Week 21, 2023 - Weekly Market Outlook

TLDR

• Hong Kong's SFC begins accepting crypto trading license applications.
• Celsius bankruptcy to be resolved through Fahrenheit's winning bid.
• Ethereum's Shapella upgrade boosts Ether staking.
• Strong growth in Liquid Staking Derivatives finance (LSDfi).
• Current market data shows Bitcoin outperforming Ethereum.

Introduction

In this article we shed light on various developments in the crypto sector. We discuss the transformation of Hong Kong into a new haven for cryptocurrency as the Securities and Futures Commission (SFC) begins accepting applications for crypto trading licenses. We then shift our attention to the restructuring of Celsius, a bankrupt crypto lending company, and the efforts to revive it through the successful bid by Fahrenheit. Following this, we delve into the recent Ethereum upgrade, Shapella, which has ignited considerable interest in staking Ether (ETH). Moreover, we explore the emerging field of Liquid Staking Derivatives finance, a sector offering new market opportunities related to staking yields and validator monopolies. Finally, we provide an analysis of the current crypto market data, including the performances of Bitcoin and Ethereum

Hong Kong; the new crypto haven

Hong Kong's financial regulator, the Securities and Futures Commission (SFC), recently announced that it would accept applications for crypto trading licenses starting from June 1.

This move comes after the SFC has reviewed public feedback on its initial policy recommendations, released in February. The new regulations permit licensed crypto service providers to cater to retail investors. However, this is allowed only if the service providers ensure their users understand the risks involved in such investments. Interestingly, the SFC is not in favour of allowing the trading of stablecoins, a type of crypto tied to other assets' value, for retail investors until new regulatory measures for this asset class are in place. Additionally, the regulator has decided to prohibit crypto "gifts" that are often used as incentives for retail customers to invest, which could include giveaways like airdrops.

The SFC emphasizes that it's the responsibility of the crypto platforms to perform due diligence before listing any crypto asset. Being included in two recognized indices is seen as just the bare minimum requirement. Regarding financial requirements, crypto exchanges are always required to maintain a capital of at least 5,000,000 Hong Kong dollars ($640,000). Moreover, each month, they must submit a detailed financial report to the SFC, including liquid capital, bank loans, credit facilities, and profit and loss analysis.

The SFC's guidelines also touch upon procedures for listing tokens on exchanges. All tokens must undergo due diligence and independent smart contract audits before being listed. The guidelines also address potential conflicts of interest within token review committees. The SFC also supports separating client and platform assets, either through escrow or by the platform setting aside funds. The platform's compensation arrangement should fully cover the client's virtual assets. While some have suggested engaging third-party custodians for the safekeeping of client assets, the SFC has expressed concerns as there is currently no regulatory framework for such custodians. Finally, the SFC plans to review the possibility of allowing derivatives, which it recognizes as crucial for institutional investors. Also, it has addressed the implementation of the Financial Action Task Force's (FATF) rule for sharing crypto transaction information, stating that information should be submitted as soon as possible, with a final deadline of January 1, 2024.

As for Conflux, a public blockchain that is regulated in China. On one hand, if Conflux is included in the licensed crypto services, it could see an increase in adoption and use within Hong Kong. On the other hand, the new regulation might increase the cost of compliance for Conflux, potentially affecting their operation in the Hong Kong market.

Celsius has been acquired

Celsius, a crypto lending company that has declared bankruptcy, recently announced that a proposal by Fahrenheit has been chosen as the winning bid in a court-approved auction. Named after temperature measurement systems, Fahrenheit is a collaboration of US Bitcoin Corp., Arrington Capital, Proof Group, Steven Kokinos, and Ravi Kaza. They will provide the funds, management team, and technology to establish and operate a new entity, named 'NewCo', as part of a Chapter 11 bankruptcy plan.

According to the plan, Celsius's account holders will get a significant share of the company's liquid cryptocurrency as soon as the plan comes into effect. Additionally, the plan also includes agreements with the Custody and Withhold groups. Managing Celsius's illiquid assets, like the institutional loan portfolio, mining operations, and alternative investments, will fall on NewCo. As a public, regulatorily compliant company, NewCo will aim to benefit account holders. Moreover, the account holders will fully own the new equity in NewCo, although there may be some dilution due to the equity distributed to Fahrenheit as management fees. A board of directors, primarily appointed by creditors, will supervise NewCo.

This plan significantly improved over the earlier "stalking horse" bid. It will distribute additional liquid cryptocurrency worth hundreds of millions of dollars to account holders and reduce Fahrenheit's management fees by a similar amount. The plan offers an opportunity for Celsius to restart its currently dormant mining rigs and for NewCo to grow its mining business over time.

Just in case, Celsius has also secured a backup bid with the Blockchain Recovery Investment Consortium, which could potentially create a publicly traded mining business. In this scenario, Celsius's creditors would fully own the equity interests and could sign a management contract with GlobalXDigital, allowing for an orderly winddown of Celsius's remaining assets.

The next steps for Celsius are to negotiate and file a plan sponsor agreement with Fahrenheit and a backup plan sponsor agreement with the Blockchain Recovery Investment Consortium. They must also file a revised Chapter 11 plan and a disclosure statement. All of these steps require approval from the bankruptcy court.

