CoinLoan Weekly: Crypto retreat, Silvergate fallout, Coinbase’s blockchain debut
Before a steep fall, Bitcoin traded around $23,500. It rose higher on Monday, February 27, and Wednesday, March 3, eventually topping out at $23,829.95. The next day’s pullback dragged the price below $23,300. On Friday, March 3, the leading coin briefly climbed above $23,500 before collapsing to a 7-day low of $22,259.68. It failed to rise above $22,350 through the rest of the week.
BTC had the second consecutive week of straight losses. The market reacted to the news of Silvergate Capital Corp. delaying its annual 10-K report filing with the SEC. On Wednesday, March 1, the holding company for Silvergate Bank, one of the industry's key US dollar banking providers, told the regulator it needed more time to complete specific audit procedures.
Investors were also mulling the US regulatory clampdown and expectations of new interest rate hikes aimed at cooling the persistent inflation. Yet although BTC’s year-to-date rebound has shrunk to 35%, the Crypto Fear and Greed Index remained neutral throughout the week.
At press time, BTC is trading at $22,446.00, with a 24-hour change of +0.1% and a 7-day loss of -4.6%.
Like BTC, ETH fluctuated slightly for the first four days — from roughly $1,640, it dipped to just above $1,600 on Wednesday, March 1, and hit a 7-day high of $1,663.98 the next day. Friday's climb above $1,650 ended abruptly with a vertical descent to $1,550.26. Subsequently, ETH failed to recover, staying close to $1,570 for the rest of the week. Monday trading barely added any momentum.
The ETH burn rate more than halved between February 14 and March 5, reaching 2,700 ETH, as estimated by Etherscan. Burn rate declines reduce the coin’s scarcity, potentially pulling its price down. According to Santiment, the NFT trading activity on the network, a significant source of fees and value locked, also slowed down over the same period.
Unless the trends reverse soon, ETH may end up in the bearish zone. As analysts position for potential underperformance, they will watch the Shanghai upgrade closely. Initially scheduled for March, it has been delayed until early April.
At the time of writing, ETH is worth $1,573.27, with a 24-hour uptick of +0.6% and a 7-day decrease of -3.7%.
XRP incurred the least damage as it proved more buoyant. The price rose from $0.380 to a high of $0.384212 on Thursday, March 2, and hit a 7-day low of $0.359561 the next day, following the rest of the market. It then sprang to over $0.378 early on Saturday, March 4, headed down the following morning, and bounced back to over $0.372 on Monday, March 6.
XRP network growth — the net change in the number of blockchain participants — shed 37% between February 1 and March 5, suggesting the January rally was not supported by more demand for the tokens. Combined with price volatility levels reminiscent of the November 2021 crash, it prompts holders to brace for a downturn.
Meanwhile, Ripple's Fair Notice Defense, now supported by a US Supreme Court case, might give it legal leverage over the SEC. The filing states that a warning on prohibitions must be provided "in language that the common world will understand" before legal action. However, "the government's prior guidance appears to contradict its present litigating position."
As of this writing, XRP is trading at $0.373128, with a 24-hour increase of +2.3% and a 7-day slip of -1.6%.
Cryptocurrencies retreat as Silvergate delays annual report
On Wednesday, March 1, the crypto market began absorbing the fallout of the crisis at Silvergate Capital Corp, the holding company for a crypto-friendly US bank and a key industry payments network. It delayed filing its annual report citing "a number of circumstances," and announced that it was reviewing its viability and financial controls.
The notification of late filing mentions ongoing analysis of "certain regulatory and other inquiries and investigations that are pending with respect to the company" and the involvement of an "independently registered public accounting firm." It also confirms Bloomberg's reports of an investigation by the US Justice Department's fraud section.
This investigation, focused on Silvergate's dealings with FTX and Alameda Research, was prompted by short sellers' suspicions of misconduct and money laundering. For example, James Gibson and Marc Cohodes have demanded that Silvergate's auditor, Crowe LLP, look into any issues concerning the handling of customer funds. Meanwhile, US lawmakers have called the firm's earlier responses evasive and incomplete.
