The Breakdown - Crypto Funds See Biggest Inflows Of 2023

Episode Date: November 28, 2023

Looking for evidence that a resolution with Binance is a positive thing? Digital asset funds saw their 9th straight week of inflows, and there biggest week overall this year. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Tuesday, November 28th, and today we are talking about another week of big inflows for exchange-traded digital asset funds. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show. are go to bit.ly slash breakdown pod. So friends, we are doing two things today. First of all, as you might expect,

there is a bunch of follow-up and continuing cleanup around the Binance story, so we'll do a little bit of that. But we're also talking about the shift away from Binance and FTX and all of the things of the past year and a half into the future. Remember, the argument for many, including me,

is that removing the Binance overhang opens up even more excitement for Tradfai actors. And that is indeed where we are going to start. coin shares have reported another massive week of digital asset fund inflows. Last week saw 346 million of net inflows extending the streak to nine weeks in a row with positive inflows. Coin shares head of research James Butterfield said, this run spurred by anticipation of a spot-based ETF launch in the U.S. is the largest since the bull market in late 2021. In fact, the pace was almost double from the previous week, which had shown a significant

slowdown. Year-to-date inflows have now risen above $1.5 billion. Bitcoin investment products are a clear winner, adding 312 million in fresh capital. Short Bitcoin products experienced their third week in a row of outflows, with Butterfield noting that, quote, short sellers continue to capitulate. Assets under management and short funds are now down 61% from their April 2020-3 peak. In addition to Bitcoin, Ethereum products captured 34 million worth of inflows, extending their positive run to four weeks. The 103 million added to Ethereum funds over the last month has almost filled in the brutal outflows from earlier in the year. Butterfield called this a, quote, decisive turnaround in sentiment. Regionally, Canada and Germany-based funds comprised 87% of total

inflows. U.S.-based funds received just 30 million worth of inflows last week, which the report suggested was an indication that investors are waiting for the ETF to launch. Reflexivity research co-founder Will Clemente wrote, last week, crypto investment products are their largest inflows of the year at $350 million, signs of ETF front-running euphoria, or a prelude to continued institutional demand to come. Now, moving globally a little bit, spot Bitcoin ETFs appear to be gaining a foothold as a preferred investment vehicle. One clear example is in Brazil, where the products have been available for more than two years. Together, spot Bitcoin ETFs trading in Brazil have 96.8 million of assets under management. Hashtex is offering has a dominating 60% share of the market.

For comparison, the largest ETF in Brazil is the I-Shares-IvovSpa index with 2.41 billion in AUM. That index fund tracks the top 92 shares traded on the B3, the largest Brazilian stock exchange, similar to how SPY tracks the S&P 500 index. That means that the Brazilian Bitcoin ETFs are around 4% of the size of the leading national stock index fund. Hashtex CEO Marcelo Sanpal credited the success of Brazilian Bitcoin ETFs to pro-market digital asset regulation and interest from institutional investors. He said, there is a growing positive sentiment across the most sophisticated investors, and we've been seeing increasing interest from some of the largest institutions, whether that be allocating or considering adding crypto soon to their portfolios.

Hashtex's total AUM across all crypto products is currently around 500 million. Now, others pointed out clear investor preference for using ETFs over other investment products. Guizilva, a managing partner at Tagas Capital, said, there are about 4 million investors with accounts at the B3 Stock Exchange in Brazil, and around 700 of these invests in ETFs. About one-third of those investors allocated funds to crypto ETFs last year. He also added that reasonable fees are viewed as a driver for ETF adoption, noting, ETF fees in Brazil range from 0.5% to 1.5%, which is considered relatively low compared to other products in the market. Now, bringing it back to the U.S., the discount for shares of the Grayscale Bitcoin Trust have narrowed again. GPTC is now

