By Brett Munster
As it is every year in cryptoland, 2023 was chock full of activity. But before we get into the three biggest stories from the year, let’s quickly recap many of the other major events that happened in 2023.
On January 1st 2023, we published a research piece in which we argued that a variety of on-chain data metrics all strongly suggested that the market had bottom in November 2022. The price of bitcoin was roughly $17,000 when we published that article. It’s now above $40,000. It’s almost as if having a real time, granular view into the movements of digital assets in a way we don’t with traditional financial assets can be valuable. Go figure.
We saw a distinct narrative shift this year regarding bitcoin’s climate impact among prominent research groups. This is a topic we have covered frequently in this newsletter (most recently here and here), but it’s nice to see the likes of KPMG, MIT and even The World Bank acknowledge the grid balancing and methane mitigating benefits of bitcoin mining. More and more scientific papers and academic reports (here, here, here and here) are examining the data and coming to the same conclusion about the benefits bitcoin mining is having on the environment.
Ethereum successfully completed its Shapella update (which we covered here and here) and we previewed the future roadmap of the network known as Danksharding. We also saw Ethereum eclipse $10 billion of revenue this year and tokenization of financial assets really began to emerge.
We covered the banking crisis and examined the US Debt Spiral twice (here and here). We explored the potential national security benefits of the U.S. embracing stablecoins and adopting bitcoin as a cybersecurity network. We dove into concepts such as Proof of Reserves, the Blockchain Trilemma and the changing accounting rules for crypto. We analyzed the structural difference this cycle compared to previous ones, crypto’s correlation to other assets falling back to historical norms and both Visa and PayPal’s motivation for getting into the stablecoin market.
There was the Prometheum scandal and the blatant misreporting on terrorist financing by the WSJ. And oh yeah, Sam Bankman-Fried was found guilty on all seven charges.
But none of those made it into our top three biggest crypto stories for 2023.
U.S. Regulators Swing and Miss
Since first getting into bitcoin and crypto back in 2013, the number one concern I have heard over and over from skeptics has been regulatory risk. By that they usually mean, “What happens when the U.S. government decides to crack down on the crypto industry?”
My response has always been that regulators likely will crack down at some point but that it ultimately won’t matter. In fact, I have made that very argument numerous times throughout the history of this newsletter. Sure, regulators could make it difficult (or maybe even impossible) for crypto businesses to operate in the U.S. That would surely hurt the U.S. crypto market, American consumers, and our standing as the global leader in innovation and finance. But the U.S. government can’t kill the crypto industry. I often point out all the examples of countries that have banned crypto in the past (of which there are many) only to see adoption increase shortly thereafter. This includes China who was arguably more influential over the crypto industry than the U.S. at the time of their mining ban in 2021. Because crypto is a global, decentralized, permissionless industry, capital and talent freely flow to friendlier jurisdictions and the industry simply continues to grow regardless of what any single government decides to do.
That explanation, however, rarely ever seemed to satisfy most skeptics. Maybe it is because U.S. based investors have trouble realizing this is the first truly global asset class that everyone in the world has access to. Or maybe because the U.S. is the largest market and most powerful government most investors think it will be different when the U.S. decides to act. Regardless, the fact of the matter is that the number one reason most investors and institutions have not entered the space has been the risk of a regulatory crackdown.
Well 2023 put that fear to the test. This year saw the most powerful regulatory bodies wage an all-out assault on the crypto industry and not only did it withstand that attack, the crypto industry thrived.
The SEC sued just about every major U.S. based crypto company. It sued Coinbase (which we covered here, here and here), Ripple (here), Paxos (here), and Grayscale (here). The SEC even sued Kraken not once but twice. The SEC also sued Binance, the world’s largest crypto exchange. So did the CFTC. And in those lawsuits the SEC listed at least 68 tokens as unregistered securities thereby indirectly claiming all those projects also violated the law. The SEC not only went after exchanges and specific tokens, but it also went after staking services and stablecoin issuers.
