The Return of the Bull

WSJ screws the pooch I IRS tax rule commenting | Hivemapper licensing map data | BlockFi emerges from bankruptcy

Author

Decential Media
October 27, 2023

Decential Media
A weekly recap of the most insightful news, analysis, and capital flows in the wild west we call crypto.

Hello and welcome back to the Web3 Rewind! Per usual in this industry, lots has happened this past week. Here's what we have in store for you:

  • BTC and crypto wide rally

  • IRS tax rule commenting

  • Hivemapper licensing map data

  • BlockFi emerges from bankruptcy

  • Large token unlocks

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The Latest

Wall Street Journal screwed the pooch

It’s interesting how things come in bunches, isn’t it? Last week I wrote about a pretty major journalistic failure when Cointelegraph used an anonymous Telegram post as the source to tweet that the SEC had approved a spot Bitcoin exchange-traded fund, when no such thing had happened. Bitcoin popped 7.5 percent then came right back down when the mistake was acknowledged.

So, a week later we have another media fuck up, but this time it’s much bigger and consequential. The Wall Street Journal misinterpreted data from blockchain forensics firm Elipic to say that the terrorist group Hamas had raised $93 million in cryptocurrency to help fund its attack on Israel. Senator Elizabeth Warren wasted zero seconds in grabbing the WSJ story and using it to bash crypto, and enlisted around one in five members of Congress to sign a letter calling for more information on how the Biden administration is acting to prevent crypto funding terrorism. Pretty engaging stuff, eh?

If only it was true. The Journal story misunderstood how an exchange has a total amount of trading going through it compared with individual transactions traced to specific wallets. That hasn’t stopped Sen. Warren and other politicians from using the bogus story to further restrict blockchain activity in the U.S., nor has the Journal retracted its story as of this writing. Elipic has been very clear on the mistakes that were made by the two reporters who wrote the story.

“However, there is no evidence to suggest that crypto fundraising has raised anything close to this amount, and data provided by Elliptic and others has been misinterpreted,” the firm said in a statement. “We have spoken to representatives of the lead signatory, Senator Warren, as well as the authors of the Wall Street Journal article, to clarify this.”

Not only has the newspaper not retracted its story, one of the reporters has been battling folks on Twitter who are rightly calling for the error to be acknowledged and fixed. Of all the stupid things to be doing here, the reporter, Ian Talley, is quoting Neil Stephenson as though he understands the writer. Talley should shut his mouth and work to correct the bad information he published that’s spurring spurious Congressional activity against crypto. He should also do some research, such as that Hamas disavowed accepting crypto for donations earlier this year because digital assets are easy to track, block and trace. I’m also shocked the Journal is allowing Talley to continue his rant in public, at Bloomberg News the rules about what reporters can tweet is strict and quickly enforced.

The Journal has never distinguished itself for its coverage or understanding of crypto. Like the New York Times, the Journal is an organ of state power in this country, and enjoys a huge amount of leeway when it comes to anyone being able to really tell them they’ve made a grave mistake. Who remembers Judith Miller? My point is, though, that of course crypto is funding terrorism. That’s the party line in DC at the moment, facts be damned. So the lack of a retraction should be seen at least in part in that light. It doesn’t make it right, of course, but it does add context.

First things first, the Journal must retract its story and explain how this happened. – Matthew Leising, editor in chief, Decential Media

It’s time dept.

The return of the bull

What a week. The energy on CT hasn’t felt that electric in a long time. People are calling for $40K BTC, an imminent spot ETF approval, making fun of Paul Graham marking the pico bottom with his tweet of a “systematic risk” to crypto, and questioning when all those who left crypto for AI are returning. As we’ve slogged through this brutal market, it seems like the end is near. Or at least the market thinks it is. Over the past week, BTC hit $35K over a weekend rally and a Monday mega pump. As a result of the rally, most alts rallied alongside, with SOL hitting $33 and LINK reaching $11. Last week’s 7.5% candle on the back of fake news of a spot BTC ETF approval was simply foreshadowing what would happen this week.

What could be driving this recent rally? I think it’s quite simple. Last week, the market saw what would happen if we got a spot BTC ETF approval. They didn’t want to be sidelined for the real thing. And thus, what do you do? You buy a little BTC in anticipation. Front-run everyone else front-running. This price appreciation clearly reflects the demand to front-run an announcement.

If you’re looking for a slightly more sophisticated reason for why the market is pumping, then could I direct you to options land, where market makers are in negative gamma territory. Why does that matter? It's time to dive into the options greeks. When options market makers have negative gamma, that means that as the price of the underlying (BTC) rises, their delta decreases. Assuming options market makers want to stay delta neutral (have no price exposure), then as price increases, they would either need to be long more of the underlying or be less short to remain delta neutral. Regardless of either scenario, it increases buy pressure on Bitcoin, pushing the market up.

