IN TODAY'S ISSUE:
- Industry practices are under the spotlight as investors scrutinize the memecoin industry, one of the cycle’s dominant narratives.
- Exchange hacks are an unfortunate reminder of the counterparty risks in the industry.
- Hedge fund ownership of IBIT explodes as we analyze quarterly ETF holdings.
Memecoin Mayhem
The drama continued to unfold around memecoins this week, one of this cycle’s notable “narratives.” While the collapse of any one memecoin or even the entire memecoin industry doesn’t directly affect bitcoin, it has implications for the wider digital asset industry as well as topics we’ve analyzed over the past 2 weeks, such as bitcoin’s continued rise in dominance and the sheer number of coins in existence.
What are Memecoins?
Memecoins are digital assets created either explicitly as jokes or with no intended use case. Dogecoin (DOGE), the Shiba Inu inspired digital asset, was the first memecoin, launched in 2013 to make light of the speculative nature of the industry (fact: there were 41 digital assets in existence at the time of Dogecoin’s genesis block, today there are 11.72 million). While DOGE continues to endure as a self-described “accidental crypto-movement”, spurred on by support from public figures like Elon Musk, memecoins today look nothing like even Dogecoin in economic structure or technology.
The "Evolution" of Memecoins
To say the memecoin industry has “evolved” might be a bit too rosy, as it implies the existence of progress whereas a more thorough description might be “Darwinian shortcut.” To illustrate this, it’s helpful to compare the industry’s first memecoin, DOGE, to the current iteration of memecoin.
While DOGE’s history has been marked by lack of technical development and security risks associated with Scrypt-based PoW merge mining with Litecoin, it has some distinguishing characteristics, especially in comparison to today’s memecoins—its own blockchain, an economic policy (this has changed over time but today its supply is uncapped and there’s fixed block subsidy) and a lack of a premine (no developer allocations, insider grants or sales, or other allocations).
By comparison, today’s memecoins are issued as a fixed supply token on another network, like Solana. All tokens are granted into existence at launch, allocations are made to the founding team, backers, the public, and future community with some sort of vesting schedule. Tokens allotted for the public are then sold according to a predesignated formula (bonding curve), one typically that increases the price of the token as the number of tokens sold increases.
Alongside these memecoin “innovations” has been the building of connected on-chain infrastructure, like token generation platforms, bonding curve launchpads, and decentralized exchanges, that facilitate the launch of memecoins. Numerous guides exist (some examples: here and here) that make the process of launching a memecoin accessible to those without hard technical skills. Whereas the creation of Bitcoin was truly a remarkable innovation, the launch of a memecoin can now happen with just a few clicks of a button—this is how the industry ends up with 11+ million digital assets.
Egalitarian for Thee but Not for Me
Given the lack of technical innovation, ease of creation, regulatory grey area, explicit lack of use—just “for the fun of it”, and lack of economic incentive alignment, it’s not hard to imagine how this goes awry very easily. Self-dealing, insider trading, front running, and pay for play—these are just some of the industry tactics that have been exposed by industry insiders (LIBRA promoter Hayden Davis’s interview is worth a watch here) with the recent collapse of high profile memecoins. It is an important reminder that Bitcoin was created as an open technology to level the playing for financial transactions and investment, eliminating gatekeepers. The alleged behavior going on in memecoins is anything but the egalitarian ideals envisioned.
While the industry’s attitude toward it all might be “caveat emptor”, real losses are occurring for purchasers of these memecoins. On-chain analysis indicates that 86% of traders lost $251 million on LIBRA, while winners secured $180 million in profits. The Central African Republic’s Meme coin (CAR) price is down 98%+ from its post launch peak—this is a country whose economic prosperity is ranked 191st out of 193 countries by the World Bank.
Spotlight on Industry Practices
That isn’t to say that memecoins cannot have lasting value, they clearly can—DOGE has been around for over a decade and had a peak market cap of nearly $74 billion. This presentation on “The Memecoin Supercycle”, which caused quite a stir a few months ago, has some important observations about the state of the digital asset industry, digital asset investing, fundraising practices, and society at large. But to think that memecoins, with no technology or economic design, could prop up an entire $3T+ industry, seems to have the equation turned upside down.
Our opinion is if the cycle continues, memecoins, could do well, but that’s because of their market position as the most speculative part of the digital asset risk curve. To equivocate memecoins to Bitcoin, as some in the industry do, is disingenuous to the innovations and utility Bitcoin pioneered, aspects that rest of the industry owes homage to, and is ignorant of the practices within the memecoin industry.
Exchange Hack Reminder of Counterparty Risk
Friday morning, the exchange Bybit reported that it had been hacked for $1.45 billion in ETH, stETH (Lido Staked ETH), and cmETH (Mantle restaked ETH), the largest single hack in crypto history. The exchange and executives were swift to act, notifying the community of the incident, even hosting a livestream to divulge as much information as possible.
While the source of the vulnerability is not presently known, it appears as though executives approved a malicious transaction in their regular top off of the exchange’s hot wallet from one of its cold wallets that directed the wallet’s balances instead to a destination controlled by the hacker. Bybit was using the (Gnosis) Safe wallet, a popular multisig smart contract wallet, that required approval from multiple signers, including in Bybit’s case its CEO. His private keys were apparently stored on Ledger hardware wallets but it’s hard to speculate as to the root cause from our vantage point. If there were vulnerabilities with the wallet itself, either the front end or backend, that would be a bigger industry issue as the wallet secures over $100B in assets across the industry. Blockchain sleuth ZachXBT has fingered The Lazurus Group as the culprit, a North Korean supported hacking group which has been behind many of the hacks over the past few years.
