Bitcoin and Time Horizons

IN THIS PUBLICATION:

• DeFi Bridge protocols have seen $2 billion stolen, half of which by North Korean hackers.
• Bitcoin’s narratives shift depending on investment horizon: short-term risk on, medium-term risk off, long-term adoption.
• New addresses momentum seems to imply Bitcoin still needs more time to consolidate before we can call an end to the bear market.

News Update

Let’s start with some of the most important developments of the past month:

• BTC and ETH are down more than 50% YTD, with most of the losses occurring in Q2 alongside a broader risk-off sentiment in financial markets. As we mentioned in our June Update, “the current bear market is not simply a crypto-specific event, but a broader financial market’s one that is being compounded by idiosyncratic issues within DeFi.”

• Ethereum’s Merge is the key event to follow into year-end (key bullet points on what that is can be found here). After years of delay, the Merge, which will help ETH migrate from Proof-of-Work to Proof-of-Stake consensus, is now expected to happen around September 15^th, and investors' focus on this has helped ETH outperform BTC since mid-June.

• Coinbase Q2 results highlighted trading volumes are at the lowest level since 2020, and average transaction revenue per user is now expected to decrease by more than two-thirds this year when compared to 2021 as a consequence of these lower volumes. This all makes intuitive sense given the broader correction within crypto assets. On a positive note, earlier in August, they landed a win by announcing a deal with Blackrock (world’s largest asset manager) to give its clients direct access to crypto (beginning with BTC).
• Galaxy Digital, the closest thing we have to JP Morgan within crypto, is trying to abandon its $1.2 billion acquisition of BitGo claiming that the crypto custodian has failed to provide 2021 audited financial statements. BitGo has retaliated by suing Galaxy for improperly terminating the merger (they claim that audited financials have indeed been provided) and is asking for the $100 million break-up fee to be paid in full.
• Almost $3 billion was stolen from DeFi projects so far this year, $2 billion of which from bridge protocols (which allow investors to move assets from one blockchain to another, increasing interoperability amongst protocols [Tim’s note: don’t worry, I’ve no idea what this means either, so check out this link]). This has become a major issue for the industry, especially given that states like North Korea are using the vulnerabilities of bridge protocols to steal significant amounts of money (North Korea has “raised” more than $1 billion this way so far), which is forcing government institutions like the US Treasury and the DoJ to intervene to stop the bleeding.
• The US Treasury has, in fact, sanctioned crypto mixer Tornado Cash on the account of it being used by North Korean hackers. Mixers are entities (both centralized and decentralized) that focus on trying to conceal the flow of funds that is processed through a blockchain. They exist because there is demand for anonymity within crypto given the transparent nature of blockchains, which is not to say that it’s strictly associated with nefarious activity (ETH’s Vitalik Buterin, for example, used mixers to allow him to circumvent the supervision of the Russian government and send donations to Ukraine).
• The sanctioning of Tornado Cash has led Circle (which issues one of the most widely adopted stablecoins – USDC) to blacklist dozens of ETH addresses associated with the mixer, and this matters because it’s one example of how, even in Decentralized Finance land (whose core value proposition is to disintermediate the centralized control of financial services from large institutions), there are centralized players who can make unilateral decisions that have a significant impact on the entire space.

• Ah, and since we mentioned Circle, earlier last month they disclosed the full breakdown of their $56 billion USDC reserves. As of June 30, 75.6% were held in Treasuries and 24.4% in cash at regulated financial institutions.
• After the UST (algorithmic stablecoin) collapse, market participants have increased their exposure to fiat-backed stablecoins (i.e. projects that are theoretically 1-to-1 backed by cash or cash equivalents) given they’re supposedly safer and more stable. With enhanced visibility into USDC reserves and Tether, the world’s largest stablecoin, gradually reducing its commercial paper reserves to zero (which investors have been critical of given commercial paper has significantly more risk than cash), we see these as positive developments since they bring additional stability within the system, especially given the importance of stablecoins for frictionless sector inflows and outflows.