Bitcoin price rallied past the $27,000 mark yesterday morning but is back in the $26,000 range today. As of this writing, the cryptocurrency is changing hands at $26,923, down 1.2% from a day earlier.
Amid regulatory crackdowns and investor defections in the United States, there is a sliver of positive news from Asia. CoinDesk reports that investors there are still holding onto their reserves of the cryptocurrency and Coinglass data shows that liquidations of its long positions trail those of its shorts.
Red Flags
The vote of confidence for Bitcoin by Asian investors, however, does not solve the cryptocurrency’s immediate problems as an asset class. Its trading volumes are down and there are fewer investors in its markets.
The biggest venue for trading the cryptocurrency is Binance, an exchange that was recently charged by the Commodities Futures Trading Commission (CFTC) for flouting Anti-Money Laundering (AML) and Know Your Customer (KYC) laws in the United States.
Another red flag is that its biggest trading volumes occur against Tether. The stablecoin is the subject of three legal cases. In an ecosystem that makes a big deal about transparency, Tether functions as an opaque entity. Its banking relationships are unknown. Its management is missing in action. And its attestations are smoke and mirrors.
The Stablecoin Dependence
Bitcoin’s future price action depends on stablecoins like Tether, states a new analyst note by JP Morgan. According to them, crypto prices are unlikely to recover until stablecoin supply and trading volumes increase.
Because they are mostly backed by the US dollar, stablecoins function as a proxy for fiat in cryptocurrencies. Investors can book profits by using them to enter and exit trades in volatile crypto markets.
Stablecoin volumes and numbers have shot up in the past during bull runs. This year, however, they are down because of regulatory action and uncertainty about crypto regulation. Only Tether has bucked prevailing winds and increased its circulating supply.
To back the new tokens, Tether claims to have bought more treasury securities. But even that is not enough to assuage concerns about the future. “The share of U.S. Treasury Securities in the reserves of major stablecoins has been increasing over time, implying a big challenge by stablecoins to maintain their pegs in an adverse scenario of U.S technical default,” write JP Morgan’s analysts. A teetering Tether peg will magnify problems in bitcoin price.
Visa Nixes Ether for USDC In Test Run
Payment processing giant Visa has successfully conducted a test run to commit transactions on Goerli, Ethereum’s test blockchain. According to a report from online publication The Block, the payment processor simplified user interaction with the network by eliminating the need for end users to hold ether to pay fees.
“…the company can potentially employ account abstraction scenarios to facilitate more user-friendly stablecoin transactions. This includes taking care of transaction fees for users or offering users the option to pay with any token of their choice including stablecoins,” writes the publication.
Digging further, this functionality was enabled by the ERC-4337 standard for smart contract operations earlier this year. Among other things, the standard eliminates the need for ether as gas fees. Visa will be able to design its ERC-20 tokens, or it can use alternatives, like USDC, for its transactions.
Ether’s Future Price Action
While account abstraction is good for Ethereum’s adoption as a blockchain to commit transactions, the new standard is not good news for its native token’s future. One of the pegs of future price action for ether is user demand. A decline in the amount of ether available in the markets coupled with increasing supply is supposed to push its price higher.
But ether’s only use case this far in its short existence has been as a token to conduct transactions on Ethereum. Other institutions and startups using the blockchain could also increasingly choose to create their own tokens, instead of relying on an unproven and volatile asset that is prone to high transaction fees.
Staking Rewards
Staking is another lynchpin for ether’s evolution as an investment asset. Even here, things are not looking good. The average rewards figure for validators – systems responsible for assembling blocks of transactions – on Beacon Chain, Ethereum’s main network, have trended downwards after the Shapella upgrade. That upgrade enabled withdrawals of staked ether.
However, the overall figure for rewards, one that considers all active validators operating across the blockchain, has followed a more erratic trajectory. As of this writing, there are 65,405 validators outside of the Beacon chain.
The problem with these disparate stories is that it means the rewards rate differs between validators on Ethereum’s network. Consider that the figures for ether staked at validators have jumped by 2.3 million since Shanghai. Approximately 1 million of that number consists of ether handed out as rewards to validators. It is likely that validators outside the Beacon Chain are pumping up rewards rates because ether’s price has not risen after the upgrade.
Ether’s utility, or lack of it, does not figure in the rates since the number of transactions on the blockchain’s network – an important variable in rewards calculation – has remained constant since the beginning of this year, except for a brief spike due to a meme coin. Instead, many validators have resorted to using tactics like Maximal Extractable Value (MEV) – a front running tactic that steals from users – to pump up their rewards offering.
What are the chances that a staking program based on a cryptocurrency with dwindling use cases and sustained by illegal practices will survive regulatory scrutiny?