MarketVector’s Memecoin index jumped to a high of 300% while Coinbase’s index of major Altcoins only reached a peak of 134%. The divergence is even more extreme in small caps. 

There are 3 main reasons for memecoins outperforming altcoins and major opportunities hiding behind these issue:

1)Investors are disillusioned with technology projects

For the last 7 years, the new cryptocurrency world cycled through a succession of buzzwords, and misunderstood and premature narratives like Blockchain for Everything, DeFi and NFTs.  

This buzz fed two bubbles (and crashes) of altcoins in 2017 and 2021, losing tens of billions of dollars for people who believed the stories. After being fooled twice, no one believes the crypto tech promises without proof.

Memecoins are teaching this market a lesson about coin distribution, technology and hype. Beyond Bitcoin devotees, even popular trading podcasts like 1000x share their thesis that “nothing is real so you might as well buy memes.” 

2) SEC enforcing security laws 

On the other side of the spectrum, Uniswap token represents a DEX with over $1 billion in daily volume with over $300,000 a day in fees to liquidity providers. However, there’s no link between the token and the protocol's popularity due to the issues around security laws. Profitable infrastructure like this is prevented from naturally sharing its profits with token holders. Speculators today take this into consideration.

3)VCs’ easy profits in the spotlight

In 2024 the crypto space, at last is aware of “how the hot dog is made” when it comes to funding token companies. VCs and founders usually get a big part of the total market cap of a token, for dirt cheap compared to the public. 

The VCs and founders are fully incentivized to promote the project to the retail public while quietly selling their tokens for millions, hundreds of million and sometimes even billions. When the hype dies down they just move on to the next thing.

Today the profiteering role of crypto VCs is scrutinized and analyzed on social media, projects are nicknamed ‘VC coins’ and pages like VC Printer track the unlock dates and amount of coins in the hands of founders and VCs.

Memecoins on the other hand are usually being launched at tiny marketcaps with around 10% distribution to founders and 90% available to the public on launch. This doesn't necessarily lead to a fair distribution, but the very low market cap on launch offers a better opportunity to random people on the internet. Disillusioned speculators rather enjoy this pure casino atmosphere, especially when they don’t believe tech or utopian stories anymore. 

Welcome to the futuristic casino

Today, the regular gambling industry generates 30% more revenue than the gaming, music, and movie industries combined.

The cryptocurrency ecosystem represents part of the next generation of global gambling entertainmet.

Profitable infrastructure around this ecosystem continues to expand and presents many opportunities for those interested in being part of this futuristic casino. For instance, pump.fun allows users to generate memecoins on Solana, earning approximately over half a million dollars daily.

Decentralized exchanges (DEXs) and other platforms are also an integral part of these expanding activities. 

Crystal ball predicts success

As usual the crypto industry herd is going too far, and have definitely thrown out the baby with the bathwater. Real crypto projects and tech do exist and can be built; for example Arweave, which happens to be one of our partners. Anyway, networks like Arweave are completely undervalued.

The disillusionment with fake or useless tech and lack of profit models is a sign the industry is maturing. Energy and resources will start going in better directions. It’s no longer too early to build real infrastructure and applications for the cryptocurrency world. Builders will, of course, need to think carefully about what they're creating. The crypto industry isn’t used to thinking carefully about anything, so that’s probably the biggest challenge.

Now is the best time to build a real innovative technology or service company in the Bitcoin and altcoin space. It’s no longer too early for the real use cases to shine so the next few years are going to be very interesting.

efrontier.io/ sales@efrontier.io

The issuing of electronic currency directly from a central bank (CBDC) is dangerous for individual freedom. It replaces bankers with bureaucrats, allows instant and personalized monetary policy, has built-in state surveillance and is controlled by an independent non-elected bureaucracy. It's a mystery why electronic sovereign currency cannot be issued by a country's treasury or even post-office. 

That said, there is a need to replace the slow and antiquated international SWIFT system with something, as its current network isn’t much faster than when it launched in 1977. So for now CBDC is the buzzword. 

In this new multi-polar world if the US dollar wants to stay on-top it needs an upgrade. The head of the Federal Reserve, Jerome Powell, stated several times they are not planning on issuing a CBDC.  For good reasons: why would international traders trust a system where they’re one click away from confiscation or freezing?

In 2021 the inter-bank SWIFT network expelled Russia and the US confiscated Swiss bank accounts of Russian businessmen. The United States is wise enough to know launching a CBDC would be even less appealing for anyone who has a shaky relationship with the US. 

Now some extreme, but warranted, speculation;

Technologically, Bitcoin is the next generation of the SWIFT network. Its ‘game theory’ innovation and decentralized record keeping is unbreakable even if its cryptography may be cracked eventually. It’s a truly trusted, transparent and fast international money network. 

Even if a bug is found or after quantum cracking, the distributed system could likely be reset and become trusted again. This cannot be said for tech companies or banks, which are protected by similar cryptography.  

In a world free of power struggles, 195 countries can opt for settlement between foreign currencies on Bitcoin due to its transparency, reliability and relative speed or maybe create a delegated proof-of-stake controlled blockchain of their own, where each country held a node, with equal voting rights. Unfortunately, this is not on the menu right now.

Back to today, Tether USDt, founded by Brock Pierce in 2016, is a Bahamian company that issues the USDt token- a US dollar token running on open-blockchains like Etherum, Bitcoin and Tron. It increased in market cap from $1.8 billion in 2018 to over $110 billion today, settling hundreds of billions of dollars a month, and it’s not slowing down. It allows people, even in countries where the dollar is sanctioned or limited, like China and Nigeria, to use and exchange US dollars.  

We ourselves at Efficient Frontier, being a crypto-native trading firm, have moved tens of millions of dollars across borders in minutes using USDt Tether, as it’s the most convenient method for us. We understand from our own experience its huge advantage.

Is the United States government also aware of Tether’s value?

The US has shut down and even seized several offshore crypto exchanges over the years and it seems like there’s nothing they can’t do if they set their mind to it. Lately Binance exchange was fined $4 billion dollars for avoiding American anti-money laundering and securities regulations. The same government allows Tether USDt to continue to operate from Deltec Bank bank in the Bahamas. 

USDt brings the dollar to the global black market, and it’s also arguably one of the reserved currencies of the crypto space, along Bitcoin itself. Despite that, Tether had few restrictions and no real audit, serving as a backbone of off-shore crypto-markets like Binance. 

Tether’s USDt solution seems workable for an international sovereign currency in the internet age- controlled by a commercial entity, backed by the United States as a currency, easily moved, open-source so you don’t have to register to use it, and automatically confirmed transactions on the blockchain unless you get into some serious trouble. 

On one hand all transactions are public, on the other hand, it’s hard to control who uses it. It’s kind of perfect.

Will the US government allow tether to grow from today’s $111 billion into trillions? Will it introduce a more official USD open-blockchain token once Bitcoin becomes generally trusted? And what would this mean for Bitcoin as a settled settlement layer? 

Tell us what you think. 

efrontier.io | sales@efrontier.io

Note from our CEO

Dear partners and network,

I am pleased to share a few excellent updates. First, we’ve seen healthy growth in trading activity and volumes, have ramped up activity in a new major exchange and also enjoyed a significant expansion in new partnerships.

To support this expansion we're looking to fill around 10 new positions in our back office, sales, DevOps, and customer success. You’re welcome to send talented and motivated people our way. 

On a completely different note, recently we've bid farewell to Tim Freed and Alon Ohayon, two central figures in our company. Both were instrumental in guiding us through the bear market. I wish them both fulfilment and success in their upcoming ventures. 

Best regards,

Yohai Rayfeld

Team update

• We’re thrilled to welcome two talents. Joining our trading desk is Data Analyst Eden Abramov who holds a magna cum laude degree in financial mathematics. Tom Shanaider is joining as an Account Manager after doing blockchain research at KPMG. Welcome!

• Conference: Zach Reingold our Head of Ecosystem had a great time at NFC Lisbon.

• Last week our research department went on a team building outing in the desret. Anyway, several HFT trading secrets are hidden in the image below, can you find them?

  

Who are you going to trust?

The US won't issue a Central Bank Digital Currency (CBDC). 