The incident triggered a drop in price not just in ETH, but in digital assets across the board, as fears rippled across the industry and the withdrawal queue piled up at Bybit. The exchange said it was processing withdrawals on other assets normally and that they hadn’t been affected. It also said it was securing bridge loans from industry partners to top up ETH balances, and that it could use the company’s treasury to ultimately cover lost funds.
We're eagerly awaiting the post-mortem on this incident. Once again, unfortunate events like this serve as a stark reminder that counterparty risk—such as exchange exposure—remains the industry's most significant threat, despite being one of its oldest.
Analyzing Quarterly ETF Ownership
13F quarterly securities holder reports were due this week, giving us the latest look at who was buying and selling the spot bitcoin ETFs during Q4 2024. While it might seem a while ago at this point (13Fs are due 45 days from the end of the quarter) given all that has happened the political, regulatory, and economic backdrop, it’s important to remember that Q4 was a standout quarter from a performance perspective, one that was propelled by the outcome of the US elections in which crypto was an important factor. The following are our most important takeaways:
First Sovereign Wealth Fund Buys Bitcoin ETFs
Mubadala Investment Co, one of the several sovereign wealth funds managed by the United Arab Emirates (UAE), reported a $437 million position in IBIT at the end of the quarter. While the plans around a US sovereign wealth fund and a potential US “digital asset stockpile” are presently not known, the investment from UAE represents only the third national investment in bitcoin, behind El Salvador and Bhutan.
HF Ownership of IBIT Explodes
Hedge funds are big owners of the spot bitcoin ETFs, second only to retail (non-13F filers). Most of this is because of the “basis trade” employed by relative value funds that short futures, hedge their exposure by buying the ETFs, and collect the spread, not directional bets on the price of bitcoin. Given the basis expansion to the mid-teens on an annualized percentage basis following the elections, it’s not surprising to see hedge funds come into the ETFs in a big way ($4.5 of fund flows).
What was surprising, however, was the disparity between the different ETFs. Hedge funds have long favored IBIT and FBTC due to their size, liquidity and cost advantages, but this quarterly IBIT really took over. Fund flows into IBIT from hedge funds was a $4.2 billion while FBTC showed net outflows of $39 million. Hedge funds now own 3.7x as much IBIT as FBTC, a metric that was only 1.8x last quarter.
Retail Pours Money In, But Share Shrinks as Institutions Grow
Retail investors, non-13F filers, are still by far and away the largest owners of the bitcoin ETFs, accounting for $77.9 billion or 74% of the industry AUM. By our calculations, retail investors continued to flock to the ETFs, contributing $9.7 billion in fund flows during the quarter. Even as retail investors poured money into the ETFs during the quarter, their share of the industry AUM continues to shrink, down to 74.0% this quarter from 78.5% the previous quarter. The remainder of the ETF AUM, 26%, is made up institutional investors and professional advisors. While still the minority, this share continues to grow over time.
Investment Advisers Contributing Greatest to IBIT, FBTC, and BTC
Investment advisors, the third largest investor class in the ETFs behind retail and hedge funds, showed a strong preference to put money to work in IBIT, FBTC, and BTC, as indicated by their quarterly fund flows, $1.6 billion, $773 million, and $308 million respectively. They still own relatively large positions in GBTC, their second largest holdings, but pulled $39 million in funds during the quarter. ARKB was the biggest loser in the Investment Adviser category, however, with investors pulling $165 million in assets during the quarter.
Banks a Surprise Winner
While we have yet to see the wealth arms of the big banks embrace bitcoin in a meaningful way, we did see increased ownership by banks, including international banks such as Barclays and Bank of Montreal, but as well at PNC Financial Services and Bank of America. Media reports of investment banks upping their bitcoin positions likely have to do with trading and market making associated with the ETFs as these positions, except for Morgan Stanley, mostly owned through their broker-dealer arms.
Market Update
Bitcoin closed the week (measured as of Thursday) with a 2.3% gain, but it continues its rangebound trading, bouncing between $92K and $107K. This price action is reminiscent of the post ETF-launch hangover in 2024, when bitcoin bounced between $55K and $70K from March to November 2024. Ultimately, it was the US elections that caused bitcoin to break out into a higher range and as a result, investors continue to hunt for price moving catalysts. While work continues to happen in the background on legislation, regulatory clarity, and executive initiatives, many of those catalysts are most likely several months down the road.
Crypto prices across the board experienced a drop late Friday morning in the wake of the aforementioned hack of Bybit. While the hack didn’t affect bitcoin directly, fears of exchange solvency, like what happened with FTX, caused fears to ripple through markets. While the hack is large in dollar amount, it accounted for ~7.5% of the exchange’s assets, which were about $20B.
Important News This Week
Investing:
FTX’s Initial $1.2B Payout Process to Creditors Is Underway - CoinDesk
Regulation and Taxation:
SEC Voluntarily Dismisses Appeal in Case to Push 'Dealer Rule' on Crypto, DeFi - The Block
SEC Announces Cyber and Emerging Technologies Unit to Protect Retail Investors - SEC
Righting a Major Wrong - Coinbase
SEC Poised to Drop Coinbase Lawsuit, Marking Big Moment for U.S. Crypto - CoinDesk
Companies:
Mastercard Says It Has Moved Beyond Experimentation in Crypto, Focused on 'Real Solutions' - CoinDesk
Michael Saylor’s Big Bet on Bitcoin Is Inspiring Copycat CEOs - Bloomberg
Crypto Exchange Deribit Still in Talks to Be Acquired by Kraken: Source - CoinDesk
Upcoming Events
Feb 28 - CME expiry
Mar 4 - FTX creditor payment deadline
Mar 12 - CPI release
Mar 19 - FOMC interest rate decision
Jul 2 - Final SEC deadline for decision on GDLC ETF conversion
Jul 22 - EO Working Group report deadline
