THE COIN STREET JOURNAL
Market News - July 19th 2024
THIS WEEK IN THE CRYPTO MARKETS
Bitcoin’s price hovered around $64,000 following a dip from $65,000 on Thursday. Earlier in the week, Bitcoin had briefly reached $66,000. This fluctuation is partly due to the increasing likelihood of President Joe Biden withdrawing from the upcoming U.S. presidential race. The potential for a second term for Donald Trump, viewed favorably by the crypto industry, had initially boosted Bitcoin’s price. However, as Biden’s campaign performance falters and the assassination attempt on Trump affects political dynamics, crypto traders’ sentiment has dampened, leading to a slight decline in Bitcoin’s value.
On Indian crypto exchange WazirX, Bitcoin and Shiba Inu traded at significant discounts following a hack attributed to North Korea. The BTC/INR pair saw a 22% drop in the past 24 hours, while the SHIB/INR pair fell 30%. WazirX’s native token, WRX, plummeted 40% since the attack. The hacker reportedly drained $230 million from the exchange, converting most of it into ether. As of Friday morning, the hacker held over 59,097 ETH, worth $200 million, along with $15 million in various other tokens.
A global internet outage led to the creation of numerous crypto tokens themed after CrowdStrike and the Microsoft “Blue Screen of Death” (BSOD) error. Millions of Windows users worldwide faced system shutdowns or restarts due to a faulty CrowdStrike software update. The issue affected various sectors, including airlines, railways, and stock exchanges. Despite the widespread disruption, no crypto-related companies reported any outages. Creating tokens based on trending news is a common practice in the crypto community, often generating quick profits for creators and early investors before the tokens lose their value.
Bitcoin has been trading within a range this week, influenced by the ongoing release of Mt. Gox supply and declining equity markets. QCP Capital noted that this range-bound movement could indicate the market is shaking off concerns. They believe the market is poised for a breakout as the U.S. elections approach. Volatility has decreased, with Bitcoin remaining between $61,000 and $71,000. FxPro senior market analyst Alex Kuptsikevich observed that Bitcoin indicators suggest the asset is not overbought and sentiment is not overly euphoric, leaving potential for near-term gains.
The cryptocurrency market experienced a broader decline, with the CoinDesk 20 Index (CD20) dropping 1.9%. This index measures the performance of the broader crypto market, reflecting the general bearish sentiment. Despite the challenges, some analysts remain optimistic about Bitcoin’s potential for growth, citing current indicators and market conditions that could support a rally in the near future.
Bitcoin’s recent performance highlights the influence of macroeconomic and political factors on the crypto market. The potential withdrawal of Biden from the presidential race and the implications of a Trump presidency have significantly impacted trader sentiment. Additionally, external events like the WazirX hack and the global internet outage have further complicated the market dynamics, causing fluctuations in various crypto assets.
The WazirX hack underscores the ongoing security challenges in the crypto industry. Despite advancements in blockchain technology and security protocols, exchanges remain vulnerable to sophisticated attacks. The incident highlights the need for continuous improvement in cybersecurity measures to protect users and maintain trust in the crypto ecosystem.
Overall, the crypto market remains volatile, driven by a mix of political developments, security breaches, and global events. While short-term fluctuations are expected, the long-term outlook for Bitcoin and other cryptocurrencies will depend on how these factors evolve and the market’s ability to adapt to new challenges.
EEA RELEASES DEFI RISK ASSESSMENT GUIDELINES HANDBOOK
The Enterprise Ethereum Alliance (EEA) has released a comprehensive DeFi Risk Assessment Guidelines handbook to clarify regulatory uncertainties in decentralized finance (DeFi). This initiative aims to foster innovation in the DeFi sector while addressing concerns over potentially restrictive global legislation. The guidelines provide detailed insights into evaluating, managing, and mitigating various risks associated with DeFi operations.
