Crypto Long & Short: A Bear Market Doesn’t Spell Doom

Plus: The key findings from CoinDesk Research's Q2 Quarterly Review. |

Weekly insights, news and analysis for the professional investor By George Kaloudis, Research Associate July 11, 2021 Sponsored by     Bitcoin (BTC) - $33,507.89 Ether (ETH) - $2,098.80 Prices as of 07/11/21 @ 8 a.m. UTC If you were forwarded this newsletter and would like to receive it, sign up here.  Hi all! On Thursday, the CoinDesk Research team published our 2021 Q2 Quarterly Review, which breaks down the main events and trends that have shaped the crypto markets over the past three months. (You can download the report for free from our Research Hub.) This week's Briefing summarizes our findings and expands on a select group of key narratives. Quick programming note: While Galen Moore, CoinDesk's Director of Data & Indexes and the usual author of Crypto Long & Short, is away for the next few weeks, the Research team will be pitching in to write the newsletter. While I have no dog photos or groovy tunes to break the ice, I hope my youthful exuberance will suffice in putting at least one smile on your face as you read.   – George Kaloudis, Research Associate A message from Crypto.com Buy bitcoin and 100+ cryptocurrencies with 20+ fiat currencies. New users can enjoy 0% credit/debit card fees on all crypto purchases made in their first 30 days. Download the Crypto.com App now. THE BRIEFING A bear market need not spell doom  (Note: We use Bitcoin/Ethereum with uppercase for the blockchain and bitcoin / ether with lowercase, or BTC/ETH, for the asset.)   In Q2, bitcoin hit an all-time high (ATH) of $64,888.99 and ended the quarter down 46% from its ATH at $35,046.22. The drop, among other factors, prompted our team to make the bold claim in a previous issue of Crypto Long & Short that cryptocurrencies are officially in a bear market.  Price declines invite the cynics in droves and once-pompous, paper-rich day traders are suddenly "in it for the tech," but a bear market need not spell doom for the institutional investor. For investors who believe in the intrinsic value of bitcoin, ether and other cryptocurrencies, bear markets shine a spotlight on tools and metrics useful for gauging market sentiment and shaping long-term investment strategy.  One of these metrics, MVRV, or Market Value to Realized Value, has yet to reach the highs it historically hits before profit taking, which suggests there are still unrealized gains in the crypto markets on which traders can capitalize. In addition, a second metric known as the Puell Multiple, which is calculated by dividing the total dollar value of bitcoin mined in a single day with its 365-day moving average, dipped to a one-year low recently, signaling undervaluation of BTC and a potential weakening of bearish market momentum.  For a deeper look at these metrics and how they are calculated, check out the full CoinDesk Quarterly Review 2021 Q2 on the Research Hub. A brief point I should mention before moving on from price discussion is the fact that ether's price increased 20% in Q2, while bitcoin's shed 40%. It's only the fourth time since the inception of CoinDesk's Ether Price Index (ETX) in 2016 that the two assets have recorded mixed quarters. Despite the unique divergence, 90-day correlations of daily log returns for BTC and ETH remained strong and unfazed, trending around 0.75 throughout the quarter.  China vs. Bitcoin In other notable news from this past quarter, the Chinese government cracked down on bitcoin mining in the country. Again. This time feels different, though. There have been rumors of a potential "east-to-west" bitcoin mining migration for some time now, but this is the first indication that it's actually happening.  Regulatory crackdowns between May and June in Qinghai, Inner Mongolia, Yunnan and Sichuan forced multiple Chinese mining pools to either shut down or scale back operations. Following each event, Bitcoin's hashrate – a measure of how much computational power miners are expending – was negatively affected. Hashrate touched 200 million terahashes per second in Q2, and ended the quarter just below 90 million. Hashrate is likely to rise back up eventually as China-based miners relocate their operations. Therein lies the real takeaway. Where are these miners going? Are they airlifting their rigs to Maryland? Or are they moving operations to Kazakhstan? Are they holding out hope that the government's current stance on bitcoin mining will be short-lived? We don't know for certain now, but where these miners end up will have a meaningful impact on bitcoin mining's energy mix and will be an important narrative to keep watching in the months ahead. Bitcoin is not a 'boomer coin' Market volatility and regulatory crackdowns on bitcoin mining aside, Bitcoin proved itself as a technology worth iterating and innovating upon in Q2. On June 12, 2021, miners signaled their support for a technological upgrade to Bitcoin known as Taproot. Taproot is a bundle of three upgrades that are aimed at improving network security, privacy and scalability. Taproot is the most significant upgrade to the Bitcoin network since the activation of the block capacity enhancement of Segregated Witness in 2017. There are some corners of Twitter that characterize bitcoin as the "boomer coin" because it's an "old, hulking and slow technology." It's true that over the years bitcoin's "digital gold" narrative has shifted more toward "gold" than "digital," but with Taproot officially locked in for activation this November, bitcoin is a boomer coin no more. Bitcoin is now a fun and exciting technology!  