March 10, 2023
Greg Cipolaro

Research Weekly - Banking Turmoil Spills Over to Bitcoin Markets


  • We look at the second-order impacts the banking sector is having on bitcoin markets.
  • The growth of inscriptions using Ordinals has sparked an essential technological and philosophical debate: what should blockchains be used for?

The Knock-On Effects of Banking Sector Turmoil

It has been a challenging week for the banking sector with crypto-friendly bank Silvergate announcing its intention to wind down operations, the failure of tech-friendly Silicon Valley Bank, and a host of other bank stocks being sold off on more general fears. While some of these issues can be traced to the bank-specific clientele and operations, we think the current interest rate environment and inverted yield curves are broadly impacting the banking sector. For institutions that borrow short term and lend long term, the deeply inverted yield curves are likely crimping net interest margins and therefore profitability. Right now, the 10y-3m US Treasuries curve is the most inverted it has ever been and the 10y-2y US Treasuries curve was only this inverted in the inflation-fighting era of the late 70s and early 80s.

Weekly 1-Mar-10-2023-09-31-36-3003-PM

The changing natures of banking relationships with crypto service providers, something we have highlighted previously, are likely having knock-on effects on the crypto industry. Most noticeably, we see a declining share of USD trading of bitcoin compared to stablecoins and widening spreads as order book liquidity declines. Regarding trading volumes, exchange-traded volumes for bitcoin have risen with the rebound in price at the beginning of the year.

Weekly 2-Mar-10-2023-09-33-43-1940-PM

However, USD quoted trading volume has been on a secular decline throughout 2022 and 2023. This likely has to do with changing investor adoption and attitudes throughout the drawdown as more trading has shifted overseas.

Weekly 3-Mar-10-2023-09-34-31-1521-PM

While exchange volumes have rebounded recently, third-party data provider Kaiko has highlighted that market depth has hit its lowest level since May 2022. Lower market depth will likely result in more intraday volatility and higher execution costs. While neither are ideal outcomes, they are certainly symptoms of the current market and regulatory environment.

The Tension Between Tech and Money

With the launch and success of Ordinals over the past 2 months, an important discussion has re-emerged about how Bitcoin’s blockchain should be used. Ordinals, through some technical ingenuity (or “trickery” for those opposed), have shown the ability to embed significantly more data in a Bitcoin transaction than was previously understood to be possible. As a result, the number of inscriptions has crested 340,000, the preeminent NFT creator, Yuga Labs, launched a collection called TwelveFold natively on Bitcoin, and Rollkit has created an Ethereum Virtual Machine (EVM) compatible rollup (an off-chain code execution and data storage environment) for Bitcoin. On one end of the debate spectrum, monetary purists who view Bitcoin only as a financial network to be used for the storage and transmission of value see the growth of Ordinals as a muddying of the network. On the other hand, technological purists see the growth of Ordinals as a new use case for Bitcoin as a data availability layer that can add to network security through increased transaction fees. Where one lands in the debate might depend on how one views Bitcoin; is it a technology layer or a financial layer?

It is important to understand that it has been possible to embed data on Bitcoin’s blockchain for many years using op_return. This function can make a transaction output provably unspendable, but filled with arbitrary information. The data is limited to 80 bytes, 1/50th of the block space that can be allocated to an Ordinal inscription, restricting its functionality, but it is enough to embed small messages or to anchor other blockchains such as Omni, the original home for Tether, Stacks, and Rootstock. The usage of op_return has been controversial throughout Bitcoin’s life, something chronicled in detail by BitMEX research. We think it is important for readers to understand that many of the use cases “unlocked” by Ordinals were previously available but never saw significant adoption because overlaying applications never really took off. The primary difference with Ordinals is the amount of data that can now be stored on-chain. Rather than relying on 80 bytes of storage, Ordinals makes nearly the entirety of Bitcoin’s 4MB block space available for data storage in a single transaction. This naturally unlocks a greater range of features and has led to an escalation of the original op_return debate.

