Blockstone Capital Weekly Digest: Friday 19 May 2023
Updated: Jun 16
A summary of the most important developments in the digital asset industry, every week
Digital asset markets traded lower this week, continuing the pullback from mid-April highs amid investor concerns about the US debt ceiling and low liquidity in crypto markets. We learned that Jane Street and Jump Crypto, two of the industry’s leading market makers, are winding down some of their crypto exposure in the US – adding to the continued trend of institutional flight from the US towards other jurisdictions. This move will likely have ramifications for liquidity in the industry, which has already witnessed the departure of several significant players over the past year.
While Bitcoin's price may have shown sluggishness, transaction volumes on the network are soaring as a result of the ongoing memecoin frenzy. As per Delphi Digital, BRC-20 assets have accounted for a staggering 47% of all Bitcoin transactions in May. In response to Bitcoin’s limited block space and the brief Ethereum finality issues, people seem to be migrating to other chains, as evidenced by Solana witnessing a surge in the average number of new daily addresses – reaching its highest level in nearly a year.
In an impressive feat, the number of BTC wallet addresses holding one whole BTC has surpassed the one million mark, signaling a growing interest in Bitcoin as an investment asset. Even after a 14% slip from its 2023 high of $31K, returns on BTC for the year still come in at a respectable 61%. We would certainly call that a robust start to the year.
Carl, Vegard and Yev
Ripple dives into the institutional custody space with $250m acquisition of Metaco
Amid a long-running dispute with the SEC over the sale of its XRP asset, Ripple this week announced its $250m acquisition of Swiss institutional custodian Metaco. This surprise foray into the custody space not only strengthens and diversifies Ripple's product suite, but also grants the blockchain firm access to Metaco's impressive client base, which includes names like Citi Bank and BNP Paribas.
The acquisition emerges as one of the largest deals witnessed in the crypto industry over the past year, highlighting the increasingly crucial role of crypto custody infrastructure. Ripple forecasts that this sector will reach a staggering $10 trillion by 2030. Notably, traditional custody banks such as State Street and BNY Mellon have already made their foray into the market, with NASDAQ also recently announcing plans to launch crypto custody services for Bitcoin and Ethereum. In a more recent bullish development, Zodia, the institutional custody solution by Standard Chartered and Northern Trust, recently secured $36m in a Series A funding round.
This acquisition comes on the heels of a spike in M&A within the crypto sector during the first quarter of 2023. According to Architect Partners, M&A activity in the industry surged by 10% YoY in Q1 2023, with 54 transactions recorded in the quarter. The majority of deals involved crypto infrastructure firms. This flurry of activity signals a maturing industry that is becoming more competitive and efficient. In the coming months, further consolidation in the custody space is anticipated, particularly as custodians vie with each other to secure a leading position in AuC.
Adding to Ripple's recent string of major announcements, the company also recently revealed its expansion into Dubai, opening a new office in the region. The firm’s expansion plans yet again illustrate its confidence in a positive outcome against its ongoing case against the SEC, with a decision expected this year.
Tether to buy BTC regularly with its profits
Last week, stablecoin issuer Tether revealed its impressive net profit of $1.48bn for the first quarter of this year. Now, the company aims to put some of the profits to use.
Starting this month, Tether plans to allocate up to 15% of its net realised operating profits towards buying up BTC, representing a change in the way the company will manage its reserves. Based on the firm's most recent net profits, this investment in Bitcoin would amount to approximately $222m.
Tether emphasised its decision to self-custody all of its Bitcoin holdings, reflecting its steadfast belief in the principle of "not your keys, not your coins." In its blog post, the leading stablecoin issuer elaborated on its rationale, highlighting Bitcoin's track record of delivering favourable returns and also pointed to the growing adoption of Bitcoin by institutional investors.
The introduction of Tether's new Bitcoin allocation strategy closely follows the publication of the company's 2023 Q1 attestation, which revealed that it holds $1.5bn of BTC and $3.4bn of gold among the assets that backs the value of USDT and its smaller stablecoins. Some 85% of the reserves are held in cash and cash-like assets such as US Treasury bonds.
When questioned about how this strategy differs from the approach taken by the Luna Foundation Guard prior to the collapse of the Terra ecosystem, Tether's Paolo Ardoino responded on Twitter, highlighting that its approach is "100% different." Ardoino clarified that LFG held a substantial portion of Terra/Luna collateral in Bitcoin, setting it apart from Tether's strategy.