Last year's crisis took its toll on Silvergate: the bank reported a $1 billion loss in Q4 2022 with a $14 billion reduction in customer deposits. In January and February, it covered billions of dollars of customer withdrawals through sales of additional debt securities. Those sales are expected to bring "further losses," affecting the regulatory capital ratios of Silvergate and its bank subsidiary.
Possible ties to Bankman-Fried
According to recently added court papers with new charges against Sam Bankman-Fried, he and others may have used Silvergate accounts (the bank is referred to as Bank 1) to conceal funds used for FTX.
These allegations have come to light as federal prosecutors build their case against the former CEO. They allege he opened accounts under the name North Dimension to avoid stricter due diligence by the bank. A person familiar with the matter has confirmed to Bloomberg that Bank 1, described as a California-based entity, is Silvergate.
Implications of delay
Under the US security rules, Silvergate must file a 10-K annual report, including audited financial statements, 60 days from the end of the fiscal year. It must also provide a letter certifying the results and written attestations by the CEO and the CFO. In case of a justified delay, firms have 15 more days to comply, but the process may take longer in practice.
The Silvergate stock has lost over a third of its value following Wednesday's announcement. Several major industry players, including Coinbase, Tether, Paxos, Circle Internet Financial, and Galaxy Digital, were quick to sever ties with the struggling bank.
Meanwhile, CoinDesk's analysis of Silvergate's financial reports shows that its reputation as a pillar of the industry's US banking presence was "outsized." Even at its highest point in late 2021, the total assets only reached $16 billion. However, given the institution’s focus on digital assets and the broader regulatory crackdown, Silvergate's failures may limit the banking options for crypto businesses in the US.
Crypto community rejoices as Coinbase unveils its blockchain
Coinbase Global Inc. has announced the launch of a proprietary blockchain called Base. As a layer 2 network, it will operate on top of Ethereum to deliver a "secure, low-cost, developer-friendly way for anyone, anywhere, to build decentralized apps."
The testnet was launched in late February. Base is powered by the Optimism scaling solution and uses price feeds from the decentralized oracle network Chainlink. It will host the company's own blockchain-based products and an open ecosystem with increasing decentralization. Coinbase's ambitious goals include onboarding over 1 billion users into the cryptocurrency economy.
That said, there are no plans for a new token. Instead, Strahinja Savic, head of data and analytics at FRNT Financial, sees "proximity to Coinbase" as Base’s key advantage. Savic suggests that, like BNB Chain, still reliant on support from Binance, it could remain highly dependent on Coinbase.
Prospects for Base
The crypto community has greeted the news with cheer. However, Wall Street is not impressed due to a lack of "immediate fees or new direct revenue generation," in the words of JP Morgan analyst Kenneth B. Worthington. The banking giant expects Coinbase to "leverage Base for its own development, including its wallet and NFT platforms" as more businesses are brought on chain.
Despite its push into areas beyond crypto trading, Coinbase still heavily relies on trading fees. However, according to Needham analyst John Todaro, with Base comes another source of profit — transaction processing fees. As Coinbase will run Base itself, it may earn as much as $60 million in ETH rewards annually over the medium term, according to his rough estimates.
With a significant number of Dapps on Base, the total revenue could be multiples of that. Generally, as a first-mover positioning, the launch "gives us comfort that management is returning to its roots and offering product differentiation from non-crypto native peers, such as Robinhood," Todaro wrote.
Dapp building is Coinbase’s primary focus. According to Jesse Pollak, the company's lead for Base and head of protocols, it aims to make building and accessing Dapps "dead easy." It is also going to "double down on those values of decentralization, open source, and having this be for everyone and a bridge that connects our users into the crypto economy and brings them to places they can go that aren't controlled by Coinbase but can offer them valuable experiences."