The issuing of electronic currency directly from a central bank (CBDC) is dangerous. It replaces bankers with bureaucrats, allows instant and personalised monetary policy, has built-in state surveillance and is controlled by an independent non-elected bureaucracy. It's a mystery why electronic sovereign currency cannot be issued by a country's treasury or even post-office. 

That said, there is a need to replace the slow and antiquated international SWIFT system with something, as its current network isn’t much faster than when it launched in 1977. So for now CBDC is the buzzword. 

In this new multi-polar world if the US dollar wants to stay on-top it needs an upgrade. The head of the Federal Reserve, Jerome Powell, stated several times they are not planning on issuing a CBDC.  For good reasons: why would international traders trust a system where they’re one click away from confiscation or freezing.

In 2021 the inter-bank SWIFT network expelled Russia and the US confiscated Russian businessmen's Swiss bank account. The United States is wise enough to know launching a CBDC would be even less appealing for anyone who has a shaky relationship with the US. 

Now some extreme, but warranted, speculation;

Technologically, Bitcoin is the next generation of the SWIFT network. Its ‘game theory’ innovation and decentralized record keeping is unbreakable even if its cryptography may be cracked eventually. It’s a truly trusted, transparent and fast international money network. 

Even if a bug is found or after quantum cracking, the distributed system could likely be reset and become trusted again. This could not be said for tech companies or banks, which are protected by similar cryptography.  

In a world free of power struggles, 195 countries would likely opt for settlement between foreign currencies on Bitcoin due to its transparency, reliability and relative speed or maybe create a delegated proof-of-stake controlled blockchain of their own, where each country held a node, with equal voting rights. Unfortunately, this is not on the menu right now.

Back to today, Tether USDt, founded by Brock Pierce in 2016, is a Bahamian company that issues the USDt token- a US dollar token running on open-blockchains like Etherum, Bitcoin and Tron. Jumping from $1.8 billion in 2018 market cap to over $110 billion today, settling x dollar a month, and it’s not slowing down. It allows people, even in countries where the dollar is sanctioned or limited, like China and Nigeria, to use and exchange the US dollars.  

We ourselves at Efficient Frontier, being a crypto-native trading firm, have moved tens of millions of dollars across borders in minutes using USDt Tether, as it’s the most convenient method for us. We understand from our own experience its huge advantage.

Is the United States government also aware of Tether’s value?

The US has shut down and even seized several offshore crypto exchanges over the years and it seems like there’s nothing they can’t do if they set their mind to it. Lately Binance exchange was fined $4 billion dollars for avoiding American anti-money laundering and securities regulations. The same government allows Tether USDt to continue to operate from Deltec Bank bank in the Bahamas. 

USDt brings the dollar to the global black market, and it’s also arguably one of the reserved currencies of the crypto space, along Bitcoin itself. Despite that, Tether had few restrictions and no real audit, serving as a backbone of off-shore crypto-markets like Binance. 

Tether’s USDt solution seems workable for an international sovereign currency in the internet age- controlled by a commercial entity, backed by the United States as a currency, easily moved, open-source so you don’t have to register to use it, and automatically confirmed transactions on the blockchain unless you get into some serious trouble. 

On one hand all transactions are public, on the other hand, it’s hard to control who uses it. It’s kind of perfect.

Will the US government allow tether to grow from today’s $111 billion into trillions? Will it introduce a more official USD open-blockchain token once Bitcoin becomes generally trusted? And what would this mean for Bitcoin as a settled settlement layer? 

Tell us what you think. 

efrontier.io /sales@efrontier.io

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Quick background

The FlashBots network, unlike the Ethereum blockchain, is not public. It was built to allow Ethereum users to pay miners extra in exchange for priority in including their transaction in blocks, skipping the line to this public database. This ‘bribing’ of miners facilitates front-running of normal on-chain traders. This practice, nicknamed MEV, netted over $1 billion in profits since 2019. 

FlashBot operators are usually unable to see or modify transactions they are relaying, but the Pepaire-Bueno brothers found a bug. They relayed a block after slightly changing it to make it invalid. As a result the system automatically exposed the content of the block. Then, the brothers modified the transaction data to suit themselves, signed it and broadcasted it to the miners, this time without the mistake in it. 

Why were the brothers arrested while MEV front-runners are free? 

The brothers ‘skimmed’ the $25 million by finding a bug which let them bypass the normal functionality of the FlashBot system. Now that the bug has been discovered it was fixed. In contrast, the practice of MEV uses normal blockchain rules to front-run traders, and this can not be fixed. But you can also argue that the FlashBot network itself helps MEV traders game the normal Ethereum network.

Another answer may be in the definition of front running. Illegal front running is defined as using privileged information to gain an advantage for example, a stock broker front-running a client. Using public Ethereum transaction information for profit isn't obviously illegal front-running. 

MEV is not off the hook though. While you can say MEV is just arbitrage, arbitrage has a function in markets- it improves liquidity and lowers prices in addition to raising them. MEV only hikes prices, sometimes substantially. Miners and front runners are the only ones benefiting.  

Everyone else, the everyday users of the Ethereum network, are manipulated. It’s definitely possible to categorize this practice as not front-running, serving no purpose but hiking prices for profit. It’s possible that continued regulation of blockchain activity will put MEV in question as well. 

What’s clear is that the DOJ is watching activity around DEXs and DeFi closely and taking regulating seriously. Their 19-page detailed report on the matter proved they have access to people who understand these technologies and activities well. Arresting people for ‘wire-fraud’ on the Ethereum blockchain is a big step and a huge signal to all operators across all blockchains.Furthermore, their ability to arrest them shows additional expertise. We’re now in yet another new phase of cryptocurrency regulation. 

efrontier.io / sales@efrontier.io

Dear clients, partners, and network,

It has been gratifying to witness the recent months' growth in the crypto market, which has borne fruit for us and our partners. As summer approaches and the crypto markets begin to quiet down, this is an opportune time for review and process improvements before the market heats up again.

Your trust has been essential to our success in 2024, and for that, we extend our heartfelt gratitude. With your feedback, we continue to develop new products and trading technology to provide the best solutions for both our existing and new clients.

"A violent wind does not last for a whole morning; a sudden rain does not last for the whole day." 

Wishing you all a wonderful summer season,

Yohai Rayfeld

Chart of the month

May’s memecoin craze saw The Block’s Memecoin Index rise from 145 to a peak of 386 on the last day of Q1. April followed with a new record of 74,000 tokens listed to DEXs (on-chain exchanges) in one month, with a flurry of listings on Ethereum, Solana, Base and others, as you can see in the chart below.

Team update

Summer is also conference season and we’ll be present at all major gatherings:

• Roei Levav, our co-founder and Zach Ringold, Head of Ecosystem, will represent us at Berlin Blockchain Week from May 18th to 27th. Then Roei will head to Coindesk’s Consensus in Austin Texas from the 29th to 31st of May.

  

• After surviving Dubai, our VP of Sales Andew Tu will join Roei at Consensus.

We recommend being bored

Financial markets, especially in recent decades, and even more in cryptocurrency markets, largely function around human psychology and take us for a volatile trips. The “correction” over the last two weeks took many from euphoria to despair. But most tokens are 2-3 times higher than they were 18 months ago and most major tokens (and of course Bitcoin) remain more than one hundred percent higher than November 2023’s lows. Most importantly, this is only the first leg of the usual 4 year Bitcoin cycle

Normal cycle activity 

Our take is not very original but it’s probably correct. ‘The Bitcoin ETF run up’ was in tune with the previous 2 halving cycles. There’s no reason not to expect a continued strong uptrend down the line in 2024 or early 2025. 

Recent moves in Bitcoin show in our opinion a strong similarity with the 2016-2020 halving cycle, where Bitcoin ran up from around $3,000 to $15,000 in the summer of 2019, correcting and crossing that threshold only 18 months later, in the final leg of the 2019-2021 bull run.

Two fundamental trends are gaining an undeniable foothold 

The first is the continued build out and liquidity of institutional infrastructure for Bitcoin trading. 

BTC options and futures at the century old CME today total $10 billion in OI. US ETFs have an additional $11.2 billion in holdings. Deribit options trading is also breaking records. In other words, the ground for mainstream investment  in Bitcoin is - at last - ready. 

On the tech side, distributed on-chain exchanges, the leading use case for non-Bitcoin cryptocurrency, is booming. 