The EEA’s new guidelines arrive at a crucial moment, addressing a significant lack of consistent accounting standards and regulatory guidance, as seen with the EU’s Markets in Crypto-Assets regulations. Charles Nevile, Director of Technical Programs at EEA, emphasized the regulatory learning curve regarding DeFi, particularly in areas like securities regulation and accounting issues. The guidelines are intended to help DeFi protocols proactively comply with regulatory requirements and establish best practices for risk assessment.
Covering a wide range of topics, the guidelines address governance, tokenomics, software issues, liquidity, and compliance with regulatory and external market factors. They tackle specific software challenges such as oracles, smart contracts, and bridges, focusing on security and interoperability. To aid practical application, the guidelines suggest best practices for risk management, including user education, bug bounty programs, stress tests, security updates, and data encryption. A glossary of DeFi-related terms is also included to help newcomers navigate the sector’s complex terminology.
Beyond assisting developers, the guidelines serve as a reference for regulators and licensing authorities, already influencing licensing requirements at the Abu Dhabi Global Market (ADGM) and being integrated into the EU’s Sandbox program use cases. Nevile highlighted the importance of regulators participating in the multi-stakeholder development approach to effectively contribute to DeFi development.
The guidelines have garnered support from EEA board members, including industry leaders from Consensys, the Ethereum Foundation, and major corporations like JP Morgan, Santander, and Microsoft. They are designed to be applicable to both non-crypto firms and regulatory bodies, offering crucial insights for financial institutions assessing investment risks in DeFi. Dyma Budorin, co-chair of the EEA’s DRAMA working group and CEO of Hacken, stressed the guidelines’ utility for traditional financial institutions cautious about entering the DeFi space.
As traditional finance firms increasingly adopt DeFi, the relevance of the EEA’s guidelines is underscored. Notable examples include BlackRock’s launch of its inaugural tokenized fund on Ethereum, and the exploration of DeFi by financial giants such as JP Morgan, Goldman Sachs, and HSBC through tokenization initiatives. The EEA plans to maintain oversight through its Working Group, continuously refining the guidelines based on new developments and user feedback.
A recent security breach involving the Arcadia Finance protocol on July 16 highlighted the critical need for robust DeFi risk assessment. Hackers exploited a specific contract address, stealing over $455,000 in various cryptocurrencies and laundering the funds through Tornado Cash. This incident underscored persistent security vulnerabilities within DeFi protocols, reinforcing the importance of comprehensive risk management strategies as advocated by the EEA’s guidelines.
NEW HIGH RISK, HIGH REWARD CRYPTO ETFS HIT THE MARKET
This week saw the launch of two new leveraged funds by Direxion, expanding the range of high-risk, potentially high-reward crypto exchange-traded funds (ETFs). These new offerings include the Direxion Daily Crypto Industry Bull 2X Shares (LMBO) and the Direxion Daily Crypto Industry Bear 1X Shares (REKT). These funds aim to provide amplified daily returns on investments in U.S.-listed companies involved in blockchain technology, non-fungible tokens (NFTs), decentralized finance, and digital asset mining hardware sectors.
Direxion’s latest ETFs aim to deliver 200% positive or 100% negative daily exposure to the core infrastructure of the crypto industry. Edward Egilinsky, Direxion’s Managing Director, highlighted the growing significance of crypto equities, now an almost $3 trillion asset class. He emphasized that LMBO and REKT allow traders to express their short-term views on the companies shaping the future of a decentralized, crypto-driven economy.
Leveraged ETFs use financial derivatives and debt to amplify the daily returns of their underlying securities, contrasting with traditional ETFs that typically track their indices on a one-to-one basis. These new offerings by Direxion are part of a broader trend, following the successful launch of Bitcoin ETFs earlier in the year, which accumulated $16.59 billion in net inflows and $50 billion in assets under management. Other firms like REX Shares and Tuttle Capital Management have also introduced similar high-risk leveraged funds.
