Happy New Year and welcome to The Node. This is Daniel Kuhn, here to take you through the latest in crypto news and why it matters. In today’s newsletter:
As Sam Bankman-Fried prepares for his Jan. 3 arraignment in New York, his lawyers have asked the court to redact identifying information pertaining to the two co-signers of the FTX founder’s bail. The legal eagles cited privacy and safety concerns, noting SBF’s parents “received a steady stream” of threats that might befall the separate, as yet unnamed individuals pledging to forfeit $250 million (supposedly) if SBF skips court. Meanwhile, the Bahamas Securities Commission issued a press release claiming current FTX CEO John J. Ray has made “material misstatements” when alleging collusion between FTX and the Bahamian government. This comes after Ray discounted claims Bahamian authorities are safekeeping $3.5 billion in FTX assets, which are more likely to be severely devalued FTT tokens, and continues to deny Bahamian liquidators access to FTX’s internal systems amid a jurisdictional turf war.
Nothing Exchanges?
In an open letter Monday, Gemini co-founder Cameron Winklevoss claimed crypto broker Genesis Global Capital and its parent company, DCG, have been stonewalling for six weeks on making a repayment deal related to $900 million worth of customer assets tied up in Gemini’s frozen lending service that were lent to Genesis. DCG CEO Barry Silbert responded over Twitter that a proposal was made on Dec. 29. This comes as investment firm Valkyrie bids to manage DCG’s “crown jewel,” the Grayscale Bitcoin Trust, which has been trading at a steep discount. Separately, Bithumb Holdings’ ex-chairman was acquitted of 130 billion-won ($100 million) fraud charges in Korea related to a failed acquisition deal by a cosmetic surgeon while Bitstamp’s ex-CEO takes a new gig as chief executive of Zodia Custody. Finally, Bernstein’s analysts have called Binance solvent, liquid and stable amid concerns of legal challenges and insolvency for the world’s largest crypto exchange.
Taxes, Losses
The U.K. is enforcing a tax exemption for foreign investors purchasing crypto through local money managers or brokers starting Sunday. The tax break, announced in December, is a part of Prime Minister Rishi Sunak’s plans to turn the U.K. into a crypto hub and attract “global investors” the government’s tax arm, the HM Revenue and Customs, told CoinDesk. In other news, a new startup called Unsellable has bought over 9,000 nearly “worthless” NFTs from investors looking to offload capital gains tax through tax-loss harvesting. Semi-relatedly, blockchain audit firm CertiK found that December was 2022’s lowest month in terms of hacks, scams and attacks with proceeds totaling $62 million. Some $3 billion worth of crypto was lost due to hacks and other exploits in 2022.
Sound Bites
“[Developers] are picking to build on Solana because the network has similar performance characteristics to Web2 services.”
– Solana Foundation head of strategy Austin Fedra, on CoinDesk TV’s “First Mover”
The Takeaway: Mining Outlook
(Eliza Gkritsi/CoinDesk)
In a recent piece titled “Crypto will be fine,” former CoinDesker Brady Dale noted that even though crypto has taken a beating throughout the year that was, there are some indicators that remain bullish. Notably, Bitcoin’s hashrate (how much computational power is directed towards securing the network) remains steadfast.
“If the industry were dying, these miners should be winding down. They aren’t,” Dale wrote. Indeed, according to Blockchain.com data, Bitcoin’s hashrate is just a ways off its all-time high set in November, 2022.
Bitcoin’s hashrate rose steadily over the past 12 months even as the network’s token, bitcoin, lost over two-thirds of its value. For many, this is a sign of faith in the long term success of the world’s largest cryptocurrency network.
Of course, there’s more to the story than a single statistic. As Compass Mining’s Zack Voell (another ex-CoinDesker) detailed in a Monday report, the Bitcoin mining industry took a series of beatings in 2022.
In his catalog of “all of the bad things that miners suffered” found that at least four executives of major mining firms resigned over the year, six lawsuits have been filed against mining companies – for reasons stretching from breach of contract to zoning rule violations – and stocks for publicly-traded mining companies are in the doldrums.
Additionally, two mining companies, Core Scientific and Compute North, filed for bankruptcy while Celsius and BlockFi, two bankrupt crypto lending firms with sizable mining wings, are likely going to have to restructure their operations. Another two mining companies, Marathon and Argo, are also at risk of declaring bankruptcy.
The situations vary by firm, but the main causes of the issue stem from BTC’s depressed price and, often, poor treasury management. My colleague George Kaloudis simplified the picture by saying that over the last few years many mining companies pursued accelerated growth strategies financed by debt and other investments while often choosing to hold onto their mined coins.
“Many miners acted too deterministically,” projecting bitcoin would hit $100,000, Juri Bulovic, head of mining at crypto mining and staking firm Foundry, which is owned by CoinDesk’s parent company, Digital Currency Group, told CoinDesk’s Eliza Gkritsi. The situation worked well when bitcoin’s price was rising and the cost of financing expansion was cheap – two things thrown off course amid macroeconomic uncertainty and rising interest rates.
Although the mining sector is in a precarious position – fueled in part by unprecedented deployment of state-of-the-art mining equipment order and deployed during the heady days of 2021, when bitcoin hit a high of $69,000 – the industry isn’t likely going to be wiped off the map. In addition to battle-tested firms deploying better treasury management, there are also a line of new financing options coming online – like derivatives options from Two Prime, which could allow miners to hedge their risk over mining bitcoin in a similar way as in other commodities markets like oil.
More capitulation and bankruptcies could come, and unprofitable miners may be taken offline. But considering the global sprawl of the mining industry, the sectors’ committed activist investors and supporters and the growing importance of mining within the hydrocarbon and wider energy sector mining will remain. And the business might be better for its recent troubles.
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Off-Chain Signals
OG Bitcoin dev Luke Dashjr claims he lost 200 BTC after his PGP key was compromised (Protos)
Grayscale’s ETH trust also setting record discounts, trading at -60% the underlying price of ether (The Block)
Ukrainian pharmacies are using Binance Pay (Cointelegraph)
World Economic Forum writes about crypto’s outlook. Sees blockchain and cryptography as “integral” to a modern economic toolkit (blog)
Economist Tyler Cowen looks to history to find fault with poorly designed possible crypto regulation (Bloomberg Opinion)
Is Portugal still a tax-minimizing destination for bag holders? Not likely … (International Tax Review)
