How Uncertainty in the Crypto Market brings Opportunity

A round up of developments in the crypto market and a prediction on where the market is headed

It would be an understatement to say that the crypto industry is under a cloud right now. Although many would point to the current rumblings of a bull market some of the pessimists suggest it’s a false dawn.

There has definitely been a clear out of bad actors recently including fines and punishment for past misdeeds. And whilst it looked like the SEC were going all out against cryptocurrency they went ahead and approved the first spot Bitcoin ETF. They are even examining the possibility of an Ethereum ETF. That is more forward thinking than the UK for example which hasn’t reached that place of comfort yet. The massive inflow of funds into Bitcoin ETFs and the all-time high reached by Bitcoin has pushed the whole market into a new bull run, although the market is much more cautious than previous bull runs. Investors seem to be far more discerning this time around although there are still meme coins which are being pumped and dumped so maybe this bull run isn’t going to be so different after all…

To get a feel for the current market direction let’s first take a look at the negatives.

Uniswap

Uniswap is a decentralized exchange that enables the trading of digital assets. The company behind Uniswap, Uniswap Labs, was recently hit with what is called a Wells Notice from the SEC signifying that it would likely be sued. That lawsuit will probably concern operating an unlicensed exchange selling securities. It is a lawsuit that has been in the offing for some time and whilst it was always a strong possibility that the SEC would start cracking down on decentralized exchanges when the day arrives it is never pleasant. Using the analogy that all good things happen for a reason, this forthcoming lawsuit will provide much needed clarity to the industry in an area which is arguably more significant than centralized exchanges. It is likely to end with fines and new regulation including anti money laundering requirements. It could even lead to a ban from the US.

Coinbase

Recent developments here include the judge ruling that the SEC’s claim that the cryptocurrency exchange engaged in unregistered sales of securities could be heard by a jury at trial. Again, Coinbase being the most compliant participant in the marketplace, this case will provide much needed clarity.

Binance

In the June 2023 lawsuit, the SEC filed 13 charges against Binance, accusing the exchange of mishandling customer funds and offering registered securities, alleging that the company and founder Changpeng Zhao had engaged in an “extensive web of deception.”

The lawsuit targeted not only the global company but also its U.S. arm, which operates under an entity called BAM Trading. In separate legal complaints, both the SEC and the Justice Department claimed Binance.US — which Binance had complained was independent — had engaged in so-called wash trading in collusion with its parent company to artificially inflate volume on the platform.

Binance agreed to pay $4.3 billion to settle with the Department of Justice and the Commodity Futures Trading Commission over illicit finance breaches. Its then-CEO Changpeng Zhao pleaded guilty to breaking U.S. anti-money-laundering laws and agreed to step down as CEO, but the SEC’s case still hangs over the exchange.

With all this negativity Binance still maintains its position as the largest crypto exchange by both volume and value, a lead it holds by a large margin.

A possible Ethereum ETF

As late as February of 2024, the market was anticipating a green light from the SEC on May 23 following the spot BTC ETF approvals in January 2024. This view has been turning sour over the past few weeks, to the point that the current prevailing view is a denial by the SEC. The discount to NAV on the closed-ended Ethereum trust ETHE, a proxy for the market-implied likelihood of denial, increased from 8% to over 25% in the past month.

Many sectors are still under water

Whilst there has been plenty of price action in the meme coin space of late, prices of the main players, Dogecoin and Shiba Inu are down 77% and 70% respectively from their all time highs.

The metaverse, another sector that drove the last bull market, has seen little recovery with The Sandbox, Decentraland and Apecoin all down over 90% from their all time highs.

And now for the positives.

Bitcoin ETF

The first quarter of spot bitcoin ETF trading concluded, with the eleven SEC-approved offerings enjoying roughly $12.1 billion in total inflows. Blackrock’s IBIT has been the biggest winner up to this point, accumulating $13.9 billion in flows since trading began in January.

