Top Stories of the Week - 1/27
In the newsletter this week, we review Dimon’s criticism and point out that Bitcoin is among the world’s top performing assets across many time frames, even on a risk adjusted basis, and that Ethereum is literally the best performer. We also discuss Genesis’s bankruptcy filing and staked-ETH provider Lido’s plans for Ethereum’s Shanghai upgrade. Subscribe here and receive Galaxy's Weekly Top Stories, and more, directly to your inbox.
JP Morgan CEO Jamie Dimon calls Bitcoin a "hyped up fraud” and “pet rock” on Davos sidelines. Speaking on CNBC’s Squawk Box from the sidelines of the World Economic Forum in Davos, Switzerland, Dimon questioned why CNBC “wastes any breath” on crypto. When asked by Andrew Ross Sorkin how he accounts for the fact that BlackRock and other firms “are investing in infrastructure,” Dimon suggests that blockchain (not cryptoassets) “will be deployable.” (Dimon apparently ignores the fact that BNY Mellon (America’s oldest bank) is building crypto custody; Fidelity has crypto custody, brokerage, and retirement offerings; BlackRock’s allows Aladdin clients to purchase crypto; and on and on. Some of these institutions may also be working on “blockchain technology” solutions like Dimon describes, but they are also building infrastructure for natively-digital cryptoassets.)
Among other claims, Dimon also suggests that Bitcoin isn’t scarce – he says “how do you know it’s going to stop at 21 million? Maybe it’s going to get to 21 million and Satoshi’s picture is going to come up and laugh at you all.” While Dimon talks specifically about Bitcoin, it’s clear he’s referring to all of the public crypto asset market.
Dimon runs one of the world’s largest investment banks but still ignores or can’t admit the fact that Bitcoin is one of the world’s best performing assets across almost any time frame. And Ethereum is the best performing asset. We looked at Total Return and Risk Adjusted Return (Sharpe Ratio) of Bitcoin and Ethereum across a range of time frames (7 years, 5 years, 3 years, 2022, 2023 YTD, and COVID low to present). Across every single time frame except 5 years (which would start BTC/ETH at Dec. 31, 2017, near the top of the 2017 bull run), Ethereum is the best performing asset against equity indices, major tech stocks, bonds, commodities, and really anything else. Across all the time frames, Bitcoin is one of the top performers. We won’t even regale you with the total return numbers over other time frames, which frankly only look better. And of course these analyses are dependent upon the time frame selected, but the fact is that Bitcoin and Ether outperforming is the norm, not the exception.
Our preferred analysis is to compare the Sharpe ratios of Bitcoin and Ether to a handful of global assets across asset classes from their early COVID lows to present (Jan. 25, 2023). One of the main reasons we like early COVID lows is because they serve as a “great equalizer” as a normalized starting point. For example, according to daily close data from Bloomberg, the S&P 500 bottomed on March 13, 2020; BTC, ETH, and Moderna bottomed on March 16, 2020; Gold, BCOM (Bloomberg’s Commodity Index) and LBUSTRUU (Bloomberg’s US Aggregate Total Return bond fund) bottomed on March 18, 2020; Tesla bottomed on March 23, 2020, and so on. Using these dates for each asset as the starting point and looking forward to the present (Jan. 25, 2023), on a risk-adjusted basis Ether was by far the best performing asset, and Bitcoin was #5 in our sample, beat by only Moderna, Tesla, and a commodities index, but besting all major tech stocks, equity and bond indices, and real estate investment trusts (and JPM, for what it’s worth). And as Goldman Sachs pointed out this week, Bitcoin is the best performing asset in 2023 at +40% YTD (as of Jan. 26).