DEXs have regained their uptrend against CeFi spot exchanges with a much higher money velocity. DEX volumes rival 2021 with much less TVL (for now).  

This trend is a direct result of the advantages of crypto’s open source finance:

-No hurdles: Permissionless DEXs don’t vet assets or customers, so the asset and customer base are almost limitless.

-Immediacy: Listing of assets and signing up is almost immediate. 

Compared to regulated exchanges, there’s no wonder that DEX popularity is growing, which continues to solidify the success of cryptocurrency.

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With volumes up across the board and growing deal flow, we decided to strengthen our operations and are hiring for additional positions. We’re looking for talented and motivated individuals to fill the roles of QA, client services, sales and sales analyst.

If you know anyone interested, please send them our way.

Best, 

Yohai Rayfeld

Chart of the month

Bitcoin traded on Wednesday above $73,000, at a market cap of $1.44 trillion. On Monday, the Bitcoin market cap passed silver’s and Meta’s. Today, Bitcoin is one of the world's biggest currencies by market cap and the most easily auditable and transferable one. 

Bitcoin hit its previous ATH on November 9th 2021. At that time 777,800 additional bitcoins were yet to be mined, adding $56bn to Bitcoin’s market cap at this price. 

Blogs and Feeds

• This month, we shared analysis of the changing market dynamics brought on by the new Bitcoin ETFs.

• Recently Starship announced our collaboration in which we provide liquidity to support their fundraising ecosystem. 

Team update

Anyone going to London? Roei Levav, Efficient Frontier's co-founder, was at ETHGlobal and will be next week at Digital Asset Summit 2024. Our Head of Client Services, Tim Freed, and CTO Alon Elmaliah, will also be joining at DAS.

Please feel free to reach out to sales@efrontier.io if you want to set up a chat during these events.

Efficent Chef. On February 21th some of our team attended an Italian cooking workshop, thanks to the dedicated planning of our office manager GalYaeli Nahum. 

Bitcoin’s IPO

If Bitcoin had a CEO this would be its IPO moment. Like gold in 2004, the changes to our markets structure, valuation and perception are likely to be some of the biggest yet. Now, anyone trading in the US markets and soon in The London Stock Exchange will be able to buy exposure to Bitcoin in their bank account.

The first Gold ETF was listed on the NYSE in November 2004. Seven years later, gold peaked at $1,700 with fear of inflation and collapse of the global financial system. Despite the events of the 2008 financial crisis, US stocks kept rising as the Federal Reserve created four rounds of QE (Quantitative Easing- a method of dollar creation).

The official Federal Reserve balance sheet has grown from $0.87 trillion in 2007 to $7.63 trillion today. QE1 in 2008 reached $2 trillion, QE2 0.6 trillion, QE3 $4.5 trillion and QE4 in 2020 $2 trillion. 

Inflating the dollar system 

For the last 10 years, capital that would have gone into gold before the invention of Bitcoin in 2009, has flown into the crypto markets. Total cryptocurrency market capitalization grew from $1.6bn in mid-2013 to $2.7 trillion. About 50% of this is Bitcoin, by far the most liquid crypto assets. 

Since a low of $618 in 2008 gold's market cap roughly tripled, adding $10 trillion. But gold has stagnated since 2014, when Bitcoin started coming into its own, with for example, the launch of BitMEX’s perpetual BTC swaps. 

From 2008 to 2024 the S&P 500 increased by 880%, representing a market cap increase of about $30 trillion. During these years inflation soared, as the United States’ GDP (Gross Domestic Product) grew by less than 40%. In our opinion this difference between real economy growth (GDP) and stock prices, is due largely to monetary inflation. 

As Global assets and currencies led by the US dollar continue to inflate, the CEO of BlackRock said this week that Bitcoin is digital gold and that it is bigger than any government. Would it be trite to say that the sky's the limit for now?

How high

Our 2020 blog post “Entering the Greed Zone” reviewed what happened the last 3 times (now 4) after clean breaks of the former all-time high in BTC. Basically, some kind of blow off top played out again and again as Bitcoin has ballooned and went from millions to billions and now trillions. 

Now is the first time since 2012 (when one Bitcoin traded in single to double digits) that the all-time high price was broken before the halving, which is still over a month out. This hints at how unique this Bitcon cycle may turn out. BlackRock’s endorsement of Bitcoin should not be underestimated. 

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Since 2018, perpetual Bitcoin swaps dominated Bitcoin’s pricing, becoming the most liquid Bitcoin market since 2019. Now, American ETFs are becoming more dominant in setting the price. Additionally, CME Bitcoin futures have overtaken Binance in open interest (the amount of money betting on the contract) for several months. We’ll look into how dominant the ETFs are becoming in our next post. Next, we will look at some of the interesting changes and events in the market following the ETF launches:

The launch of US Bitcoin ETFs on January 11th was followed by a drop to $38,500 on January 22nd. In the following weeks metrics like Bitcoin futures funding rates and volume, which usually explode during Bitcoin rallies, were eerily quiet as Bitcoin rose by 43% percent to $54,500.

Meanwhile institutional-size accounts— accounts holding tens of millions of bitcoin per-blockchain-address— accumulated 247,500 BTC.

The entire month of January was marked by retail selling to whales. Crypto native traders only stopped being apathetic when price passed $54,00 on Tuesday February 26th.

On-chain sleuths say they identified many of these accounts as belonging to ETF issuers such as BlackRock, due to their correlated with the sums and timing of the public ETF inflows.

On Tuesday, after breaking $54,500 the crypto native market woke up and funding spiked as well as volumes. An exhilarating jump to close to $65,000 with over $1 billion in ETF inflows commenced.

Sign of life from the retail audience and high prices signaled some big investors to cash out. According to the on-chain analytics- while bitcoin jumped from $57,000 to $61,000 - 133,000 bitcoins were sold, netting around $6.66bn. This was the biggest one day of profit taking in Bitcoin’s history, counting in dollars.

efrontier.io

The entire market rallied in the 3 months leading up to the approval, with many tokens increasing hundreds of percent. Now with the unlocking of Grayscale, allowing billions worth of formerly ‘trapped’ Bitcoins to be sold, and 90 more days to halving, all eyes continue to be on Bitcoin.

Note from our CEO

The last period of growth benefited us in four ways: It increased our trading volumes, expanded the value of many of our clients’ tokens, brought us several new exchange deals and created more robust token launches. 

As a liquidity provider we were very satisfied with the recent launches we facilitated. Volatility was relatively mild and the tokens quickly found support. This is a great sign for things to come.

Happy new year,

Yohai Rayfeld

Chart of the month

The image above is a crypto futures ‘heatmap’ from CoinGlass, showing the excitement and market over-heat leading to the Bitcoin ETFs announcement and the following cool down. The chart marks in colors the last 6 months of premiums paid to speculate on cryptocurrencies. The bright yellow shows the period between December 27th and January 2nd when speculators paid over 50% annualized interest to bet on price increases. Currently premiums are back below 10%.

Blogs and feeds

Gaming is one of the hottest narratives in crypto, so this month we shared on the EF blog a deep dive on the subject. The article overviews in-game economies, taxation of creators and how The Sandbox stands to change it all.

Team update

• We're happy to welcome Tom Patreanu, the new addition to our excellent 24/7 monitoring team. Tom is studying to be a full-stack developer with an avid interest in economics and cryptocurrency markets.

  

• Conferences: Our research analyst, Sara Wiesner, was at 37C3 in Hamburg, the yearly digital rights and futurism focused event. 

January commentary  

Days after FTX’s collapse in November 2022, we wrote: 

“This is the equivalent of a forest fire.  As bad as it is, it will clear the forest of debris, open it up to sunlight and create fertile ground for the next period of growth.” The recent ETF hype cycle and price lift-off shows the foundation is there for the next period of real growth in Bitcoin. 

Galaxy Digital forecasted an inflow of $125bn to $450bn in Bitcoin ETFs in the next few years, assuming 10% of global funds will allocate 1% of their assets. “We expect other markets to follow the US… A wide range of other investment vehicles are likely to add Bitcoin to their strategies.'' they wrote. 

