The Breakdown - June Was Bitcoin’s Worst Month Ever

Episode Date: July 2, 2022

This episode is sponsored by Nexo.io, Chainalysis and FTX US.    On the “Weekly Recap,” NLW looks at:  The progress around two major European crypto regulation frameworks. The latest in Three Arrows Capital crypto contagion.  Issues in the mining space.  And more!    - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company safeguards your crypto by relying on five key fundamentals including real-time auditing and insurance on custodial assets. Learn more at nexo.io. - Chainalysis is the blockchain data platform. We provide data, software, services and research to government agencies, exchanges, financial institutions and insurance and cybersecurity companies. Our data powers investigation, compliance and market intelligence software that has been used to solve some of the world’s most high-profile criminal cases. For more information, visit www.chainalysis.com. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsors is “TheNow ” by Aaron Sprinkle. Image credit: D-Keine/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.  

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. The breakdown is sponsored by nexus.com, and FtX, and produced and distributed by CoinDex. What's going on, guys? It is Saturday, July 2nd, and that means it's time for the weekly recap. Before we get into the recap, 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 notes or go to bit.ly slash breakdown pod. Also a disclosure, as always, in addition to them being a sponsor of the show,

I also work with FTX. Now, yesterday was effectively the weekly recap when it came to the macro side of the house, and today we are doing a weekly recap on the crypto side. We're going to kick off with an update on European crypto legislation, and really there are two parts going on. Firstly, there is the transfer of funds regulation, or TFR, which deals specifically with anti-money laundering provisions, and is the regulation dealing with self-hosted wallets, something that we talked about earlier this week. Then, there is the markets and crypto assets regulatory framework, or MECA, which is the overarching set of regulations that the crypto industry will operate under in Europe. Both pieces of legislation had their parameters finalized in

negotiations at the EU this week, and they will now move on to being drafted and signed into law. So first up, the TFR. Negotiations wrapped up Wednesday night, and the final terms were that custodians will be required to comply with the travel rule for all transactions between custodied wallets. This means sending identifying information together with transaction data. Self-hosted wallets will be largely exempt from reporting requirements, however, custodians will need to report any transactions to customers' self-hosted wallets with no 1,000 euro threshold such as which exists for cash and bank transfers. There was a very small nod to data privacy with the deal noting that if there was no guarantee of privacy from the recipient of data,

then no data should be sent. Patrick Hansen summed this up on Twitter, saying it's not looking great but could have ended up even worse. He writes, overview of the decisions. No threshold or exemptions for transfers between crypto asset service providers, traceability from the first euro has to be insured. This is not technologically neutral. Tradfai travel rule starts above 1,000 euros, but has been expected. TFR does not apply to P-to-P transfers. What about transfers between a CASP, crypto-asset service provider, and a wallet? The TFR will apply here, and CASPs will have to collect information and apply risk-based AML measures. Luckily, the verification is only mandatory if the wallet belongs to the CASP's client and the transfer is above 1,000 euro. It doesn't sound too good

know, but for long it looked way worse. For most transfers to and from wallets, there won't be a mandatory verification. Hence, this key demand on hosted wallet verification from the EU Parliament was quite weakened. So what we see here is that the worst of the self-hosted wallet regulations were stripped away, which is the really big win here, but these provisions still remove any prospect of privately acquiring crypto assets from regulated exchanges. The on-and-off ramps into the crypto ecosystem will be completely surveilled in Europe. But again, allowing peer-to-peer transactions without onerous reporting requirements is a win for Defi. Still, this is definitely a Pyrick victory at best. The second half of the European legislation is the MECA framework,

which was agreed to on Thursday night. This is intended to be a broad set of regulations that set the ground rules for the industry and provide regulatory clarity. The biggest problem with this process has been that the negotiations have been pretty reactionary to whatever the biggest headline in crypto is on any particular day. To wit, we've had proposals for a proof of work ban, for treatment of NFTs and algorithmic stablecoins, all find their way into what was originally supposed to be a fairly general-purpose set of regulations. The big outcomes here are that investor protections will be strengthened via disclosure rules, which will require exchanges to disclose standardized token white papers and be liable for any misleading information. They will also have a

