Digital Assets Monthly Report | September

Cryptocurrency Monthly Report: Key Takeaways

• Markets struggle as macro deteriorates - but Ethereum Merge offers hope

• UK, US, EU race to compete on regulation to grow digital assets

• Helium Solana switch sees blockchain development match the internet

Macro Outlook

Markets struggle as macro deteriorates - but Ethereum Merge offers hope

August 2022 represented another concerning month for global equities investors, with the S&P 500 down -4.2%, bringing its year-to-date returns to -17.4%,[1] the FTSE 100 down -1.74%,[2] the Xetra DAX sliding -4.78% for the month [3] and the Hang Seng[4] suffering minor losses.

Via the CME Group’s Fedwatch tool, markets are now pricing in an 86% chance[5] that the US Federal Reserve will raise interest rates by the higher 75 basis point hike, putting further pressure on debt repayments and piling on headaches for tech and emerging industries.

Some light on the horizon came from crypto markets with The Merge: a major technological overhaul for Ethereum, the second-largest digital asset globally. By September 15 the Ethereum blockchain will switch off the energy-intensive Proof of Work consensus model that it shares with Bitcoin, and instead turn on the newer Proof of Stake, a move that is expected to reduce its energy consumption by 99.95%. [6]

This is an upgrade seven years in the making. ETC Group debuted a major research report[7] that covers every factor relevant to the smart contract blockchain and goes into painstaking detail about why this is the biggest story in crypto markets for the last half decade.

It is also a signifier that crypto markets do not always move in tune with equities, bonds or commodities, and instead follow their own internal calendar.

Anticipation of the Merge has produced a rampant bullishness in Ethereum prices. From a low of $921 in mid-June, the price of Ethereum’s native currency ETH (and hence the ETPs that closely track it, like ETC Group’s ZETH) climbed 73% to the end of August. As covered in ETC Group’s regular Crypto Minutes analysis, Ethereum futures volume overtook Bitcoin[8] for the first time ever.

A forthcoming split in the Ethereum blockchain will also produce two competing versions, one which will use the newer Proof of Stake, and one supported by miners that will hold onto the older Proof of Work model.

While some cryptocurrency exchanges have refused to recognise the older chain after September 15, ETC Group has launched an ETP for any investors holding ZETH at the time of the Merge that will see them receive free tokens in the Proof of Work version (ZETW) on a 1:1 basis, effectively doubling their holdings.

Please remember that cryptocurrencies can be highly volatile, and your capital is at risk. Past performance is not indicative of future performance.

UK, US, EU race to compete on regulation to grow digital assets

Crypto markets are such a fascinating place to be for analysts and investors because they consistently provide historic firsts.

UK politicians have set out their stall to support the burgeoning digital asset industry in the hope of competing with the EU and United States. This sets the stage for a battle between the largest Western economies to regulate — quickly — to dually protect crypto investors and allow for the growth of the fifth asset class.

The European Parliament moved first in late June, reaching provisional agreement on its landmark Markets in Crypto Assets (MiCA) legislation[10] that would see the bloc limit dollar-denominated stablecoins and treat issuers like banks, bringing them under the oversight of the European Banking Authority.

A 180-day deadline set out by President Biden in his Executive Order[11] to investigate the risks and opportunities of the digital asset market has now passed. This will see the best-funded and most powerful American government agencies report on all aspects of digital assets to investigate how the US can make the most of being the biggest global marketplace for the $1 trillion industry.

The UK has also now witnessed seen its first ever Parliamentary debate[12] on regulating crypto and digital assets. Cross-party politicians met in Westminster Hall to thrash out the talking points that will see the UK attempt to compete with their closest economic rivals.

The Economic Secretary to the Treasury Richard Fuller, who will advise new UK Prime Minister Liz Truss,[13] said in the debate:

“By making this country a hospitable place for crypto technologies, we can attract investment, generate new jobs, benefit from tax revenues, create a wave of groundbreaking new products and services and bridge the current position of UK financial services into a new era.”

Martin Docherty, the Shadow SNP spokesperson for Industries of the Future and Blockchain Technologies, added: “It is important that regulation is able to make a clear delineation of where the legitimate [digital assets] business exists and outright scam cannot…despite the halving of the value of Bitcoin since its peak in November, the market remains remarkably buoyant, despite all that has happened.”

Helium Solana switch sees blockchain development match the internet

Helium, a network of peer-to-peer internet providers, may be shutting down its blockchain and relocating wholesale to Solana. ETC Group offers investors the ability to buy Solana just like an ETF with ESOL[14] which would be expected to profit under such circumstances.

Helium core developers cited[15] Solana’s transaction speeds, growing ecosystem, and interoperability with other blockchains as key factors.

The Helium network represents a decentralised Internet of Things (IoT) that challenges centralised internet services offered by telecoms companies. There are more than 940,000[16] Helium hotspots spread across North America, Europe, and other parts of the world.

Helium users host data hotspots using wireless routers or other smart devices that share bandwidth. Hotspot providers receive Helium’s utility token HNT as a reward. As of 9 September 2022 HNT was the 78th-largest digital asset by market cap, with a total token value of $466m. Solana occupies the ninth spot globally, with a market cap of more than $11bn.

The Helium foundation has made it clear that the blockchain they designed in 2018[17] to disrupt the $800bn IoT industry is no longer capable of meeting the expanding user demand and hotspots springing up on its network. Put plainly, Helium has outgrown its own blockchain; now confronting inefficiencies and data bottlenecks.

Developers believe that rather than expending time and resources levelling up the Helium blockchain, it would make more sense to shift to a blockchain that can offer it the speed, reliability, and scalability it needs. Solana can handle more than 3,000 transactions per second[18] compared to the 13 transactions per second on Ethereum, for example.

Solana is home to a constellation of DeFi, NFT, and Metaverse protocols calibrated by thousands of developers. Helium would also be subsumed by a blockchain that is prized for its fast transactions at inexpensive prices.

According to Electric Capital,[19] Solana is one of the five largest developer ecosystems in blockchain today, alongside Ethereum, Polkadot, Cosmos and Bitcoin. In 2021 the number of developers joining Solana grew by almost 600%.

It is unclear whether the Helium community will vote to migrate to Solana. But this event may represent a microcosm of what is to come as the digital asset space matures. It is not impossible to imagine more developers transferring their projects away from original blockchains to those with the strongest properties: security, scalability, or marketability.

And this may be the natural endpoint of a story we’ve heard before. When the internet first burst onto the scene, there were dozens of protocols vying to become the standard way to pass data between computers. Only the four most successful protocols survived: HTTP, FTP, SMTP, and TCP/IP.

The migration proposal — HIP 70[20] — will be decided in the coming weeks with votes from key stakeholders in the Helium community: developers, node operators, and tokenholders.

For their part, Solana and other blockchains that lead in terms of user adoption and throughput may well assimilate smaller rivals. In this scenario, the disjointed blockchain space of today will be succeeded by a more streamlined future.

Digital Assets Performance (As of 31.08.2022)

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 31/08/2022 Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product.

Learn more about our crypto products:

BTCetc – ETC Group Physical Bitcoin

ETHetc - ETC Group Physical Ethereum

ETC Group Digital Assets and Blockchain Equity UCITS ETF

ETC Group Global Metaverse UCITS ETF