Welcome back to The Node Ahead, a cryptoasset resource for financial advisers. Every other week, we discuss the latest crypto news and the potential impacts it may have on you and your clients.
In this edition, we’ll be covering:
- On-Chain Analysis
- Crypto Goes to DC
- Crypto’s Growing Political Power
- Tick Tock, Next Block
- Onramp in the News
- In Other News… (linkfest)
One of the leading on-chain data providers in the space is a company called Glassnode. The charts used in previous editions of our newsletter, as well as those seen below, came from Glassnode. If you would like to have access to the data yourself, we highly encourage you to sign up for Glassnode through the link below and start playing around with some of the amazing charts they have.
With that, let’s jump in.
Before we jump into key developments and analysis of the last two weeks, we wanted to share the below chart from Galaxy Digital Research. Despite its recent price volatility, bitcoin’s usage continues to grow. Thus far in 2021, bitcoin has settled more than $12 trillion of value on the network; to put that number in perspective, PayPal settled $936 billion in 2020. So, while bitcoin’s price may be volatile, adoption and usage continue to go up. This feels like a good time to remind our readers that price is a lagging indicator…
In the last edition of The Node Ahead, we detailed the market’s recent liquidation cascade. Bitcoin and the greater crypto markets have basically been range bound ever since that de-leveraging event. The good news is that futures open interest has remained at these lower levels, meaning that the leverage wiped out of the system has not returned.
Another key metric we are watching is SOPR. First introduced by Renato Shirakashi in 2019, Spent Output Profit Ratio (SOPR) compares bitcoin’s price at the time the user first received a specific bitcoin (or fraction of a bitcoin) to the price at which that same bitcoin was “spent” (transferred to another wallet or sold on an exchange). The SOPR ratio simply reveals whether that bitcoin was spent at a profit or a loss. We can then aggregate this ratio across all transactions that occurred to understand the magnitude of the profit or loss the market is selling at.
The key number in the SOPR ratio is 1. Any value above 1 means that, in aggregate, the market is realizing profits, and vice versa for when SOPR drops below 1. When SOPR falls below 1 it also means that older coins, which have a lower cost of acquisition, have stopped selling. If they were still selling, those coins would be sold for a profit, thus SOPR would stay above 1. In other words, when SOPR drops below 1, there is a base of market participants that refuse to sell at current prices. This provides us a signal for when the market has established or is close to establishing a new price floor, and we are likely to see another run up in price at some point in the future.
Because of this, SOPR is one of our favorite buying indicators. If we zoom in on the same graph from above, we can see that SOPR dipped below 1 this past week.
Lastly, we would like to cover a metric developed by Will Clemente and Willy Woo called Illiquid Supply Shock Ratio. This metric measures the ratio between illiquid supply and liquid supply. When addresses classified as illiquid accumulate coins, the numerator in the ratio increases, thus the ratio increases. Typically, ISS and bitcoin’s prices move in the same direction. This is because as illiquid supply increases, assuming all else equal, less supply should result in a higher price. However, when there is a divergence (price falls and ISS rises, or price rises and ISS falls) that’s historically been an indicator worth paying attention to. The reason we bring up this divergence is to highlight the difference between the crash we had in May versus now. As Will Clemente recently pointed out on Twitter, bitcoin’s price started rising as ISS started falling right before the crash in May. In other words, ISS showed there was an increasing sell pressure just before the crash. Fast forward to today and we have the exact opposite occurring; the ISS ratio is rising as the price is falling. This is a bullish dynamic for bitcoin’s future price.
We are currently in a very interesting time in the market. Leverage has decreased, selling is showing signs of slowing down and more coins are continuing to be moved to entities that tend to HODL for the long term. All of these observations are healthy and suggest a strengthening of underlying network fundamentals. However, we may not be out of the woods quite yet. The short-term holder cost basis is right around $53k, which means that short term holders are still underwater in aggregate. $53k is also near the threshold for bitcoin to reclaim a $1 trillion market cap. It seems that $53k is a key marker for bitcoin to break out of, and stay above, before it is ready to go on another run towards higher prices.
Why this matters to RIAs: We remain cautious and patient in the short term until we cross and stay above the $53k mark. Long term, we continue to be incredibly bullish heading into 2022.
As always, the on-chain data is provided by Glassnode. If you would like to have access to the data yourself, you can sign up here: Glassnode Sign Up Link
Crypto Goes to DC
On Wednesday, December 8th, top executives from Coinbase, Circle, FTX, Paxos, Bitfury, and Stellar appeared before the House of Representatives Committee on Financial Services. This wasn’t the first time that Congress held a hearing on crypto, but this one did have a noticeably different tone. In past years, crypto advocates were typically greeted by congressional members with what can be described as skepticism at best and sometimes outright hostility at worst. However, the congressmen in this most recent hearing seemed to be much more curious and, dare we say, optimistic about the crypto industry.