As long as all the 11 ETFs approved by the SEC on January 10th are managed with transparency, they’re a huge positive for crypto prices. But there are many eyes on blockchain analytics ready to count how many BTCs are held by each ETF at any time.

Efrontier.io

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Note from our CEO

Dear Clients, Network, and Friends,

We’ve seen recovery in volumes across the market and our client base, and are glad to see 2023 is coming to a positive conclusion for the market and for our company. 

Time has quickly passed this month as we actively engage in prominent industry and unveiled an advanced reporting system tailored to meet the diverse needs of our clients.

"Nature does not hurry, yet everything is accomplished."

Warm regards,

Yohai Rayfeld

Chart of the Month 

CME open interest in BTC futures. The Open Interest in the CME Bitcoin contract (in green) is 30% below its all-time high of $5.36 billion. The last time this much capital was betting on Bitcoin’s price through the CME was in December 2021, when Bitcoin traded for $58,600. CME activity reflects business from institutional and traditional financial entities. 

Blogs and feeds

• EF Blog: Insights from Hong Kong Fintech Week

Our VP of Sales, Andrew Tu, shares his keen insights on the Hong Kong conference, the local ecosystem and the last 2 months meeting with crypto companies in Asia. 

• Looking back: The FTX debacle and the future of crypto

“On the fallout of the $10+ billion black hole in one of crypto’s most loved exchanges and why we think this awful event will not impact the long run success of cryptocurrency tech". Let's look back now.

Team update

• Conferences:  Zach Reingold, our Head of Ecosystem, took part in BreakPoint 2023, Solana’s annual community conference in Amsterdam. Andrew Tu, our VP of Sales, attended Hong Kong Fintech Week.

• This month we’ve welcomed a promising addition to our trading room-Monitoring Officer Evyayar Haim.

Commentary: Springtime for Bitcoin

We concluded our September 7th newsletter writing “Coupled with a shortage of sellers, ongoing adoption, and the cyclical nature of Bitcoin prices, we hold a positive outlook heading into 2024.” 

Now, with the catalyst of BlackRock’s vocal  support and anticipation of an American Bitcoin ETF, Bitcoin and crypto trading are awakened from their slumber. The small boost in buyers combined with the lack of sellers drove up BTC by over 30%.  

Real liquidity 

Bitcoin’s ascent for the $25,000 to $31,000 following the November 16h ETF rumor was on a 2 year low in spot volumes. It was the same money that’s been sloshing around for the last year since FTX’s demise.

When Bitcoin broke above the July high of $35,000, the fun started. Spot volumes jumped, as well as market depth. As trader Avi Feldman noted- altcoins kept going up with Bitcoin, another sign of fresh entrants to the crypto sphere.

In conclusion: It’s alive! But a sign of a life is not the same thing as an ‘up only’ market. 

Sizeable public interest is nowhere to be found (yet), as we can see from the social media slumber:

These facts have a positive twist: If a rumor and a few words from BlackRock got Bitcoin to $38,000, it’s jarring to imagine where actual, substantial interest would take this market.

What would create public interest? Well, as we’ve shared above, CME open interest and the 2-year high of $1 billions of inflows to stock market traded crypto products shows that the institutional world is making this bet. Who are we to mock their vision? 

If a bit of new liquidity is rain, and institutional interest is fertilizer, to complete the spring metaphor all we need is some time and decent weather.

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EFrontier.io

What were your expectations from Hong Kong Blockchain Week?

I wanted to see if there was reality to the marketing of Hong Kong as a renewed center for crypto in Asia and learn about the current Hong Kong ecosystem.

Is Hong Kong the new crypto center?

They're definitely trying. It’s very nascent still in terms of giving out licenses and in terms of traditional finance participating in the ecosystem. KuCoin, OKX, Gate.io and Huobi are still applying for the HK VASP license. Traditional banks are not yet at the point of offering banking to crypto businesses and custodying crypto but some fintech/neo-banks are offering banking services to crypto companies.

What did you learn about the Hong Kong ecosystem?

The Hong Kong ecosystem is definitely still composed more of asset management, trading and financial services than builders. There are a lot of venture funds, family offices, and exchanges but still not many crypto projects.It’s not surprising and in-line with my expectations. Of course there are a couple bigger players like Animoca and some DeFi / Fintech projects like Infinity and Reap but it’s clear that the crypto ecosystem here is dominated by the finance side. 

The government is definitely  trying to support crypto builders. They’be built two organizations that invest in crypto startups, HKSTP and Cyberport. They both include a VC, an accelerator and provide grants for startups. 

There’s not been so much news about this in the West but this year there was a huge, $1 billion scam in Hong Kong called JPEX, which put a dent in the reputation of crypto amongst retail in HK. It wasn’t a licensed exchange but it makes crypto seem illegitimate, similar to the FTX effect last year. We need to see how supportive the local government will be of Web3 following this.

What was Hong Kong Fintech Week like? 

There was a lot of traditional finance presence at the conference. It was a mix of web3 and fintech, so HSBC, Standard Chartered, DBS (one of the few traditional banks in Hong Kong that accept crypto businesses) were there. A lot more suits than a typical crypto conference for sure.

Last time you were in Hong Kong was in 2019, how has it changed?

When I was last there, the city was embroiled in protests. Since then, Hong Kong has definitely become even more quiet, as strict Covid policies and political turmoil have driven a lot of expats and youth out of the city. It’s definitely not the same city it once was.  It’s less vibrant, and there are noticeably fewer people in LKF and Central (the business and expat district), though some people are moving back in.

Tell us about the crypto side of HK Fintech Week

Animoca Brands was the crypto company that had the biggest presence at the conference and gathered a lot of its portfolio companies and subsidiaries in town for this event. Sandbox had a whole creator day, where I sawa lot of different games being built on Sandbox. I went to the TON demo day, RWA event, OKX VIP event (a meetup for OKX VIP clients and network) and a Cyberport event.

What did you think about the crypto gaming offerings?

Sandbox reminds me a lot of Roblox. The fact that Sandbox is an open world is very interesting. It feels like eventually something in the gaming sector will stick as long as people create something fun and create the right tokenomics. I don’t know if it will ever be decentralized, but having an NFT element and maybe having a token.

In the last two months you’ve been to Korea, Thailand, Indonesia and Hong Kong, what are your takeaways? 

The consensus among Asians is that the builders in the west are the ones willing to be on the bleeding edge of tech, and the Asians are the practical ones, the ones using proven ideas and building consumer apps. 

In Hong Kong it’s mostly service providers, traders, and financiers. In South Korea, crypto is an outlet for gambling because gambling is fully banned. Most of the Korean projects are games, and there are a lot of them. A bit of DeFi too. Nexon, which is one of the biggest gaming companies in Korea, has partnered with Polygon and a lot of other gaming companies in Korea are testing out crypto partnerships. If there ever is user adoption, I think it will come first from Asia with crypto gaming. 

efrontier.io

Note from our CEO

Efficient Frontier’s HQ is in Tel Aviv and obviously things are not as usual. The events of the past week have been profoundly unsettling. Together with our friends in the Tel Aviv crypto startups scene, our Crypto Aid Israel initiative so far has raised over $170,000, to help the families who lost loved ones or had to leave their homes. 

To contribute through this effort, please go to cryptoaidisrael.com (beware of copycat addresses).

As an international company serving clients from many different locations, we are dedicated to keeping up our level of service and continue to earn the trust you’ve placed in us. 

We appreciate you care and trust.

Sincerely,

Yohai Rayfeld

Chart of the Month 

Ethereum ‘Whales’: The chart above displays Ethereum's price in black since October 2019. The blue line represents the number of Ethereum addresses holding over 10,000 ETH, as recorded on the blockchain. These addresses are considered large, or ‘whale’ investors. 

In the red square we marked a recent decoupling between the number of ‘whale’ addresses and the price of ETH, showing a decrease of 145 ‘whales’ since February 2023. This sparks the question: Where are they going and why? 

Blogs and feeds

• EF Blog: Industry upgrade

  On the evolution of crypto exchanges over the last half-decade from the viewpoint of HFT trading.

• X/Twitter Feed: Chiming in again on the market making discussion.  A short insight into daily market-making operations.

• Podcast: Navigating the crypto ecosystem with Andrew 

  Andrew Tu, our VP of Sales, was interviewed on HashTalk.  A rare chance to hear Andrew’s expert view on our industry.