The introduction of these leveraged products provides traders with new tools to capitalize on Bitcoin’s price movements. Scott Acheychek, COO of REX Financial, underscored the potential of these ETFs to enhance trading strategies amid Bitcoin’s price volatility. Meanwhile, Bloomberg Senior ETF Analyst Eric Balchunas pointed out the competitive landscape, with existing players like ProShares and VolShares having significant investments in leveraged Bitcoin ETFs.
Leveraged ETFs are designed for short-term use by experienced traders due to their high risk. Historical data shows that more than half of all leveraged/inverse ETF products in the U.S. were liquidated by April 2022, reflecting their risky nature. Analysts from QSR noted that while these ETFs can lead to significant gains, they can also result in complete losses, highlighting the extreme outcomes associated with them.
The past few years have seen the launch of single-stock leveraged funds, tracking the performance of major companies like Apple, Nvidia, and Tesla. Tuttle Capital Management has proposed a new fund to track the 2x performance of MicroStrategy, a company that has seen significant growth as a proxy for Bitcoin. This proposed fund, if approved, could become the most volatile ETF in the U.S., according to Eric Balchunas.
The potential impact of these leveraged funds on Bitcoin’s price has been a topic of discussion. Louis Sykes, a senior crypto analyst with All-Star Charts, believes that these funds are too small to pose systemic risks to Bitcoin or the broader crypto market. He noted that despite headlines suggesting increased volatility, the market has become more stable with the entry of major players and improved regulatory oversight.
Leveraged funds, while useful for short-term trading, are generally poor long-term investments due to their decay function. Louis Sykes pointed out that skilled traders might benefit from these funds for managing short-term price risks, but most traders are likely to incur losses. Despite this, the presence of leveraged funds is not expected to pose significant risks to the market, given their relatively small size and the overall structural improvements in the crypto market.
TRUMP ANNOUNCES PLANS TO RELEASE A FOURTH NFT COLLECTION
Former President Donald Trump has announced plans to release a fourth NFT collection, as detailed in an interview with Bloomberg Businessweek. Trump stated that his previous NFT collections were highly successful, selling out rapidly. He mentioned that he has done three collections already and will proceed with another one due to high demand from the public.
Trump hinted at the possibility of a fourth NFT collection earlier this year at a gala for his mugshot NFT holders at Mar-a-Lago. However, he was non-committal at that time, expressing a belief in the principles of supply and demand. Despite this earlier hesitation, the former president has now confirmed his intention to launch another collection, citing continuous public interest and enthusiasm.
As Trump’s reelection campaign gains momentum, he has increasingly embraced the crypto industry. In May, his campaign began accepting crypto donations. According to a recent Wall Street Journal report, Trump’s campaign raised approximately $331 million last quarter, with about $3 million coming from cryptocurrencies such as bitcoin and ether.
In a significant move, Trump recently announced pro-Bitcoin senator J.D. Vance (R-Ohio) as his running mate. This decision reflects Trump’s growing alignment with the crypto community, which has been supportive of his campaign. High-profile figures in the crypto industry, including Kraken co-founder Jesse Powell and Gemini co-founders Tyler and Cameron Winklevoss, have contributed substantial donations to Trump’s campaign and associated super PACs.
Trump’s growing relationship with the crypto sector marks a shift from his previous skepticism. In his interview with Bloomberg Businessweek, he acknowledged this change in stance, stating that the U.S. must embrace crypto to prevent other countries, particularly China, from dominating the field. He emphasized the strategic importance of maintaining a strong presence in the crypto industry.
Trump highlighted the potential of the U.S. crypto industry, describing it as an emerging field with significant growth potential. He expressed a desire to foster this development, positioning it as a national interest to ensure the U.S. does not fall behind other countries.
Trump’s interaction with the crypto industry has deepened through various fundraisers, where he has met numerous key players. He described these individuals as highly capable and influential, which has reinforced his belief in the importance and durability of the crypto sector.
Overall, Trump’s evolving approach towards NFTs and the crypto industry reflects his strategic shift in aligning with emerging technologies and the communities that support them, as part of his broader campaign efforts for the upcoming election.