The purpose of this circular is to provide a market update regarding Valour’s current underlying exposures.

Bitcoin fell 10% over the last week, dropping to mid January lows. The decline follows the spate of difficulties faced by crypto-centric Silvergate Bank, a crucial fiat payment rail servicing the crypto industry with real-time transfers. Having delayed the publication of their K-10 report last week, several notable entities severed ties with the bank, including Coinbase, Galaxy Digital and Paxos. Silvergate previously faced a run on deposits last year with the collapse of the FTX exchange and its trading desk Alameda Research. Despite selling a portion of its debt holdings earlier this week, the bank announced its voluntary liquidation leaving exchanges, market makers and trading desks unable to move liquidity. Citing recent industry and regulatory developments, the bank indicated that spot deposit balances had dropped $826m between January and February this year. Given Silvergate’s role as a crucial infrastructure bridge for the wider crypto industry, its ceasing of operations had a clear effect on market movement, notwithstanding the heightened selling pressure caused by the transfer of more than 9,800 BTC from wallets purportedly linked to to U.S law enforcement’s seizure of Silk Road coins. Consequently, data by CryptoQuant showed a 35% decline in BTC transfer volumes and a 10% decline in active addresses. Considering the market impact thus far, investors are wary of further regulatory crackdowns, especially following the SEC’s action against Kraken’s Staking-as-a-Service offering earlier last month and the NYDFS’ investigation over stablecoin issuer Paxos’ administration of BUSD. Prior to this week’s decline, Bitcoin had recovered to pre FTX levels, trading upwards of $25,000 in late February. Thursday’s news of tech and VC servicing Silicon Valley Bank’s future uncertainty sent markets into further turmoil as European banking stocks took a sharp decline in light of the increasingly fearful landscape.

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Ethereum was no stranger to the market effects of Silvergate’s downfall, trading down 10% over the last 7D. Whilst the crypto industry has been subject to increased regulatory scrutiny over the last few months, Ethereum has received expressive support from the CFTC whose recognition of Ethereum as a commodity reflects a stark contrast to the SEC’s securities classification following its transition to a Proof-of-Stake consensus mechanism, and that of the NY Attorney General’s latest action against the KuKoin exchange. Since ‘the Merge’ last September, users have been eagerly awaiting Ethereum’s Shanghai fork in which staked ETH withdrawals will be enabled. In the run up to next month’s tentative deployment date, the Ethereum Foundation has announced the launch of the ERC-4337 standard (Account Abstraction) at ETHDenver. Regarded as the key to mainstream adoption, account abstraction merges externally owned accounts with contract accounts to essentially turn executable smart contracts into software wallets for storing the currency. The recently introduced standard will bring a suite of banking operations on EVM compatible networks, including 2FA, monthly spending limits, session keys, and the decentralised recovery of wallets. This latest development aims to help onboard the ‘next billion users’ by making Ethereum more usable for all audiences. Meanwhile, on the Layer-2 scaling front, leading Ethereum software company ConsenSys has announced its plans to launch a public testnet of its zkEVM, competing against the likes of Polygon and Matter Labs (zkSync) as the race to dominate the Ethereum-based L2 market continues to intensify.

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Cardano reached a significant milestone after managing to mint a wrapped form of BTC on its network. Unlike Ethereum-based wBTC, cBTC requires no centralised custodian. Users are able to mint cBTC by adding their ADA address to the BTC TX metadata and depositing BTC which is then verified by the anetaBTC protocol. The latest development opens new possibilities for the Cardano ecosystem, enabling deeper liquidity and Bitcoin functionality on Cardano’s smart contracts platform. Although also subject to the recent market downturn, Cardano continues to advance its DeFi ecosystem with the network’s TVL reaching a new all time high in ADA terms, surpassing 340m ADA (circa $108m at current market prices).

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Polkadot’s leading parachain and innovation hub has partnered with Tokyo’s major commercial and financial centre to further advance the city’s Web3 initiatives. Astar Network, Polkadot’s ‘smart contracts infrastructure hub’ that supports EVM and WASM development has joined forces with Tokyo’s Shibuya ward in the first such alliance of its kind. Structured to help foster Shibuya’s Web3 strategy, the latest outreach follow’s Polkadot’s launch of the network’s third Blockchain Academy. Offered in collaboration with UC Berkeley’s Center for Responsible, Decentralized Intelligence, the program will serve Polkadot’s mission of creating a fairer internet, providing the educational means to further build the next iteration of the web (Web3).

