Crypto Lengthy & Brief: The OKEx drama exhibits a weak spot within the crypto market infrastructure


This week, more exchange drama has rocked the crypto markets.

OKEx, one of the largest crypto-fiat exchanges in the industry, has suspended all cryptocurrency withdrawals, stating that one of the exchange's key holders has "been out of contact" with the exchange because he is "currently working with a public security bureau on an investigation ".

Following the BitMEX indictments from a few weeks ago, this will surely draw market attention to the security of the withdrawal protocols of major exchanges.

At that time, concerns emerged that withdrawals from BitMEX, one of the largest futures exchanges in the industry, could be stopped. The revocation protocol required a certain number of authorized signatures, and one of the authorized signers had been arrested. The concerns turned out to be unfounded, the withdrawals continued without any problems, but the opportunity now combined with the reality of OKEx shows how unique the market infrastructure for crypto assets is.

Traditional market infrastructure companies are not exempt from regulatory risk. In traditional markets, however, customers do not deposit their money directly into exchanges. They do this through brokers. For example, even if a broker should go bankrupt, segregating funds means that the broker's bank could return funds to customers.

Crypto markets don't work that way. Brokers are not yet a function, and client funds are usually held by the exchange platform. When it comes to crypto holdings, there isn't even a bank that can handle the return of funds at the behest of the authorities.

This also underscores the irony that an industry with a decentralized ethos is dominated by centralized companies with centralized vulnerabilities. While exchanges often have multi-sig protocols (which allowed BitMEX to continue withdrawing even if a signer was unavailable), not all seem to do so.

While participants in traditional markets operate in slightly regulated countries, these companies do not dominate their market segment as in crypto.

Another problem is jurisdiction. OKEx is based in Malta, part of the European Union, with headquarters in Hong Kong and offices in Singapore and San Francisco. After the first CoinDesk report was published, Chinese media reported that founder Star Xu had been released from police custody in Shanghai. The exact fees are still unclear, and the company has stated in a statement emailed that they have nothing to do with OKEx. Rumors (not yet confirmed) have surfaced that it is money laundering – should they be true, which jurisdiction should prosecute and how far should Malta be involved?

Chinese media also reported that Xu's detention was the result of an investor battle over forced liquidations, a system crash, and OKEx's handling of the situation. The company has claimed not to be aware of such a problem.

Additionally, OKEx's corporate structure is frustratingly confusing – Xu is also the founder of OKCoin based in China as well as the CEO of the OK Group and based in San Francisco according to his LinkedIn profile. Some reports say that Xu was not arrested by the police for asking for their protection. Others say he was arrested two weeks ago and has not been since. OKEx claims that Xu no longer represents the company that was spun off from OK Group earlier this year. This then leaves the suspension of withdrawals unresolved.

By the time you read this, more news will likely have surfaced to clarify the legal situation and the withdrawal plan. Or maybe we're even more confused. In the meantime, the company insists that customer funds are safe.

This situation shows both the relative immaturity of the crypto markets and how far they have come. It reminds us that the markets are still immature as there is still relatively little customer protection on many systemic platforms. The market remains largely retail, which has fueled the growth of platforms that fail to meet the strict compliance and accountability requirements of institutional investors.

However, this also reminds us of how far the crypto markets have come in terms of resilience and adaptability. Bitcoin (BTC) price initially fell a little more than 2% on the news, less than the almost 4% drop in BitMEX indictments on October 1st. As I type, there is an indication that it will remain stable at $ 11,300. $ 11,350.

Source: CoinDesk

Looking ahead, developments like these will accelerate a trend that has already started: the growing interest of central exchanges (not just in the crypto industry) in decentralized applications. Earlier this week, Binance founder CZ reiterated at our Invest: Ethereum event that it sees decentralized finance (DeFi) as a complement rather than a competitor to the more traditional structure.

Indeed, the price of UNI, the mark of decentralized liquidity provider Uniswap, initially fell on the shock of the news, but then rebounded nearly 15% as investors considered the potential impact.

University priceSource: CoinGecko

Meanwhile, tokens issued by more centralized crypto exchanges such as Binance (BNB) and FTX (FTT) have declined 5% and 3% respectively and have not yet recovered at the time of writing.