trading for around an 8% discount to the underlying Bitcoin, which is the smallest margin since July 2021. During December of last year, the period of peak fear for crypto markets, the GBT discount blew out to almost 50%. The discount has been continually narrowing over the past few months on speculation that GPTC would be allowed to convert into an ETF. Over the past week, this speculation has solidified significantly on news of additional filings and movement at the SEC. Grayscale met with the SEC on Monday, likely to discuss the conversion process and hammer out remaining details. A meeting was also held with BlackRock on the same day. On Wednesday, Grayscale filed an updated prospectus. The details were largely unremarkable. There were a multitude

of additional risk disclosures in line with other Bitcoin ETF applications, but there are some differences as well. Grayscale is attempting to facilitate creation of redemption of shares mainly through the transfer of Bitcoin rather than using a cash mechanism. This topic appears to be controversial among ETF applicants, with a few different mechanisms being proposed. Ark and BlackRock appear to be insisting on using physical Bitcoin. During BlackRock's meeting with the SEC, they presented an explanation of their mechanism in an attempt to convince the regulator that it was a sound proposal. Also, as part of their most recent filing, Grayscale disclosed that they have entered into a transfer agency and service agreement with BNY Mellon, which will facilitate the creation,

and redemption of shares. The grayscale conversion is, of course, still waiting a final sign-off from the SEC, but preparations are being made and markets seem to be repricing GBT accordingly. Now, one other interesting sign of the change, Coinbase's stock has reached a new yearly high. Levels from last May have been recovered on the back of a 50% increase this month. Coinbase equity is now up more than 250% year-to-date, outstripping returns for Bitcoin and Ethereum. The stock price is still down dramatically from its lofty all-time highs from late 2021, but even with that, the recovery seems like a strong indication that the crypto industry's reputation is beginning to be rebuilt among equity traders and investors. Or of course, simply that traders whose risk managers

keep them out of crypto-native markets are looking for proxy exposure ahead of ETFs launches. Still, one of the major tailwinds for Coinbase is their affiliation with asset managers. They've signed deals to act as the custodian for 13 of 19-spot crypto-etfs with pending applications, which should, of course, provide a boost to revenue once those funds are launched. Crypto McKenna wrote, There are two things I've been watching to gauge the Bitcoin Spot ETF approvals, Coinbase stock price and GPTC discount to NAV. The coin stock has been in an accumulation range since May 2022,

now at range highs seeking a breakout. GBT discount is at an all-time low of 8.06%. Bitcoin Spot ETF approvals will happen in December. To me, there's no point in derisking prior to this, as all dumps will get immediately bid. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours,

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So clearly a different tone of vibe shift, a sentiment change. But what is happening with Binance? What's the latest on that story? Well, it appears that former Binance CEO, CZ, will remain stuck in the U.S. for the time being after a federal judge agreed to take another look at his bond conditions. Last Tuesday, CZ successfully argued before a magistrate judge that he was not a flight risk and should be allowed to return home to the UAE to await sentencing. The magistrate acknowledged that the decision was a close call and ordered that CZ would need to return to the U.S. two weeks ahead of sentencing. This decision appeared to come as a shocked prosecutors, who quickly filed a motion for it to be reconsidered. Their filing argued that

CZ is a flight risk that could be managed. The DOJ had also noted that pre-trial services had recommended that CZ be detained until sentencing. A core point made by prosecutors was that this isn't a minor criminal case. Although federal sentencing guidelines recommend an 18-month prison term, the DOJ emphasized that they could ask for the 10-year maximum. They said that this tough sentence could be enough to make CZ rethink plans to return voluntarily. A federal judge has now stayed this part of Z's bond agreement, denying his opportunity to return to the UAE as planned on Monday. Now, contrary to some early reporting, this does not mean that CZ will necessarily be forced to remain in the U.S. until his sentencing, which is currently scheduled for February.

