Monthly Update || July 2023

Opening Remarks

Greetings from Ikigai Asset Management¹ headquarters. We welcome the opportunity to bring to you our fifty-eighth Monthly Update and hope these are helpful in better understanding some of what we’re doing and what we’re seeing. We have the privilege of deploying capital on behalf of our investors into a new technology and asset class that already has and will continue to fundamentally change the world – continuing to create trillions of dollars of value in the process.

We believe we are obligated to be shepherds of this technology – to help the world better understand the powerful potential of DLT and crypto assets, and to fund and be an ambassador for DLT projects that will change our lives forever.

To that end, June was a tale of two months – a barrage of negative events to start the month, topped by SEC suing Binance and Coinbase on June 5th and 6th, followed by BlackRock filing a spot Bitcoin ETF on June 15th, and price rocketing $6,000 thereafter.

We’ll dive into the potential implications of the BlackRock filing in detail but suffice it to say that the filing shifted sentiment significantly, which was quite negative leading up to the filing. And for good reason – the largest crypto exchange in the world (Binance) is under a multipronged global regulatory onslaught and the largest crypto exchange in the US (Coinbase) is charged by the SEC of offering unregistered securities. Between the two complaints against Binance and Coinbase, the SEC alleges that BNB, BUSD, SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, COTI, CHZ, FLOW, ICP, NEAR, VGX, DASH and NEXO are securities. In aggregate, these names account for ~8% of total crypto market cap but the eventual outcome of these SEC complaints have much bigger implications for the crypto ecosystem as a whole.

Unfortunately, we shouldn’t expect an outcome for these allegations of unregistered securities any time soon. Not this year. Probably not 2024. Maybe 2025. It’s going to be a slog. At this point, it’s probably more likely that we get legislation passed in the US (in 2025+) that provides superseding clarity to these complaints before a resolution occurs through the judicial process. That makes it particularly challenging to imagine a roaring bull market in Alts over the next 18 months. Maybe I’m wrong. This is a global asset class and Hong Kong, UAE and Europe are making real steps towards welcoming crypto. So maybe that will be enough to shrug off so much regulatory uncertainty in the US and drive Alts much higher, but I struggle to have that as my base case.

That said, having a high degree of confidence in any crypto predictions at all at the moment is difficult with so much uncertainty around the fate of Binance. It’s difficult to get accurate market share estimates because so many exchanges, including Binance, engage in wash trading, but Binance is the biggest crypto exchange in the world, likely by a wide margin. And the last seven months have been nothing short of a Cat 5 shitstorm for Binance and Changpeng, with June 2023 being the worst of it (so far). Binance is such a giant in the crypto landscape that imagining a future where: 1) Binance’s dominance remains as is; 2) Binance’s dominance is significantly diminished; or 3) Binance is shut down entirely - is imagining three very different worlds.

Which I think puts all eyes on an impending DOJ case against Binance which everyone assumes is coming but no one has a sense of when. Could be tomorrow, could be months from now. Whenever that happens, you’ll get a better sense of whether option 1, 2 or 3 is most likely to materialize in the following quarters, which in turn will give you a better sense of the likelihood of a bull market in Alts with such a large regulatory overhang in the US.

The winds of change are palpable in crypto right now. That’s always true to some extent, but in the wake of the last 18 months in crypto and with so many identifiable regulatory shifts on the horizon, it’s safe to say the next few years in crypto are going to look pretty different than the last few. Use cases for this technology (beyond speculation) that will drive increased adoption and thus a new bull market are unfortunately still not clear at this point. I’ve been writing about that here for the last few months, and I continue to struggle to see these compelling use cases materializing. If you think I’m missing something, reach out and let’s talk about it.

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June Highlights

• BlackRock Files for Spot Bitcoin ETF, WisdomTree, Invesco, Valkyrie, Bitwise and Fidelity Follow in Kind; SEC Responds Saying the Filings Do Not Contain Sufficient Details

• SEC Sues Coinbase for Offering Unregistered Securities, Coinbase Responds

• SEC Sues Binance and Changpeng on 13 Charges with Incredibly Damning Evidence

• Bloomberg Claims Changpeng May Step Down and Be Replaced by Richard Teng

• SEC Seeks Restraining Order to Freeze Binance US Assets; Judge Denies Restraining Order and Forces SEC and Binance US to Compromise on Securing Customer Assets