The debate on the purpose of the Bitcoin blockchain, alongside the explosion of the number of digital assets and blockchains more generally, raises an important question: Now that anything can be built on a blockchain, what should be built on a blockchain? Given the tradeoffs inherent within blockchain design and the tension between scalability, security, and decentralization, one guiding principle is that only applications that take advantage of blockchains’ trustless, permissionless, and censor-resistant nature should be built on blockchains. For many, that first and foremost use case is money, a supranational currency natively designed for the internet without government or financial institutions' required administration or intervention. One can envision other financial applications as well, which is why the concept of DeFi is so tantalizing, however, implementation often entails centralization, technology, and regulatory risks. While these risks continue to play out in real time, it is important to understand that not every application needs blockchain or a digital asset.

Market Update

Weekly 4-Mar-10-2023-07-19-00-1354-PM

The price of bitcoin declined significantly this week, down 14.3%, amidst ongoing regulatory activity, and turmoil in the banking sector. Stocks were off as well, with the S&P 500 down 1.5% and Nasdaq Composite down 1.1%. Commodities struggled as well, with gold down 0.3% and oil down 3.1%. Bonds were mixed on the week with investment grade corporate bonds up 0.3%, high yield corporate bonds down 0.7%, and long-term treasuries up 2.6%. Real yields rose while inflation expectations declined.

Important News This Week

Regulation and Taxation:

Attorney General James Continues Crackdown on Unregistered Cryptocurrency Platforms - New York Attorney General's Office

Fed Chair Jerome Powell Boosts Warning on Crypto Industry and Its ‘Turmoil’ - Bloomberg

Crypto Sector’s Reserve Reports Can’t Be Trusted, Says U.S. Audit Watchdog - CoinDesk

Biden's Budget Proposal Crackdown on Wash Trading in Crypto - WSJ

SEC Files Emergency Action Against Miami Investment Adviser in Crypto Fraud Scheme - SEC


GBTC Heads Higher as Judge Expresses Skepticism of SEC Arguments in ETF Hearing - CoinDesk to Wind Down UK-Based Crypto Asset Management Arm - Bloomberg

Mt Gox Pushes Creditor Registration and Payout Dates - Mt Gox


Texts From Crypto Giant Binance Reveal Plan to Elude U.S. Authorities - WSJ

FTX Debtors File Lawsuit Against Grayscale Investments - FTX

Kraken is on Track to Launch Bank 'Very Soon' Despite Regulatory 'Weird Place' - The Block

CryptoFi Announces Integration with Q2’s Digital Banking Platform - CryptoFi

Binance.US gets green Light to Buy Voyager Digital Assets - The Block

Bitmain Changed its ASIC Design. Miners Need to be Ready - Compass Mining

The Mining Development Kit - Unlocking Innovation in Bitcoin Mining - Block

JPMorgan Is Cutting Ties with Crypto Exchange Gemini: Source - CoinDesk

Upcoming Events

Mar 14 - February CPI release

Mar 22 - FOMC rate decision

Mar 31 - CME expiry

This report has been prepared solely for informational purposes and does not represent investment advice or provide an opinion regarding the fairness of any transaction to any and all parties nor does it constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. Charts and graphs provided herein are for illustrative purposes only. This report does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of New York Digital Investment Group or its affiliates (collectively NYDIG).

It should not be assumed that NYDIG will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein. NYDIG may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this report.

The information provided herein is valid only for the purpose stated herein and as of the date hereof (or such other date as may be indicated herein) and no undertaking has been made to update the information, which may be superseded by subsequent market events or for other reasons. The information in this report may contain forward-looking statements regarding future events, targets or expectations. NYDIG neither assumes any duty to nor undertakes to update any forward-looking statements. There is no assurance that any forward-looking events or targets will be achieved, and actual outcomes may be significantly different from those shown herein. The information in this report, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.

Information furnished by others, upon which all or portions of this report are based, are from sources believed to be reliable. However, NYDIG makes no representation as to the accuracy, adequacy or completeness of such information and has accepted the information without further verification. No warranty is given as to the accuracy, adequacy or completeness of such information. No responsibility is taken for changes in market conditions or laws or regulations and no obligation is assumed to revise this report to reflect changes, events or conditions that occur subsequent to the date hereof.

Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Legal advice can only be provided by legal counsel. NYDIG shall have no liability to any third party in respect of this report or any actions taken or decisions made as a consequence of the information set forth herein. By accessing this report, the recipient acknowledges its understanding and acceptance of the foregoing terms.


Bitcoin for All.
Insights for You.

Subscribe now to learn what’s driving bitcoin markets, track significant regulatory developments, and get the data that deserves your attention.