• EF Blog: Market making 101 

  Following recent online discussion, we answer the question that confuses many internet users: What the heck is market making? 

Team update

Conferences: Our Co-founder, Roei Levav, attended ETH Milan.

Kudos to Tim Freed, Head of Client Services and Growth, for spearheading our involvement in CryptoAidIsrael.

Commentary: Fear of FTX’s Liquidations are Overblown

FTX liquidators published a new summary of the bankrupt exchange’s holdings, valued at $3.5 billion. The initial news triggered a quick sell-off, but this has since recovered for good reasons. The liquidators' sales of Bitcoin and Ethereum may reach up to $100 million per week, totaling $752 million. However, it appears that stricter controls will be applied to the smaller-cap coins, possibly aimed at minimizing market turmoil.

Traders’ choices confirm this assumption. The price of shorting Ripple, Solana, Aptos, and Stargate Finance on Binance’s perpetual contracts barely budged since the publication of FTXs holding and until today.

Open interest has drifted upwards, which could express a measured shift of the liquidators from spot to future. This is a likely first step in seeking liquidity to gradually offload Galaxy’s positions. 

Nevertheless, the situation is grim for tokens like BitDAO, with $49 million in tokens awaiting liquidation. With a maximum market depth of $23,000 at 2% from the price on SushiSwap. Galaxy Digital, the official liquidators, face a grim task. One of the best options for tokens in this predicament would be to sell them back to the DAOs and foundations that created them.

Taking a closer look at the perpetual contracts, since the announcement, negative funding on Aptos has risen from around -0.015% to approximately -0.02% today. These changes are still marginal. The same applies to Stargate Finance, which has $46 million in assets for sale, and Solana, with a total of $1.1 billion in tokens, including over $300 million available for liquidation. Since the Galaxy Digital announcement on August 25th, funding for Solana has shifted from marginally positive to marginally negative.

When selling smaller-cap coins commences and becomes meaningful, it will be clearly signaled by a shift in the funding rates. 

The fake story of the BTC ETF being approved gave us a little taste of what it could be like if and when it does eventuate. We are hoping for better times ahead in both markets and in the world.

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The mystery of market making

In the world of cryptocurrency the term ‘market maker’ has a mysterious and sometime ominous connotation. In this post we’re sharing a simple explanation of what market making really means.

Market makers and liquidity providers are core infrastructure in all financial industries. We will debunk some common market making misconceptions and also simplify some of the perplexing lingo.

1) Three types of market makers

1. Voluntary: The market maker has a strategy that makes him a small profit on each unit he buys or sells. This can involve arbitrage (having a ‘runner’ go back and forth to the large record store downtown to benefit from price differences) and also by recognizing trends in the market ahead of others (The market maker’s employee detects a large group of grunge fans arriving at the fair so before they get to the stand he raised all the prices and brings out rare editions). The voluntary market maker uses his ability to predict short term price movements for his own profit and creates liquidity in the market as a byproduct.

2. Designated Market Making (DMM): Even if the market maker takes losses on some trades, the market maker is incentivized will keep trading, as long as the market benefits. The owner of the market place or token incentivizes the market maker either with fees per-trade, kickbacks or other benefits in return for providing liquidity to his market. This market maker is focusing primarily on making the markets more liquid and efficient for other players to trade.

3. AMM (Automated market making) in DeFi: This new type of market making deserves its own post. We’ll just say here it’s nothing like traditional market making!

2) Maker and taker

In an exchange, each order in an exchange has a taker and a maker.

If we would compare a market to a store, the store is always the maker and the customer is always the taker. The store offers goods and sets a price, and the client can choose if to close the deal and pay the marked price.

Taker: The taker is the active participant in the market. The taker literally chooses and ‘takes’ an extincting offer off the market, thous closing the deal.

picking an offer (either to buy or sell) off the books in an exchange is considered a taker transaction or a ‘market order’.

Maker: A maker is a passive participant in the market- he presents offers that others participants can choose from. But the maker never closes the deal. The maker is the trading counterpart to the taker.

The makers offer to buy or sell sits patiently in the order book until someone picks it off the market. When picked, the exchange will execute the trade and transfers the goods.

Market makers are always makers

As the price of the assets moves, the market makers will algorithmically and automatically adjust the price of all the orders (offers).

Typically many of the maker offers are created by a market maker. Exchanges typically offer lower fees on maker transactions in order to incentivize a full order book of offers, making the market more liquid and attractive to traders.

Market Makers are critical in markets in order to ensure the markets are liquid and attractive for users and institutions to trade on. They ensure the following:

• Order books are filled on both the bid and the ask side, improving market depth.

• Spreads between the mid-price are optimized: The distance between best bid and best offer (bid/offer spread) is optimized. Without a market maker, spreads (and attractiveness of trading) are at the whims of organic buy vs sell pressure.

• There is sufficient capital sitting in the book so that if any person wants to trade a decent size of the asset, they will be able to.

The token brings the camel to water, and the market maker ensures there is an abundance of the freshest water to drink.

3) Nirvana fan at the record fair

The best way to explain market making is to use a parable.

A Nirvana fan wants to open a stand at a record fair so other fans can buy and sell their vintage Nirvana records. He puts up a sign that says: “Trade Nirvana records here”.

As a fan of Nirvana, he only has a few extra records he’s willing to sell from his collection, and he’s not willing to buy any record because he already has almost every Nirvana record he wants, including the rare editions.

This market will be disappointing: After he sells his handful of records, the stand will be empty. Afterwards, if you really want to buy or sell a Nirvana record you need to hang out at the stand for the whole day and wait for the right person to show up, but even then the rare seller might try to jack up the prices, as you as a buyer may appear desperate.

Solution: The Nirvana fan invites a “record market maker”.

The record market maker has a large stash of Nirvana records and a lot of cash too, and he is always willing to buy and sell Nirvana records for the right price. He’s also willing to turn around and sell a record he just bought for a small profit.

If a new Nirvana fan shows up with a lot of cash, he can reach into his record box and sell him as many Nirvana records as the new fan would want.

If an old fan wants to unload his entire record collection he’s willing to buy it for a reasonable discount, and then is happy to offer it all back to the market.

The record market maker has literally created or made a market.

Without a market maker, the commerce at the record stand would be slow, volatile, less fairly priced and in other words inefficient or illiquid.

Capital markets market makers operate in a very similar way and serve the same function, providing a substantial percentage of the trades in any market in the world . The Nirvana record stand is an extreme example but makes the point. The market maker is almost always buying and selling, making the market more liquid and easy to interact with while turning a profit.

Thank you to Efficient Frontier’s trading team for their help in putting together this post.

If you are interested in hearing more please reach out to sales@efrontier.io

Since we joined the cryptocurrency markets in 2017, there has been meaningful progress in the quality of the market and the trading infrastructure. Particularly, spreads, latency, and exchange stability improved considerably, as we will delve into in the following paragraphs.

Ancient History of 2017

Back in 2017, manual arbitrage was still quite profitable. Exchange systems were slow, spreads were wide, and the majority of tokens did not have a market maker. The amount of wash trading 

was alarmingly rampant, with an estimated 95% of reported cryptocurrency trading volumes being fake.

During the 2018-2020 bear market, many improvements were made. Liquidity began to be taken more seriously, and wash trading calmed down a notch. Today, while still a wild west compared to traditional markets, topics like wash trading and market manipulation are being taken seriously. 

Exchange Connectivity 

Exchange connectivity is typically measured using RTD (Round Trip Delay). RTD representing the time, measured in milliseconds, required to send an order to an exchange and receive back a confirmation. Limiting RTD variability has been a challenge for the crypto exchanges and is a critical factor for high-frequency traders.

Exchange latency is assessed using a metric known as P90. P90 means that from the list of RTDs with an exchange, it represents the slowest RTD among the fastest 90%. P90 is a way to estimate the typical slow RTD, with the bottom 10% considered abnormal. This type of calculation is important for high-frequency traders, as we rely on specific speeds to execute strategies correctly. 

Today, some exchanges have succeeded in limiting their worst RTD to only twice as slow as the average RTD, which is significant progress.  Even in less advanced exchanges, erratic spikes that once reached hundreds of milliseconds or even a full second are a thing of the past across the industry. 