Post Shapella Update

Since Ethereum implemented an upgrade called Shapella, or Shanghai, on April 12, there's been a notable increase in the interest in staking Ether (ETH). Staking is a process where people lock up their coins in the Ethereum network to earn a passive return. According to data from Glassnode, over 4.4 million coins have been staked since the upgrade, pushing the total to 22.58 million. Ethereum has a low staked to supply ratio compared to other PoS blockchains. Ethereum has a 33% staking rate while other PoS chains like Binance and Avalanche have 60% staking rates.

It was expected that due to the deflationary forces, Ethereum's price would rally, and I expect that the trend of staking will continue. Interestingly, this surge in demand has happened even though there's a waiting time of over a month to become a validator on the network - a role that requires depositing at least 32 ETH and involves processing transactions and storing data on the blockchain. More than 50,000 potential validators are in line to stake their Ether, drawn by the prospect of an annual yield of around 4-5%.

Previously, staking was seen as a risky proposition because, for three years, stakers couldn't withdraw their locked coins whenever they wanted, exposing them to fluctuations in Ether's price. However, the Shapella upgrade has made staking less risky by allowing users to unlock their coins whenever they choose. This new flexibility in withdrawing staked ETH has reduced the perceived risk for many investors. Before the upgrade, potential stakeholders might have been put off from staking their Ether due to concerns about their funds being locked up excessively.

The Narrative

With this increased interest staking in Ethereum. Liquid Staking Derivatives have also grown. A new sector growing in the space is the Liquid Staking Derivatives finance space.

LSDfi builds on LSDs to create new market opportunities related to staking yields, validator monopolies, slashing risks, and even validator censorship. These mechanisms provide unique opportunities for users, promoting healthy competition among validators and preventing one party from monopolizing the consensus layer.

At the core of LSDfi are LSDs, LSDs are tokens that users receive when they stake their assets. These tokens enhance network security and allow users to earn an additional yield on top of their staking rewards. An essential feature of LSDs is that they provide users with flexibility and liquidity. This means users can still reap the benefits of staking crypto without locked assets. LSDfi represents staked assets and can be traded, loaned, restated, or used for arbitrage trading on secondary markets. To learn more about upcoming projects in the space, read more here.

Crypto Market data

After Bitcoin broke its 8 Week range, it has been rejected from previous support. There are a couple of scenarios that could play out here. Based on the US equity market having a bullish trend and looking good, crypto could trade higher. That does not blindly mean buying right now. 2 Possibilities of getting crypto exposure. 1. We have broken below support, and to be bullish on crypto, we need to reclaim $26,700. I would target about $30,000 as the first take profit. 2. Buying $24,000- $25,000. I have spoken about the 9-month retest for the last two months. I still stand by this. Buy the 9-month retest; if it doesn't hold, you can buy Bitcoin below $20,000. Buying below $20,000 is one of the best cases. It is crucial to note that these scenarios are hypothetical and can be changed because of different information.

In my opinion Ethereum looks awful. It has been steadily trending lower. Until it can break the bearish market structure, it remains an asset I'm not buying. Until $2000 is reclaimed, I plan to buy Ethereum at $1450 or $900. Till then, Bitcoin looks like the better chart.

The DeFi Sector

With Ethereum being so weak, there wasn't a chain that did extremely well. The best-performing chain of this week has been Tron.

While Tron outperformed Ethereum this week, it outperformed so well because it offers the highest yield for stablecoins. The Tron network offers about 30% on stablecoins. But this yield is extremely unsustainable, so use caution if u want to use the tron network

Best and worst performers

There isn't a narrative with the top gainers. A very interesting project here is Tomochain. Tomochain is an EVM layer 1, and it's designed with several crucial features in mind, including speed, privacy, user-friendliness, and decentralization. Since 2018, TomoChain has been highly secure and notably scalable, making it a robust blockchain network. The platform operates using a consensus algorithm, Proof-of-Stake Voting (PoSV). This method effectively keeps transaction costs low and speeds up the confirmation process.

Among the most prominent attributes of TomoChain is its impressive scalability. It's designed to process a high volume of transactions, accommodating up to 2,000 per second. Plus, it only takes 2 seconds to complete each block. This efficiency allows swift and smooth token transfers and executions of smart contracts, which is essential for high-priority transactions.

There isn't any narrative about the losers. Multichain is the biggest loser after users reported that their multichain funds had not arrived due to a backend node upgrade and the team was arrested by Chinese authorities. At the same time, a wallet address linked to layer-1 blockchain developer Fantom Foundation reportedly removed 449,740 MULTI ($2.4 million) from liquidity on the decentralized exchange SushiSwap. Rumours also appear to have fueled the sell-off.

The week ahead

Bitcoin is trying to reclaim its 8-week range support. A failure to do so would mean that this would be an underside retest of a range break. When an asset breaks out of its range, it usually takes a while to find balance again. We will be waiting for that balance to take place. That balance might take place at $24,000-$25,000. Till then, there is no point trying to catch a falling knife. The only person that cares about catching a falling knife is a degenerate gambler. Please wait for the knife to fall and then pick it up. The chances of you hurting yourself are smaller. The same goes for trading. Wait for the market to present an opportunity. Till the opportunity presents itself, it's best to wait from the sidelines. It's also great to start researching new narratives and projects. You can read those here.