China Ban, Snoop Dogg's NFT ventures, and Takeaways from Messari Mainnet

Hartmann Capital Newsletter, Friday September 24, 2021

In this issue

  • China Ban (Again) Roils Markets. Explosive Crypto Assets Shrug Off Worries

  • Snoop Dogg Revealed as NFT Expert?

  • “A Decentralized Economy Needs Decentralized Money”

  • Messari Mainnet Report: It’s A Multi-Chain World

Market by Numbers

A China ban announcement late in the week enforced already weak price dynamics. 

China Ban (Again) Roils Markets. Select Crypto Assets Shrug Off Worries

Going several steps further than in previous bans, China this week stated that all crypto transactions are now illegal. The People’s Bank of China has deemed all crypto trades illicit financial activity. 

Long term crypto investors took this most recent ban in stride. On-chain data shows that addresses that have held Bitcoin the longest actually accumulated during this week’s price collapse. Long-term holdings are now approaching 80% of total.

Perhaps these early adopters have stayed long for good reasons? 

This is not the first time China has acted against crypto. As recently as May of this year, it prohibited banks from dealing in digital assets, forcing trading (further) offshore. In fact, there have been many such “bans” originating from various entities with a variety of specific interdictions. Given China’s history of controlling the internet, and Western tech in particular, the bans should come as no surprise.

Importantly, BTC prices since each ban are much higher. It’s paid to fade the China fear, uncertainty and doubt (FUD).

China bans have yet to suppress Bitcoin, and they are unlikely to kill digital assets completely in China. In fact, Bloomberg reported that some experts believe that the ever-increasing restrictions are a sign that the government is failing to have the desired impact. Messari’s Ryan Selkis agreed on Twitter.

While this ban goes further than any others, many commentators believe that the decentralized nature of Bitcoin and newer cryptocurrencies as well as the ever-increasing growth of decentralized protocols will offer some if limited options for crypto trading in spite of the new restrictions. Is this China news yet another buying opportunity?

Besides the fact that bans have tended not to affect crypto prices or long-term conviction in the space, it was very encouraging to see many crypto asset shrug of the bad news, that also included an attack by SEC chain Gary Gensler, who called stablecoins “poker chips” and pointed out that experiments with private money never last long, and result in much harm.

New darling layer 1 blockchain Avalanche (AVAX), for example, is up on the week in dollar terms.

Play-to-earn crypto game Axie Infinity (AXS) and many other favored gaming assets have also behaved solidly this week. Even with regulatory headwinds in the US and China FUD, the crypto markets soldier on. 

The recent tendency for some assets to move counter to Bitcoin and ETH fits well with our views that we will see decreasing correlation between crypto assets. No longer will Bitcoin drive markets, nor will a BTC collapse affect all assets, as has been the case in every correction on record. We discussed sector rotation last week: L1s appear to have taken the lead from metaverse and gaming assets. The key to profitable investing now includes spotting the trends within sub-segments and picking the best assets within them, rather than trading Bitcoin technicals.

Snoop Dogg Revealed as NFT Influencer?

Who is @CozomoMedici? The NFT influencer burst onto the scene only last month, with the claim he or she had taken a portfolio of NFTs from zero to eight figures. Besides the fact that the tweetstorm revealed that the first purchase was $2 million (so not starting at zero), Cozomo attracted a large and active community in a very short time.

This week, famed rapper Snoop Dog claimed to be this CozomoMedici, following up with his own NFT release within Sandbox, a recent metaverse project. The collection sold out in minutes. He has also promised to give concerts and interact with others in the virtual realm.

Whether or not Snoop is Cozomo is actually irrelevant. He is simply the latest celebrity influencer to enter the NFT space. Crypto is going mainstream.

“A Decentralized Economy Needs Decentralized Money”

The most recent FUD concerns the USDC dollar-pegged asset-backed stablecoin. USDC is a joint venture between Circle and Coinbase, and with Coinbase conceding to regulators and halting its Coinbase Lend account, there have been suggestions that USDC may be forced to whitelist decentralized applications that are allowed to use it. 

MakerDAO founder Rune Christensen confirmed that such a ban would destroy DAI which, up to now, has been the dominant decentralized USD stablecoin.

The challenger TerraUSD (UST)  would, therefore,  be the primary immediate beneficiary of any USDC worries. Terra founder Do Kwon indirectly reminded Twitter that UST is not as centralized as DAI, tweeting out a fake Terra 2.0 whitepaper:

Terra is layer 1 blockchain focused on use cases for its stablecoins, so far primarily UST and its Korean equivalent. These include real world payments (Chai), leverage (Anchor) and cross-chain DeFi usage. We highlighted Terra’s growing ecosystem in last week’s blog, and continue to believe in Terraform Labs and Terra’s native token, LUNA. The stability of UST and value accrual will continue to depend on the growth in use cases for both assets, which is currently proceeding apace and is Terra’s competitive advantage over other decentralized stablecoins.

LUNA seems to have shrugged off the FUD earlier in the week, and has not been affected by the China story.

Messari Mainnet Report: It’s A Multi-Chain World

No blog this week, as we attended Messari’s Mainnet crypto conference in New York City. In last week’s blog we set out our thesis for a multi-chain world. Our views were confirmed at the conference, where many distinguished panelists believed that Ethereum will share the future of DeFi and NFTs with other chains, both specialist and non. Terra’s Do Kwon compared crypto ecosystems to cities. There is not one city on Earth. Multiple cities coexist, supporting different populations and offering varied services.

Blockchains dedicated to specific use cases will need to interact with each other. Many at the conference, therefore, were concerned about bridging between chains. On the down side, experts believe that bridges are not truly decentralized while offering opportunities for exploits. This, of course, has already been a problem. Several high profile hacks, including the largest ever,  have been bridge-related.

At the conference we were impressed with the growing Cosmos IBC, where bridging should be straightforward. Besides Terra, several specialist chains have made Cosmos their home, including one of our favorites, Secret Network (private smart contracts) as well as Akash (decentralized cloud computing), Band Protocol (oracles) and Injective (perpetual swaps and futures). In the near future, opportunities to bridge between the specialist chains should drive more value to the Cosmos ecosystem. There was an acknowledgement at the conference that Cosmos native tokens economics need to improve. If that can change, ATOM should outperform.

Overall, the mood was very positive, in spite of the week’s price action and negative regulatory and policy news. Web3 protocols such as Arweave are gaining users and traction. Layer 1s are finding their niches, including privacy (Secret), NFTs (Flow, Tezos), high-frequency DEX trading (Solana) and stablecoins (Terra). Bridges will continue to improve. Institutions continue to arrive.

The final trend we noticed may infuriate crypto-native decentralist maxis, but should be encouraging for those who are pushing for mass adoption: Onboarding TradFi into DeFi is going to result in some decentralization, or CeDeFi. Providing front ends for more seamless UX, fiat onboarding, custody and KYC/AML introduced trust back into the system. Staking services, custodians, KYC portals and fintech UIs will drive adoption. At the conference this was mostly celebrated. The DeFi mullet of fintech in the front and DeFi in the back should attract new users that may not even know they are interacting with a blockchain. Think Axie Infinity or Chai payments in Korea. The sky’s the limit.