February Overview

Article by Sixte C.

Photo: Max Kukurudziak | Unsplash.com
  • Russian Invasion of Ukraine: Impact On Crypto And Bitcoin’s Increasing Correlation With Stocks
  • Regulators
    - Canadian government is trying to freeze cryptocurrencies fundraised for protest
    - Russia with central bank support will regulate cryptocurrencies instead of banning them
  • Corporations
    - New iPhone will a crypto payment feature integrated in its tap to pay new service
    - Mining companies’ stock are collapsing and bitcoin difficulty is reaching all-time highs
  • Financial institutions
    - BlackRock is planning to offer crypto trading

RUSSIAN INVASION OF UKRAINE: IMPACT ON CRYPTO

February has struck many nerves as geopolitical tensions resulted in Russia invading Ukraine on 24/02. Risk assets have been dominated by the narrative, with the S&P 500 down 10.6% YTD and Nasdaq -15% YTD. According to Goldman Sachs, U.S stocks could decrease by another 6%.

Major political events are often priced in by adding a risk premium on traders’ strategy. To hedge the risks, traders have been massively exchanging their risk-on positions for risk-off assets: gold (an absolute Feb winner — see XAUUSD), European bonds, US treasuries.

Source: Bloomberg

Bitcoin price action suggests that the worst-case scenario — Russian invasion of Ukraine — had already been priced in in the couple of weeks leading up to the event. In fact, on the day of invasion, Bitcoin had already lost over 20% of its value since February’s heights.

This situation is yet again increasing bitcoin’s correlation with stocks, which has been on the rise since November 2021. End of January, bitcoin’s 30 days rolling correlation with equities reached over 0.7 — the highest it has been in over a year.

Source: Bloomberg, JKL Research

The correlation is also driven by a growing entry of institutional investors in the cryptocurrency market. These risk averse investors tend to close their position on Bitcoin to cover their losses in the stock market, which adds selling pressure on bitcoin when the stock market is acting poorly. Short-term, growing correlation can be considered as a negative outlook for bitcoin as it threatens to undermine cryptocurrency’s diversification benefits.

More on Ukraine invasion:

· Rouble-crypto trading soars as sanctions hit Russian currency (Read More)

· Crypto Donations to Ukraine Jump to $20M (Read More)

· Russia May Use Cryptocurrency To Try And Evade Sanctions — But Here’s Why That Will Be Hard (Read More)

REGULATORS

Canadian government asks centralised exchanges to freeze all funds raised through cryptocurrencies for truckers’ protest

To protest against Covid 19 restrictions, Canadian truckers blocked the country’s roads paralysing its economy. The movement raised funds though traditional crowdfunding platforms that were requisitioned by the Canadian government. Therefore, truckers opted for decentralisation to prevent their funds from being seized by the government and received cryptocurrencies from supporters all around the world. However, the government reacted by asking all centralised exchanges to freeze the 34 wallets that received crypto support, if they had been accessed for fiat conversions. This situation illustrates the benefits of a decentralised peer-to-peer payment solution’s invulnerability to central authorities, as well as its limitation due to its dependence on regulated financial firms for fiat conversions.

In an ultimate effort to stop weeks of protests, on February 14th, the Canadian prime minister Justin Trudeau resorted to the Emergencies act for the first time since inception 34 years ago. The law allows the government to freeze any financial asset or account without legislative review beforehand. This highly undemocratic measure coupled with the successful crypto fundraising raised awareness of the potential freedom decentralised peer to peer network can provide to the population provided respective servicing infrastructure is in place.

Russia with central bank support will regulate cryptocurrencies instead of banning

Last month, the bank of Russia suggested a complete ban of all cryptocurrency activities except for owning crypto. The central bank accused cryptocurrencies of being too volatile, too convenient for illegal activities and a threat to the efficiency of monetary policies. Despite the central bank’s aggressive position on the cryptocurrency market, the government decided to regulate the space instead of a full ban. This measure come as great news for Russian actors of the space, since the country represents 12% of total crypto ownership according to Kremlin and the 3rd share of global mining hash rate.

The government proposal consists of using banks as intermediaries to verify users’ identity and keep records of all transactions. Therefore, measures do not satisfy the appetite for privacy many investors opted for when gaining exposure to crypto. In this process, banks would also facilitate tax reporting and ensure no fraud is committed. Government will have its eyes on every transaction thanks to the bank intermediary, which overall resembles a CBDC framework. The measures taken are highly focused on preventing illegal activities such as money laundering. For example, all banks implicated in the process will have to use a tracking tool to verify the owner’s identity of any wallet.

Despite the troubling underlying condition of the cryptocurrencies’ acknowledgement by the Russian government, the market reacted positively to the news with a 3% gain on 7/02. However, the rising price might have been explained by other major news like KPMG Canada’s purchase of Bitcoin that occurred the same day.

More on regulators:

· Bill to regulate crypto in Brazil for first time heads to Senate vote (Read More)

· FBI to form digital currency unit (Read More)

· Fed approves rules banning its officials from trading stocks, bonds and also cryptocurrencies (Read More)

· Crypto Miners Get a Big Break With IRS Tax Exemption (Read More)

· BlockFi Agrees to Pay $100 Million in Penalties and Pursue Registration of its Crypto Lending Product (Read More)

· Indian Crypto Exchanges Met With Finance Ministry Officials to Seek Tax Reconsideration (Read More)

· Congressman Warren Davidson introduces bill to protect self-hosting of cryptocurrencies (Read More)

· Spain’s Central Bank Licenses Bit2Me to Be Country’s First Crypto Services Provider (Read More)

CORPORATIONS

New iPhone will have a crypto payment feature integrated in its new tap to pay service

In November 2021, Apple CEO, Tim Cook, revealed he owned cryptocurrencies. Later, in January, he acknowledged the potential of the metaverse and confirmed Apple is “investing accordingly”. On the app store, Apple is hosting 14,000 apps designed for the use of augmented reality (AR). This technology would facilitate users’ access to the metaverse. According to Bloomberg, Apple is even supposed to release its own AR headset in 2023. However, if Meta and Microsoft have the ambition to expand into the Metaverse, Apple seems to be more focus on gaming and communication instead of a fully virtual day to day experience.

