This too shall pass

Bitcoin 

Bitcoin closed last week down -3.38% at $27,122 on thinly traded volume. The 2 days of this trading week so far have delivered major market events in the lawsuits against Coinbase and Binance (more on that below). 

Interestingly, Bitcoin is only down -2.68% since the announcements hit the press. We are seeing a “flight to crypto safety” as a result of the recent regulatory actions, and that is maintaining a bid on bitcoin prices. We dive deeper into the details of this in our next section. 

From a technical standpoint, Bitcoin is currently holding the very important 200 week moving average price that we’ve been monitoring for months. That level is currently at $26,438. If bitcoin can manage to close the week above this level, it should bode well for a continuation of the rally from a technical perspective.

If bitcoin fails to hold the 200 week moving average price, the next level down in terms of technical support would be the $22k level.

Digital Asset Markets:

This too shall pass

This week the Securities and Exchange Commission took action against Coinbase and Binance, 2 of the largest crypto exchanges in the world, alleging that they both have been operating as illegal securities exchanges.

In the Coinbase lawsuit, the SEC alleges that Coinbase has been operating as an illegal securities broker since 2019. (fascinating, as they approved Coinbase stock to be sold to the public in 2021 - cc @WillClementeIII). The SEC also lists 13 cryptocurrencies that it considered securities in its lawsuit against Coinbase, and 12 cryptocurrencies that it considered securities in its Binance lawsuit. 

Cryptoassets named as securities:

As you can see, the list is not that extensive (although the SEC alleges that “at least” these crypto assets are securities - out of the hundreds of assets that the platforms list). 

Coinbase’s staking program, which allows U.S. retail clients to stake their Ethereum, Solana and other Proof of Stake crypto assets and earn interest, was also named as an investment contract and unregistered security. However, Ethereum itself was not listed as a security.

Notably, the list of named securities leaves out the most relevant assets in the market. Bitcoin, Ethereum, Tether (USDT), and USDC. Which comprise roughly 67% or more of daily average market volume. 

It’s not what you say - it’s how you say it.

What’s important here is not so much the allegations - one could argue that some of those tokens do have the characteristics of securities, but the way in which the message was delivered reveals more about the SEC’s intentions than the claims themselves.

Consider this timeline of events:

Monday June 5th, 11 AM EST: SEC Sues Binance and Chanpeng Zhao for violating U.S. Securities Laws.

Tuesday June 6th, 9 AM EST: SEC Sues Coinbase for violating U.S. Securities Laws.

Tuesday June 6th, 10 AM EST: Ten (10) U.S. State Regulators issue a “Show of Cause” order to Coinbase, giving the company 28 days to respond on why it should not be shut down.

Tuesday June 6th, 4 PM EST: SEC Files motion for restraining order to freeze Binance U.S. Assets.

This was very clearly a coordinated attack. It is meant to send a message. They could have communicated the news to Coinbase in one of the many meetings they held together - or in private. And could have worked collaboratively to get the offerings into compliance, as Coinbase had repeatedly asked. But they didn’t. 

You can bet that every other exchange in the U.S. is currently making sure that their offerings are “bullet-proof”. Nobody wants to be the next headline. That’s exactly what the SEC wants.

To be clear - many products and services that exist for bitcoin and other digital assets today are built to comply with the existing legal frameworks - Ledn is a good example of this. 

Bitcoin Carries On…

Also of interest is how Bitcoin’s price has reacted this week. Bitcoin sold off by -5% on Monday after the Binance announcement, and fully recovered on Tuesday, up +5%. It is down only -2.36% for the week at the time of writing. This is after the 2 largest exchanges in the world were sued by one of the world’s most powerful regulators. 