warning label requirement about the risk of loss in crypto trading. Market abuses will be addressed with clear rules about disclosure of inside information and prohibitions of insider trading and market manipulation. The proof of work ban, which the Green Party was pushing for, has been diluted down to a disclosure regime around the sustainability of consensus mechanisms. Stablecoins that are, quote, widely used as a means of payment, will have operational and prudential rules. They will require stablecoin issuers to maintain full reserves and grant redemption access to holders. And if T's are excluded from these regulations except where they function as tokenized securities or financial instruments. There's also a lot of chatter about a $200 million transaction value per

day limit on stable coin transactions, but that is less clear. It's something that I'm going to watch because obviously it would be quite market limiting if that's really the case, but we'll have to return to that on a different day. All in all, this is a deal where neither side is close to 100% happy, so at least there's some amount of compromise. There is a lot to fight and continue to be wary about here, but it's definitely not the worst outcome we could have had. We also saw that there wasn't political capital, even in Europe, to do the most reactionary things, such as a proof of of work ban, an NFT crackdown or a defy crackdown. Still, the political messaging is very hostile to this industry. The European Council is still using terms like Wild West. Green Party members are

still articulating a long-run goal of getting proof of work gone entirely. And they're already working on the idea of amika two, which will focus at defy and NFTs specifically. The EU has repeatedly stated that their ambition is to be the global leader in crypto regulations, but, as critics have pointed out, historically, being the global leader in regulations is not actually a thing that exists. In times like these, security of your assets should be your number one priority. If you want to offset risk as much as possible and still stay in crypto, you need a trusted partner by your side. Nexo is a security-first company that manages risk by relying on mechanisms such as over-collateralization, real-time auditing, and insurance on custodial assets. Learn more about Nexo,

reliable business model and start your crypto journey at nexo.io. That's nexo.io. Eager to make more informed decisions around crypto, chain analysis is here to help. Chainalysis demystifies cryptocurrency by providing industry-leading compliance, market intelligence, and investigations support for all crypto assets. For organizations like Gemini, crypto.com, and BlockFi, gain unparalleled visibility and maximize your potential with the leading blockchain data platform by visiting us now at chainalysis.com slash coin desk. The breakdown is sponsored by FTXUS. FtXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest

exchanges in the U.S. FDX U.S. is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTCX app today and use referral code breakdown to support the show. Shifting over to a little contagion update, Three Arrows Capital continues to be all over the news. Sky News of all places broke the story that a court in the British Virgin Islands had been ordered to liquidate 3AC. They noted that New York-based Tenio Restructuring had been appointed to handle the liquidation. A report by FS Insight said that the crypto industry was, quote, brought to its knees by a, quote, old-fashioned Madoff-Syle-Ponsie scheme wrapped in a trade that was similar to the positions that sunk

long-term capital management. And basically, according to their report, 3AC took under or uncollateralized loans from more or less every lender in the industry that would have them. They seemed not to have properly disclosed the nature and size of their total assets and liabilities to those counterparties. This led the firm to end up deep in negative equity, owing much more in loans than their assets could cover. If I could sing, I would sing Beauty and the Beast's tale as old as time. Cryptominers are also feeling the pinch of industry woes. According to data collated by CoinDesk from industry sources, major private and

public crypto miners are carrying total debt burdens of between $2 billion and $4 billion. Some miners, like Core Scientific and Marathon, have structured their debt out to 2025. or 2026, so are unlikely to face significant pressure to liquidate assets in the short term. Others like Blockfusion have already felt the pain, having been forced to liquidate millions of of dollars of Bitcoin in order to service debts. CEO Alex Martini said if the market doesn't turn, the company will be forced to do another round of liquidations. We've also seen resignations hit the mining industry. On Monday, the cloud mining company Compass Mining announced that CEO Witt Gibbs and CFO Jody Fisher had resigned affected.

