Commentary

Supply Overhang, Miner Capitulation, and First MiCA-Compliant Stablecoin

Week in Review

Commentary

Supply Overhang, Miner Capitulation, and First MiCA-Compliant Stablecoin

Introduction

Week in Review

  • SEC returns S-1 forms to ether ETF issuers, with at least one more round to go
  • Circle earns license to issue USDC and EURC under Europe's MiCA regulatory framework
  • Miner capitulation levels now comparable to end-2022 lows post-FTX implosion

Crypto markets decline, Circle leads MiCA stablecoin future

Crypto markets continued to decline, with the total market cap slipping by 1.3% compared to the previous week, while bitcoin's dominance remained steady above 53%. BTC fell by 1%, and ETH dropped by 2.3% week-over-week. In the US-listed spot bitcoin ETF space, after daily outflows in the second and third weeks of June, flow activity slowed in the last week of June, followed by a $129.5 million net inflow on July 1, 2024.  This early trend may indicate a potential market structure change due to ETF adoption. 

The first trading day of the month typically sees noticeable ETF flows due to monthly investment contributions, portfolio rebalancing, new cash deployment, and performance reporting adjustments.

The US Securities and Exchange Commission has returned the S-1 forms to prospective ETH ETF issuers following the latest round of review, indicating light comments according to news reports. Issuers have until July 8 to address these comments and resubmit the forms. This process marks the second step in the ETF approval process, with the first step involving the approval of issuers' 19b-4 forms in May ahead of a critical deadline. 

Unlike the 19b-4 forms, there is no specific deadline for the S-1 forms, leaving issuers dependent on the SEC's turnaround time. Earlier speculation suggesting ether ETFs could launch as early as July 4 was ruled out, with issuers uncertain about the exact launch timing until the SEC clarifies final filing deadlines. SEC Chair Gary Gensler previously indicated that ether ETF approvals could occur "sometime over the course of this summer," but specifics on timing remain unclear.

Circle has received licensing and approval to issue stablecoins under the Markets in Crypto Assets (MiCA) framework, making it the first global stablecoin issuer to meet MiCA compliance effective from July 1, announced CEO Jeremy Allaire during a press conference in Paris. 

According to the press release the company is now registered as an electronic money institution, or EMI, in France. This milestone enables Circle to issue its stablecoins USDC and EURC within the regulatory framework. The approval follows Circle's ongoing efforts to align with regulatory standards in the stablecoin sector, including obtaining a digital asset regulatory license in France last December. Circle will introduce its MiCA-compliant stablecoins in Europe through its French entity. MiCA mandates that stablecoins issued in the region meet stringent regulatory criteria, with phased implementation of additional provisions expected to be completed by year-end. Starting June 30, stablecoin issuers must adhere to initial MiCA requirements. Non-EU stablecoin issuers serving EU residents are also required to comply with MiCA regulations.

BTC supply overhang, zoom in zoom out

In a matter of days, Mt. Gox, the bankrupt Tokyo-based bitcoin exchange, will commence the long-awaited process of reimbursing thousands of users with approximately $9 billion worth of tokens. This payout marks the conclusion of a decade-long saga since the exchange collapsed due to multiple thefts that resulted in the loss of up to 950,000 bitcoins. The distribution follows a complex bankruptcy proceeding fraught with delays and legal battles. 

On June 20, the court-appointed trustee overseeing the exchange’s affairs announced that payments to  creditors would start in early July. Recipients will receive a combination of bitcoin and bitcoin cash, an early derivative of the original cryptocurrency. Users who choose to receive their reimbursements in cryptocurrency have seen the value of their coins soar by over 10,000% over the past decade. However, there are concerns that this influx of Mt. Gox-related funds could lead to significant bitcoin sales as users seek to capitalize on their gains.

This development has been a major overhang for the crypto markets across various cycles, potentially triggering a sell-off in July due to substantial liquidation. Once this process concludes, it could ultimately benefit market dynamics, particularly during the remainder of the summer months, which have already absorbed significant selling pressure from government sales and transfers, and the return of over $2 billion in seized bitcoin by Gemini’s Earn lending program.

Additionally, according to a Cryptoquant report, miner capitulation levels are now comparable to those seen at the end of 2022, a period marked by significant market correction following the FTX collapse. Miner capitulation indicators such as declining hashrate and reduced mining revenue per unit of hashrate (hash price) have both shown sharp declines this month, with hashrate plunging by 7.7% since the halving and hash price nearing all-time lows.

Hashrate represents the computational power in the Bitcoin network, while hash price denotes the revenue miners earn per unit of hashrate. As miners face diminished daily revenues—falling from $79 million on March 6 to $29 million currently—many have begun shutting down equipment, further contributing to the decline in hashrate. Historically, instances of Bitcoin miner capitulation have often coincided with market bottoms, indicating a potential turning point ahead.

Macro pulse 

Traditional financial markets experienced a risk-on sentiment this week. Oil futures surged by 3.4% compared to the previous week, and US equities rose by 1.1%. 

US stocks continued their upward momentum, printing fresh highs. The latest FOMC Minutes, released after the market close, indicated that most participants viewed the current policy stance as restrictive. Several participants noted that if inflation remains elevated or increases, the Fed Funds Rate may need to be raised. 

The US Dollar Index dropped by 70 basis points following several disappointing data releases, including Factory Orders, ADP Employment, Jobless Claims, and ISM Non-Manufacturing PMI data. Additionally, the 10-year US Treasury yield rose by 3 basis points, while the Gold & Silver index rallied by 3.7% week on week.

*Note: Weekly (7 calendar day) performance figures are as of 8am SGT on July 4, 2024 

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