8th January 2023 > > Huobi and GBTC.

tl;dr

Two possible news items to keep an eye on. The potential downside is underestimated for one, and overestimated for the other, by the mostly ill-informed popular press.

Market Snap

Market Wrap

The last time we had a handle different from 16 was on the 16th December 2022. Frankly this is getting ridiculous.

Let’s look at BONK instead. Down about 50% from when we last visited its remarkable price action of thousands of percent gain since Christmas day, this is a salutary reminder that trying to get in on the price action of small alts immediately AFTER they have listed on a centralised cryptocurrency exchange is a mug’s game.

Curious Cryptos’ Commentary — Huobi

Huobi – the fourth largest centralised cryptocurrency exchange based in Singapore – was recently bought by Justin Sun, founder of the Tron foundation, and an early crypto-made billionaire.

In the last week Huobi has seen nearly $90mm of funds withdrawn, of which $60mm occurred in the last twenty-four hours.

This is in response to a report by Reuters – that has since been denied – that Huobi is laying off 40% of its staff.

After the fraudulent FTX fiasco of 2022 it comes as no surprise that those who have deposited the greater amount of their crypto stash on a centralised cryptocurrency exchange are somewhat skittish.

Intriguingly these withdrawals have been met with a $100mm deposit of USDC (USD Circle) and USDT (USD Tether), two of the well-established stablecoins, taken from Binance by … Justin Tron.

This revelation raises two key questions for me.

The first is obvious – if depositors’ assets on Huobi are backed 100% by funds held in a segregated account, why did Tron feel the need to top up the balances at Huobi?

And the second one is more concerning. Why would Tron hold $100mm at a rival exchange and not either in self-custody, or indeed his own exchange?

…

Let me repeat again. You should only hold 5-10% of your crypto assets at a centralised cryptocurrency exchange, and preferably only Coinbase or Binance.

The CC Treasury has a small holding of ZED (a gaming coin) at Huobi which is being moved to self-custody as soon as today’s CCC is published.

Why delay you ask? It’s simple. Our readers are more important to us than any amount of crypto could ever be.

…

If Huobi is insolvent and about to fail, the hit to the crypto market’s confidence will be more severe than currently recognised.

Curious Cryptos’ Commentary — GBTC (Grayscale Bitcoin Trust)

GBTC is now trading at around a 45% discount to NAV (Net Asset Value) whilst the ETH equivalent is trading at a 59% discount.

For long-term holders these discounts give an extraordinary opportunity in my personal view, but market prices clearly indicate that once again I find myself in the minority with a contrarian view. Unfortunately for us Brits, we are not allowed to gain exposure to GBTC, another shining example of the deleterious effects of poorly designed over-regulation whose objective is to protect the regulator to the detriment of the investor.

GBTC has applied to turn the trust into a physical ETF (exchange traded fund) that would immediately decimate the discount, but crypto-hater Gary Gensler, chair of the SEC (Securities and Exchange Commission) turned it down, to no surprise to anyone.

A new idea has been put forward, to initiate a Reg M (no, me neither) which would allow owners of GBTC to exchange the shares for the physical asset.

It is being claimed that this would lead to a huge oversupply of the physical asset into the spot market – 3.3% of BTC and 2.5% of ETH are held within the relevant trusts.

What utter tosh.

Reg M will simply take out the discount immediately before anyone could arbitrage the trade in any meaningful volume.

I believe that Reg M will actually be very positive for the price of BTC and ETH as everyone realises – too late of course to take advantage – that the discounts were an opportunity not a threat.

As I said, I am in the minority on this one. I don’t do it on purpose, but it seems to me that in matters financial the prevailing market view is often wrong. Identify that mispricing, and oversized returns are your reward.