Cryptoverse: Buoyant bitcoin’s losing its liquidity

The banking boom has brought out the surprise winner, bullish bitcoin. Investors looking to increase their stakes face a grave obstacle: A lack of liquidity could lead to wild price swings.

Since March 10, when Silicon Valley Bank (SVB), failed, the price of No.1 cryptocurrency has increased 40% to $27,700.

However, liquidity is dwindling on the other side.

According to Kaiko data provider, Bitcoin’s market depth shows that the asset has reached its lowest liquidity level in 10 months. This is even worse than the November FTX collapse. Kaiko stated that the market depth of the two most popular trading pairs, bitcoin-dollar or bitcoin-tether, is 5,600 bitcoin. This amount is approximately $155 million.

Keyrock CEO Kevin de Patoul stated that while we strive to provide liquidity wherever we can, we are facing a difficult situation. “There is a huge network effect.” Liquidity will be a problem in the short-term at most.

Slippage, which is a liquidity measure that measures how prices change between placing and execution of trades, has also increased. Conor Ryder from Kaiko, a research analyst, stated that slippage for purchasing bitcoin using U.S. Dollars on Coinbase is 2.5 times greater than at the beginning of March.

Kaiko stated that slippage in a simulated $100,000 sale order has increased by two-fold over the past month. This means that the average bitcoin price is now lower than it was a month ago.

The network effect that Patoul was referring to was the collaps Silvergate Capital and Signature Bank. These networks were long used by market makers, who increase liquidity by buying and selling tokens quickly and transact with exchanges.

Low liquidity is often a sign of more volatile markets, particularly in crypto. Kaiko Ryder suggested that this could be one reason bitcoin took off this month.

The CryptoCompare Bitcoin Volatility Index jumped to 96 last Wednesday. This is a far greater number than the 52 to 65 range it saw last month, as the cryptocurrency held its ground despite market turmoil. The index currently hovers around 68.

THE ALAMEDA FACTOR

Binance, the world’s largest crypto exchange, ended zero-fee trades for almost all of its bitcoin trading pairs last Wednesday, further crimping liquidity. This has made it possible for market makers to charge higher fees for execution trades on the platform.

According to Kaiko data, liquidity for the bitcoin-tether pairing on Binance has fallen 70% and trading volumes have fallen 90% since the announcement.

The collapse of Sam Bankman Fried’s FTX and Alameda Research, the hedge funds that Alameda Research managed, is responsible for the disappearing liquidity. Alameda was a major liquidity provider in the crypto sector. Its bankruptcy created a vacuum that has been further exacerbated by the financial crisis of 2023.

Market participants anticipate that new competitors will gradually emerge to fulfill the network functions of Silvergate or Signature. However, they believe complete replacements are unlikely to appear overnight.

Joseph Edwards, an investment advisor at Enigma Securities, stated that liquidity will only get worse until then.

Experts say that it is not only market turmoil that is reducing crypto liquidity. Despite bitcoin’s recent rally after a long downturn, many investors still trade cautiously due to rising interest rates and the banking crisis.

Edwards stated that even though some players are still at the club, they are now on the sidelines because of the banking crisis.

US Federal Trade Commission Investigates Marketing Schemes of Crypto Firm Voyager

The U.S. Federal Trade Commission (FTC), in a bankruptcy court filing, stated that it is investigating Voyager Digital’s marketing scheme.

The complaint states that the FTC has initiated an investigation into the acts and practices of Voyager and the debtors’ directors, employees, and officers for deceptive and unfairly marketing cryptocurrency to the public.

According to the FTC filing, the sale of assets by the debtor would be disruptive to the current probe. This could effectively discharge Voyager or specific staff members from fraud-related debts that were held by a government unit.

Voyager is being investigated by more than one government agency, including the FTC. Texas’s attorney general and securities regulator objected to FTX buying Voyager before FTX collapsed.

Binance US was opposed by the Securities and Exchange Commission (SEC). Voyager was granted court approval to continue with the sale despite the objection.

Allyson Smith, Kirkland & Ellis’s lawyer, stated to the court that Voyager is ‘on track’ for the sale. Voyager’s lawyer stated that the sale is on track and didn’t anticipate any obstacles. The FTC has filed a new filing stating that the debtors ‘don’t have the right to any discharge here.