Despite its slower metaverse adoption, the most valuable company on the planet is about to integrate a crypto payment feature on the upcoming iPhone. Its new “Tap to Pay” solution, would technically allow any merchant and businesses to receive crypto, from Coinbase or Crypto.com credit cards for example, directly on their phone. Since 2021, Coinbase and Crypto.com credit cards are supported on Apple Pay. Tap to Pay would allow merchants to receive fiat from instantly converted cryptocurrencies on the crypto exchanges card.

Mining companies’ stock are collapsing and bitcoin difficulty is reaching all-time highs

The stock of the two largest publicly traded mining companies, Riot and Marathon, respectively lost 67% and 72% of their value since early November. Their price nosedive can have 2 explanations. First, it is evident that the decreasing price of Bitcoin is aggravating the profitability of their activity. In the same timespan, Bitcoin lost 48% of its value, making mining stocks even more volatile than Bitcoin. Traders trying to de-risk their holdings are adding more selling pressure on these stocks. The second reason is that Bitcoin network hash rate keeps reaching all-time highs. More electricity is needed to mine the same amount of bitcoin. Bitcoin mining difficulty is up 45% in only 6 months. Therefore, mining machines are less efficient and the return per unit becomes more and more sensitive to the price of bitcoin. One would ask why the bitcoin network hash rate keeps increasing while the profitability of mining is decreasing? This is because mining was incredibly profitable during the spring 2021 bull run, and after the China crypto crackdown, when the mining difficulty dropped 28%. Consequently, mining companies built additional mining real estate and ordered larger amounts of mining rigs that took months to deploy. They were functional only end of 2021, when the price of bitcoin was decreasing and the hash rate on the rise, thus hindering profitability. Finally, Antminer S19 and S9, the two most popular mining machine, are currently offering half the cash flow they were yielding in November, according to data from Arcane Research.

Source: Arcane Research

To pay the electricity bills, mining companies had to sell shares, adding even more selling pressure on the stock price. For example, Hut 8 sold $65 million of its common shares on February 11th. As we often see in crypto ecosystem, the greediness of miners during the bull run enhanced their downfall in the period of contractions.

Further readings

· McDonald’s starts applying for metaverse trademarks (Read More)

· KPMG Canada adds bitcoin on firm’s balance sheet (Read More)

· Twitter enables users to give and receive Ethereum tips natively (Read More)

· Circle valued at $9B in New Transaction Terms Agreed with Concord Acquisition Corp (Read More)

· Coinbase adds former SEC official (Read More)

· Fireblocks acquires crypto payments processor First DAG (Read More)

· ConocoPhillips is selling extra gas to bitcoin miners (Read More)

FINANCIAL INSTITUTIONS

BlackRock, the largest asset management firm and 16% owner of MicroStrategy, is planning to offer crypto trading

BlackRock, the largest asset management firm in the world with $10 trillion AUM, is about to offer crypto trading services to its clients. Sovereign wealth funds and public pension schemes, as well as many other BlackRock’s clients, will be able to trade cryptocurrencies on its investment engine Aladdin. Back in June, the firm was already recruiting blockchain strategists for its platform. This is not the first time BlackRock gains crypto exposure. Investment manager has already been trading CME bitcoin futures and is planning to launch a ‘blockchain and tech’ ETF focused on firms involved in crypto and blockchain technologies. It is also worth noting that the firm owns 16.3% of MicroStrategy, the largest BTC holder among publicly traded companies.

Further readings

· JPMorgan Is the First Bank Into the Metaverse (Read More)

· Sequoia Capital (3rd largest VC funded in 72) to Create Crypto Fund of as Much as $600 Million (Read More)

· Warren Buffett invests $1B in Bitcoin-friendly Neobank, dumps Visa and Mastercard stocks (Read More)

· NYSE Parent ICE Takes Stake in tZERO in Potential Move Toward Tokenized Stocks (Read More)

· NYSE files a trademark application for trading NFTs (Read More)

· Binance Smart Chain and Binance Chain become BNB Chain (Read More)

· Crypto apps soar in popularity after Super Bowl splurge (Read More)

· Fidelity International Debuts Bitcoin ETP in Europe (Read More)

· CME Group to Launch New York Reference Rates for Bitcoin and Ether (Read More)

DISCLAIMER

The contents of this material have not been reviewed by any regulatory authorities. You are advised to exercise caution in relation to the contents of this material. Although information contained in this material has been compiled from sources believed to be reliable, JKL does not represent or warrant the accuracy, completeness or reliability of the information contained in this material. If you have any doubt about any of the contents of this material, you should obtain independent professional advice. Neither JKL nor any of its affiliates, nor any of its or their respective directors, officers, employees, and representatives will accept any responsibility or liability whatsoever for any direct, indirect, or consequential loss arising from the use of or the reliance upon any information contained in this material. This material does not constitute an offer or an invitation to subscribe for or purchase any financial product. It is not intended to provide the basis of any credit or other evaluation and should not be considered as a recommendation to purchase any financial product.

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JKL Group

JKL Group

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Quantitative fund focused exclusively on trading digital assets and blockchain technology. Find out more on www.jkl.capital