The bottom line is that there’s a very good reason why investors pay close attention to crypto assets: they have performed better than basically everything else (or literally everything else, in the case of Ether). And leaving aside the stupidity of his critiques, there may be another bias clouding Dimon’s judgment: Bitcoin was created to disrupt the banks—Satoshi wrote directly in Bitcoin’s genesis block “Chancellor on brink of second bailout for banks.” (JPM received a pretty big bailout from the US government during the 2008 financial crisis, we recall). And Ethereum’s DeFi appears on a path to disrupt financial services broadly. There’s a lot more we could say on these topics – including addressing the inaccuracy of Dimon’s claim about Bitcoin’s scarcity – but when assessing Dimon’s question about why CNBC “wastes any breath” on the topic, the historical returns alone speak for themselves. -AT
Genesis Files for Chapter 11
The Genesis saga comes to an end after filing for chapter 11 in the U.S Bankruptcy Court for the Southern District of New York. Included in the filings are Genesis Global Holdco LLC (the holding company), and the lending focused subsidiaries Genesis Global Capital LLC and Genesis Asia Pacific Pte. Ltd. Notably, Genesis Global Trading and other subsidiaries involved in derivatives, spot trading and custody were left out of the filings and remain fully operational, according to Genesis. Genesis proposed a roadmap in their Chapter 11 bankruptcy filing that attempts to establish a global resolution of all claims through a trust that will distribute assets to creditors. The bankruptcy process proposes a marketing and sale process to raise capital to pay creditors fairly. However, if the process does not result in a sale or capital raise, creditors will receive ownership interests in Genesis Global Holdings.
According to the filings, Genesis Global Capital has roughly $5.1bn in total liabilities outstanding across over 100,000 creditors. Gemini Earn users are at the top of the list with an unsecured claim totaling $765.9m, whose claim The size of the Gemini users’ claim alone surpasses the $500m in assets Genesis says it has. Other notable creditors include Mirana, VanEcK and Cumberland, who respectively have unsecured claims totaling $223m. Notably, both Mirana and Cumberland criticized the filing for being “sloppy” and inaccurate. Cumberland tweeted that they had liquidated Genesis on November 16 and thus their actual outstanding claim against Genesis is only ~$46k. And crypto exchange Bybit CEO Ben Zhou said that Mirana is the exchange’s investment arm and that it had liquidated $120m of the $150m exposure to Genesis, making their actual exposure ~$30m. Of the top 50 creditors on the filed document, half of the identities were withheld.
Markets took the Genesis filing in stride, with investors having priced in the likelihood well in advance. Genesis had signaled as early as mid-November that it could file for bankruptcy, so the filing itself didn’t stop Bitcoin’s relentless YTD run. One of the major considerations is whether DCG can effectively keep Genesis at arm’s length. Presumably, the creditors will want to pierce the DCG corporate veil to bring more recoverable assets into the bankruptcy process, an outcome DCG has been diligently guarding against. Fir Tree’s lawsuit against Greyscale, another DCG subsidiary, claims that DCG CEO Barry Silbert “grossly mismanaged” funds by having significant involvement in all of DCG’s subsidiaries. We cannot say whether Fir Tree’s claim against Silbert is true, but the claim is likely to resurface in the Genesis bankruptcy. (For a great and concise analysis of the situation, read Arca’s blog from Monday). Regardless of how it all pans out, crypto’s former largest lender is now fully off the board, leaving room for competitors to take market share going forward. -AT/GP
Lido, Ethereum’s Largest Staker, Prepares for Shanghai
Lido, the largest staking pool on Ethereum, released plans for enabling staked ETH withdrawals post-Shanghai. The proposed design details a simple “request-claim process” for all stETH holders wishing to redeem their stETH for ETH. Users will send their withdrawal request to a “WithdrawalQueue” smart contract that will order requests chronologically, then calculate the redemption rate for each withdrawal request, and subsequently reserve the necessary ETH for redemption, as well as burn the corresponding amount of stETH. The calculation of the stETH/ETH redemption rate is an important step that accounts for any inactivity leaks or slashing events that have reduced the total amount of staked ETH in the pool. While there have been no slashing events of a Lido validator in the protocol’s history, the proposal outlines several worst-case scenarios for users to be aware of.
