Empire Newsletter: The suspects behind this weekend’s crash

Today, enjoy the Empire newsletter on Blockworks.co. Tomorrow, get the news delivered directly to your inbox. Subscribe to the Empire newsletter.

Gox Watch

If the price of bitcoin were a murder mystery, there would be several key suspects.

It was macro factors that crashed crypto, some analysts might say.

Renewed recession fears, the potential AI bubble and absentee rate cuts from the Fed have all bruised the stock market. Why wouldn’t bitcoin also reel from the same effects?

Mt. Gox could be another potential culprit. As many as 20,600 creditors had been waiting 10 years to have their bitcoin returned, during which time its price had gone from under $500 to $58,000 when repayments began in May.

About $5.77 billion in bitcoin has been sent to participating crypto exchanges to date, valued at the time of transfer. Any creditor who had $1,000 in bitcoin when Mt. Gox went belly up would now have over $110,000 based on distributions so far.

Figures for how much remains differ from screener to screener, but based on my calculations, 51,957.7 BTC — worth $3 billion — is left from an initial 141,690 BTC ($8.15 billion at current prices). All the remaining bitcoin should be sent out sometime over the next two months or so.

For scale, the government of the German state of Saxony in total sent $2.92 billion directly to exchanges and other OTC desks, which on the surface appeared to dent the price of bitcoin, either directly or indirectly.

Saxony’s net outflows are marked in purple on the chart below. Notice those purple areas coincide with a bitcoin dip, and prices picked up directly after they were done.

Mt. Gox distributions are those big spikes downward in red while ETF flows are the lighter colors in the background

Coincidentally, bitcoin ETFs — particularly BlackRock’s IBIT — posted some sizable days of inflows as Mt. Gox made its $3.07 billion transfer to Kraken.

Which, all things considered, would’ve hypothetically balanced some selling from Mt. Gox creditors by the end of the day.

It only goes to show that plotting the exact impact of Mt. Gox repayments on the price of bitcoin requires tons of assumptions. The payments aren’t being made directly to individual addresses. Mt. Gox trustees instead forward them to crypto exchanges which will then credit the bitcoin directly to user accounts.

That’s one button away from being sold and even completely cashed out for fiat. And because hot wallets generally jumble user funds under one address, once Mt. Gox bitcoin goes in, there’s little way of knowing what happens to it from there.

Glassnode at the end of last month still gave it a go. Its analysts compared Kraken and Bitstamp volumes around the time of Gox distributions and found only a marginal uptick in sell-side dominance, and still within typical ranges.

Still, there were some major whales among Gox creditors. Twenty-three alone had claims to more than a quarter of all funds ($2 billion at current prices), and the top 1% of creditors were set to receive more than half.

If any of those decided to sell all at once, on public markets and not over-the-counter, then it’s reasonable to assume that they could impact prices in the short term.

But let’s say we had to choose bitcoin’s Colonel Mustard out of a lineup: macro, Mt. Gox, the Saxons, the US government or bitcoin ETFs.

It was bitcoin ETFs in the conservatorium with a candlestick for me. Investors have net pulled over half a billion dollars from ETFs in the past three days — during which time the price of bitcoin has fallen up 20%.

If the macro environment truly set bitcoin up for a fall, ETFs could have very well pushed it over the edge, especially so if they were selling at the bottom. In that case, bitcoin will have to get back up before Mt. Gox joins back in.

What a welcome back to bitcoin for Gox creditors.

— David Canellis

Data Center

• BTC is above $57,300 after extending its recovery by 3.6% in the past day. ETH is otherwise up 0.7% to $2,485.
• HNT, FTN and LEO are the only three top-100 tokens in the green over the past week, between 3.6% and 2.1%.
• A small uptick in Ethereum validators in the exit queue: currently 286, up from five at the start of the month.
• Bitcoin open interest on CEXs is down 25% — to $28.2 billion from $37.5 billion —since the end of July.
• Uniswap has eclipsed Lido for fees generated in the past week: $24.43 million to $23.3 million.

Hot summer, hotter takes

While politics and crypto’s role in it has become a very hot topic for a lot of folks in this industry, entrepreneur Anthony Pompliano has a bit of a different perspective.

“I believe that for all asset prices, the president is probably not nearly as important as people think it is,” he told me.

