings having already secured approval from the Financial Regulatory Authority (FINRA), Galaxy can now facilitate IPOs for crypto companies. Galaxy Digital, a merchant bank which trades in digital assets, is now one step closer to offering the full suite of services that come standard in traditional finance. Remember, earlier this year Galaxy Digital sold its shares in EOS developer Block.One for a staggering $71.2 million in what CEO Mike Novogratz described as an attempt to “rebalance our portfolio”. Could EOS be one of the first projects that Galaxy puts through its IPO offering…?
Thank you for reading,
The BeQuant’s Analytics team