Ripple legal decision

The latest regarding the long running battle between the U.S. Securities and Exchange Commission and Ripple is the SEC is seeking fines and penalties totaling $2 billion in its case against Ripple Labs over sales of the cryptocurrency XRP.

The judge ruled in July that the blockchain company’s sale of XRP worth $728.9 million to hedge funds and other sophisticated buyers amounted to unlawful sales of unregistered securities.

The SEC sued Ripple, its CEO Brad Garlinghouse and co-founder Chris Larsen in 2020, accusing them of illegally raising more than $1.3 billion in an unregistered securities offering by selling XRP.

The SEC dropped its remaining claims against Garlinghouse and Larsen in October.

The case has been highly watched, as it is among the biggest brought by the SEC in the cryptocurrency space.

While the SEC partly won the case, the Judge dealt the regulator a high-profile setback when she ruled that XRP Ripple sold on public cryptocurrency exchanges did not meet the legal definition of a security.

The Judge denied the SEC’s request to repeal that ruling while the case is in progress. This is a significant victory for both Ripple and the industry as it relates to the trading of cryptocurrencies on exchanges, a key factor in all the SEC’s cases against both Binanace and Coinbase. There is still some way to go before a decisive conclusion is reached.

DeFi and Total Value Locked (TVL) expands

DeFi TVL surged from a Q4 2023 low of $36 billion to peak at almost $97 billion in the first quarter of 2024. Since the beginning of the year, TVL has increased by 81%, reaching a two-year high of $98 billion last week.

Bitcoin reaches all time high

The total market cap reached an all time high in Oct 2020 hitting $2.7 trillion. That figure is looking surpassable with the total market cap now resting at $2.5 trillion. This market activity has been driven by Bitcoin which on March 5, crossed $68,900, the highest price in its 15-year history.

Memecoins

This year, the meme coin segment has witnessed a surge in activity, with established players like Dogecoin and Shiba Inu commanding attention alongside emerging contenders like PEPE and dogwifhat. Although Dogecoin is 77% off its all time high and Shiba Inu 70%.

Summary

One thing is for certain the future of Bitcoin is assured. Regulators have reluctantly accepted it and mainstream investors are buying it. The big question is, what is the future of altcoins which encompasses the likes of DeFi, gaming, metaverse, file storage etc.?

The total cryptocurrency market cap hides a number of underlying factors. This may be a bull run, but it is driven by bitcoin. We have already talked about meme coins and the metaverse, however the same applies to gaming. Axie Infinity for example is 95% off its all time high, and in the DeFi space Aave and Uniswap are over 80% off their previously recorded highs. The same uncertainty has been hanging over the industry from the start when Mt Gox began selling bitcoin worried they were floating US laws.

The worst case is the larger players will regulate if they have to. It may stifle a few smaller projects coming to market as it will become costlier for them to be in compliance. However I see new projects pivoting and raising money through normal venture capital channels. Take the market for raising funds for startups. There are clear regulations in place and many platforms have been established to fulfill this demand including crowdfunding and companies raising their own capital through Reg D offerings. Crypto will go the same way. Innovation won’t be stifled, it will simply be funded differently.

The good news is the innovators will be able to operate on stable ground without the fear of being hauled off to prison or fined. There will be no excuse to hide behind an avatar and that is good news for investors where there will be accountability. When Terra collapsed leaving thousands out of pocket the complaints were all the same, ‘This was supposed to be a stable coin, our money was supposed to have been safe.’ The people saying this knew the risks. They knew none of this was regulated and they were told constantly investing through stable coins that were backed by bitcoin, a highly volatile asset, was never a stable coin by definition. Eventually stable coins will be regulated and that must be good news for investors. What the Terra and FTX debacle showed was that whilst crypto investors say they want to be able to invest in whatever they want without restriction the reality is different. When the shit hits the fan investors blame the regulator, everyone but themselves. That is why there is always a place for the regulator. It’s an age-old problem. Crypto will be around for the long haul but it is going to grow up.