Hxro: Crypto Report – The Weekly No. 7

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This week’s major crypto events:

• A dormant mining wallet from Feb 2009 made a transfer of 50 BTC over the network, sparking a sharp sell-off and rabid speculation of who was moving the coins and if it was the first of many
• DeFi suffered another setback as crypto lender Blockfi announced they experienced a data breach that compromised users’ account activity and sensitive personal information

This week’s major legacy events:

• The Bank of Canada is due to announce their interest rate decision on Wednesday morning, with expectations that they will hold rates at 0.25%
• Traders will be on high alert as the monthly U.S. Nonfarm Payrolls (NFP) report will be released this Friday morning at 7:30 AM EST. Expect another ugly number as the ongoing pandemic has taken a significant toll on U.S. employment figures

SIM swapping has plagued the crypto space for years and with the recent surge in prices and renewed interest in crypto, it is prudent to take a closer look at this scam that has affected many prominent crypto personalities and investors. Michael Terpin, a long-time crypto investor, was in the news again this week when he announced he had filed a civil suit against Ellis Pinsky. In 2018, at 15 years old, Pinsky ran a SIM swapping ring and thought he had gotten away with stealing more than $24mn of crypto. Victims of SIM swapping attacks lose control of their phone and any sensitive information stored on apps such as SMS, chat apps, or two-factor authentication linked to SMS, can be used by attackers to access crypto holdings and other sensitive data. One of the best procedures to protect against this is to use 2FA with Authy or Google Authenticator, rather than 2FA via SMS, and to avoid exchanges or services that don’t allow for alternative 2FA methods that don’t utilize SMS.

BTC/USD – W (BNC: BLX)

Points of Discussion

• Sentiment: Neutral
• Key Levels: S = $7,800, $6,400 / R = $9,950, $10,300

Tension among traders ran high last week as the price of Bitcoin flirted with the psychological barrier of $10,000. Price failed to break through the resistance despite numerous pushes on relatively high spot volume.

Last Wednesday, 50 BTC was transferred from a dormant wallet dating back to February 2009. Within the hour, as the news circulated beyond the smaller circles that monitor for such movements on the blockchain, the market began to nosedive. BTC fell more than $400 to the daily support at $9,400 in a few hours, as speculation was rampant about who owned the address and if more supply would be moved to exchanges and sold. Luckily for bulls, it was a single transfer, but it again highlighted the fact that Satoshi, the (assumed) owner of over one million BTC, may have the capacity to flood the market at any time.

Looking at market structure, there have been no major breakdowns of any weekly support levels, the nearest being around $7,800. To the upside, weekly resistance levels are intact, leaving Bitcoin trapped in a wide range between $9,950 and $7,800. Until price can close a daily candle outside the range, expect the market to chop around between the weekly levels.

ETH/USD – W (Gemini: ETHUSD)

Points of Discussion

• Sentiment: Bullish
• Key Levels: S = $178, $164 / R = $224, $255

Markets usually fall in one of the two categories: trending in a direction or consolidating in sideways chop. Last week, ETH/USD continued to be the latter, moving over 11% but respecting weekly support at $178 and resistance at $224. The Bitcoin and Ethereum USD pairs mirrored one another last week when Bitcoin began its march down in price, and if Bitcoin were to see a continued downside, we expect this relationship with the USD pairs to hold in the short term. The market will need to break the $224 resistance in order to trigger upside expansion to the $255 and $288 daily and weekly levels. Weekly support will need to hold at $178 or there will be a risk of further downside to the next block of support at $164.

Some interesting data was released by Grayscale, the company owned and operated by Digital Currency Group (DCG), who owns a stake in most of the large companies in crypto. Grayscale reported that inflows into their Ethereum Trust this past quarter were over $110mn, compared to combined inflows over the previous two years of $95.8mn. This is a substantial increase in a short period of time, which signals that institutions are diversifying their crypto portfolio, but it remains to be seen how wide that diversification is outside of the ‘blue-chip’ crypto networks.

