Justin Arzadon
7 minutes reading time
Welcome to the first issue of Off the Chain. With BetaShares set to launch our first crypto-focused ETF (ASX: CRYP) on Thursday, continued positive developments in the Australian regulatory landscape for the potential launch of cryptocurrency ETFs and widespread investor interest, we thought the timing was right to launch this new email newsletter.
Off the Chain will be published every Tuesday, and provide highlights of key developments in bitcoin and the rest of the crypto market along with analysis, insights and the latest news in the world of crypto.
It provides general information only and is not a recommendation to invest in any crypto asset, crypto-focused company or investment product.
Bitcoin price action finally took a breather last week, with a slight pull-back to the $58K level. Since then, the price has recovered to $61,178 where it is trading at the time of writing. Overall, October was a strong month, with the price up 41.9%.
Ether broke out last week and set a new all-time high. Over the last seven days it has returned 5.45%, outperforming bitcoin which was up 0.96%.
Bitcoin’s market cap is sitting at $1.15T and “market dominance” is 44.04%, whilst the value of the entire crypto market is $2.62T.
| Price | High | Low | Change from previous week | |
| BTC (in US$) | $61,178 | $63,729 | $58,296 | 0.96% |
| ETH (in US$) | $4,307 | $4,446 | $3,920 | 5.45% |
Source: CoinMarketCap. As at 31 October 2021. Past performance is not indicative of future performance.
News we are keeping an eye on
The Australian regulator, the Australian Securities and Investments Commission (ASIC), has last week given the green light to Bitcoin and Ethereum ETFs. After consultation with industry participants, ASIC issued guidance and good practice for both product issuers and market operators, covering admission and monitoring standards, custody of crypto-assets, pricing methodologies, disclosure and risk management. ASIC Commissioner, Cathie Armour, said, “The good practices we published provide practical examples of how these obligations may be met, in a way that maintains investor protections and Australia’s fair, orderly and transparent markets.”1
In the U.S., banks are looking for a way to engage with cryptocurrencies, rather than shy away from them. The three main U.S. bank regulators – FDIC, Federal Reserve and the Office of the Comptroller of the Currency – have formed a team to ensure cryptocurrency policy coordination and to try to provide a roadmap. Jelena McWilliams, who chairs the FDIC, said: “If we don’t bring this activity inside the banks, it is going to develop outside of the banks…The federal regulators won’t be able to regulate it.”2 The regulators are working on how banks can be allowed to offer services such as holding crypto for client trading, and collateral for loans, or to possibly hold on balance sheets like traditional assets.
A report being prepared by the President’s Working Group on Financial Markets will announce that U.S. regulators will give authority to the SEC to crack down on the U.S. $131B stablecoin market.3 When crypto exposure is no longer desired, traders and investors typically look to use stablecoins that are pegged to the U.S. dollar or gold, instead of moving back into actual fiat currency. However, with billions of dollars now being held in stablecoins, a collapse could threaten an economy, no different than a collapse in a fiat currency. To promote stability and to ensure investors can convert back to fiat when needed, stablecoin issuers claim to be backed by reserves. The report is looking for Congress to pass legislation that these coins be subject to rules like bank deposits to support the backing and security that they claim.
Crypto equities
Australians now have another way to gain exposure to the crypto economy.
Launching later this week on the ASX will be the BetaShares Crypto Innovators ETF (CRYP). The fund will not hold any cryptocurrencies directly but will take a ‘picks and shovel’ approach by investing primarily in pure play companies driving the crypto economy. The ETF will provide a cost-effective, convenient and transparent vehicle to access the growth potential of the crypto sector. Companies held in the index CRYP will aim to track include Coinbase, Microstrategy and Galaxy Digital, with sectors such as crypto miners, exchanges and custodians, and companies that have significant amounts of crypto in treasury holdings, all being covered.
One of the top holdings in the BetaShares Crypto Innovators ETF will be a firm that has been referred to as the ‘Google of cryptocurrency’ – Coinbase Global (COIN). Coinbase is the largest cryptocurrency exchange by number of users, runs multiple business lines in custody and prime brokerage, and recently announced an NFT platform launching which already has over a million people signed up ready to use.
