Crypto market: bankruptcies and lawsuits unsettle the market, future of cryptocurrencies
Chart of the week
The graph shows investor sentiment in America. To calculate this index, the following data are analyzed: Stock market momentum, market breadth, futures market data, volatility, and risk behavior (for example, using data from the lowest-rated junk bond market).
Why it matters
A high value indicates carelessness and neglect of the risk aspects. That's why a high value, titled "extreme greed," also indicates a dangerous market situation in which a market correction often occurs.
The chart shows the development of the indicator since July 2022. Both in November 2022 and in February 2023, when the indicator showed "extreme greed", there was a correction on the stock markets. It is therefore worth being particularly cautious at present.
Crypto market: bankruptcies and lawsuits
For more than a year, the crypto market has seen one horror story after another:
- Fraud and collapse at crypto exchange FTX,
- Collapse of Terraform Labs (payment platform for stablecoins),
- Collapse of Silvergate and Celsius (crypto banks), etc.
- SEC lawsuits against Binance and Coinbase
There is a lot of talk about the new wave of lawsuits filed by the SEC. It directly attacks the two largest crypto trading platforms in the world.
The chart shows the market share of the individual crypto trading platforms. Binance is the clear top dog with over 60%.
But what is very important, the SEC cannot indict the global platforms, only the USA part. The USA offshoots of both companies are legally separate from the global trading network. Still, the SEC's influence is huge. The Coinbase company is listed on the NASDAQ.
If you hold cryptocurrencies on these exchanges, you are definitely on the safer side if you transfer them to a cold wallet now.
The chart shows how important the US is for bitcoin and also all other cryptocurrencies. After the crypto ban in China, the U.S. has taken the lead in mining (creating new cryptocurrencies as a reward for providing computing power).
The lawsuit against Coinbase and Binance includes allegations of unauthorized securities trading, operating a staking program but also misusing customer funds and lying to regulators.
Most explosive is the accusation that Binance transferred USD 11 billion of customer funds to a company owned by the company's founder in order to "misuse" them for its own purposes. This is the same accusation the SEC made last year against FTX co-founder Sam Bankman-Fried, who is now in jail.
To complicate matters a bit more, Coinbase has also sued the SEC, for defamation of character. There is currently no law stating that cryptocurrencies are considered securities in the US. The SEC wants to obtain this through the courts. However, it would make more sense for the Biden administration to pass such a law in the parliament. However, it lacks the majority there to do so.
The SEC explicitly named 19 cryptocurrencies as securities in the two charges against Binance and Coinbase. But differently in the two lawsuits. The chart shows the overlap of the cryptos mentioned in the lawsuits. Here it hits some of the biggest cryptos like Solana, Algorant, and Cosmos.
The SEC has directly mentioned a total of 67 cryptos in all of the lawsuits to date. However, it does not give reasons for this selection. Can any insights be gleaned from this as to how the SEC is proceeding and which cryptos might be next? Some of the cryptos mentioned are tiny and illiquid. Of the largest 200 cryptocurrencies by market capitalization, 26 have been mentioned in SEC lawsuits so far.
The chart shows the new cryptos mentioned by the SEC in each market segment. The SEC seems to see a particular problem with smart contract solutions, but it still targets all market segments.
The chart shows how much volume in each cryptocurrency is dominated by whales. Investors who hold more than USD 10 million in the cryptocurrencies are considered whales.
In the cryptos RLY or BTT, more than 90% of all holdings are held by whales. This is considered particularly risky, because if this should decide to sell, there is too little liquidity in the market and the prices crash.
But even here, one does not see a consistent picture in the wave of complaints from the SEC. Why Solana, Dash or Cordana are on the list here is difficult to understand.
The chart shows how decentralized the validation network is. The SEC has a bias in its complaint toward cryptos that are centrally controlled. But again, it is hard to see why Solana or Algorand are on the list.
The selection of cryptocurrencies mentioned by the SEC in the lawsuits does not show any commonality or strategy. It appears arbitrary.
Moreover, the SEC attacks Coinbase with the allegations that they had been operating as an unregistered broker for over 4 years. In 2001, however, the SEC approved Coinbase's IPO with exactly this activity.
This action of the SEC then also leads to a maximum uncertainty in the whole industry.
The future of cryptocurrencies
Cryptocurrencies are at a crossroads. Will they survive the waves of lawsuits from the authorities? We think they will.
There are various points that make us positive:
The really big firms in the financial sector have taken advantage of the lower prices in recent months to position themselves in the crypto sector with investments. These include firms such as BlackRock, Fidelity and Goldman Sachs.
The market does drop on negative news, but only by a relatively small amount. Volumes and retail investor interest is at an all-time low. All are criteria that would normally bring an upward trend reversal.
The whales (large investors with over USD 10 million in holdings) are staying calm and buying more rather than reducing their holdings (in a panic).
Blockchain technology has enormous potential to change the industry with innovative applications.
Of course, statements by Janet Yellen (US Treasury Secretary), Gary Gensler (SEC head) or Christine Lagarde (ECB President) that there is no need for cryptocurrencies because the USD or EUR are already digital currencies are worrying. From our point of view, however, such statements show how little these individuals understand about cryptocurrencies. However, their statements are logical, as the authorities and central banks would lose massive control if cryptocurrencies were successful.
It is also interesting to note that the SEC has so far exempted two cryptos from the wave of lawsuits. And those are the two largest, Bitcoin and Ethereum. With Ethereum, a lawsuit can still follow at any time, but with Bitcoin, SEC chief Gary Gensler has given absolution. He has clearly stated in interviews that he does not view Bitcoin as a security because of its decentralized nature.
There will not be one cryptocurrency in the future that dominates everything.
The chart shows how many transactions the respective networks can process. Bitcoin manages around 20 transactions per second. To fulfill its function as a global currency, it would have to manage 65,000 transactions per second, like VISA. Ethereum is currently upgrading its network with updates to the capacity of 20,000 transactions per second, but Solana already manages 3,500 and wants to upgrade to 180,000 transactions per second.
For smart contracts or NFTs, however, even that still seems low. To map an NFT with cryptos, between 1,500 and 3000 transactions are needed.
Ethereum or Solana would be better suited as a global currency. Bitcoin, however, can definitely take over the role of gold in a portfolio. I can't currently buy bread at the bakery with a gold vreneli.
However, investing in cryptocurrencies is still too risky for serious asset management. The volatility is too high and the legal security too low.
For family office or very long-term thinking investors, however, the addition of 1-2% in cryptos can be useful.
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