Binance and Coinbase in trouble?
The US Securities Exchange Commission (Ses) has sued the two largest cryptocurrency trading platforms in the world, Binance and Coinbase. The analysis of Claudio Wewel, FX Strategist of J. Safra Sarasin on cryptocurrencies
After a long period of decline that began in late 2021, crypto-assets have seen a remarkable recovery since the beginning of this year. Bitcoin and Ether, which account for about two-thirds of the total cryptocurrency market capitalization, are both up 50% year over year. However, in light of the extreme volatility both cryptocurrencies have exhibited over the years, it could be argued that by historical standards, both have traded within a relatively narrow range over the past 12 months. Also, the correlation between Bitcoin and Ether appears to have gotten tighter. In our view, this suggests that crypto-assets are essentially driven by very similar forces, despite the significant differences in their technological setup.
Looking over the past 12 months, we see that Bitcoin has moved closely with the US dollar, hitting lows when the dollar peaked in Q4 2022 and bouncing back as the US dollar fell. Based on monthly data spanning from 2015 to the present, we can say that on average a 1% trade-weighted US dollar appreciation translated into a 15% decline in the price of Bitcoin and vice versa. The analysis derived from our model reveals two important points:
1 – While statistically significant, break-even inflation contributes only a small part to the overall movements of Bitcoin. Real yields fare even worse, which reinforces our view that the substantial degree of monetary tightening by itself will have little significance for the crypto-asset movement going forward.
2 – Our analysis also reveals that Tech stocks are the second most important underlying driver for Bitcoin, albeit to a lesser extent than the dollar. However, we can see that Bitcoin has started to diverge from tech stocks.
By definition, modeling Bitcoin in a macro framework overlooks the fact that crypto-assets have long been predominantly driven by events and incidents other than what happens on the macro front. Over its 14-year history, Bitcoin has experienced a series of crashes and bear markets. Among them, the theft of 850,000 bitcoins from Tokyo-based former cryptocurrency exchange Mt Gox was arguably the most vicious, dropping Bitcoin from $32 to just $0.01 in a matter of days in June. 2011. In this context, more recent events such as the breaking of the dollar peg of stablecoin TerraUSD in May 2022 and the collapse of FTX in November 2022, both of which triggered declines of around 30%, appear rather moderate.
However, the US government's recent push towards stricter regulation of the cryptocurrency space could represent a major change. Recently, the US Securities Exchange Commission (SEC) sued the two largest cryptocurrency trading platforms in the world, Binance and Coinbase. Both complaints accuse Binance and Coinbase of offering trading services on securities that the SEC believes fall within its jurisdiction.
While we have to wait for the outcome of these trials, the filing of lawsuits against two major cryptocurrency industry players is ample indication that US regulators are finally following up on a broad crackdown on the industry, which had been looming ever since the FTX breakup in November 2022. We think a blanket ban is rather unlikely, given that adoption is already too widespread, but regulatory requirements will only grow in the months and years ahead. This is expected to increase compliance and reporting requirements, which will likely drive smaller cryptocurrency companies out of business. Furthermore, we see the risk that crypto-assets may become less attractive to different groups of investors. To date, impending litigation risk has already caused market makers to substantially reduce their exposures, which is likely to drag on for some time and further deteriorate liquidity in the cryptocurrency space. Overall, we expect the cleaning process to continue. In the course of this process, the cryptocurrency space is likely to consolidate further before hitting a low.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/binance-e-coinbase-nei-guai/ on Sun, 02 Jul 2023 05:16:50 +0000.