What are on-chain analytics?
On-chain analysis is an emerging field that leverages information found on the public blockchain to facilitate better decision making. On-chain analysis is a powerful tool that gives us an insight into what’s happening on a blockchain network in real-time, something not available with traditional asset-classes. Its tools and techniques are often applied for trading and investment purposes but should be used in conjunction with other disciplines.
This week I take a look at a couple of metrics that are referred to frequently.
1. Activity by entities holding over 1,000 bitcoin in a single address (excluding known entities such as retail funds, ETFs, exchanges, etc.)
- The assumption is that any address holding over 1,000 bitcoin, (currently valued over $60M) could be considered experienced, well-informed or “in-the-know”.
2. Supply Shock Ratio
- In particular, we look at long-term holders, which are bitcoins that have not moved over 155 days. Due to the length of time they have not moved, they are considered unavailable compared to the coins that have recently been transferred and are therefore regarded as more available.
- The metric can be an indicator of bearish or bullish sentiment, as long-term holders would tend to start selling if bearish on the market.
A single metric does not tell a whole story, but in conjunction with multiple metrics and other disciplines can give some insight into what the sentiment of the market may be.
On-chain metrics
Citing data from on-chain analytics company Glassnode, we look at the holdings of whales (entities holding >1000 BTC filtered for known entities such as exchanges and large funds) and minnows (entities holding 0.1-1 BTC) applying a 14-day moving average. Whilst you can see the minnows have steadily accumulated going back to May when the BTC price last peaked, whale holdings tended to vary with the movement of price. Interesting to see that with the most recent run-up in price, whales started to sell, but with the slight pullback in price, started to buy once again.
Whales filtered for all known entities
Source: Glassnode
Looking at the metric Long-Term Holder Supply Shock, we can see that this remains at an all-time high. Keeping an eye out for a reversal in the trend, in addition to whale activity, can provide insight into what the so-called ‘smart money‘ is doing at the time.
Altcoin news
Our first altcoin of the week is Ethereum (ETH), the second-largest cryptocurrency by market capitalisation. Ethereum is also the most actively used blockchain.5 Unlike bitcoin, Ethereum is a platform, and was designed as a network for the construction of decentralised computer applications (dapps). So, whilst bitcoin does one thing, being a decentralised payment network, Ethereum can be used for multiple applications such as non-fungible tokens (NFTs) and decentralised finance (DeFi). Underpinning the Ethereum network are smart contracts. Smart contracts can define rules, like a regular contract, and automatically enforce them via the code instead of an underlying company or authority.
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Investing in crypto assets or companies servicing-asset markets should be considered very high risk. Exposure to crypto assets involves substantially higher risk when compared to traditional investments due to their speculative nature and the very high volatility of crypto asset markets. Investing in crypto assets or crypto-focused companies is not suitable for all investors and should only be considered by investors who (i) fully understand their features and risks or after consulting a professional financial adviser, and (ii) who have a very high tolerance for risk and the capacity to absorb a rapid loss of some or all of their investment. Any investment in crypto assets or crypto- focused companies should only be considered as a very small component of an investor’s overall portfolio. |
1 https://asic.gov.au/about-asic/news-centre/find-a-media-release/2021-releases/21-285mr-asic-releases-guidance-on-crypto-asset-related-investment-products/
2 https://www.reuters.com/business/finance/us-regulators-exploring-how-banks-could-hold-crypto-assets-fdic-chairman-2021-10-26/
3 https://www.bloomberg.com/news/articles/2021-10-25/sec-gets-path-to-rein-in-stablecoins-as-u-s-weighs-new-rules?sref=6EQWk76O
4 https://www.cnbc.com/2021/10/26/citi-initiates-coinbase-as-a-buy-says-crypto-stock-can-jump-more-than-27percent.html
5 https://www.reuters.com/article/sponsored/ethereum-instrinsic-value