In one of the worst-case scenarios, where a significant number of Lido validators are slashed (upwards of 600 active validators), the protocol will enter into a “bunker mode.” In bunker mode, all withdrawals from Lido will be delayed until the full ramifications of network penalties have been assessed and the redemption rate of stETH/ETH can be accurately recalculated. This delay lasts upwards of 36 days. Taking extreme network conditions one step further, in the case of an unforeseen failure that even bunker mode cannot correct, the Lido DAO may trigger “the gate seal smart contract” and halt all withdrawals. The gate seal smart contract will be controlled by a multisig likely operated by certain members within the Lido DAO.
Lido’s proposal for enabling staked ETH withdrawals was released on Tuesday, January 24. The Lido team is currently seeking feedback from the community about the proposal with the intention of deploying new smart contracts before the activation of Shanghai. Ethereum core developers have been making good progress developing and testing the upgrade in recent weeks. On Monday, January 23, developers launched their first mainnet shadow fork of Shanghai and on Thursday, January 26, developers launched their large-scale test network featuring over 300,000 active validators. Therefore, it appears likely that developers will be able to release public testnets for Shanghai in February and move forward with a mainnet activation of the upgrade sometime in March.
At least 75% of all staked ETH on Ethereum is controlled by an intermediary, such as an exchange, like Coinbase or Kraken, or a staking pool, like Lido or Rocketpool, which means that for the vast majority of stakers, they will not be able to directly initiate their own staked ETH withdrawals. The process for unstaking will be dictated by the intermediary in control of validator node operators. Ethereum’s largest staking provider, Lido, has outlined a fairly straightforward procedure for initiating withdrawals post-Shanghai impacting roughly 30% of staked ETH deposits. Under normal network conditions, users will be able to redeem their stETH for ETH without delay by interacting with the Lido “WithdrawalQueue” smart contract. However, there are edge case scenarios that change withdrawal dynamics on Lido and highlight unique risks associated with staking through an intermediary:
The stETH/ETH redemption rate depends on the collective performance of Lido validator node operators. In the event that Lido validators are penalized or slashed, reducing the amount of total staked ETH in the protocol, users may receive less ETH for their stETH than what they had originally submitted.
The Lido Withdrawal Queue is an additional queue that operates separately from the withdrawals queue and exit queue enforced by the Etheruem protocol. Therefore, there may be additional delays that users are subject to when withdrawing their staked ETH due to the procedures set by the staking intermediary.
Lido must initiate a withdrawal credentials update to 13% of the active validators under their control, which requires new instructions and tooling to be built for Lido validator node operators. The Lido team is currently working on a rotation messages signing ceremony and will release more details about this process once an audit of their code is completed by Sigma Prime. Delays or unexpected bugs in this procedure presents a risk of technical failures reducing the amount of buffer ETH available to Lido users for redemption shortly after the activation of Shanghai.
All staking providers will need to update their procedures in lead-up to Shanghai. Outside of Lido, Coinbase and Kraken are the second and third largest staking providers on Ethereum. As centralized exchanges that offer staking services for a variety of crypto assets, Coinbase and Kraken already have procedures for unstaking crypto assets outside of ETH that will likely be adopted for Ethereum once Shanghai is enabled. These additional procedures enforced by intermediaries present an additional layer trust required by users through the unstaking process. For independent stakers operating their own validators, a large amount of trust is being placed in Ethereum core developers to ultimately activate Shanghai and do so in a secure manner for all network stakeholders. The majority of stakers on Ethereum will also need to place a high degree of trust in the intermediary responsible for stewarding their assets and transparently redeeming them upon request. In order to reduce the amount of trust needed for staking through an intermediary, Ethereum community members have proposed code changes to better support staking through smart contracts, instead of centralized intermediaries. However, in comparison to the many other priorities on Ethereum’s development roadmap, such as scaling and EVM upgrades, the overreliance on centralized staking intermediaries by stakers is unlikely to change in the near future. -CK
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