In addition to the improvement in RTD speed and variance, another equally significant achievement has been the overall exchange stability during high user loads. Since 2021, we’ve experienced no exchange outages, where an exchange becomes unresponsive for minutes or even hours. 

Communication Protocols

The adoption of faster communication protocols has been a central factor in this progress .In 2017, exchanges primarily relied on the Rest API. Over time, Websocket and now FIX API (which is specifically designed for online financial activities) have been integrated into many venues. It's worth noting that Binance transitioned to Websocket only in the past year, completing an industry- wide upgrade. 

Market Efficiency and Institutional Services  

Today, BTC spreads on the leading exchanges are comparable to those of the top 25 most traded US stocks. Market depth has expanded, but not as much as the price, with more liquidity positioned closer to the spread. This reflects the professionalization of the market makers and improved capital efficiency. 

Another major improvement has been the emergence, since 2019, of companies like Copper and FireBlocks, which provide immediate transfer of funds between exchanges and accounts. They enhance safety and efficiency when managing accounts across many exchanges.

We should also acknowledge the rise of cryptocurrency prime brokers like FalconX and Hidden Road, which simplify investment and certain types of trading for institutional investors and hedge funds.

Onward and upward!

efrontier.io

Note from our CEO

Dear Clients, Network, and Friends,

Over the past month, we've been quietly but diligently working on scaling up our oprational capatiy. We've focused on improving many of our operation controls and upgrading internal processes, all improving our capabilities to serve you better.

As part of this process we’re thrilled to introduce two exceptional additions to our team, Ben Abitbul and Johnathan Orlianski, who will play key roles in our growth. 

Thank you for your continued trust in us. We look forward to serving you even better in the days ahead.

Warm regards,

Yohai Rayfeld

Chart of the month

The highlight of the month is GBTC, which surged by 17.8% on August 29th after a US appeals court granted it another chance to apply for an ETF status. 

GBTC, an exchange-traded Bitcoin trust by Grayscale, holds 643,572 Bitcoins (3% of the total supply) and is the sole American instrument tracking Bitcoin. Due to its unusual structure, its previous discount reached as low as -48.7% compared to Bitcoin. Following recent developments, it now stands at a more 'moderate' -18%. This represents an additional market capitalization of $7.1 billion since last November, out of a total of $16 billion in assets.

This holds significance for two reasons. First, the unanimity and decisiveness of the ruling led Bloomberg's ETF analyst to increase the likelihood of American BTC ETF approval to 95% by Q4 2024. Second, the GBTC discount serves as a key indicator of investor sentiment.

Blogs and feeds

•  If you're interested in learning about the volume breakdown of BTC & ETH versus the top 50 tokens versus all the others, please check out our blog! 

  

•  In our Telegram Broadcast, we publishes a timely explainer of recent Binance “FUD” and more. Join us for more market updates. 

• On our Twitter we shared “Spread 101: Efficient Frontier’s Head of Research explains spreads”, a beginner explanation on the meaning of spreads. 

Team update

This month, we are excited to announce that Zach Reingold, who has four years of experience in developing our network, has taken on the role of Head of Ecosystem at Efficient Frontier.

He will be dedicated to fostering collaborations among Efficient Frontier's network, partners, and clients. You can reach out to Zach for connections in the crypto world, including token projects, service providers, exchanges, and VCs!

Conferences: This month, Efficient Frontier is taking on Asia. Our Head of Sales, Andrew Tu, is attending currently Korean Blockchain Week. You still have the opportunity to meet him on Friday if you’d like to say hello.  

Our co-founder, Roei Levav, and CTO, Alon Elmaliah, will be flying to Token 2049 in Singapore next week. Feel free to drop us a line if you'd like to say hello at sales@efontier.io.

Commentary: Proof of cycle

Liquidity in cryptocurrency markets is drying up, the mood on CryptoTwitter is reminiscent of 2019 but are there any concert reasons for optimism? Yes.

A Bitcoin bull run requires several factors to converge: cyclical, macroeconomic, and fundamental. In the following post, we will examine these factors.

1. Cyclical

Bitcoin is influenced by both the typical market cycle and its unique halving cycle. It would be easy to persuade anyone following the crypto world that over the past year, Bitcoin has already undergone the “depression, panic, and despondency” stages.

The aftermath of Luna, Celsius, BlockFi and FTX blowing up with Bitcoin touching $15,400 on November 21st 2022 was brutal.

The NUPL/MVRV metric is a quantifiable representation of the depression phase and the subsequent recovery, as explained in detail in our 2020 post here. It has accurately marked the last three Bitcoin market cycle bottoms. Is this time any different?

Lack of Sellers: The following chart tracks on-chain assumed Bitcoin sales. The green line indicates Bitcoin sales for USD profit, while the red lines represent selling BTC at a USD loss. 

Both types of sales have significantly fallen since 2021. We believe the large spike in November 2022 was capitulation. Notice that subsequent low prices did not trigger additional large selling events. Higher highs off the bottom in the last few weeks (e.g., $31,800) did not lead to additional profit or loss-taking. There are hardly any sellers left.

Another chart hinting at the scarcity of sellers is the refusal of the institutional-sized Bitcoin address chart to make a lower low for over 5 months.

Halving Cycle: As we approach the 4th halving event, the concept of the halving cycle has not yet been invalidated. Historically, during each 4-year cycle, the Bitcoin market has hit its bottom in the year leading up to the halving, and it appears we are still following that pattern. Subsequent to each halving, there has been a (gradually diminishing) parabolic surge followed by a roughly 75% drop.

This pattern is expected to persist until Bitcoin technology achieves full adoption. The upcoming halving, projected to occur in April 2024, will reduce daily production from 900 to 450 bitcoins. Consequently, the daily inflows required to maintain price equilibrium will be cut in half to $12.5 million (based on today’s price).

2. Fundamental

Analyzing the fundamental value of Bitcoin warrants a dedicated blog post. However, for the sake of brevity, it can be summarized in terms of adoption, which can be divided into two categories: accumulation and usage.

 Accumulation metrics are very strong. Addresses holding over 0.1, 1, and 10 BTC have been steadily increasing since last winter, with individual-sized accounts representing average buyers of 0.1 and 1 BTC at all-time highs.

The amount of trasnaction is fairly stable and growing:

3. Macro

“Bitcoin is a bad main street inflation hedge, but a great monetary inflation hedge”

Until the issue of Western government debt is resolved, there is no reason to expect anything other than further monetary inflation. Bitcoin has historically proven to be a reliable hedge against monetary inflation, as illustrated in the chart below:

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There are three likely options:

A) If world currencies, led by the dollar, are printed into oblivion, Bitcoin, gold and real assets will serve as a protection.

B) If the Federal Reserve refused to print the difference, a debt collapse of the US would be even worse for the US dollar and the international currency system.

C) If the United States government achieves miraculous economic growth in the coming years, and the dollar maintains its value, Bitcoin will benefit, as it is the breakthrough money technology in an increasingly computerized and digitized world. 

Whether driven by speculative frenzy, hyperinflation fears, or its technological superiority over gold and the dollar, Bitcoin is likely to gain market share, bolstering various segments of the cryptocurrency markets.

Coupled with a shortage of sellers, ongoing adoption, and the cyclical nature of Bitcoin prices, we hold a positive outlook heading into 2024.

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Note from our CEO

A bit of what I've been seeing. Recovery in crypto markets is apparent beyond price action. During Q2, we've had a meaningful uptick in the number of deals we closed compared to 2022, with significantly more deal flow. As the crypto bear market is starting to retreat, we decided to add new developer and sales roles.

We're grateful to be in a strong position after almost 5 years in crypto. We're looking forward to the rest of 2023 and are keeping our eyes open for opportunities that will bear fruit for us and our partners in the coming bull run.

Yohai Rafield

CEO, Efficient Frontier

Chart of the month

Over the last month Coinshares reported the highest inflow to stock exchange-traded crypto funds since 2021. That’s $736 million in five weeks. We’ll let your make your own conclusions (hint: “Institutional liquidity”.)