immediately. There is a he said she said as it relates to mining equipment and debts, and it all seems very messy. Now importantly, Compass came under pressure in May when around $30 million worth of mining equipment had to be abandoned in Russia following the imposition of U.S. sanctions on Russian mining firm BitRiver. One of the crazier stories we've seen recently came from CoinFlex. The company revealed that they had a large $47 million outstanding loan to someone who was unable to pay, and were actually trying to tokenize the bad debt and offer 20% APR for pying the tokens. On Tuesday, it came out that that $47 million outstanding loan allegedly belonged to Roger Vair, one time known as Bitcoin Jesus and the founder of Bitcoin Cash. Verr took to Twitter to explain, saying, recently

some rumors have been spreading that I have defaulted on a debt to a counterparty. These rumors are false. Not only do I not have a debt to this counterparty, but this counterparty owes me a substantial sum of money, and I am currently seeking the return of my funds. CoinFlex responded then directly, accusing Vair of being the mystery debtor. They explained that the company had gotten themselves into this position of being owed $47 million by allowing Vair to operate a margin trading account that CoinFlex was forbidden to liquidate. According to CoinFlex until recently, he had been proactive about topping up the account to meet margin requirements. Dylan LeClair tweeted all Roger Ver had to do was legitimately

nothing, and he'd be set for 100,000 lifetimes. Fast forward five years and he's defecutive. Fast forward five years and he's defaulting on a margin account after going bust on a leverage position on a dead fork chain. Unreal. In the U.S. regulatory world, the president's working group on financial markets, which is the intergovernmental group composed of the head of several financial regulators, met on Thursday to discuss recent stablecoin issues in future legislation. An administration official told CoinDesk that the meeting was held to allow participants to comment ahead of an effort by the administration to push stablecoin legislation this year. That's 2022. The meeting reportedly consisted of a review and discussion of the various events that have occurred in the stablecoin space,

including algorithmic stablecoins. This official said that the legislative package was yet to be finalized or introduced, but would define stablecoins under U.S. regulation and address how they're used while preserving existing regulatory authority over the sector. Now, all in all, I'm sure I don't have to tell you that this was a no-good, horrible, very bad month. July, in fact, was the worst month for Bitcoin price action in the history of the asset. Bitcoin closed out the month down 40%. The previous worst performing month was November 2018 when Bitcoin fell by 37%. Quarter two, additionally, was the worst quarter ever for Bitcoin, with the asset down 56%. The previous worst was Q1-2018, with the collapsing ICO ecosystem dragging Bitcoin down

by 50%. Private market cryptovaluations also seem to be taking a beating. Masari's Ryan Selkis shared a spreadsheet of private offers he has received that showed shares in blockchain.com, consensus, crackin, and opency all down 50% from the internet. their latest funding rounds. Importantly, it is not just crypto. The S&P recorded its worst half in 52 years. Michael Burry, the famous Big Shorter, said that we're not done yet. He tweeted, adjusted for inflation, 2022 first half S&P 500 down 25 to 26%. Nasdaq down 34 to 35%. Bitcoin down 64 to 65%. That was multiple compression. Next up, earnings compression. So maybe halfway there.

Now, if we might end with just a little bit of opium, J.P. Morgan had a more optimistic take in a report released on Wednesday. The bank said that while it's hard to estimate how much more de-leveraging needs to happen, its indicators suggest that the process is already well-advanced. Analysts suggested they would not be surprised to see multiple outright failures among companies in the industry. They noted that high leverage entities were the most vulnerable. Quote, whether it is minors having borrowed to expand operations using their Bitcoin as collateral, or corporates such as micro-strategy having borrowed in the past to invest even more heavily in Bitcoin, or hedge funds using futures to lever their positions,

or retail investors borrowing via margin accounts to invest in various cryptocurrencies. They forecast that although miners had already demonstrated some force-sell, they expect that behavior to continue in Q3. Unremarkably, but importantly, the bank also pointed to the entities with the healthiest balance sheets as the ones likely to survive and come out the other side stronger. The note pointed out two reasons the bank believes this de-leveraging cycle may not be very protractical. Firstly, that strong crypto companies were expressing a willingness to step in and help contagion, and second, that venture capital investments were continuing at a healthy pace, providing a much-needed

source of capital to startups on the ropes. Candidly, I am not totally sure about this second one. This is exactly the type of moment that VCs tend to clam up in, to wait and see what happens, and especially in this moment when private valuations are still really in the midst of their reset. But you know what? It's July 4th weekend, and we'll take all the hope. we can get. For now, I want to say thanks again to my sponsors, nex0.io, chain analysis, and FtX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.