• Binance Under Investigation in France for Aggravated Money Laundering

• Binance Forced to Cease Operating in Netherlands

• Binance Forced to Cease Operating in Belgium

• Binance Attorneys Allege Gary Gensler Offered to Be an Advisor to Binance in 2019

• Binance and Changpeng Hire George Canellos, Former Chief of SEC Major Crimes Unit, As Criminal Defense Attorney

• Prime Trust Receives Cease and Desist from Nevada Regulators, Halts All Operations After BitGo Rescue Acquisition Falls Apart, Likely Committed Fraud

• Abra Accused of Fraud and Insolvency in Emergency Cease and Desist Order by State Regulators

• MSTR Purchases 12,333 BTC for $347mm at $28,136

• Citadel, Schwab and Fidelity-Backed Crypto Exchange EDX Launches with BTC, ETH, LTC and BCH Spot Trading

• 21shares/Ark Modify Their Existing ETF Application to Include a Surveillance Sharing Agreement with CBOE, Similar to BlackRock’s; If Approved, Ark ETF Would Be Before BlackRock

• UK Passes Bill Recognizing Crypto as Regulated Financial Activity  

• HSBC Begins Trading of BTC and ETH ETFs Listed on the Hong Kong Exchange

• “Hinman Emails” Released in Ripple vs SEC Case, May Provide Legal Protection for ETH

• CFTC Wins Landmark Case Against Ooki DAO

• SEC Approves Levered Futures BTC ETF

• RobinHood Delists Cardano, Solana and Polygon in Response to SEC Case Against Coinbase

• Celsius Bankruptcy Estate to Sell Altcoins into BTC and ETH

• FTX Estate Sues to Clawback $800mm from K5 Global

• FTX Estate Pauses Sale Process of Anthropic AI

• US Prosecution Drops Four Criminal Charges Against Sam Bankman-Fried

• Crypto.com Suspends US Institutional Exchange Service

• USDC Receives Digital Token License in Singapore

• CME to Launch ETH/BTC Ratio Futures on July 31

Source: TradingView. As of 6/30/23.

The Adults Are Coming! The Adults Are Coming!

As previously mentioned, sentiment halfway through June was quite negative due to a barrage of regulatory actions, topped by the SEC suing Binance and Coinbase on back-to-back days. The tide turned swiftly on June 15th with BlackRock’s filing for a spot Bitcoin ETF. Below are some free-flowing thoughts on BlackRock’s filing and the potential implications. Please note that the below includes my best understanding of the situation, but there are a lot of finer points and nuances in here that I tried to get right, but could have missed something. If you read something you think I got wrong, I’d appreciate any feedback.

BlackRock’s record for ETF approvals is 575-1. BlackRock has extremely close relationships with the highest levels of government to the point that BlackRock basically IS the US government. Thus, the market is viewing BlackRock’s filing from the perspective of “they wouldn’t have filed if they weren’t going to get approval” and that view makes sense.

The timing of the approval process is a little weird, but it could come as early as mid/late August or as late as Q1-24, based on the series of delays the SEC can enact if they so choose (which we’ve seen in the other spot BTC ETF applications).

The Grayscale vs SEC case matters as it relates to the BlackRock ETF. Legal experts believe Grayscale has quite a decent shot at winning its case against the SEC.

If Grayscale wins its case against the SEC, four things can happen: 1) the SEC immediately approves GBTC’s conversion to an ETF; 2) the SEC makes up a new reason they’re denying the approval and then that gets fought over in courts for months; 3) SEC could appeal to the Supreme Court; or 4) the SEC revokes approval of existing CME BTC futures ETFs. #4 feels quite unlikely. #2 and #3 are possible, but if you read into the intentionality of BlackRock’s filing on June 15th, #1 is probably the most likely outcome if SEC loses and thus BlackRock wants to hurry up and get in line for its own approval.

The BlackRock ETF is using Coinbase custody. Coinbase is embroiled in their own legal battle with the SEC at the moment. In the most bearish scenario, this might cast a doubt on Coinbase as a long-term going concern. I think it’s safe to read into BlackRock’s choice of custodian that whatever ends up happening to Coinbase, it won’t be so severe as to potentially force a winddown of the business. Coinbase likely makes it out of the SEC case ok, regardless of the outcome of the SEC lawsuit.