“Further,” the FTC objection states, “Even if debtors had the right to discharge (through operation consensual release, for instance), the code specifically precludes discharge of fraud-related debts owned by a government unit.”

“Therefore, the FTC respectfully requests that the court deny confirmation to the debtors’ proposed plan; strike Section VIII.B. and D of their proposed plan; or grant any other relief that the Court considers appropriate and just.

Peter Thiel’s fund wound down 8-year bitcoin bet before market crash

Founders Fund, a venture capital firm founded by billionaire Peter Thiel and generating returns of approximately $1.8bn, has closed nearly all its eight-year-old bet on cryptocurrencies.

In early 2014, the fund based in San Francisco made its first bitcoin investment. It then went on to invest large amounts in crypto. According to people familiar with the fund, around two-thirds of their total investment was used for bitcoin purchases.

One of the people familiar with the matter said that Founders Fund had sold the vast majority its cryptocurrency portfolio by March 2022, before the market for digital assets became flooded in a crisis in May 2018.

According to people, the fund does not have any significant exposure to cryptocurrency at present. It has not been reported that the crypto bet is being closed. Founders Fund declined comment.

Thiel is a major backer of Republican candidates. He was also a supporter for former US President Donald Trump.

Thiel expressed optimism about bitcoin’s future in April 2022 at the same time as Founders Fund had sold most of its cryptocurrency holdings. Thiel stated that “we’re at end of fiat money regime” and suggested that bitcoin’s price, which was at $44,000 at the time, could rise by a factor 100.

Thiel stated that Jamie Dimon, chief executive of JPMorgan, and Larry Fink, BlackRock boss, ‘need’ to allocate some of their money for bitcoin’. He added: ‘We must push back against them.

Bitcoin’s price soared from $750 in 2014, to an all-time high above $65,000 in November 2021. Its price has fluctuated in recent years. There have been several major drops in its value, including a fall to $15,500 last November, which was a two-year high.

Since May 2013, the digital assets market has been in turmoil, with high-profile companies like Terraform Labs and Celsius, Voyager, Three Arrows Capital going bankrupt.

November saw market sentiment toward crypto further eroded when FTX, second-largest cryptocurrency exchange shut down owing creditors over $3bn and its cofounder Sam BankmanFried was arrested with multiple fraud charges.

Bitcoin had lost approximately three-quarters its value since its peak in December and the global crypto market had lost more than $2tn.

Many Silicon Valley blue-chip investors have invested in digital currencies in the past few years. However, most of them have concentrated their investments on equity stakes rather than directly buying cryptocurrencies.

A16z crypto, the crypto arm at venture firm Andreessen Horowitz, has exceptions to this rule. It raised $4.5bn last year and invests directly in tokens and coins.

Paradigm, a crypto-venture firm, was also founded by Fred Ehrsam, Coinbase founder, and Matt Huang, Sequoia Capital partner. It raised $2.5bn in the late 2021.

Many large financial institutions avoided cryptocurrency due to concerns about cyber security, their potential links with money laundering and drug trafficking. Dimon of JPMorgan called bitcoin a fraud in 2017.

The shift in crypto focus of Founders Fund was one of nine major exits that venture fund made between 2020 to the end of last fiscal year, which allowed it to return approximately $13bn to its investors.

Other exits included initial public offerings by companies it had supported since early fundraisings, like Palantir and Airbnb, which Thiel co-founded.

Thiel founded PayPal in 1998 with his partner. He went on to be one of Silicon Valley’s most successful venture capitalists, and was the first to back Facebook.

Founders Fund manages more than $11bn, with $5bn in capital raised through two funds last year. It has also taken stakes at more than 100 companies such as Elon Musk’s SpaceX, Lyft, and defense tech group Anduril.

The fund is currently in discussions to acquire an equity stake in OpenAI the developer of chatbot ChatGPT at a value of $29bn.

SEC Will Use All Available Tools to Crack Down on Crypto Firms That Aren’t in Compliance With Its Rules, Says Chair Gensler

Gary Gensler, Chairman of the SEC, stressed the importance to bring crypto platforms into compliance following the filing by the Securities Regulator of charges against Caroline Ellison, former CEO Alameda Research and Gary Wang for defrauding equity investors. Wednesday’s tweet from the SEC boss:

Investors will continue to be at risk if crypto platforms do not comply with the time-tested securities laws. The SEC will continue to make it a priority to use all available tools to bring this industry into compliance.