It's not often that the dynamics of the market infrastructure change before your eyes. But as we say in our industry, a year in crypto is like 10 years in traditional finance.

The crypto market is broader and more interesting than most believe

We had our first Ethereum-focused event this week, where investors, analysts and builders from all industries came together to discuss the second largest crypto ecosystem by market capitalization and the upcoming technological change.

I hosted a panel of crypto market infrastructure leaders to discuss the financial aspects of Ethereum out of the chain – its markets, products traded, investors and prospects. We didn't have time to dig into everything I would have liked, but here are some of the key takeaways:

Ethererum becomes a ramp

Bitcoin (BTC) remains the number one crypto asset on the rise for investors as it is the most liquid and has the most venues and trading opportunities. According to Michael Sonnenshein, managing director of Grayscale Investments, a growing number of traditional investors are drawn to the potential of decentralized financing and the value proposition of Ethereum as a platform for innovative market applications. ETH becomes a ramp.

The growth of ETH investors is reflected in the number of addresses with a balance other than zero, which has increased by almost 40% since the beginning of the year.

glassnode-studio_ethereum-number-of-address-with-a-non-zero-balanceSource: Glassnode

Volatility is a function, not a bug

Many investors cite volatility as an obstacle to investing in crypto assets. Some regulators use this as an excuse to restrict access to retail investors who may be at unexpected risk. In fact, crypto assets are more volatile than most traditional assets – but that's more of a function than a bug.

Both Sonnenshein and Thomas Chippas, CEO of Crypto Asset Platform ErisX, pointed out that their client bases represent a variety of investment strategies, including risk arbitrage trades. This is undoubtedly a feature of the market as a whole, as traders and quant funds are looking for higher volatility than what can be found in traditional markets as they can generate superior returns if used well. The growth in liquidity in the market for crypto derivatives, both in terms of volume and the range of products and maturities, shows that hedging strategies are becoming more and more sophisticated, which enables volatility deals that increase returns.

The institutions are already there

The "great wall of institutional money" that some commentators on the crypto market waited breathlessly a few years ago did not materialize. But that doesn't mean that “the institutions” aren't here yet.

All three panellists acknowledge that crypto markets are still largely retailed, but that institutional investors are playing an increasing role in liquidity and in shaping market infrastructure development.

Grayscale Investments (a subsidiary of CoinDesk's parent company, DCG), whose clients are mostly institutional and professional investors, announced their best quarter to date earlier this week. It raised over $ 1 billion in three months, more than four times the amount for the third quarter of 2019.

Also earlier this week, PricewaterhouseCoopers (PwC) released a report that found over $ 1.1 billion of institutional money flowed into the industry in the form of venture capital investments. And JPMorgan published an investment note on Bitcoin for its institutional clients.

A growing ecosystem in terms of maturity and opportunity

Overall, the event showed that the crypto asset ecosystem encompasses much more than just Bitcoin. While this may be the largest and most liquid cryptocurrency, the innovation, build, and emerging structure of other crypto assets like ETH will attract the attention of a wider range of investors – not just those looking to diversify their crypto holdings ( ETH has done so) has outperformed Bitcoin so far this year (+ 194% versus + 60%), but so has those who take the time to understand the value proposition of alternative assets as individual opportunities.

In other words, investors will increasingly realize that crypto assets are far more than an alternative group of assets. They are a collection of compelling ideas that respond to unusual market dynamics and offer a unique opportunity not only to witness the emergence of a new type of value exchange, but also the emergence of new valuation techniques and portfolio strategies.

btc-eth-return-2Source: Coin Metrics

Does anyone know what's still going on?

As if there was a need to prove that the crypto markets can move fast, the healthy outperformance shown in the chart below was reduced within minutes when the OKEx crypto exchange announced an indefinite suspension of withdrawals (which may have been restored when you did have read). .

With this price drop, which was relatively subdued compared to a year ago, the markets are still hovering in a steady band, awaiting further signs of vaccine / stimulus optimism or pandemic / recession / inflation pessimism.



