Bitcoin Dominates During A Crackdown On Crypto
Coinbase receives a Wells Notice from the SEC, signaling potential violations for offering unregistered securities. Bitcoin price starts decoupling from altcoins. A new trend or repeat of past cycles?
Relevant Past Articles:
The FTX Ponzi: Uncovering The Largest Fraud In Crypto History
The Ethereum Merge: Risks, Flaws and The Pitfalls Of Centralization
The Crackdown On Crypto Intensifies
On Wednesday evening, Coinbase, the preeminent North American crypto exchange, announced that the company had received a Wells Notice from the Securities and Exchange Commission, signaling the regulator’s intent to bring enforcement action against the company.
The Coinbase news comes during a flurry of recent enforcement action by the SEC, but this announcement in particular took many by surprise. Coinbase is known as the “gold standard” of the crypto industry and the company has been open and transparent about its desire to communicate with the SEC. Nevertheless, a Wells Notice has been issued, which warranted this response from Coinbase:
“We asked the SEC for reasonable crypto rules for Americans. We got legal threats instead.” — Coinbase
In the blog post, Chief Legal Officer Paul Grewal detailed the company’s ongoing dialogue with the SEC and outlined the oversight agency’s recent actions, regarding an undefined portion of listed tokens, the Coinbase staking service, Coinbase Earn, Coinbase Prime and Coinbase Wallet.
Grewal explained how Coinbase had attempted to engage with the SEC in good faith, stating, “We've always tried to be good actors in the space — leaning into sensible regulation even when it is difficult or expensive.” Despite their efforts, Coinbase received a Wells Notice from the SEC, suggesting potential enforcement actions against the company.
The blog post highlights the lack of clarity in the SEC's approach, with Grewal noting, “Rather than get that clarity, the SEC has told us they consider Lend to involve a security, but they haven't explained why.”
The basis of most of the frustration from Coinbase came not from the enforcement action itself, but rather the continued lack of clarity that led up to the enforcement action.
“Tell us the rules and we will follow them. Give us an actual path to register, and we will register the parts of our business that need registering. In the meantime, the U.S. cannot afford for regulators to continue to threaten the good actors in the crypto industry for doing the same legal and compliant things they’ve always done. This unfair approach will only drive innovation, jobs, and the entire industry overseas. At our core, we are the very same company that we were on April 14, 2021 when we became a public company at the end of the lengthy process with the SEC itself. We remain confident in the legality of our assets and services, and if needed, we welcome a legal process to provide the clarity we have been advocating for and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets.” — Coinbase
Coinbase isn’t the only one to find themselves at the wrong end of SEC enforcement in recent weeks. Sushi labs, the core team behind the UniSwap fork SushiSwap, which is an altcoin protocol that allows for altcoins to be swapped for one another using an automated market maker, announced that they were hit with an SEC subpoena.
Interestingly, the response from Sushi was to announce the launch of a legal defense fund, which is quite the interesting paradox…
If a “decentralized protocol” can raise a legal defense fund to defend itself in the courts, was it really even a decentralized protocol?
Anyway, the developments of the first few months of the year, following a historic fiasco in the crypto market during 2022, has us thinking that the “industry” as it is known today may be entering an inflection point. We believe this could be beginning to manifest in market pricing.
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Bitcoin dominance in relation to the “leading” altcoins. 💪
Both sides of the argument for another altcoin bull rally. 🐂
How altcoins may operate after a regulatory attack. ⚖️
Bitcoin Dominance
While bitcoin dominance is a flawed metric for a number of reasons, we find the recent trends in bitcoin performance relative to the rest of the crypto market very telling. One reason bitcoin dominance is a flawed metric is due to the extreme illiquidity of altcoins, many of which trade with only a small float of circulating supply. The true dominance metric is much higher, but for the sake of taking the data at face value, let’s examine the current trends.
The recent appreciation of bitcoin from its 2022 lows of around $15,500 has led to an increase of approximately $240 billion in the bitcoin market capitalization, while the total crypto market capitalization has increased by approximately $380 billion from the lows. It is well understood that bitcoin’s price action dictates the trend of broader prices in the “crypto market”, but what’s most telling is the recent shift from altcoins serving as beta to bitcoin itself. Instead the altcoin trends are now lagging bitcoin in both directions, leading to a relative uptick in bitcoin’s market share as liquidity further congregates.
Notably, the second and third leading cryptocurrencies, Ethereum and BNB, have seen their bitcoin-denominated pairs meaningfully underperform to start 2023, with the rolling 30-day correlation between BTC/USD, BNB/BTC, and ETH/BTC both falling to all-time inversely correlated lows.
Despite the appreciation in USD terms due to the performance of bitcoin, the “leading” altcoins are bleeding when compared to bitcoin and are no longer serving as upside beta like they did throughout 2021 and much of 2022.
We believe this is a result of the crypto ecosystem increasingly coming to realize the inherent value of a truly decentralized, digital bearer asset with no single points of failure. Guidance from the SEC and New York Attorney General have claimed all crypto assets outside of bitcoin are securities, while banking rails that service inflows and outflows into the ecosystem are being decapitated, at the same time as the stability of the banking system in the traditional financial world is faltering, causing many in the ecosystem to increasingly appreciate the value that bitcoin provides. We believe this could be the start of a strengthening trend: a flight to safety from “crypto” into bitcoin. In layman’s terms, we expect bitcoin to continue to outperform its “competitors”, as many market participants begin to realize bitcoin has no true competitors in the crypto market at all…
A Counterpoint
When referencing the recent bitcoin outperformance, an argument to contradict our expectation of continued bitcoin outperformance is that a very similar dynamic played out to kick off the bull cycle in 2020. As bitcoin’s exchange rate took off, the rest of the crypto ecosystem lagged behind, causing bitcoin dominance to appreciate. Subsequently, traders and speculators “rotate” their profits from the appreciation of bitcoin into altcoins to play an arbitrage or simply because they expect that other participants will do the same.
Our response to that line of thinking is that the conditions today are drastically different than the ones that presented themselves in 2020 and 2021, or even during 2017 and 2018. For better or worse, the wild wild west days of unregulated crypto appear to be coming to a close. Our position is not that bitcoin wins because nearly everything else gets regulated into submission. Instead, our position is that nearly everything that exists in the crypto ecosystem except bitcoin can get regulated, due to centralization forces or clear single points of failure. If a flaw can be exploited, it will, and that appears to be what’s unfolding.
For crypto natives who envision a future of a trustless, multi-coin, multi-chain world where all financial interactions are done on “decentralized” platforms utilizing their own unique token with its own distinguished value proposition, the long arm of the law — in this case the SEC — would say otherwise.
On the other hand, the more realistic and perhaps pessimistic take, is that 99.9% of the “crypto economy” never was resistant to a state-level attack in the first place, and crackdown on various single points of failure were always inevitable. This is why our publication is Bitcoin focused, and bitcoin-only in regards to our stated support of the crypto ecosystem. While we expect various forms of the “crypto ecosystem” to survive in a permissioned fashion under the purview of the state, we are strongly held in our belief that bitcoin and bitcoin alone is the sole cryptocurrency that is purpose built to become global money, made for enemies.
It is not that we aim to be close minded or dogmatic in our approach, it is actually the opposite. Game theory tells us that any single point of failure that can be tested, will be tested. This is ultimately a battle for the largest market in the world: a battle for global money.
Final Note
There is no second best.
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