That wasn’t all. There were a few other catalysts that likely pushed the market up. For one, BlackRock’s planned ETF was listed on the DTCC (Depository Trust & Clearing Corporation), given a ticker and a CUSIP code, and they also amended their filing that they will be seeding the ETF in October. The market promptly interpreted that as an imminent spot ETF approval and sent the market up accordingly. However, on Tuesday, BlackRock’s Bitcoin ETF was no longer listed on DTCC’s website, which resulted in the market cooling down. And then it was relisted again on Wednesday. At this point I’m not really sure what’s happening anymore.

Despite that, it’s clear that institutional demand is there, and they too, are following the market and eating up Bitcoin. This was shown in $43M of public fund inflows into Bitcoin products, representing 10% of the YTD total in one day. Between a peak in real rates, the BlackRock ETF, and the imminent Bitcoin halving in 6 months, it feels like we’re setting ourselves up for a perfect storm. — Joseph Cooper, Decential Media

Quick Bits

IRS extends crypto tax rule commenting

  • The IRS had previously proposed rules requiring crypto brokers, including CEXs, to file information returns and furnish payee statements for all customers.

Hivemapper starting to license map data

  • DePIN (decentralized physical infrastructure networks) may finally be generating some value. Hivemapper, a decentralized mapping protocol, has started to license map data on behalf of customers. To date, they have mapped 75 million road kilometers. Not bad at all.

  • Hivemappers earn by purchasing a dashcam from the protocol and then uploading their dashcam footage so that map developers can use more recent map data. There are token incentives involved, but I’ll save that for another time.

BlockFi emerges from bankruptcy

  • On Tuesday, BlockFi announced that it is emerging from bankruptcy. This means that the company may now claw back assets that it is allegedly owed from FTX and 3AC. Add them to the list of FTX creditors fighting for a piece of their money back.

  • Realistically, the likelihood of clawing anything back anything is small. This statement doesn’t just apply to BlockFi. It applies to FTX which may also try to clawback funds from users who withdrew large amounts of funds days before FTX collapsed.

And last but not least

Circulating supply explodes upwards

Are token unlocks bullish or bearish? The short answer is it depends. Although token unlocks greatly increase the circulating supply, sometimes some events are bullish unlocks, where the token's price goes up. Intuitively, that doesn’t make much sense. Assuming the value of a protocol stays the same, increasing the circulating supply of tokens means that the same value is divided by a larger number, which should make the tokens worth less. For the rest of 2023, we can talk about two large token unlocks. The first, which occurred on Tuesday, is a $410M unlock of the Polkadot coin DOT. The second is a massive 82% increase in the circulating supply of DYDX, which amounts to ~$350M at current prices. However, these are two very different scenarios.

Polkadot is an interoperability solution that enables cross-chain transfers of any data or assets. Their value proposition was that you could connect to every blockchain imaginable by building on Polkadot. During the bull, Polkadot was all the rage. You had to lease a slot on its relay chain for up to 96 weeks to build on it. Auction winners had to lock up a bond in DOT (you can see where I’m going with this). At its peak, DOT was trading at $55. It now trades down 92.4% from that at a measly ~$4. It is an understatement to say one got hosed if they put up a bond in DOT. At the peak, the amount of bonded DOT was probably well into the billions. The solution here is simple. Avoid the bear market and hope your token price isn’t down 90%, like 99% of tokens out there. On a more serious note, there needs to be genuine value accrual for a token price to be sustainable, even if that value is not distributed. And DOT has near zero value accrual, and now, with rollups proliferating, there is not much utility for it either.

On the other hand, DYDX’s circulating supply increase is a completely different story. DYDX’s unlock is to investors, founders, and future employees. I think these groups deserve their vested tokens at some point in time. You can’t just delay that forever. If not, no one would have any financial incentive to build or invest. In addition, one year cliffs with a four year vest are very common in the world of web2 startups. It is only because we have made tokens liquid from day one that such a problem exists. If you don’t want the circulating supply to increase drastically from a token unlock, there are a few ways to mitigate this. You could increase your initial circulating supply so that a smaller % of the supply gets unlocked when unlocks do occur. But doing so would come at the expense of having fewer token incentives further down the road, so it may not be ideal. Or, for example, you could spread out your vest over longer periods of time, but that messes with employee incentives. You would need to wait longer to vest your tokens fully. You could also consider not having a cliff, which means investors and employees start receiving their tokens on day one. However, that means there is not much incentive alignment. Ideally, you want both parties to be in it for the long run. These are questions that Web2 startups have been attempting to answer for years without much success, so perhaps we can try to come up with a creative solution in the meantime. — JC

Have you read the definitive history of Ethereum? No? Well then get your copy of Out of the Ether while you can.