Whereas hearings in the past typically focused on the criminal use of cryptoassets or the potential downsides of speculating on an emerging asset class, this most recent five hour long hearing featured questions about the security advantages of blockchain technology and the potential for crypto to provide greater financial inclusion.
At one point during the hearing, Ohio Representative Anthony Gonzalez even said that “Web3 can empower anyone.”
But it wasn’t just Gonzalez. Several members brought up the prospect of the U.S. losing out on crypto-related innovation because of cumbersome regulation, praised the potential for crypto to provide lower-cost alternatives to the existing banking system, and suggested the industry would benefit from a more cohesive policy from the U.S. government. At one point Congresswoman Ann Wagner not only agreed with the need for regulatory clarity but took a shot at Gary Gensler saying she “wished that he would listen to his commissioners and the feedback he has been given.” That sound you hear is the entire crypto industry nodding and cheering in agreement.
The drop-the-mic moment came from Congressman Ted Budd’s exchange with Bitfury’s CEO Brian Brooks. When Brian Brooks pointed out that spot ETFs safely exist in Canada, Germany, Brazil, and Singapore but not in the US, Ted asked why that is. Brian calmly pointed out that the SEC has refused to approve a spot ETF, a product that other G20 nations have approved which prompted this exchange:
Ted Budd: So, the US is behind the curve?
Brian Brooks: Unquestionably.
Ted Budd: …
You could see the lightbulb going off in the minds of committee members and, while all of the crypto executives were good representatives for the industry, Brian Brooks was exceptional.
It wasn’t all sunshine and roses, though. Some members did raise concerns about bitcoin mining’s carbon footprint (clearly there is much more educating that needs to be done on this front) and a lack of diversity in the industry. That being said, the hearing was by far the most positive, constructive, and bipartisan discussion the US government has ever publicly had on crypto. In fact, several members of the Committee declared they would be working on bills to streamline crypto regulation and support the industry.
It is difficult to say whether this was all just posturing and empty rhetoric, or if this will actually amount to something. The cynical view would be that because 2022 is an election year and everyone has seen what supporting the crypto industry can do for fundraising and raising a candidate’s national prominence (see Cynthia Lummis and Francis Suarez below), politicians are merely jumping on the bandwagon out of self-interest. The optimistic view is that policymakers have actually started doing their homework (as evidenced by the level of crypto knowledge inherent in many of the questions the committee asked) and are realizing the positive impact this industry can have. Regardless of which is true, it appears that this past hearing marked a shift in Washington’s outlook on crypto.
Why this matters to RIAs: Regulation is one of the most commonly cited concerns for RIAs and their advisors, and a major risk factor for investors to consider. Understanding how policymakers view the industry and what actions are likely to come in the future is crucial to advising clients who are invested in crypto or interested in doing so.
Crypto’s Growing Political Power
One of the biggest stories in crypto this past year has to be the rapid growth in the crypto industry’s political clout. The tone and questions received during the hearing discussed above are a testament to the increased efforts, donations, and engagement in DC over the last several months.
What is so impressive about the entire crypto industry’s lobbying efforts is how it went from 0 to 60 seemingly overnight, catching the attention of every policymaker in Washington. In the first 3 quarters of 2021, the crypto industry spent 4x what it did in all of 2020 on lobbying efforts. In August of this year, the $1.2 trillion infrastructure bill that had been in the works for many years was suddenly ground to a halt because of concerns about its impact on the crypto industry. Although the pushback ultimately wasn’t successful, the effort highlighted the 50+ million pro-crypto US citizens on both sides of the aisle, who organized swiftly and were not afraid to call out bad DC policy. It’s clear that many politicians took notice and have since expressed a desire to learn more about cryptoassets.
The bottom line is that there are a growing number of incentives for politicians to embrace crypto. As the industry has become an increasingly viable force in Washington, its role in political funding has been on the rise, and no one has benefited more from this than Cynthia Lummis. The Senate’s most outspoken crypto advocate and first US Senator to publicly hold bitcoin, Lummis has had a significant portion of her campaign donations come from the crypto industry. Furthermore, you can expect future announcements about the crypto industry’s efforts to create pools of capital to back crypto-friendly politicians regardless of what political party they belong to. If you are a politician with a pro-crypto stance, it should be very easy to raise money for your campaign in 2022.
Miami Mayor Francis Suarez has attracted national attention over the past year due to his embrace of the crypto industry. Buoyed by the support of crypto Twitter, Suarez has been the subject of glowing magazine profiles rarely reserved for mayors. This rise has begun fueling speculation that the youthful Republican could be a future presidential candidate.
Every time a politician tweets something positive about crypto, it tends to go viral. The amount of money coming into crypto lobbying groups and into pro-crypto political campaigns is accelerating. Politicians are now issuing NFTs to raise money. Crypto companies are getting increasingly involved in Washington. The number of consumers who use crypto and advocate for it is growing. Being pro-crypto appears to benefit one’s political career, and that is not going unnoticed by an increasing number of politicians.