While Tether has long attracted unwelcome attention due to the somewhat opaque nature of its business, it continues to solidify its position as a trusted and most popular stablecoin. At the time of writing, USDT boasts a market capitalisation of $83bn, representing an impressive growth of $15bn since the beginning of this year. Though the price of BTC remains relatively unchanged by the news, Tether's move to allocate profits towards Bitcoin purchases signals growing confidence in the crypto asset, and could potentially fuel further upward momentum.
VC funding for early-stage crypto and blockchain businesses in Europe sees 700% increase in the past year
Despite none of the top 25 global crypto venture capitalists being based in the EU, VC investment in European crypto projects continues to surge – demonstrating that regulatory clarity is key to attracting capital and entrepreneurs from around the world.
According to new data from Pitchbook and Bloomberg, the infusion of capital into European crypto startups climbed from 5.9% to 47.6% between Q1 2022 and Q1 2023, representing a 700% increase. By the looks of it, this substantial growth is largely due to MiCA; the EU’s landmark Markets in Crypto Assets legislation, which established Europe as the first continent with comprehensive regulation for crypto assets.
In recent months, Europe has made notable strides in positioning itself as an attractive destination for crypto business. Circle recently strategically chose Paris as the location for its new European headquarters and is pursuing a license as an e-money provider for its euro-backed stablecoin, EUROC. In response to challenges encountered by crypto banking in the United States, we have all seen Switzerland's Sygnum Bank and SEBA, along with Liechtenstein's Bank Frick, successfully position themselves as successors to SVB, Silvergate, and Signature. Meanwhile Coinbase’s new subscription service that launched yesterday is available in 35 European countries, but not in the US.
Europe's willingness to engage with the industry extends to the European Banking Authority, which has been actively recruiting professionals with crypto expertise. This move reflects their preparedness to oversee large stablecoins and draft regulations for the forthcoming MiCA regulation. We remain confident that as MiCA's implementation unfolds, other nations may take cues from Europe, refining their own regulatory approaches and contributing to the emergence of a more cohesive global regulatory landscape for digital assets.
Ethereum resolves finality issue that hit Beacon Chain
Ethereum developers swiftly released software updates to address the recent finality issues that impacted the network's beacon chain. Over the course of last Thursday and Friday, the beacon chain experienced disruptions in finality, causing blocks to stop finalsing for over an hour. These incidents raised concerns about the security of the network, although end users of Ethereum did not encounter any transactional disruptions.
Finality plays a crucial role in ensuring the immutability of blocks on the blockchain. When blocks are not finalised, there is a potential risk of reordering or even dropping pending transactions. The issues arose due to high loads on some of the consensus layer clients, creating an exceptional scenario. Despite the temporary lack of finality, transactional activity continued without interruption. However, services built on top of Ethereum, such as the DEX DYdX, had to make adjustments to their operations in response to the finality issues.
Though the network has since resumed the process of finalising blocks and validators have been advised to upgrade their hardware specifications, this technical hiccup serves as a reminder that Ethereum's beacon chain is still a work in progress. Interestingly, despite the glitch, the price of ETH remains resilient, highlighting the market's confidence in the robustness of the Ethereum network.
Roundup of other key developments
Binance exits the Canadian market. More
Ripple starts platform for central banks to issue their CBDCs. More
DEX Uniswap trading volume outpaces Coinbase for 4th consecutive month. More
OpenAI’s Sam Altman nears $100m funding for Worldcoin crypto project. More
Bitcoin services startup River Financial secures $35m from Peter Thiel, others. More
Auradine raises $81m to build 'next-generation web infrastructure’. More
Do Kwon to be released after Montenegro court accepts $436K bail. More
China opens Blockchain Research Centre with plans to train 500,000 industry professionals. More
Binance launches platform to connect crypto funds with institutional capital. More
From Blockstone Capital
Blockstone Capital at DigiAssets
On Thursday 25 May, our Managing Partner Carl Szantyr is attending the TradeTech DigiAssets Conference in London, where he will be participating in a panel discussion exploring the role of digital assets in portfolio construction. Joining him on stage are Jasmine Burgess (Coinbase Asset Management), Eva Szalay (Bloomberg), Michael Wee (Portage) and Yves Choueifaty (TOBAM).
We hope to see you there!