And it wasn’t just lawsuits. The U.S. government used the banking sector to organize a sophisticated, multi-agency crackdown to discourage banks from dealing with crypto firms in what has become known as Chokepoint 2.0. We covered the unlawful issuance of SAB 121 last newsletter. But we also saw politicians publicly scold crypto friendly banks, the Fed issue policy statements to discourage banks from holding cryptoassets, the FDIC and OCC release joint statements on the risks crypto poses to banks, and the National Economic Council publish a policy statement strongly discouraging banks from transacting with cryptoassets. The Federal Reserve suspiciously denied crypto bank Custodia’s application, and both Protego and Paxos’ application to become a National Trust Bank were ignored well past the legally required 18 month decision deadline. We saw the collapse of Metropolitan Commercial Bank, Silvergate Bank and Signature Bank, the three most crypto friendly banks here in the states. The first two were never offered the same bailout options as Silicon Valley Bank or First Republic and we covered the suspicious circumstances of Signature’s forced closure despite it being financially healthy.
The crypto industry has faced nothing short of an onslaught from U.S. regulators for most of 2023. With skeptic’s worst fears now being fully realized, the crypto industry must be reeling heading into 2024 right? Think again.
As of writing this, Bitcoin is up 150% on the year. Ethereum is up 85% and Solana is up 500%. The crypto industry’s overall market cap grew 115% in 2023.
And it’s not just the tokens, crypto equities had a great year too. Coinbase’s stock is up 280% on the year despite multiple lawsuits with the SEC. Bitcoin mining companies Riot and Marathon are up 310% and 300% in 2023. Galaxy Digital is up 130% year to date.
Meanwhile, the S&P 500 is only up 20%. Gold is up 12% and bonds are basically flat. Despite all the lawsuits, the banking industry crackdown, and postering from the U.S. government, crypto has vastly outperformed every other asset class this year. That makes crypto the best performing asset class 10 out of the last 13 years.
But it’s not just price performance, the courts overwhelmingly sided with the crypto industry throughout the year. Remember all those lawsuits filed by the SEC we previously listed? In every instance the SEC either lost or is expected to lose. The SEC lost its case against Ripple and its appeal. The courts unanimously found the SEC’s actions “arbitrary and capricious” in their loss to Grayscale. The court claimed that the SEC defaulted on its duty to respond in good faith to Coinbase’s petition for crypto rulemaking and ordered the SEC to stop stalling. And in the case against Binance, the SEC itself acknowledged that after a multi-year investigation, it has no evidence customer funds were misused. Just this past week, a federal judge threatened to sanction the SEC for lying and misrepresenting facts in their case against Debt Box and making up stories in order to get a restraining order against the firm.
The SEC racked up so many loses in 2023 it caused the WSJ to ask “is Gary Gensler ever going to win a case?” Let me put it this way, the NFL’s worst team this year, the 1-11 Carolina Panthers, have a better record than the SEC in 2023.
The SEC’s credibility has been significantly eroded over the course of this year. When the Hinman Documents were released they revealed significant disagreement within the SEC with regards to the agency’s policies toward cryptoassets. The documents also revealed that SEC knew internally, as far back as 2018, that their public guidance created confusion and there are “regulatory gaps” where the SEC does not have jurisdiction. That flies in the face of everything Gensler has said and done over the past 5 years. It’s gotten so bad that there is now a proposal from Congress to fire Gensler (the hashtag #FireGaryGensler trended on social media) and reorganize the SEC. It’s no wonder Gensler has now decided to soften his stance on the crypto industry and pivot his focus to AI.
The crypto regulatory landscape in the U.S. lags far behind several other countries. Europe passed a comprehensive framework called MiCA earlier this year. The UAE, Brazil, Switzerland, Singapore, Hong Kong, and the UK already have or are in the process of creating clear crypto friendly regulations. Even if the U.S. government wanted to further clamp down on the crypto industry, all that would do is further highlight the value proposition of a permissionless economy and drive capital and talent to friendlier jurisdictions (of which there are many). While it’s true the U.S. government can continue to harass U.S. based crypto companies and consumers who want to transact with crypto, the bottom line is there is nothing the U.S. government can do to stop the growth of the crypto industry. 2023 was the year that fear was finally laid to rest.
Blackrock Enters the Market
No story sparked more interest from the traditional financial world in 2023 than Blackrock’s announcement that they filed to launch a spot bitcoin ETF in June of this year. This was in no way the first spot bitcoin ETF application. In fact, there have been over 40 applications filed since 2017, all of which have been denied by the SEC. But this one was noteworthy because of who was filing it.
Blackrock is the largest ETF manager in the world, so they carry far more weight than any previous applicant. The firm has a 575-1 record when it comes to ETF approvals. Even that one denial they later got approved so history would suggest that the odds they receive approval are high. Not to mention the success of spot ETFs in other jurisdictions, the courts unanimously striking down the SEC’s rationale for denying ETFs in the Grayscale case, and mounting political pressure on the SEC all suggest the SEC is likely to approve a spot bitcoin ETF in the near future.