At the end of the day, there are good reasons for both conservatives and liberals to embrace crypto. We anticipate that in the coming years we will see politicians run for office with an explicit crypto mandate, and have previously argued that we will have a bitcoiner as president in the future. This is all becoming more likely by the day.
Why this matters to RIAs: As the crypto industry’s influence in Washington DC continues to grow, it further derisks investments into the asset class. RIAs and the advisors working for them should remain well informed on updates from Washington as crypto talks continue.
Tick Tock, Next Block
On December 12th, bitcoin reached an interesting milestone. Of the 21 million bitcoin that will ever be created, 18.9 million have now been released into the network meaning 90% of the total supply has been mined. Although this is largely a superficial milestone, it does highlight the stark contrast between bitcoin and fiat currencies.
The first difference of note is how scarce bitcoin is in comparison to fiat. There isn’t that much bitcoin left to be mined and the supply that has been mined is increasingly being locked away in cold storage. Meanwhile, the US Senate just passed an increase to the debt limit by $2.5 trillion and we highly doubt that anyone believes it will not be increased again in the future. While the amount of fiat currency available is essentially unlimited, bitcoin will only become harder and more expensive to accumulate in the years to come.
Second, reaching the 90% threshold took just under 13 years. However, the last bitcoin will not be mined until the year 2140 due to the fact that bitcoin’s supply issuance gets cut in half roughly every four years. This means the next 9% will take roughly the same amount of time as the first 90%. It also means that by 2035, 99% of bitcoins will be in circulation, but it will take another 100 years to mine the last 1%. The number of bitcoins being created is decreasing at an exponential rate. Conversely, the supply of dollars appears to be increasing at an exponential rate as evidenced by the fact that 40% of all dollars ever created have been printed in the last 12 months.
Once the auction was over, something really interesting happened. Although the DAO offered to refund everyone their deposits (minus the gas fees) and the core team that launched the DAO announced they were stepping away, a large percentage of the community decided not to take a refund and instead try to put those funds to some other use. Although the DAO failed in its initial objective and the core team left, the fervor of the community has meant that ConsitutionDAO continues to live on. In fact, since losing the auction, the PEOPLE token (the token issued for the investment into ConsitutionDAO) has skyrocketed in price, increasing as much as 2,650% at its peak.
Why this matters to RIAs: In an environment with low yields and rising inflation, it is important to understand why bitcoin is a great macroeconomic hedge. As trusted fiduciaries, it is also critical that advisors understand the major differences between bitcoin and fiat currencies.
In Onramp News
Register for our upcoming webinar: The Financial Advisers Guide to Decentralized Finance and Beyond, with Tyrone Ross, Akin Sawyerr, and Adam Blumberg of Interaxis
On Purpose, With Tyrone Ross – RIA of the Future
Tyrone Ross on The Blockchain Interviews
The Crossroads Ep. 16 – Why Decentralized Finance Matters with Akin Sawyerr and Adam Blumberg
Kevin Mulrane shares his insights on the role of the Chief Revenue Officer
YCharts: The Charts that Defined 2021
Onramp Invest CEO Tyrone Ross shares his thoughts after meeting with SEC Commissioner Crenshaw’s office
Onramp Academy announces IndexCoop as its newest content partner
ETF Trends | Introducing The ETFinTwit 50: Part 2
Ep. 119: December WealthTech News Roundup
Q&A: Michael Batnick on Why Ritholtz Wealth Management Is Building A Crypto Index
The Big Picture – Advisors: Index Investing in Crypto
In Other News
A growing number of financial advisors are recommending everyone have cryptocurrency in their portfolio, no matter their age.
Most millennial millionaires have the bulk of their wealth in crypto, and they’re planning to add more in 2022 despite the recent price declines.
40% of crypto owners surveyed report they would be likely or very likely to switch their primary bank to one that offers crypto-related products in the next 12 months.
A bipartisan group of U.S. senators requested that Treasury Secretary Janet Yellen specify how the finance ministry will define a “broker” for crypto tax reporting purposes and stated that they “are also prepared to offer legislation to further clarify that intent.”
The OCC published its Semiannual Risk Perspective report for the fall of 2021 which has the most in-depth analysis of how digital assets might interact with the banking sector.
Nike has agreed to buy RTFKT, a virtual collectibles company that creates digital products like sneakers and uses blockchain technology to ensure authenticity.
Michael Jordan jumps into Web3 via Solana app for athletes.
The 2021 NFT market explained by Chainalysis.
NFTs and Cryptocurrencies replace cash as a new holiday gift.
Adidas’s first NFT drop nets $23M and shoots to the top of the charts.
Gaming giant Ubisoft becomes the first major gaming company to launch in-game NFTs.
Payments giant Visa has formed a global crypto advisory practice to help financial institutions develop cryptocurrency business lines as demand grows.
Chainalysis to integrate Lightning Network to enable clients to make deposits and withdrawals on the Lightning Network while complying with regulations.