Data Center

Key Points:

1. Institutional inflow into crypto increased significantly during the global pullback in March
2. Quarterly inflows into Grayscale’s Bitcoin trust hit an all-time high with institutional investors allocating more than $388mn
3. Hedge funds were the primary entities building positions, accounting for 88% of the invested capital

We often speak about the institutionalization of this asset class and taking a dive through Grayscale’s most recent quarterly report provides a glimpse into just how quickly this process is accelerating. Despite the bloodshed the markets saw in March, quarter-over-quarter inflows increased by more than 100%. Hedge funds were to thank as they accounted for 88% of the total capital investment over that period.

Hedge funds were very opportunistic in their timing, as Bitcoin and Ethereum prices tumbled over 50% in March, before recovering all the lost gains in the past couple of months. This behavior signals that even in a risk-off environment, demand for exposure to crypto is true, strong, and growing. Reasons why can be attributed to speculation as well as a desire (and mandate) to hedge exposure in legacy portfolios, especially those with mostly fiat-denominated assets.

The other big take away from this data is that when we see demand in a deflationary asset accelerating rapidly, it can create a large underlying bid in the asset that naturally increases its value over time. As larger institutions and high-profile investors continue to move to Bitcoin, watch these trends closely for further acceleration. Remember, there are only 21 million BTC.

DeFi Checkup

Key Points:

1. The network effects driving social awareness of many DeFi brands remains low but the broader trend for the space is positive
2. Kyber Network has been one of the biggest beneficiaries of growing brand awareness as both new addresses on the network and trade volume have surged over the past three months
3. Stablecoins continue to be the primary driver for growth and volume across most DeFi products as issuance continues to break all-time highs

This week we will take a closer look at CoinGecko’s recent DeFi survey, which asked its users a variety of questions related to the growing space. Topics touched on brand awareness as well as how users are interacting with the services offered through DeFi, such as lending and trading through decentralized exchanges.

The rate of growth of any network is dictated by its network effects, such as social awareness, and analyzing these network effects provides critical information on adoption and usage trends. These trends ultimately dictate if a network (or company) will survive in the long run. With so many companies providing the same services, the ones that have differentiated themselves have created brand awareness through social media and educational campaigns, such as Kyber Network. According to its recent ecosystem report, Kyber Network showed a nearly 50% increase in unique addresses, which has translated to over $100mn USD in monthly trade volume for the past three months.

Across all DeFi products, stablecoins continue to remain central to the growth of any product. Total stablecoin market cap sits at $8.1 billion, an increase of over 25% since the start of the year. As stablecoins serve as a huge institutional onboarding ramp via OTC desks, the incentive to integrate stablecoins into the DeFi infrastructure will retain importance within the ecosystem.

Data Center

Key Points:

1. Hashrate has seen a steep decline post-halving, but the network is expected to stabilize barring a significant and sustained drop in price
2. Some miners are cutting out the middleman in power generation by acquiring power facilities outright, as there has been a significant crunch in the oil and gas industry
3. Without a substantial increase in the price of Bitcoin and improved cash flow, it is forecasted that Canaan will require a capital infusion in the next two years

Two weeks post-halving and the Bitcoin network hashrate has seen a steep decline from over 136TH/s to 87TH/s, down nearly 40%. Meanwhile, the Bitcoin market has been stuck in a contracting range, putting miners with low cash reserves on liquidation notice. While we expect the situation to stabilize in the coming months as the industry consolidates and new equipment comes online, not all operations will be able to make it through this cycle’s transition period.

On a positive note for miners, Bitcoin’s self-adjusting network difficulty feature recently came into effect as network difficulty dropped by 6% on May 20th. Conditions currently point to an additional 6% drop in about ten days. For larger miners, this will help increase profitability as they were able to upgrade their hardware prior to the halving and will now be able to enjoy the fruits of a 12% difficulty readjustment to the downside.

Unfortunately for many, it will be too little too late as hardware manufacturers struggle to meet demand. The financially troubled ASIC manufacturer Canaan was not spared as it reported a $5.5mn net loss in Q1. Despite cutting its hardware costs by 50% to only $10/TH, most of its older machines are not worth running with electricity costs above 3c/kWh. Canaan’s cash on hand decreased from $71mn at the end of last year to $31mn only five months into 2020. Short-term investments were cited as the reason for the cash drawdown, and the company decided not to publish any Q2 forecasts due to difficulty in predicting growth during COVID-19. The numbers point to the need for an increase in the price of Bitcoin and improved cash flow for Canaan to weather this storm without a capital infusion.

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