Insights and analysis for the professional investor
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Hi readers,
In today’s newsletter, Toe Bautista from GSR talks about how pro-crypto legislation could boost decentralized finance (DeFi) and stablecoins, allowing DeFi to potentially connect with mainstream financial systems.
Then, Taylor Krystkowiak writes about how bitcoin mining operations have become a focus of a new wave of mergers and acquisitions on Wall Street.
The repercussions of historically stringent cryptocurrency oversight are well-documented, but the ensuing sea change is perhaps not fully appreciated. With pro-crypto legislators likely to replace the current regulatory regime, we anticipate a more favorable environment for crypto applications. Decentralized finance (DeFi), in particular, is well-positioned to reap these benefits. From opening the door for traditional finance (TradFi) to partake in DeFi, to enabling fee switches and U.S. user access to protocols, it’s hard to overstate the impacts for DeFi and stablecoins that can come with regulatory clarity. With DeFi TVL up 31% and the stablecoin market cap up 4% since the election, it’s clear that users share this sentiment.
Historically, institutions have hesitated to move on-chain due to regulatory risks. However, with bitcoin ETF AUM inflows on track to surpass the gold ETFs’ AUM within a year, finance and tech companies exploring the technology and offering crypto products, and corporates adding digital assets to their balance sheets, institutional interest in crypto has never been higher. That said, the coexistence of off-chain and on-chain capital thus far has mainly involved using on-chain capital to capture off-chain yield (e.g., Tether purchasing billions of dollars in U.S. treasuries). With regulatory clarity, we are now in the early stages of off-chain capital moving on-chain. Post-election developments, like BlackRock and Franklin Templeton expanding their tokenized money funds to new chains, exemplify the substantial capital ready to enter DeFi and are likely just the tip of the iceberg. And beyond tokenization, Stripe recently acquired stablecoin startup Bridge, McDonald’s partnered with NFT project Doodles, and PayPal is using Ethereum and Solana to settle contracts. This streamlines asset management, enhances market efficiency and liquidity, improves financial inclusion, and ultimately accelerates economic growth. Regulatory clarity will add an accelerant to this already-burgeoning activity.
Similarly, DeFi projects like Ethena and Blur are starting to adapt to the evolving environment as they anticipate improvements in regulatory clarity. A frequent criticism of altcoins is their lack of inherent utility. Addressing this, Ethena approved a proposal to allocate a portion of protocol revenue ($132 million annualized) to sENA holders, bridging the gap between revenue generation and token holders. Once executed, the proposal could increase participation and investment in Ethena by directly rewarding token holders, thus setting a potential precedent for revenue sharing in DeFi. This move might also encourage other protocols to consider similar mechanisms, enhancing the appeal of holding DeFi tokens. In addition, protocols may also enable US users to access front-ends and partake in airdrops, compared to the current default of restricting US users. At the same time, development and innovation should flourish, with founders more confident about the reduced risks of building in the U.S. By expanding token utility to benefit from protocol success, enabling access to fair and free on-chain services often without rent-seeking intermediaries, and removing barriers to innovation that have made this country so great, we may be on the brink of a new era for DeFi development and usage.
Collectively, these factors indicate that DeFi may be on the brink of a new growth phase, potentially expanding beyond its crypto-native user base to interact more directly with broader financial systems. The DeFi renaissance is here.
Spurred by the recent Republican electoral trifecta earlier this month and the prospect of federal policy facilitating further and more widespread adoption, bitcoin notched a new all-time high above $90,000. While all eyes have been largely fixed on the regulatory outlook in Washington, Wall Street is taking note of the new margins for miners. Just as higher prices and lower costs magnify margins for traditional commodity producers, higher bitcoin prices and lower energy costs can make mining operations more economical. Beyond the increasing proliferation of bitcoin within investment portfolios, mining operations have become a focus of a new wave of mergers and acquisitions on Wall Street.
Talen Energy’s recent 100% acquisition of TeraWulf’s Nautilus Cryptomine on October 3rd is an illustrative example of this trend. The Nautilus Cryptomine draws its power from Talen’s adjacent Susquehanna nuclear facility. This symbiotic relationship between a Bitcoin mining operation and a traditional nuclear power plant has the potential to become a prototypical model for both cyptominers and energy producers. Nuclear power can supply miners with reliable and relatively inexpensive energy, while miners can supply a consistent revenue stream to maximize the value per megawatt of nuclear power.
As big tech searches for ways to meet its voracious energy demands and policymakers search for cleaner alternatives to secure energy independence, nuclear has increasingly become a nexus for both Wall Street and Washington. On Capitol Hill, senators and representatives have passed nuclear legislation this year with overwhelmingly broad bipartisan support. In an era defined by bitter partisanship, the Accelerating Deployment of Versatile Advanced Nuclear for Clean Energy (ADVANCE) Act passed the Senate by a vote of 88-2 and passed the House by a vote of 393-13. This followed the House’s Atomic Energy Advancement Act and Senate’sFusion Energy Act, both of which enjoyed significant bipartisan sponsorship and support. The White House also recently unveiled a framework to deploy 200 GW of net new nuclear capacity by 2050, tripling U.S. nuclear energy capacity. In short, nuclear now enjoys significant support on both sides of the political aisle.
As legislators look to clear regulatory hurdles for both crypto and nuclear, this dynamic could continue to facilitate a symbiotic synergy between the two. It is a developing trend worth following, given that bitcoin and uranium may continue to be lifted by the same tide as the US shifts its sentiments towards both investments and power production.
