Market update: February

Market shows strength after consolidation

The beginning of February was characterized by a period of consolidation, followed by a rapid increase in the price of Bitcoin as it surged from $22,000 to $24,000. This was somewhat driven by the outcomes of the bankruptcy of Genesis Trading, the sudden increase in regulation, and the publication of US inflation figures. Where we previously saw interesting developments in niches such as data and AI, we saw the interest in scalability solutions further grow at the beginning of this month.

Genesis and Creditors reach agreement

In the newsletter of January, we discussed the filing of Chapter 11 bankruptcy of Genesis Trading which left various organizations such as cryptocurrency exchanges Gemini and Bitvavo with outstanding debt. Gemini formed a Creditor committee of all the creditors of Genesis and demanded that Digital Currency Group (DCG), parent company of Genesis, reimburse the outstanding debt of Genesis, which accumulated to approximately $1.6 billion. Cameron Vinkeloss, co-founder of Gemini, demanded through an open letter to Barry Silbert, CEO of DCG, that DCG needs to reimburse all outstanding debt before the 8th of January otherwise action would be taken. The deadline passed and neither party took any action toward the other and the predicament passed to the background as the cryptocurrency market initiated a strong upwards trajectory.

On the 6th of February, Cameron Winklevoss announced that the Debtors committee and Digital Currency Group have reached an agreement to pay the losses caused by Genesis. This agreement was settled in the Bankruptcy Court and more information came to light in the days that followed. Bitvavo had €280 million located at the bankrupt financial institution and has reached an agreement that €225 million will be paid back, which solves most of the problems for the Dutch cryptocurrency exchange.

On the 7th of February, it came to light that DCG has started to sell its holdings in the cryptocurrency funds managed by Grayscale Investments, the biggest subsidiary of DCG. This information came forward through a United States security filing which stated that DCG sold a quarter of its shares in Grayscale’s Ether fund. Supposedly, DCG also sold some of their shares in various other funds of Grayscale such as the Litecoin and BitcoinCash funds. When DCG was asked about the selling spree the organization responded that it was an ongoing portfolio rebalancing. Many suspect that the selling of shares is to raise capital and preserve liquidity.

The sudden selling of shares after the day of agreement of the Bankruptcy Court is an unfavorable moment as it may indicate that DCG is experiencing issues. In the month of January, DCG also announced that they are halting their quarterly dividends in the trend of financial health. The coming weeks or months may provide more insights into what the motives were during this period. DCG still remains the biggest Venture Capital and conglomerate within the cryptocurrency sector as they still have 200 cryptocurrency-related businesses in their portfolio. Nevertheless, the agreement upon the bankruptcy is a good step forward for the parties involved and the cryptocurrency market in general.

US regulators target crypto

On the 9th of February, the Securities and Exchange Committee (SEC) announced that they have charged cryptocurrency exchange Kraken with “failing to register the offer and sale of their crypto-asset staking-as-a-service program”. Kraken and the SEC have settled the charge for $30 million and have ceased the offering of staking services and programs. However, the discontinuation of staking services will only apply to U.S. customers as the SEC only operates under U.S. jurisdiction. The charge came out of the blue as Kraken is one of many exchanges that offer staking services. In addition to the Kraken charges, the SEC intends to sue stablecoin issuer Paxos, the organization behind stablecoins Pax Dollar (USDP) and Binance USD (BUSD), the third largest stablecoin. The SEC claims that both stablecoins can be considered securities, with this claim they are both trading as unregistered securities.

This announcement was published on the 13th of February and Paxos announced that the organization halted the issuance of new stablecoins, redeeming is still possible. Currently, there is $16 billion in BUSD in circulation and Paxos holds 20% of BUSD reserves, the halting of the issuance is not a good omen for the coming weeks. It seems that US regulators are starting to target cryptocurrency organizations that fall under U.S. jurisdiction. Various industry leaders have spoken out concerning the latest charges including Brian Amstrong, CEO of Coinbase, who warned people that the SEC will try to ban the staking of cryptocurrencies altogether. He furthermore mentioned that this will hurt the US as it creates a negative environment for cryptocurrencies and it encourages organizations to operate abroad.

Some participants in the market have the feeling that the latest charges are part of a bigger plan to clamp down on cryptocurrencies. This again illustrates the need for decentralized solutions and that single-points-of-failure such as centralized organizations need to be avoided. During the upcoming weeks and months, more information will be released concerning the charges and the possible implications for the sector

Confusion in markets due to CPI

On the 14th of February, the latest Consumer Price Index data was published and the anticipation of the event, for the first time in a while, didn’t cause high levels of volatility. Bitcoins’ price remained relatively stable as its price fluctuated between the price levels of $21.500 and $21.800. The Month-Over-Month and the Year-Over-Year inflation were 0.5% and 6.4%, respectively. It seems that the market isn’t quite sure how to react with the current data. Even though the data indicates a further slowdown of inflation, the CPI also indicates that it doesn’t go as fast as the market expected. Bonds already started pricing in a longer period of higher interest rates, while risk assets remained stable. The next Federal Open Markets Committee (FOMC) meeting will be on the 22nd of March and the latest data will be a crucial part of the next meeting.

If inflation continues to cool down, the possibility of a soft landing is still plausible. Currently, the majority of the market expects an interest hike of 0.25% , increasing it to 5%. The majority of the FOMC members expects the final rate of 2023 to be 5.25%, thus we can expect one more hike. This remains one of the most aggressive hike campaigns in US history and up till now, the effects have been relatively low, however, financial institutions still see a possibility of a recession on the horizon.

Layer 2 solution Arbitrum is gaining popularity

In recent weeks, the Layer 2 (L2) solution “Arbitrum” is increasingly gaining traction within the cryptocurrency market. L2 solutions execute a batch of transactions outside of the main network (Ethereum) and verify the summary of these transactions after on the main network. This technique significantly increases the transaction throughput of Ethereum and users in this scaled environment experience low transaction costs, improving the user experience. Currently, Arbitrum is the biggest L2 solution in terms of Total Value Locked, the amount of capital located in Decentralized Finance protocols. The amount of capital has been increasing since July, 2022, and we expect this will continue to grow as Arbitrum, and other L2s, provide features that the main network can’t provide such as cheap and fast transactions.

As more capital is attracted to Arbitrum, it becomes more attractive for developers and protocols to build on this network. These new projects cause investors and traders to explore this market and create new investment possibilities. During the coming months and years, we believe that L2s will become increasingly important. We aim to highlight these scaled environments through an industry report which will be available soon.

Hodl News

In the month of February, we are glad to introduce our new addition to the Hodl team: Lorenzo Ligas. Lorenzo will aid the Hodl Marketing team with new ideas concerning marketing strategy and communications. Lorenzo has recently finished his Masters in Media & Business and previously completed his Post Grad in Marketing. Now he starts his journey at Hodl as a marketeer and is looking forward to implementing his knowledge and experience in the emerging sector of cryptocurrencies.

Lorenzo: “In the past years, I had the chance to work and volunteer in a variety of communications, PR and social media roles. After years of academia, I decided to fully focus on my career to implement my acquired skills. Starting at Hodl has been enjoyable, challenging and rewarding and I’m looking forward to seeing what we can implement as a marketing team!

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