Insight
August 16, 2024
This week, BitGo, the creator of wrapped bitcoin (WBTC), made headlines with an announcement that sparked concern within the digital asset community. BitGo plans to enter into a strategic partnership with Hong Kong based BiT Global to expand the global presence of WBTC, which comes with it the controversial involvement of crypto figure Justin Sun and his TRON network. Sun rose to fame during the launch of the TRON (TRX) network in 2018, which faced allegations of plagiarism in its whitepaper and code. With ongoing civil charges from the SEC and a history of questionable business dealings, the partnership with Sun has raised eyebrows among industry observers.
What is WBTC and why is it so important? First, WBTC isn’t one asset, but a series of digital assets issued on different networks, such as Ethereum, Base, Kava, Osmosis, and TRON. It has also been bridged to numerous other networks. The way it works is BitGo holds bitcoins in cold storage and issues a commensurate amount of WBTC on the various networks on a 1 for 1 basis. BitGo also discloses the addresses of the bitcoins in custody, allowing users to self-verify the two balances match. In total, WBTC has $8.8B in total market cap, making it the 12th largest “digital asset.” It is also one of the only ways for bitcoin to interact with the DeFi ecosystem, built largely on these other networks.
The proposed changes revolve around the management of private keys for WBTC and the joint venture ownership structure. While the details continue to evolve, the current proposal as we understand it is that BitGo US will control one key, BiT Global in Hong Kong will hold another, and BitGo Singapore will manage the third. Interestingly, BitGo will have a minority stake in the joint venture, and BiT Global, a registered Trust and Company Service Provider in Hong Kong, will be the majority shareholder. There is growing concern within the community regarding the security of the underlying bitcoins as well as concern about WBTC being minted without proper backing. This is something Binance did with its BUSD stablecoin, which ultimately led to its shuttering.
In response to recent events, Coinbase has unveiled its own wrapped bitcoin asset, cbBTC, on the Base network, a platform operated by Coinbase. The revenue generated from Base is playing an increasingly important role for Coinbase, the network’s sole sequencer, and the addition of the world's most popular digital asset to the network could bring about significant advantages. While BitGo has technically already introduced WBTC on Base, it has essentially zero value on the network. Nonetheless, should the demand for WBTC (coming to TRON has proven to be a huge catalyst for USDT for example) or cbBTC rise, it could serve as a significant catalyst for the growth of bitcoin.
Bitcoin's dominance, its share of the industry's market cap excluding stablecoins, continues to climb. With a current reading of 61.1%, Bitcoin's dominance has been steadily increasing since the market correction in 2022. With a peak of 74.5% in the past cycle, there may be more relative gains ahead for bitcoin.
Why is bitcoin's dominance still on the rise, even as we approach the end of its second year of positive price gains? The answer lies in the absence of a compelling new narrative that captures investors' attention. Back in 2017, Ethereum stole the spotlight with its role as a dapp platform and as a fundraising platform (often in a non-compliant fashion) for ICOs. In 2020, decentralized finance (DeFi), non-fungible tokens (NFTs), and emerging Ethereum competitors (alt layer ones) took center stage. Fast forward to 2022, and new narratives and use cases are struggling to gain traction. While DePin, AI, memecoins, social tokens, web3, gaming, and play-to-earn (P2E) have seen some success, their impact on the industry and society remains relatively limited. Memecoins seem to have the greatest acceptance despite their lack of utility, but their popularity peaked six months ago.
The dominance of bitcoin and memecoins in this cycle speaks volumes about the industry's creativity and the technology's practicality. When evaluating new technologies, we emphasize the importance of asking: what unique capabilities does blockchain technology offer? If a solution doesn't necessitate blockchain's core principles - trustlessness, permissionlessness, and resistance to censorship - it may find better utility being hosted on a server in the cloud.
Public miners flipped from net selling their bitcoins to net buying during July. The change was driven mostly by Marathon’s acquisition of 1,590 bitcoins as part of its $100M bitcoin purchase announcement on July 25th. However, even without the MARA purchase, net sales by public miners would have sunk to their lowest level since April 2022. Our analysis is currently missing monthly data from Mawson, which has yet to publish its monthly production and sales numbers (Mawson produced and sold 58 bitcoins in June), and might show that public miners were technically net sellers when those results come in, but only slightly. Bitcoin holdings by public miners also rose to their highest level since they began disclosing the data.
This was the second month in a row MARA was a net purchaser of bitcoins, having acquired 89 bitcoins in June, and more purchasing has been in store for the company. On Wednesday, the company announced it had completed a convertible notes offering and used the proceeds, $249M, to purchase bitcoin. Given this news, there’s a high probability that August sales and holdings from public miners show a similar trend. MARA first embarked on its bitcoin acquisition strategy in January 2021, acquiring 4,812.66 bitcoins for $150M ($31,168/BTC).
The data, while focused only on the subset of miners that are public (20 - 25% of the network hash rate), continues to contradict analysis put forth by blockchain analytics firms who are reporting that miners have been “capitulating” on their bitcoin holdings. For example, a report from Cryptoquant identified 19K bitcoins that flowed from miners coffers on August 5th amidst the big Monday drawdown, something not detected by Glassnode, Coin Metrics, or Arkham Intelligence. While investors may think of blockchain data as the “answer key,” the reality is that tagging and identifying addresses is an art as well as a science, and blockchain analytics companies often get these wrong. Ironically, SEC filings often provide much better disclosures and information than blockchain data, which is often billed as the “immutable source of truth”, given the inherent difficulties of definitively identifying addresses as well as associated economic activity.
Bitcoin experienced a 4.1% decline in a week marked by turbulent trading. Despite a steady CPI print that lifted stocks, it failed to significantly impact bitcoin. The combination of summer seasonality, low order book liquidity, and a lack of clear catalysts is likely causing the current choppy trading conditions. We are hard pressed to find any overhangs on bitcoin this week as no large holders seem to be moving coins. The only item worthy of note is that 9.4K of the 29.8K BTCs the US government moved a few weeks ago in conjunction with Silk Road forfeitures landed in an addresses identified as Coinbase Prime’s hot wallet.
Bitcoin investors were left frustrated this week as stocks surged while bitcoin remained stagnant, with no clear explanation for the lackluster performance. Despite stocks making a strong recovery from recent losses, bitcoin still lags behind, sitting 16.5% below its $70K peak in late July. While we have previously highlighted the lack of correlation between stocks and bitcoin, recent data shows a 0.40 rolling 90-day correlation, yet this has not translated into gains for bitcoin.
Investing:
New Vanguard CEO Says Asset Manager 'Will Not Be Launching Crypto ETFs' - The Block
Regulation and Taxation:
Regulating Decentralized Systems: Evidence from Sanctions on Tornado Cash - NY Fed
ASIC Sues ASX for Misleading Statements on CHESS Replacement - Bloomberg
Senate Majority Leader Chuck Schumer Sets Goal to Pass Crypto Legislation by The End of This Year - The Block
2024 Crypto Crime Mid-Year Update Part 1: Cybercrime Climbs - Chainalysis
Crypto Industry Committing $12M to Dethrone U.S. Sen. Brown in Ohio, PAC Says - CoinDesk
Companies and Industry:
Celsius Targets Tether, Badger DAO, Compound, And Netanyahu's Niece and Nephew in Lawsuits - The Block
Tether Co-Founder Faces the Unraveling of a Crypto Dream - New York Times
Aug 22 - Jackson Hole Conference
Aug 30 - CME expiry
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