Why does the approval of a spot bitcoin ETF matter? A bitcoin ETF drastically increases access for mainstream investors because it allows ordinary investors to gain exposure to bitcoin in their regular brokerage accounts. Today, the only way to buy bitcoin is through crypto exchanges such as Coinbase. Bitcoin isn’t available to most investors in their Charles Schwab, TD Ameritrade, Vanguard, or Fidelity accounts. There is no easy way to add bitcoin to your 401k account. That all changes with an ETF because it makes buying BTC like buying any other stock.
For hedge funds and crypto native individuals, the ETF doesn’t have much impact because they already have access to this asset class. But for the rest of the market, a spot bitcoin ETF substantially lowers the barriers to entry into the crypto market. They don’t have to worry about managing wallets, signing up for online crypto exchanges, or grappling with private and public keys. Removing these technical hurdles simplifies the buying process, making it a more attractive proposition for those accustomed to more traditional investments.
And that group is quite large. Blackrock alone manages over $9 trillion dollars. If you add up all the groups that have filed for an ETF, they collectively manage over $27 trillion. Plus you have another $8 trillion managed by Registered Investment Advisors (RIAs). Just for context, that is 50x the size of bitcoin’s total market cap today. Now of course not all of that $35 trillion will flow into bitcoin. But the amount that could find its way into bitcoin is probably more than you might expect.
Galaxy Research did a study of just the registered investment advisors market and issued a report predicting $14 billion of inflows in the first year of a Bitcoin ETF. CoinShares Head of Research James Butterfill estimated that as much as $31 billion could flow into Bitcoin as a result of spot ETF approval. Another report expects to see $24 – $50 billion of inflow and Glassnode projects upwards of $70 billion of capital influx. That amount of capital inflow is not priced into bitcoin’s current market value.
On October 16th, crypto news publication Cointelegraph tweeted that the SEC had approved BlackRock’s application for a Bitcoin ETF with an alleged screenshot from Bloomberg’s terminal. This tweet was debunked within 20 minutes, and ultimately taken down by Cointelegraph within the hour. And yet, this false announcement by a niche-media news outlet that was up on social media for less than an hour caused bitcoin’s price to rise nearly 10% in a matter of minutes. That type of movement clearly indicates the ETF approval is not priced in and may be an early sign of what may come when an ETF is approved for real.
An ETF is very likely going to push bitcoin’s price up when it is approved. However, it’s not just about the immediate price bump or capital flows. It’s the recognition of BTC as an institutional grade asset. Pensions, endowments, insurance companies and more will soon be buying bitcoin with long term time horizons. These players don’t day trade, they construct portfolios designed to perform over multiple decades. There will be consistent buying pressure for years to come.
Last newsletter we argued that bitcoin will steal market share from bonds. Fun fact, if you had dollar cost averaged into bitcoin starting at its peak of $69,000 and continued buying to today, your bitcoin position would be up 45% right now. And that’s assuming you started buying bitcoin at the absolute worst moment. The same passive allocation into bonds would be down 12%.
Capital is about to rotate from gold, bonds, real estate, and other “store of value” assets into bitcoin. It’s why Larry Fink, CEO of Blackrock and one of the most influential and authoritative figures in finance, called bitcoin a “flight to quality.” He has also publicly said that bitcoin is a hedge against monetary debasement, that it is fit for retirement accounts, and that holding BTC is prudent. When Larry talks, the rest of the financial world tends to listen.
So, when will the ETF be approved? Days after Blackrock filed, Fidelity, WisdomTree, Invesco and Valkyrie also filed for spot Bitcoin ETFs. Ark Invest already had an application on file and the SEC’s deadline to approve or deny Ark is January 10, 2024. This is important because history has shown the first to launch has a distinct advantage in the market. Presumably, the SEC does not want to be in the business of picking winners, so the consensus is that the SEC is likely to approve all the applicants at once in an effort to be fair to all parties. If they were to deny Ark and later approve Blackrock, that would likely lead to a huge lawsuit. The last chance the SEC has to approve them all at once is January 10th which is why Bloomberg analysts give it a 90% chance to be approved by then.