He’s got some TradFi proof to his claims as well. The S&P 500 returns from both the Trump and the Biden presidencies (in terms of trading days): “It’s almost an identical return to the exact percentage point” despite the fact that the two operated in vastly different interest rate environments and, arguably, markets.

So, okay, let’s say that bitcoin’s set to hit all-time highs no matter who takes the office next January. The real concern voiced by a lot of folks is that the next president must be friendlier to crypto.

“But if you look at it from a pure results-based outcome, this regulatory administration has gotten more accomplished for the crypto industry than all of the regulatory administrations for the crypto industry to date,” Pomp argued.

He cited Coinbase going public (though they’d later be sued by the same regulators who oversaw their direct listing), the miners going public and the approval of bitcoin and ether ETFs (and while Gary Gensler hasn’t been the biggest fan, the two ETFs did end up going public… after a legal battle).

“If you fell asleep a decade ago, and you woke up today, and you just looked at results, and somebody said to you, ‘Who do you think was the best regulator or kind of leadership of regulatory organizations for the crypto industry?’ You would say that the current SEC and CFTC leadership teams got more done for crypto than anybody else. Although there is this kind of skepticism, friction [and] abrasiveness from it, the results are still better than anything that we got before,” he said.

There’s no doubt, however, that the lack of regulatory clarity has also done some damage to the industry. Take, for example, the NFT creators we talked about last week. They’re forced to take action against the SEC simply to get answers on how the SEC is approaching NFTs after it targeted multiple projects.

And take a look at developers: Electric Capital’s 2023 developer report showed that 72% of devs are outside of North America, with the US losing 14% of developer share since 2018.

But, at the mention of ETFs, I couldn’t help but pick Pomp’s brain about a potential SOL ETF.

“We believe these assets will eventually end up in the public markets,” he said. “The big question is, just what’s that timeframe look like? But again, the people want them, and so when the people want them, I tend to believe that over time, they’ll [get what they want.]

“It may take a change in political leadership, may take [different] regulatory leadership. It could actually take a change in the companies that are providing custody or various services to get people comfortable. But ultimately, I do think that those kinds of altcoin ETPs will get approved.”

When it comes to what Pomp’s bullish about, he told me that stablecoins are crypto’s “second best market fit” right behind bitcoin.

“The business is good as a stablecoin issuer. And so that means you got a lot of cash. If you have a lot of cash, you can do a lot of investing in R&D and kind of development, etc. And so it gives you a very long time horizon thought process because you know that you’re going to be around in 2, 3,4, 5 years, which is a big advantage. So I don’t see that demand going away. I actually see it continuing to grow and accelerate. And at some point, I think governments will say, ‘Yeah, you know, we’ve got to figure out how to do this as well.”

Now we just need Circle to hit the public markets.

— Katherine Ross

The Works

• Coinbase’s Paul Grewal says he wants crypto to remain non-partisan.
• Trump’s plan for the government’s stockpile of bitcoin concerns experts, Bloomberg reported.
• BlackRock filed to list and trade options for its spot ether ETF.
• Former Binance adviser David Plouffe joined the Kamala Harris campaign.
• Jump Trading continues to move millions of ETH around, CoinDesk reported.

The Riff

Q: How can crypto channel ‘hot coin summer’?

Turn all the smart money into dumb money.

If the recent push for funding infrastructure was smart money playing it safe, it’s time to play it stupid.

The sillier the better, within reason. No need to back projects with questionable tokenomics and absurd bonding curves.

Just a seasonal revival of some of the most ostentatious pitches for crypto startups we’ve seen over the past decade.

A cryptocurrency for dentists. A stablecoin pegged to the price of urea. Tokenized humans. Burning picassos to turn them into NFTs. Crypto seasteading.

Hot coin summer means pulling publicity stunts. Whatever your idea, it could be just the thing crypto needs.

— David Canellis

Q: Can we channel Cozy Coin Fall instead?

This summer’s had very European summer vibes in my humble opinion. Everyone’s constantly out of office and enjoying their lives. In comparison to last summer, which had a lot of stress tests (thanks to a certain regulatory agency filing lawsuits against Coinbase and Binance). I guess I should be grateful.

Anyway, we just need to wake ourselves up a bit if we really want a hot coin summer. Gotta pick up the momentum, maybe throw in a few positive catalysts to bump up the vibes. Oh, and people heading back to their desks would help too.

— Katherine Ross

Source