FTX Bankruptcy Hits Bitcoin Price

Jan. 22, 2023

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Welcome to The Node! This is Ben Schiller here to take you through the latest in crypto news and why it matters.

In today's news: Bitcoin's fall may be due to GBTC outflows related to FTX. Dogecoin and floki benefit from X payments speculation . And, Terraform finally files for bankruptcy.

The takeaway: When will we see an ETH ETF?

FTX Bankruptcy Hits Bitcoin

Investors have sold more than $2 billion worth of the Grayscale Bitcoin Trust (GBTC) since it was converted into an exchange-traded fund earlier this month. A large chunk of that exodus was FTX's bankruptcy estate dumping 22 million shares, according to private data CoinDesk reviewed and two people familiar with the matter. A slew of spot bitcoin ETFs began trading on Jan. 11 after the U.S. Securities and Exchange Commission finally approved them following years of delays. But the Grayscale fund had already existed for a decade – structured as a less-attractive closed-end fund – and had accumulated close to $30 billion of assets when the SEC approved its conversion to an ETF, along with blessing 10 newly created bitcoin ETFs.

Dogecoin X Speculation

Dog-themed meme tokens Dogecoin (DOGE) and floki (FLOKI) rose as much as 12% before retreating, as an @xpayments profile on social app X sent adoption hopes flying among crypto circles. Trading volumes for both tokens shot up 200% over the weekend, CoinGecko data shows, even as broader crypto volumes remained relatively lower amid little volatility. Elsewhere, futures tracking the tokens saw open interest rise to a cumulative $430 million from $200 million, indicative of rising bets. DOGE has the tendency to surge on payments-related developments at any Elon Musk-owned companies, such as X or Tesla.

Terraform Bankruptcy

Terraform Labs Pte. has filed a voluntary petition in Delaware for Chapter 11 bankruptcy, according to documents filed on Jan. 21. The embattled cryptocurrency firm behind the failed stablecoin TerraUSD declared in the filing it has between $100 to $500 million in estimated assets and the same amount in liabilities. TerraUSD, a dollar-pegged cryptocurrency and Terra's LUNA token collapsed in May 2022, destroying billions of dollars in investor wealth.

The Takeaway: When ETH ETF?

(Unsplash, modified by CoinDesk)

With the recent approval of Bitcoin ETFs in the U.S. offering buoyancy to crypto markets in recent weeks (if not necessarily in the price of Bitcoin in recent days), expectations are rising for ether to follow suit.

How soon might we see an ETH ETF approved soon, potentially driving the ETH price higher?

Ether has been somewhat in Bitcoin's shadow in recent times, with the differential between the two prices growing. Bitcoin benefitted from expectations for ETF approvals, and the newfound capabilities for smart contracts and inscriptions on Bitcoin. But now it may be ETH's time in the spotlight, due to coming tech upgrades and expectations for approval of an ETH ETF.

"ETH could be poised for a breakout year," Coinbase said in its newsletter last week, per a report from CoinDesk's Omkar Godbole. "Last week's bitcoin ETF news proved to be a boon for ethereum, which briefly spiked above $2,700 — reaching its highest price since May 2022. And there are reasons to be even more optimistic about ETH's near-term future. For one, several of the firms behind the BTC ETFs — including BlackRock and VanEck — are also plotting ether-based spot ETFs."

ETFs allow investors to put money into cryptocurrencies without directly having to own and manage the asset, potentially offering a huge boon to crypto markets. Bitcoin ETFs have amassed more than $10 billion in inflows since their approval ten days ago. Ethereum's Dencun upgrade and expected EIP-4844 implementation will improve scalability, and reduce network costs, perhaps by as much as 90%, Coinbase said in its newsletter.

Ethereum has an advantage over Bitcoin in being able to offer staking rewards on top of returns from the asset itself. This should help ETH in the coming months, according to a separate report from ETC Group, also cited by CoinDesk's Godbole.

"The strong dominance of Ethereum in terms of smart contract platforms and the possibility to earn an additional source of yield imply that it should also be a core holding in a diversified crypto-asset portfolio as well," ETC Group said. "We therefore think that it is quite likely for the relative performance of ETH/BTC to reverse itself in 2024."

However, it may be premature to expect ETH ETFs any time soon. JPMorgan said last week that it did not see the possibility of official approval at more than 50% before May 23, the deadline for the Ark 21Shares ETF application. That's because the SEC has several outstanding lawsuits with crypto exchanges over their staking services. "The ongoing lawsuits by the SEC against crypto exchanges offering staking services for proof-of-stake blockchains including Ethereum, make a spot ether ETF approval more challenging at least until these lawsuits are resolved," the JP Morgan report added.

So, while it may be a favorable time to invest in ETH due to the tech upgrades, demand for Ethereum-based stablecoins, and general buoyancy of crypto markets, the ETF-effect is harder to predict. Regulators would need to classify ETH as a commodity first — outside of the SEC securities purview — and the agency has been historically slow to move decisively on such questions.

– Ben Schiller

@btschiller

ben@coindesk.com

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Off-Chain Signals

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