Blog and feeds

1. If you’re interested to learn more about how we help our customers and the huge power of decimal points, Tim Freed, our Head of Client Services and Growth, shared this in our blog:

2. You’re welcome to join our daily updates on Twitter/X, including our no-nonsense executive summaries.

3. Join our broadcasts on Telegram, where we shared our 5 Predictions for the Next Bull Run!

Team update

To unwind from surfing the waves of the crypto market, we took the team on a beach and surf day. We’re glad to report we’re better at trading than surfing, though some did show potential.

Commentary: The outlaw future of DeFi

The hottest topic of the month was the inflection of CeFi vs DeFi and the regulation battle. We’re coming up to an interesting split between fully regulated crypto activity and ‘darkfi’ outlaw crypto. Why and how?

First, we’ll look at the numbers informing our forecast, and in the second section we’ll elaborate on how we see this story playing out.

Rise in non-KYC DeFi market share and surveillance awareness

A) On-chain (DEX) traders’ percentage of total crypto trading volumes has been growing since it started. It now stands at 14.9% of centralized exchanges’ spot volumes. This is a meaningful share of the market, especially considering each Ethereum transaction costs dollars, not cents. In May 2023, for example, DEXs moved $65.5 billion worth of assets.

There are two reasons Americans are increasingly turning to DEXs:

1. Banking on-ramps like Binance US and FTX US are no longer available while DeFi remains open for business.

2. DEXs provide access to thousands of tokens, many of which may be considered unregistered securities, banned by regulated exchanges.

B) International usage of privacy mixers and unregulated crypto activities is on the rise, as evident from the latest numbers shared by Chainalysis and CoinJoin.

These activities take advantage of crypto’s decentralized features, which were originally fostered by the cypherpunk movement, and will likely be increasingly utilized.

C) DeFi has become the sole means for Americans to access speculative financial products like 100X leverage and memecoins, which have gained significant traction.

On-chain open interest in perpetual contract DEXs has grown to $360 million, about half of it solely from the relatively new GMX on-chain derivatives exchange.

D) In the bigger picture, as economies become increasingly cashless, crypto and permissionless finance will play a more central role.

Who’s going to the ‘dark side’?

Today the next logical step for the SEC could be to target DeFi activities. Will they request Uniswap Labs to KYC the frontend?

This poses a crucial fork in the road: RegFi or DarkFi?

RegFi is Regulated DeFi and crypto with full KYCed user interface

DarkFi is KYC resistant crypto and DeFi. Likely run by anons and/or offshore. It includes KYC resistant clones or gateways to popular DEXs and applications. 

While it is impossible to regulate the Uniswap protocol itself, the front end could be a target. The implications of such actions on the broader DeFi ecosystem are uncertain but noteworthy.

Meanwhile Bitcoin is being primed by Wall St. to be one of the next big asset classes. The more Bitcoin gets regulated, the more mainstream, fully regulated demand will grow (with eventually even conservative asset managers like pension funds allocating to it).

The more strict the regulators will be, the more DeFi and crypto will have to choose increasingly consciously which side of KYC regulations they want to be on. The distinction between RegFi and DarkFi will only grow.

The rising demand for DarkFi will put the decentralization of its technology to the test. Non-KYC activity and DarkFi will either be battle-tested and become stronger or vanish altogether.

RegFi and DarkFi represent two sides of the same coin (pun not intended). Ironically, they may end up fueling each other’s growth. That’s the event horizon we envision. What comes after that is for sci-fi to predict.

The crypto industry is evolving and we’re at an inflection point. Let’s keep building and keep our eyes open to the bigger picture.

Until next month,

Efficient Frontier

One of the tick size’s effects is setting the bottom limit on the spread (For a quick definition of the spread, see this short video.)

A healthy spread is usually between 2x and 4x the minimum tick size.

The job of a market maker is to increase market depth and lower spreads. This ensures that markets are efficient and incentivized to trade.

Sometimes, in the case we’re talking about, a crypto exchange provides an asset with only 4 decimals when it’s traded at under $0.02. This means the minimum spread is outrageously close to 1%, which is… bad. It repels traders, especially day traders and algo traders, and makes the market less liquid.

So, we contacted the exchange. Then, we contacted them again. I was even asked once, “Why are you speaking to us every week about this stupid decimal?” But eventually, they agreed, and the exchange gave their developer the request, and our asset got the extra decimal, and then…

Boom! The spread falls by 60%. Liquidity flourishes, and the universe is in harmony again. Kidding aside, this is a big win for this asset. Lowering the spread by more than 50% is a huge improvement for anyone trading it, for liquidity, and for its appearance in the markets.

There is a lot more to decreasing spreads than just adding decimals, and this won’t work for every token in every market. But with the right tech, liquidity, and traders, this is as easy a win as you can get in crypto.

Right now, we’re working on an issue with another exchange where mismatched decimals in two markets of the same asset are causing trading inefficiency.

We’re glad to be moving in the direction of higher professionalism. Successful market making isn’t only about good tech; you have to combine it with particular attention to clients and sharp, detail-oriented traders.

At Efficient Frontier, we thrive on attention to detail and top-notch client service. Join us for successful market making in crypto! If you’re interested in talking, please feel free to reach out anywhere or email us at sales@efrontier.io.

We’re coming up to what could be a meaningfully split in the crypto space.

First, some interesting numbers and background for context on our forecast:

A) On-chain (DEX) traders’ percentage of total crypto trading volumes has been growing, well, since it started basically. It now stands at 16.5% of centralized exchanges’ spot volumes. This is a meaningful share of the market, especially considering each Ethereum transaction costs dollars, not cents. In May 2023, for example, DEXs moved $65.5 billion worth of assets 📈

There are two reasons Americans are increasingly turning to DEXs:

1. Banking on-ramps like Binance US and FTX US, are no longer available while DeFi remains open for business.

2. DEXs provide access to thousands of tokens, many of which may be considered unregistered securities

B) International usage of privacy mixers and unregulated crypto activities is on the rise, as evident from the latest numbers shared by Chainalysis and CoinJoin.

These activities take advantage of crypto’s decentralized features, which were originally fostered by the cypherpunk movement, and we think will be increasingly utilized.

C) DeFi has become the sole means for Americans to access extreme financial products like 100X leverage and memecoins, which have gained significant traction.

D) On-chain open interest in perpetual contract DEXs has grown to $360 million, about half of it solely from the relatively new GMX on-chain derivatives exchange.

E) As economies become increasingly cashless, crypto and permissionless finance will likely play a more central role.

Who’s going to the dark side?

Today the next logical step for regulators could be to target DeFi activities.

Will they request Uniswap Labs to KYC the frontend? This poses a crucial fork in the road: “RegFi” or “DarkFi”?

RegFi: Regulated DeFi and crypto with full KYCed user interface

DarkFi: KYC resistant crypto and DeFi. Likely run by anons and/or offshore. KYC resistant clones or gateways to popular DEXs etc

While it is impossible to regulate the Uniswap protocol itself, the front end could be a target.

Meanwhile Bitcoin is being primed by Wall St. to be one of the next big asset classes. The more Bitcoin gets regulated, the more mainstream, fully regulated demand will grow (eventually even pension funds).

The more strict the regulators will be, DeFi and crypto activities will have to choose more consciously which side of KYC regulations they want to be on. The distinction between RegFi and ‘DarkFi’ will grow.

The growing demand for DarkFi will put the decentralization of its technology to the test. Non-KYC activity and DarkFi will either be battle-tested and become stronger or vanish altogether.

RegFi and ‘DarkFi’ represent two sides of the same coin (pun not intended). Ironically, they may end up fueling each other’s growth. That’s the event horizon we envision. What comes after that is anyone’s guess.

The crypto industry is evolving and we’re at an inflection point. Let’s keep building and keep our eyes open to the bigger picture.

efrontier.io

Market depth, the amount of money bidding in an exchange order book, has taken a hit across many crypto markets. We've analyzed several markets depth at 2% (money bidding at a distance of -2% or +2% from the market price) with some dropping by 50% on major exchanges since November 9th. 

The ‘dry up’ started on November 9th, one day after FTX closed its doors and a day before it was announced that Alameda Research was winding down. Alameda Research served as a market maker for many projects, so their absence has impacted liquidity. We’ve seen this first hand, as some of their former clients approached us. 

Concerns of additional exchange shutdowns is also a big factor. Most market makers, including Efficient Frontier, have minimized their capital on exchanges, aiming to decrease exposure to further contagion. 