The day the ETF is approved, institutional exposure will have been given a green light and the career risk associated with adding bitcoin to a portfolio will dissipate. It won’t happen all at once, but bitcoin will be bought and held by far more people than it is today. Bitcoin has been mostly bought by individuals and hedge funds for some time now, while most institutions and investment advisors have stayed on the sidelines. That is all about to change.
DOJ Settles with Binance
Binance is the world’s largest crypto exchange. It does more volume than the next 3 largest crypto exchanges combined and has 150 million customers worldwide (that’s more customers than Fidelity, Charles Schwab, E Trade, and TD Ameritrade combined). But after confidence was rocked by the fraud perpetrated by FTX, many started to wonder if Binance was also susceptible to collapsing. At first glance, there are a number of similarities between Binance and FTX. Binance is based outside the U.S., run by a charismatic founder who seems to enjoy the spotlight, and has been accused of cutting corners in order to grow faster. So, when the SEC and DOJ announced they were investigating Binance, it cast quite the shadow over the industry.
Fast forward to September of this year. Even though the SEC had issued a lawsuit against Binance claiming the company ran an unregistered securities exchange (the same claim they are suing Coinbase and Kraken for), the SEC itself acknowledged that after a multi-year investigation, it had no evidence customer funds were misused.
While that was good news, there was still the DOJ investigation looming. That was until November 21st when the DOJ announced it had reached a settlement with Binance.
The settlement includes a $4.3 billion fine for pleading guilty to charges of facilitating money laundering on the exchange, conducting an unlicensed money-transmitting business, and violating U.S. sanctions. However, the DOJ found no evidence of theft, misuse of customer funds, nor was Binance alleged in any market manipulation. In other words, Binance broke a number of compliance rules but there appears to be no evidence of stealing customer funds or risk of insolvency. In fact, Binance has been doing monthly attestations as to client reserves for a year now. While this isn’t as thorough as a full-scale audit, it does prove that Binance holds more than $65 billion worth of customer funds so this is definitely not an FTX situation.
In addition to the fine, Binance founder Changpeng Zhao, commonly known as “CZ,” agreed to plead guilty to one felony money laundering charge and pay a $50 million fine. According to Bloomberg Billionaires Index, Zhao was ranked the 69th-richest person in the world with a net worth of $23 billion so this is like a $20 parking ticket for him. More importantly, CZ has agreed to step down as CEO of Binance with former head of regional markets, Richard Teng, stepping in as the new CEO.
Binance has also agreed to a three-year-long oversight and monitoring program by the DOJ to ensure they are complying with anti-money laundering and sanctions requirements. The DOJ will have access to Binance’s systems and records during that time.
All in all, this was largely seen as an extremely positive outcome for the crypto industry. Yes, Binance has to pay a hefty fine, but they can easily afford it. Yes, the company lost its founder but in the eyes of many, he played fast and loose with the rules. Replacing him with Teng, who has a background as a regulator, and the fact that the DOJ has oversight authority for the next few years, gives Binance the opportunity to improve its compliance reputation and increase investor confidence in the platform. But most importantly, the worst-case fear, that Binance would be shut down for misuse of customer funds or that customers would be impacted in any way, are now put to rest.
After the announcement of the settlement, Binance initially saw some outflows but no major exodus. According to crypto research firm Kaiko, market depth on the exchange is actually up since news of the settlement first broke. Ultimately, Binance is emerging mostly intact and remains the dominant crypto exchange internationally.
Binance and CZ clearly did break American laws but it appears the DOJ investigation found nothing that indicates fraud like we saw with FTX. Even JPMorgan sees Binance’s settlement with U.S. agencies as positive for the crypto industry as the settlement eliminates a “potential systemic risk emanating from a hypothetical Binance collapse.” This settlement closes the books on crypto’s wild west period that we saw last cycle and allows the industry to move forward in a more compliant, safer manner.
In Other News
Argentina elects pro-Bitcoin president Javier Milei.
SEC commissioner Gary Gensler faces staff burnout, widening criticism from Congress, and a potential reckoning from hostile federal courts.
Fidelity joins BlackRock in filing for an Ethereum ETF.
The SEC is suing US based crypto exchange Kraken alleging it is running an unlicensed securities exchange.
Bitcoin and ether’s active supply, the portion of coins that have moved in the past year, has dropped to record lows.
Standard Chartered Bank said bitcoin is on its way to $100,000 by the end of 2024.
A single wallet has purchased 11,268 BTC (~$424 million) since Nov. 10, becoming the 74th largest holder.
Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital or Onramp Invest.
Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital or Onramp Invest.
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