At the heart of the SEC’s prior denials of spot BTC ETFs is the claim that a spot BTC ETF needs a market that is: 1) regulated, 2) of significant size, and 3) for which there is a surveillance sharing agreement, so that 4) any fraud and manipulation can be detected and deterred. The weird part is that when the SEC approved CME BTC futures ETFs in fall 2021, it was because those ETFs held CME BTC futures and not spot BTC. But this was nonsensical logic because the price of CME BTC futures is based on an index rate made up of spot BTC prices. This same four-pronged test is in play now with the BlackRock filing. BlackRock has attempted to solve for this by introducing a NASDAQ Surveillance Sharing Agreement, which would surveil an unnamed crypto exchange, presumably Coinbase.

On June 30th, the WSJ reported that the SEC told ETF filers they hadn’t provided enough details about which exchange they would be surveilling and how exactly the SSA would work. So at time of writing, BlackRock and the rest of the ETF filers are likely scrambling to add more details to that part of their applications.

It’s all a bit confusing because the price of the BlackRock ETF is based on the CF Benchmarks – “Bitcoin Reference Rate – NY Variant” index price. This index is a volume-weighted aggregate of Coinbase, Kraken, Bitstamp, itBit, Gemini and LMAX. So from what I can tell, BlackRock is basically saying “our price is based on this index of six exchanges, and we’re closely watching the biggest exchange, so that should be good enough to satisfy your four-pronged test”. TBD on whether that’s sufficient.

As you think about this four-pronged test to solve for fraud and manipulation, you can’t help but think of Binance and their role in BTC price discovery. If you take CoinGecko’s reported numbers at face value, Binance spot BTC volume is >6x Coinbase’s.

We know that Binance has already been charged with wash trading and market manipulation by the CFTC and SEC, and the evidence is pretty damning. The CFTC claims Changpeng controls over 300 trading accounts on Binance. So if you’re the SEC and you’re honestly assessing the “manipulability” of the spot BTC market, it’s hard to ignore the behemoth Binance and their extremely shady business practices. If Binance’s dominance in the crypto market were to be significantly diminished or the exchange was shut down entirely, it would be much easier to imagine how BlackRock’s proposed solution to the four-pronged test would be sufficient. So given that BlackRock filed and they don’t miss much, what does that say about Binance’s fate?

Tangentially, in June EDX, the crypto exchange backed by Citadel, Virtu, Schwab and Fidelity, launched with spot BTC, ETH, LTC and BCH trading. I don’t know much about it, but I think it’s still very early on. Probably hasn’t even started beta testing. TBD on what the initial user/volume numbers will be. We’ve seen stuff kinda like this (Baakt, ErisX) flounder and fail before. But it’s usually not wise to bet against Citadel. If Citadel is committed to it and have reasonably clear guidelines from regulators, that’s really interesting. I would guess Citadel could make a pretty tight market for wholesale BTC and ETH and best-in-class security/custody practices would be my base case assumption.

If EDX turns out to be nothing, then forget about it. But if it starts taking real market share over the coming quarters, you begin to paint a picture of a radically different Bitcoin price discovery landscape. If you couple a successful EDX launch with a BlackRock ETF, that landscape radically changes even more. And then add on top of that a Binance dominance that is significantly diminished or shut down entirely, and you a have a drastically different market.

The entire offshore crypto market may change radically. FTX 2.0 will likely be a participant in that landscape and will represent best-in-class compliance and regulatory relations. Other offshore exchanges will also take a similar approach in international jurisdictions that are being more friendly to crypto, like Hong Kong, the EU, and the UAE. You could imagine a tradFi-backed exchange of similar style and ilk to EDX gaining prominence in each of those jurisdictions. And perhaps the dominant exchanges in each of these jurisdictions would also trade BTC and ETH wholesale with each other, creating a global walled garden of regulated, fully KYC’d, well-capitalized market participants. That’s a very different market than what we have today.

There will always be a demand for KYC-free crypto trading. Regulators will try and clamp down on it, but it will always exist. The same is true for KYC-free DeFi. There will always be a demand for it, even as a walled garden of KYC’d DeFi is likely created in a similar fashion to the walled garden mentioned above. So some amount of crypto assets will remain outside of these walled gardens, but it will become increasingly more difficult for those assets to get into the walled gardens. The KYC requirements will simply be high enough to choke out more and more of that capital. To some extent it’s already happening. If you show up and deposit 100 BTC in your Coinbase account, they’ll check where it came from and if it flashes in their compliance system, they’ll freeze your account. Same with sending crypto out to an address they don’t like for whatever reason. So just imagine that but pervasive across the globe. Feels like we’re heading that way, TBD on exact timing.