What this means is that CZ will be forced to stay put for now while the issue can be fully considered by the federal judge. The judge gave no indication whether or not a hearing will be scheduled to hear oral arguments or any potential timeline for his decision. The balance of CZ's bond agreement is not controversial, and the DOJ is not pushing for CZ to locked up prior to sentencing. For all of us, the question remains the same as it was on yesterday's show, whether this is legitimately a sign of the deal faltering or just the Department of Justice putting on a show. Now, one thing that has people feeling like this is weird is that this seems like the type of thing that would be negotiated as part of any particular settlement. Some have

speculated that one easy explanation would be that maybe part of the deal that CZ agreed to was to not make any representations about the safety of the platform. If the DOJ viewed his Tuesday tweet as a breach of that, maybe this is a reprisal. The reaction is a reprisal. The reaction is a reprisal. is that we don't really have any even leaks from behind the scene, so we're just grasping at straws. Now, after this most difficult year in Binance's history, the task of rebuilding and moving forward has been handed to new CEO Richard Tang. Tang has worked for Binance since August 2021, first as the CEO of its Singapore division and later as the global head of regional markets. His work history includes serving as the CEO of the Financial Services Regulatory Authority

in Abu Dhabi, Chief Regulatory Officer in Singapore exchange, and a 13-year stint at the monetary authority of Singapore. This extensive regulatory background makes Tang a solid choice for cleaning up the numerous outstanding regulatory issues at Binance. Tang made his vision for Binance clear from his first public statement as CEO, stating that one of his areas of focus will be, quote, collaborating with regulators to uphold high standards globally that foster innovation while providing important consumer protections. In his first blog post as CEO published on Monday, Tang asserted that the platform remains in a strong position. He noted that Binance remains the world's largest crypto exchange by volume, and told you,

users, quote, you should feel confident in the financial strength, security, and safety of the company. He wrote that the next phase for Binance would be characterized by, quote, responsible growth. And in an interview with Forbes, said that Binance will adopt a traditional corporate structure, including establishing a board of directors. Tang did not provide specifics on any necessary reforms. And for now, Tang still has the difficult task of transitioning Binance out of its crisis-ridden era and restoring trust with users. Although there was no major run on the exchange, average daily trading volume has been trending down over the past week. Notably, Binance has conducted its first round of delistings in the

post-CZ era. Among the assets to be removed from the platform was the Tornado Cash Governance token, which led to a 56% drawdown. Binance gave its standard explanation for delistings, stating that, quote, we periodically review each digital asset we list to ensure that it continues to meet the high level of standard we expect. When a coin or token no longer meets the standard or the industry changes, we conduct a more in-depth review and potentially delist it. We believe this best protects all our users. Notably, there were no specific details about the decision to delist the tornado cash token. Now, one of the largest remaining problems for Binance is the ongoing SEC lawsuit. The SEC stood out last week as the only agency not settling their legal dispute with the company. The case was back in

court on Monday for a status hearing, with Binance lawyers asking the judge to bring the SEC's fraud investigation to a close. Throughout the case, the SEC has fought hard for extensive discovery in an attempt to uncover ties between Binance U.S. and the international exchange. They said they were looking for evidence of mishandling of customer assets and potential fraud. Binance, for their part, has characterized this process as a fishing expedition. During Monday's hearing, lawyers for Binance said, the SEC has no evidence that assets have been misused in any way. They also noted that since the commencement of the SEC lawsuit in June, the value of assets on Binance U.S. has diminished by almost 90%. Around half of users have abandoned the platform, leaving it as a largely irrelevant

entity. The magistrate judge, hearing the evidentiary dispute, said that CZ's guilty plea last week made it much less likely that he would be able to misuse U.S. customer assets. He said that, at some point, I have to make a leap of faith and say enough is enough. He ordered the parties to aim to resolve outstanding evidentiary issues and report back by December 15th. So that is the story from here. And I don't know about you guys, but it feels pretty good to be on the backside of the finance story, and of course the backside of the Sam story, and a little bit more focused on

the future, even if right now the future is just rampant and ongoing and never-ending ETF anticipation. I have no doubt that more things will come to the fore soon, but for now, that is going to do it. I want to say thanks one more time to the sponsor of today's show Cracken. Go to crackin.com slash the breakdown and see what crypto can be. Until next time, be safe and take care of each other. Peace.