At our Invest: Ethereum Economy event this week, our Chief Content Officer Michael Casey spoke to Heath Tarbert, chairman of the US Commodity Futures Trading Commission (CFTC) on the regulator's view of Ethereum and its asset, Ether (ETH). BRING AWAY: What stood out from the conversation was how much thought Chairman Tarbert has put into Ethereum and its potential applications, as well as the upcoming technology shift to Ethereum 2.0. Among the takeaways to watch out for:

  • The setting of returns could potentially be viewed as income, which could turn ETH into a security, although that would fall under the purview of the US Securities and Exchange Commission. The decentralization of the Ethereum network is a factor in this equation and could shift the classification towards the commodity.
  • He surprisingly accepted the idea that decentralized finance would separate the financial system from traditional actors.
  • Enforcement actions against crypto exchanges are likely to continue as long as exchanges violate U.S. law. Chairman Tarbert sees this as necessary for the US to be a leader in digital assets.

A report from PwC shows that the dollar amount of crypto M&A transactions in the first half of 2020 exceeded the amount for the whole of 2019. Also, the average size of private equity investments increased from $ 4.8 million in 2019 to $ 6.4 million in the first half of 2020. BRING AWAY: Not only does the report shed light on the number of deals that have been made, but it is also interesting to see where the deals are concentrated. The increase in transactions with exchanges and trading companies for crypto assets shows a growing interest in the market infrastructure for crypto assets, which indicates that institutional investors are expecting an even greater interest in the industry from institutional investors.

Digital asset manager Grayscale investments * Third quarter numbers showed investment inflows of over $ 1 billion, up from $ 255 million in the third quarter of 2019. BRING AWAY: Not all of these inflows are new institutional money as many investors recycle their investments – they sell on the market when the lock-up period expires (now after six months) at a substantial premium and then reinvest the proceeds in new trust issue. However, the number is representative of institutional interest and indicates significant growth in demand for Bitcoin as an investment. (* Grayscale Investments is owned by the parent company of CoinDesk, DCG.)

The Ethereum Trust Managed by Grayscale Investments (a subsidiary of CoinDesk's parent company, DCG), it became a reporting firm with the Securities and Exchange Commission (SEC). This increases the transparency of the trust – and possibly its liquidity. BRING AWAY: This may increase the liquidity of the trust by reducing the mandatory holding period for qualified investors from 12 months to six months. This also increases the transparency of the funds flowing through the investment vehicle in accordance with the requirements of the SEC filing.

Investment bank JP Morgan released a research report on Bitcoin highlighting the “vote of confidence” in Square's recent $ 50 million purchase of BTC and the payment company's growing revenue from the sale of crypto assets. BRING AWAY: Analysts seem to be focusing more on company demographics and precedents than fundamental valuations, which in itself is a notable change from other investment bank-sponsored reports. Could it be that traditional finance is finally getting that fundamentals aren't the only value drivers?

Institutional asset manager Stone Ridge Holdings Group has acquired 10,000 BTC as the "primary treasury reserve asset" which it holds together with its crypto subsidiary NYDIG. BRING AWAY: This adds to the list of non-crypto companies using Bitcoin as a hedge against inflation and dollar depreciation. The new vote of confidence in the ecosystem that this represents is underscored by NYDIG's new $ 50 million funding round, backed by Fintech Collective, Bessemer Venture Partners and Ribbit Capital.

Bitcoin hashrate (an indicator of how much computing power is being used maintaining the Bitcoin network) rose to a record high this week. BRING AWAY: Do you remember the halving of bitcoin five months ago when the miners subsidy for new bitcoin was cut by 50% and some predicted that mining would become unprofitable for many? This would then, in theory, weaken the security of the network by centralizing the mining power in the hands of a few large pools that could generate economies of scale. Well, instead of dwindling, it continues to rise. This shows that mining costs are falling mainly due to lower energy prices and more efficient machinery. It also shows that the security of the network depends on more factors than just Bitcoin price (which determines the value of mining subsidies) – technological changes also play a role.

October 1st Diginex was the first crypto exchange operator to list on a US stock exchange. CoinDesk Research offers a look at the company's finances and outlook in light of the information declared, which is rare in crypto market infrastructure companies.

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Melinda Martin