When imagining a world where say, 1/4 of all BTC volume is done through the BlackRock ETF, 1/4 of BTC volume is done in these highly-regulated wholesale walled gardens, 1/4 of BTC volume is done on fully KYC’d retail exchanges and 1/4 of BTC volume is done on KYC-free DEX’s and CEX’s, you can’t help but ponder about the ethos of crypto. Some of all the Bitcoin in those four categories would be held in self-custody, but most would not. They would be held be qualified custodians, perhaps unable to be withdrawn into self-custody even if desired.

Bitcoin and crypto broadly have been doing this dance between privacy and KYC, degeneracy and legitimacy, fraud and regulated, for many years. The bull market of 2020 and 2021 brought in at least an order of magnitude more capital and attention than the space had seen previously. And then the ensuing events of 2022 and 2023 did so much damage that it appears we’re now dancing to a different song. It’s a song where deep pockets connected to powerful politicians enact change that suits their best interest.

I’m not exactly sure how those interests will align with the best interests of this ecosystem overall. If the world I described above comes to fruition, is that pushing this technology towards its potential to make the world a better place? Will the adults do a better job at fulfilling that potential than we’ve been able to muster ourselves recently? The answer isn’t a clear yes or no in my mind. But it’s clear we needed some sort of help because the scams and fraud and bad actors have run amuck over crypto for a long time and there’s no reason to believe we could fix the problem ourselves. So here come the adults.

Market Update – Liquid Crypto Asset Investing

Source: CoinMarketCap. As of 6/30/23. BCH includes SV. Aggregate DeFi from Coingecko.

June was a tale of two months, but in two different ways. June was a tale of two months in the sense that the first half of the month was very weak, with BTC down 9% MTD at the June 15th lows, only to rally 23% in a straight line on the back of the BlackRock ETF filing, ending the month +10%. June was also a tale of two months in the bifurcation of BTC performance vs Alts. And for good reason – the SEC sued Binance and Coinbase for offering unregistered securities and named a total of 23 Alts as securities. Then, the week after, BlackRock filed for a spot Bitcoin ETF. So the bifurcation makes sense.

With many Alts down double digits in June and BTC +12%, BTC Dominance has broken out of its 2+ year range.

There is a very clear set of fundamental narratives driving that movement higher in BTC Dominance. If the BlackRock ETF gets approved, it’s def heading higher. Honestly it might head higher regardless.

What eventually happens with Binance is going to matter a lot for BTC Dominance and what eventually happens with the SEC’s stance on Alts being unregistered securities is going to matter a lot too. The former will likely come to a head sooner than the latter. The DOJ case against Binance could come tomorrow but it’s highly likely to come this calendar year. And those charges will likely supersede the SEC’s case against Binance in terms of seriousness and relevance. Which leaves us with Coinbase vs SEC, which there’s a good chance we won’t get any clarity on this year, although there is a small chance Coinbase can get the case thrown out quickly.

Last month I showed this chart: total crypto market cap – BTC, ETH, USDT and USDC. Think of it as total Alts market cap. A month ago I said it looked like it was going to test the lows. It did that in June.

Purely from a chart perspective, it bounced where it should have, and it could head a bit higher in the near term. Fundamentally, I think it makes sense for this chart to break down. The regulatory pressure is too high, the user activity is too low and the value accrual is too uncertain. When I think about ways this chart could head meaningfully higher this year, I struggle to come up with compelling scenarios. If the Coinbase SEC case does get thrown out, this heads higher for sure. If the Binance situation ends up much more innocuous than it looks at the moment, this chart heads higher. Neither of those outcomes seem particularly likely at the moment.

The last two months I’ve shown this chart for BTC-

OK, we got our potential catalyst. A month later, we have an updated version-

I think the above chart sums up the situation pretty accurately at the moment. You may have noticed that I refrained from making a prediction earlier about whether I thought the BlackRock ETF (or Ark’s even before it) would get approved. That was intentional because I don’t have a strong conviction either way. Even money I’d say it gets approved, but I wouldn’t give you 2:1 odds on it. If it gets approved, we’ll almost certainly punch through that resistance. Unclear on how high. Again, it’ll depend on Binance.

Macro will matter for crypto in 2H-23, but I think it will matter less than the idiosyncratic factors I’ve already laid out. If the NASDAQ is +10% in 2H-23 which it certainly might be, that will be helpful to crypto on the margin. If NASDAQ is down 5% in 2H-23, that will weigh some on crypto. But I think either outcome will take a backseat to BlackRock ETFs, Grayscale SEC cases, Silk Road Bitcoin being sold, Mt Gox Bitcoin being distributed and a plethora of regulatory actions. It feels like it will be a “micro” 2H-23 for crypto.