Gensler stated that the SEC is only just starting to crack down on crypto firms not complying with its rules in a Bloomberg interview.

Gensler stated that the runway for crypto companies to register with SEC is becoming shorter. He stressed: “The casinos in this Wild West, are non-compliant intermediaries.”

Gensler also addressed proof-of-reserves reports (POR), which are used by many crypto exchanges including Binance to show that they have sufficient funds to pay customer withdrawals. Gensler pointed out that this practice does not provide the required disclosures to protect investors.

The proof of reserves does not provide a complete accounting of assets and liabilities of a company. It also does not satisfy the requirements of the securities laws for segregation of customer funds.

Gensler recommended that crypto companies ‘give customers confidence in their crypto’ by complying with time-tested custody rules, segregation rules for customer funds, and accounting rules. The SEC is focusing on crypto companies’ financial records.

Some have criticized the chairman and securities watchdog for their enforcement-centric approach in regulating crypto. In the aftermath of the collapse in crypto exchange FTX, they were examined by SEC staff.

Tom Emmer, a Republican from Minnesota, tweeted Thursday that “Gary Gensler (and the SEC) had more meetings with SBF and FTX/IEX then anyone else in crypto. This was allegedly to create a special regulatory framework to benefit FTX.” Further, the lawmaker wrote:

Backroom regulatory deals with criminal actors are not tools in the SEC’s arsenal.

Last month, Congressman Emmer stated that the FTX saga is not a crypto-related failure. It was a failure by the SEC Chair Gensler. Gensler has been asked to testify in Congress about his regulatory failures.

The SEC chief highlighted the importance of regulating cryptocurrency issuers and intermediaries last week. He stated previously that the majority of crypto tokens are securities, but that the crypto field was substantially non-compliant. Recently, the securities regulator published its strategy plan for the next four year and crypto is one of its top priorities. Gensler stated in November that the SEC’s Enforcement Division is still focused on crypto.

Binance Now Holds Nearly 600,000 Bitcoin Worth $9.6 Billion – Largest BTC Holder in the World?

Binance’s Bitcoin balance, the largest cryptocurrency exchange in the world, has risen substantially over the last month after the collapse of FTX. Total holdings are now close to 600,000.

Data from crypto analytics platform Coinglass shows that Binance currently has more than 575k BTC coins. It has added more than 137.011 coins in the last week, and an additional 67.347 BTC coins in the last month.

Binance has a stack of BTC worth more than $9 billion, with Bitcoin hovering around $16,000. Binance’s recent increase in BTC stash is due to consumer confidence in smaller exchanges, which continues to grow after the extraordinary crash of FTX.

According to Coinglass, Coinbase Pro and Bitfinex are the fourth-largest Bitcoin exchange holders after Binance. They hold 528,900 and 345,597 Bitcoins, respectively, and 153,212 and 70,622 Bitcoins. Binance is the only exchange that has seen a positive net Bitcoin flow in the last week of the top five.

Binance is the largest cryptocurrency exchange by trading volume. Due to its involvement in the FTX saga, Binance has been prominently featured in recent news. Initially, the exchange had signed a non-binding deal to acquire troubled FTX. However, it walked out of the deal the next day.

What is Proof Of Reserves? Why Should Exchanges Share It?

Many in the crypto industry expressed concern about the reliability of central players after the collapse of FTX, the third-largest cryptocurrency exchange.

To counter this suspicion, crypto executives began to share proofs of reserves. Merkle Trees are used to verify that proof of reserves is valid.

Some of the biggest cryptocurrency exchanges shared their proofs of reserves over the past few days. This included information about how many and what cryptocurrencies they hold on behalf of customers. Binance was the first to share their proof of reserves, followed Bybit, Crypto.com and Huobi.

reported that crypto investment firm Grayscale refused to share its proof of-reserves due to’security concerns. Grayscale recently stated that major cryptocurrency exchange Coinbase is used as custodian by Grayscale.

Grayscale’s financial health has been questioned by some, however. Until reading this statement, I wasn’t worried about GBTC’s solvency. Please explain why proof of reserve can pose a security threat. One Twitter user stated.