I believe Bitcoin’s price resilience is coming from 3 main sources:

1. Flight to crypto-safety: Recent developments will cause investors to sell any asset that is at risk of being named a security, and favour assets with a clear designation, like bitcoin - which the SEC has named “not a security”.
2. Sellers are exhausted: If you were going to panic sell your bitcoin, you probably did it when Terra/Luna collapsed, or when 3AC, Celsius and others went bankrupt, or perhaps when FTX or Genesis blew up, or maybe it was when the 2 main U.S. banks that supported the crypto industry went under earlier this year. All this to say that, any people that are still holding bitcoin today, are not going to let it go easily. Supply is constrained.
3. Governments are hilarious: Central Banks are raising rates to prevent people from taking on new debt and hurting those with existing debt. At the same time, THEY are taking on more debt (because they don’t have to pay for it - WE do). Examples:
   1. The U.S. Government approved an increase in the debt ceiling so that they could borrow more and not run out of money, poetically right after the Federal Reserve raised interest rates for a 10th consecutive time in May. 
   2. The Canadian government raised interest rates in a surprise decision today, while at the same time seeking approval for an additional $20 Billion in spending - up 11.7% more than what was spent by last year at this time. This is from a budget that is already running at a deficit.
   
   In other words, shrewd investors are looking past the interest rates, and past the political rhetoric. If governments are printing, running massive deficits, and devaluing the currency, people will sell the currency for other assets that preserve their value better. It’s like trying to stop water from flowing downstream.

Closing thoughts:

First they ignore you, then they make fun of you, then they fight you, then you win.

                                                                                                     (you are here)

This is not the first time a regulator has tried to flex their muscle after something goes wrong under their watch. Nor will it be the last. Coinbase and Binance are very well capitalized and prepared to take this battle on, and to adapt to any changes that could result from the verdict. The process could be long and costly, but it will result in invaluable regulatory clarity for crypto assets in the world’s largest consumer market.

We have definitely entered the “and then they fight you” stage of the revolution. And while this fight is not against Bitcoin, we should be vigilant against regulatory overreach, political backpedalling, and fight for a fair framework for technologies that could one day be built on bitcoin. 

Politics is a numbers game. The more of us that can come together, the louder and more effective our voices will be.

Hodl. This too shall pass. 

The Week Ahead 📰 

This week has delivered 2 interest rate decisions from the Central Banks of Australia and Canada. Both of which surprised the markets with rate increases of +0.25%. This could put markets on edge ahead of the Fed meeting next week, where they were widely expected to keep rates unchanged. Today’s announcements have increased the probability of a +0.25% hike from the Fed to 30%.

In the remainder of the week we will get inflation data out of China and a Gross Domestic Product reading from the Eurozone. 

As always, you can find all of the details in our calendar:

Notice for Canadian Residents: As of January 4, 2023, Canadian clients will no longer be able to take out new B2X loans.

As of February 1, 2023, Canadian clients will no longer be able to open a new BTC or USDC Savings Account, deposit BTC or USDC to existing Savings Accounts or earn yield on any existing BTC or USDC Savings Account balances.

Notice for U.S. Residents: Effective March 1, 2023, U.S. clients will not earn interest on any BTC and/or USDC balance in their Savings Accounts and/or Legacy Savings Accounts.

This article is intended for general information, educational and discussion purposes only, it is not an offer, inducement or solicitation of any kind, and is not to be relied upon as constituting legal, financial, investment, tax or other professional advice. This article is not directed to, and the information contained herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to law or regulation or prohibited by any reason whatsoever or that would subject Ledn and/or its affiliates to any registration or licensing requirement. This article is expressly not for distribution or dissemination in, and no Ledn product or service is being marketed or offered to residents of, the European Union, the United Kingdom, the United States of America or any jurisdiction in Canada, and such product or service may only be marketed or offered in such jurisdictions pursuant to applicable laws or reliance on regulatory exemptions. A professional advisor should be consulted regarding your specific situation. Digital assets are highly volatile and risky, are not legal tender, and are not backed by the government. The information contained in this publication has been obtained from sources that we believe to be reliable, however we do not represent or warrant that such information is accurate or complete. Past performance and forecasts are not a reliable indicator of future performance. Any opinions or estimates expressed herein are subject to change without notice. This article may contain views or opinions of the author that do not necessarily reflect the opinions, standards or policies of Ledn. We expressly disclaim all liability and all warranties of accuracy, completeness, merchantability or fitness for a particular purpose with respect to this article/communication. Read our Disclaimers at https://ledn.io/legal/disclaimers