The lower the market depth the less money it takes to move the price. The result is increased risk of price volatility which means increased risk for liquidity providers. Market makers manage this risk by decreasing their presence in the order books. This creates a vicious cycle of low liquidity because reduced liquidity in an order book increases the chances of high volatility even more.

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For more information visit efrontier.io

In the following post we’ll try to provide context for this massive ‘bomb going off’ moment and hopefully make it easier to comprehend and process. We extend our sympathy to anyone hurt by this fallout and anyone else affected by this.  

Is Efficient Frontier okay?

Yes. Thankfully, or more correctly, thanks to our prudent risk management system and team, we have at this time almost completely avoided the financial fallout and avoided having substantial funds trapped on FTX.

If you’re tired of hearing what happened, jump to our conclusion section at the end, where we’ll offer some positive thoughts and advice.

Executive summary of the main events

This week the crypto world discovered that one of its most beloved exchanges during the recent market cycle, FTX (led by a charismatic CEO, Sam Bankman-Fried or SBF), was insolvent. 

The exchange shut its doors on Wednesday when it no longer could process withdrawals. More than $1 billion in customer funds seems to have disappeared.  More billions seem to have ‘evaporated’ from FTX’s sister company, the hedge fund and market maker Alameda Research.

The extent of fraud and misappropriation of customer funds has grown by the day, with more and more reports and insight into what was going on behind the scenes and just how bad things were behind the “altruistic” success story. 

Inconclusive list of alleged misdeeds that were published by many media and companies in the space:

1. Hiding the fact that FTX’s sister company Alameda Research was insolvent. This has likely been the situation since the May 2022 Luna crash.

2. Giving billions in FTX clients’ funds to Alameda to trade, with Alameda losing or misappropriating most of this money.

3. Using the liquid $FTT token that FTX issued as collateral for billions in liquid loans to Alameda.

4. Being responsible for backing soBTC (over 16,000 Bitcoin backed tokens) on the Solana network, despite holding 0 Bitcoin according to their bankruptcy filing. 

5. Offering $5 billion dollars (as of now assumed to be misappropriated funds) to assist Elon Musk with buying Twitter.

6. Creating a ‘backdoor’ in the internal auditing software of FTX so that SBF could move funds between FTX and Alameda at will without being exposed to staff.

7. Pressuring crypto lending companies to give loans to Alameda (reported at $8 billion on Coindesk) if they want to work with FTX. Pressuring projects they invested in to keep their funds with FTX.

8. Encouraging employees to deposit their funds in the exchange when they knew they were insolvent

9. After the exchange shut down, FTX reported on Twitter that Bahamian authorities have directed them to allow customers in the Bahamas to withdraw. However, the Bahamian government has denied giving this order.

10.  Not shutting down deposits for a whole day after exchange was known to be insolvent with no withdrawals possible.

11.  Alameda continued to trade for 2 to 3 days after FTX and Alameda were known to be insolvent.

12.  Alameda was allegedly trying to force Tether USDT into bailing them out.

More information keeps coming out. 

FTX’s complex governance structure and subsidiaries hints there may be much more fraud to uncover. 

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How large is the damage?

• According to FTX’s chapter 11 filings, FTX has 56 (!) subsidiaries with between $10 to $50 billion in liabilities and over 100,000 creditors, which makes this fallout the biggest since Enron in 2007.

• The list of VCs who invested in FTX is long. They stand to lose in total most of the $2 billion they put into FTX.

• The number of crypto companies, projects and funds that held large sums in FTX is unknown but assumed to be in the hundreds. It’s impossible to compile and verify a complete list at this point.

  One would assume that the companies who have already publicly reported their losses are better off than the many more that have stayed mute. WuBlockchain compiled a partial list of companies reporting losses. 

• FTX invested in hundreds of companies in the crypto space. This equity will be liquidated. 

• FTX recently purchased Voyager. Their combined customers’ funds and outstanding loans are estimated to be in the billions of dollars. It is unknown how much of these funds were misappropriated. 

• Solana, the L1 blockchain was heavily funded and promoted by FTX. Its market capitalization fell from $10 billion to $5 billion this week. 

State of the market

Zooming out, the drop in crypto prices has been substantial, but not the sharpest we’ve seen by a long shot. The total altcoin market cap lost 15% this week and Bitcoin lost 22%. These relatively measured reactions are probably due to Bitcoin and crypto already having lost 75% and 78% from the market peak, almost exactly one year ago. 

Markets have been quiet, bordering on boring, in the last couple of weeks. Many professional traders assumed this was at least a local bottom, as the fallout from the implosion of Luna and 3AC in May and June seemed to be over. Unfortunately, underneath the surface, massive defaults were about to be exposed. 

With the level of trust lost by the FTX events and the amount of fear going on right now, it’s clear that remaining weak entities will be exposed in the coming months.

At the time of writing, rumors and fears about exchanges are being taken seriously and already seem to be causing more ‘bank runs’. We may see more exchange defaults by the end of this week or month.

This is the equivalent of a forest fire.  As bad as it is, it will clear the forest of debris, open it up to sunlight and create fertile ground for the next period of growth. The longer FTX would have survived, the bigger the bankruptcies and the worse the fire.

The positive twist 

Bitcoin tech has a good and bad side. The very positive side is decentralization - the bad side is piracy. This week we’ve witnessed the huge damage that extreme piracy, opacity and offshore activity can cause when used by bad actors.

Nonetheless, this fallout will bring more focus to the positives of decentralization. Real decentralization ensures that too much power or information is not concentrated in one entity's hands. 

DeFi protocols have demonstrated that they function even in the worst of times and proven the value of transparency. During the fallout, open financial protocols and exchanges like MakerDao, Aave, Uniswap and others remained operational and solvent. The reason they are solvent is that they never let debt pile up in the dark. It’s technically impossible. This is the power of real crypto tech:  transparency and decentralization.

The collapse of FTX has been a major disaster, but like every previous cycle, this does not spell the death of crypto. Traditional industries, especially traditional finance, have faced similar disasters without going anywhere.

Ultimately, the potential of crypto is still vast and its true promise is far more than just serving as a casino for traders. Looking at the technology of crypto, it provides solutions, products and access to financial opportunities to everyone across the globe like never before.

The basic ideas behind Bitcoin are decentralization and self-ownership. In times like this, it is important to reaffirm these values and build more trustworthy products and services around these ideals. 

Despite the current difficulties we are facing, this could be the beginning of a better chapter with less grift, less blind trust and lessons learned from greed and corruption. Hopefully we will also see more real products that actually improve people's lives. 

Disclaimer: Alameda Research has been a passive investor in EF since December 2019.

Here are the most interesting and informative links we’ve come across (or posted!) lately:

1. Terra collapse: the executive summary

   If you need a concise rundown, here’s our 4-minute explanation of the Terra collapse in 5 charts. 

2. Terra: one hour essential podcast on UST & algostables

   Bloomberg’s podcast talked with Kevin Zho, the crypto hedge fund founder who led the effort to warn against Terra for months. The crypto veteran details Terra’s collapse and algo-stables from A-Z. 

3. Bear market advice thread for crypto founders by Michelle Bailhe from Sequoia VC

4. The Guardian reports Tether USDT redemptions hit $7.6 billion

   On-chain data from Massari shows a $8 billion drop in USDT tokens outstanding, also signalling redemptions.

5. Terra collapse aftermath

   • The Block reported Celsius withdrew half a billion dollar out of Anchor before it crashed

   • Economist Tuur Demeester warns to be cautious of passive income products such as Celsius, Nexo and BlockFi 

   • Twitter thread: The Block Research on how Jump tried to defend the UST peg

6. Sefdain Amos on the Lex Fredman’s video podcast

   Why are we into crypto in the first place?  Is Fiat currency inherently evil? 

   If you have a couple of hours…Lex Fredman talks with one of the world’s most adamant and captivating Bitcoin believers about the Fiat money system, Bitcoin and much more.

7. Animoca Brands chairman on Pomp Podcast

   Yat Siu talks about building in the bear market, his fundamental views on the Metaverse, digital property rights and how Animoca Brands got into crypto investing in 2018.

8. Financial regulators and central bankers from 44 emerging countries are meeting in El Salvador to learn about Bitcoin