Below is a chart showing CME BTC Open Interest (in green). It increased 34% immediately on the back end of the BlackRock filing and sits near all-time highs. There is TradFi money that got long Bitcoin on the ETF filing.

Binance’s token, BNB, is sitting at 2+ year support levels and I think it’s going to break down this year. Maybe next month. Whether the token just crashes say, 50% or whether it collapses entirely will be a function of what exactly the DOJ brings and what the knock-on effects are.

ETHBTC is at the midpoint of its 2+ year range and looks like it’s heading to go test the range lows. I think the current bifurcation of BTC and ETH fundamentals would warrant at least a test of the range lows, if not a full breakdown of the range. Depends on how heavy handed the regulatory actions are and what use cases for Ethereum blockchain activity can actually materialize. If no spot BTC ETFs do get approved, I would expect this to correct back up to towards the top of the range.

Lastly, I’ll leave you with this chart. It’s BTCTUSD on Binance-

Binance chose TUSD as its backup stablecoin of choice (behind USDT) after regulators forced the shutdown of BUSD. Binance began offering fee-free trading on BTCTUSD, which explains the spike in volumes shown above. There’s a host of weird things going on with TUSD and they’re not being transparent at all. It’s the sort of thing that would be a lot of smoke for there to be no fire. I’ll spare you the details here, but if you want to read more, you can start here, here, and here. Bottom line, don’t hold any TUSD and don’t hold any assets on Binance. Take it from a guy that had to learn the hard way.

Closing Remarks

Most of what I’ve been doing over the last six months on Twitter has been speaking truth to the most powerful person in crypto, Changpeng Zhao. I’ve never done anything like that before. But I am compelled to speak up in light of the damage done to this ecosystem over the last 18 months and the pain I’ve endured personally with getting my investors’ money stuck in the FTX collapse. If you’ve been reading these monthlies, you know how I feel about the bad guys kicking the shit out of the good guys in crypto. And you know the strength of my conviction in needing to do more personally to fight the good fight. So it’s been in that spirit that I’ve been waging this public campaign against a very powerful bad actor. It’s a new journey for me but one in which I feel like I’m making a difference in a tangibly positive way.

Good actors need to be louder in this space. Full stop. I’m just trying to do my little part. And by doing so, I feel more in alignment with my purpose now than ever. My mental health is the best it’s been in years. Physically, I’m in some of the best shape of my life. My spiritual life is truly the strongest it’s ever been. I feel sturdy and excited about what the future holds, even if there is plenty of uncertainty in that future. I’m not expecting it to be an easy ride. I’m 5+ years into this and it would be silly to expect it to be an easy ride. Being in this space is challenging in a multitude of ways.

One challenge is that if you are going to participate in this ecosystem in a way that is as straightforward and truthful as you can possibly be, you should expect to be gaslighted. You should be prepared to be gaslighted, because there are many bad actors here and those bad actors will gaslight you and they will convince others to do the same. This toxic trait is more present in crypto than other industries. I’ve worked in other industries. I have friends and family that work in all sorts of industries. They don’t deal with the type of problems we deal with, because either there’s less bad actors in their industry or those bad actors just aren’t able to cause as much damage as in crypto…or both. It seems like the entertainment industry would probably give crypto a run for its money, but very few other industries. So that’s just something you need to grow accustomed to if you’re going to publicly call out bad actors. It’s all good though. I’ve been sleeping great at night lately.

“Love is like the wind — you can’t see it, but you can feel it.”

– Japanese Proverb

Travis Kling

Founder & Chief Investment Officer

Ikigai Asset Management

P.S.

Included below is an incomplete list of memorable tweets from the last month. Twitter is not investment advice and my views could easily be wrong. That being said, like it or not, Twitter matters for crypto. I have no interest in being a talking head for a living and babbling about on Twitter is a long way away from being a good steward of investor capital. However, this is a community with open-source software in its DNA, and participants want to crowd-source the truth. We are shepherds of this technology. Answers to fundamental questions about this asset class are not currently clear, so having a public platform to share your views with the community is important. After all, you’re helping shape the future :)

1. Ikigai Asset Management is the trade name for a collection of advisory and consulting businesses operated by Travis Kling, Anthony Emtman, and their team.

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