Jokes aside, Bitcoin's ability to change within the confines of broad, decentralized consensus is significant. Big changes to Bitcoin don't happen often, and the few that do successfully make it past the network's grueling and slow process of governance are worth taking the time to understand. (Read more about Taproot.) For now, bitcoin maintains its status as digital gold while expanding its use cases beyond anything gold could ever even imagine. So goes the optimist.   A message from Copper Copper provides a gateway into the cryptoasset space for institutional investors by offering custody, prime brokerage, and settlements across 250 digital assets and more than 40 exchanges. We are committed to providing flexible solutions that adapt to the changing cryptoasset space, while enabling far greater transparency, control, and security for asset managers.    To learn more visit copper.co/interest CHAIN LINKS UBS issued a warning on cryptocurrency markets, citing concerns over a potential regulatory "crack down" on crypto. TAKEAWAY: The Swiss financial services firm suggested that investors "stay clear and build their portfolio around less risky assets." UBS went as far as to say that shifting investor sentiment could pop the "bubble-like crypto markets." Digital asset investment funds saw a $63 million inflow of capital last week; 60% of those inflows were directed toward bitcoin. TAKEAWAY: After four consecutive weeks of redemptions, crypto investment funds such as Grayscale and Bitwise finally had a positive week. (Disclosure: Grayscale is owned by Digital Currency Group, the parent company of CoinDesk.) Bitcoin's quick recovery from sub-$30,000 levels may have brought some confidence back into the market.  In a note to clients, U.S. investment bank Goldman Sachs expressed confidence in the crypto asset ether, citing its potential use cases as a store of value and utility for decentralized application development on the Ethereum network. TAKEAWAY: Goldman Sachs said ether had the highest "real use" potential among cryptocurrencies. The firm also said cryptocurrencies don't directly compete with gold as safe-haven assets due to their high volatility.  Binance.US has hired Manny Alvarez, a former commissioner at the California Department of Financial Protection and Innovation, as its chief administrative officer. TAKEAWAY: Binance.US CEO Brian Brooks cited earning regulator and customer trust as the exchange's reason for hiring Alvarez. Since the end of May, Binance.US has reportedly brought on 110 new professionals to its regulatory, legal, and customer support teams in a bid to distance itself from the scrutiny Binance – the firm from which Binance.US licensed its brand and technology – currently faces from global regulators.  $1.24 billion worth of non-fungible tokens (NFTs) were sold in the second quarter of 2021. TAKEAWAY: While the prices of most of the top crypto assets plummeted in Q2, NFT sales remained strong, even slightly eclipsing first-quarter figures of $1.23 billion. Compared to the first half of 2020, sales are up over 1,700%, suggesting market hype for NFTs is ongoing and reaching dizzying heights.  Crypto financial services firm Circle is going public in a $4.5 billion special purpose acquisition company (SPAC) deal. TAKEAWAY: A presentation that came with Circle's announcement about going public using a SPAC provided a look into the company's revenue and profitability projections. Circle expects to generate $65 million by the end of the year in revenue from transaction and treasury services (TTS) while making $40 million on interest income from USDC. Atlas Merchant Capital, the sponsor of the SPAC, is taking a bet not only on USDC but that digital asset transaction and treasury services will grow in demand over the coming years.   –Teddy Oosterbaan A message from CoinDesk The CoinDesk Quarterly Review 2021 Q2   After two consecutive quarters of strong price gains for most of the top crypto assets, Q2 2021 finally brought an end to market euphoria with a resounding crash. Most CoinDesk 20 assets, which constitute 99% of the crypto market by verifiable volume, ended the quarter with negative returns.   Meanwhile, protocol development for the world's largest cryptocurrencies by market capitalization, Bitcoin and Ethereum, reached new milestones.   CoinDesk Research's latest Quarterly Review dives into the trends, developments and technological progress that shaped the crypto markets from April to June 2021.   The full report is now available from the CoinDesk Research Hub. Podcast episodes worth listening to: Anton Katz and Ethan Feldman on Trading Infrastructure in Cryptoassets – Matt Walsh and Nic Carter, "On The Brink with Castle Island." Are GBTC Unwinds Bullish or Bearish for Bitcoin? – Nathaniel Whittemore, "The Breakdown." Crypto's Place in the ESG Investing Zeitgeist – Michael Casey and Sheila Warren, "Money Reimagined." How Market Makers Trade ETH Derivatives and Make Millions – Christine Kim and Ben Edgington, "Mapping Out Eth 2.0." A message from Coindesk The Investor's Perspective on the Bitcoin Taproot Upgrade   Taproot is a bundle of three upgrades to Bitcoin aimed at improving network security, privacy and scalability. At the same time, it poses some potential drawbacks to Bitcoin including risks of low adoption, unintended privacy shortcomings and Bitcoin community disappointment and fracturing.   CoinDesk Research's newest report dives into the economic impact and investment implications of the Taproot upgrade.   Download the full report. ATTENTION: Scammers have been sending fraudulent emails with links to sites disguised to look like coindesk.com. If you are in doubt about a link, type https://www.coindesk.com directly into your browser; do not copy and paste. Remember, if something seems too good to be true, it probably is. 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