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Avalanche was selected by Luxembourg based digital securities platform DEFYCA to launch its tokenised private credit protocol. Slated for release on testnet later this month, the firm intends to market the first such offering under recent European MiCA legislation. Utilising Circle’s USDC and EUROC stablecoins, users will be able to deploy capital into DEFYCA’s two investment funds, including a $100m direct lending fund for SMEs and a larger $200m fund for private infrastructure. Meanwhile, eSports giant TSM has outlined plans to launch an Avalanche subnet to facilitate gaming transactions and tournaments, using the network’s native AVAX token to fuel transactions on the Blitz subnet. Avalanche has seen increasing uptake, especially in regards to the amount of BTC being ported over its cross-chain bridge. First introduced earlier last year, BTC.b enables users to deploy their BTC holdings in AVAX’s DeFi ecosystem. Earlier this week more than 2,000 BTC was bridged over to Avalanche, moving some supply away from Ethereum-based wBTC.

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BNB traced the wider markets’ downward momentum closing the week with a 6% decrease. Seemingly, news of Binance extending its spot market share for a fourth consecutive with 2.4% MoM growth did little in the face of the Silvergate collapse. Having been subject to prolonged regulatory pressures over the last month, Binance.US received the support of the bankruptcy judge in the Voyager Digital case, despite objections from the SEC over its planned $1bn acquisition of the failed crypto lender’s assets. Meanwhile, in continued efforts to restore investor confidence amidst widespread speculation, Binance released an updated Proof-of-Reserves to include 24 tokens. The system upgrade now allows for verification of a further 11 user assets, reflecting a total of more than $63bn in the exchange’s reserves.

For Solana, Uniswap, Cosmos and Enjin, no noteworthy news updates this week.

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Macro & Markets 🏦💱

The Week Behind: 🗓️⬅️

08/03: U.S. job openings fell less than expected in Jan decreasing to 10.8m
08/03: Canada’s CB keeps its overnight interest rates on hold at 4.5%
08/03: U.S. trade deficit increased 1.6% to $68.3bn in January amidst growing trade activity
09/03: SVB shares plunge 60% as the bank announced a $1.8bn asset sale loss and attempted $2.2bn raise to stabilise their balance sheet

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The Week Ahead: 🗓️➡️

14/03: U.K Average Earnings + Bonuses (Jan)
14/03: U.S CPI (MoM & YoY) (Feb)
14/03: CNY Industrial Production (YoY) (Feb)
15/03: U.S Core Retail Sales (MoM) (Feb)
15/03: U.S PPI (MoM) (Feb)
16/03: ECB Interest Rate Decision (Mar)
17/03: ECB CPI (YoY) (Feb)

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Fear & Greed Index 😨🤑

The multifactorial index looks at investor sentiment across Bitcoin and other large cap crypto markets, covering volatility, volume, momentum, dominance, and social trends. A score closer to 0 represents ‘Extreme Fear’ whilst a score closer to 100 is linked to ‘Extreme Greed’.

Silvergate’s voluntary liquidation led to a cascade of price drops throughout this week, resulting in a ~11% decline in the total market capitalisation for crypto assets. Whilst 2023
has seen progressive upwards movement, recent regulatory pressures have prevented markets from breaking out, with the latest market development putting investors on edge. Currently sitting in the fearful territory (34), the current market landscape reflects a rapid departure from last month’s greed sentiment (58), with investors hoping for calm to be restored in the coming week.

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CBOE VIX Index 📉🦘

The CBOE VIX Index measures the implied volatility of S&P 500 Index options, traditionally following an inverse relationship.

The S&P 500 closed lower earlier this week as Fed chair Jerome Powell gave his semi-annual monetary policy report to the U.S Congress. With the Federal Reserve still unsure on whether to accelerate interest rate hikes, much remains in the balance until the Fed’s next committee meeting later this month. The derailing of Silicon Valley Bank prompted a further fall in the S&P, closing 1.8% lower as banking stocks began to succumb to widening concerns of a financial fallout. Consequently, the VIX ended the week at 22.92 (pre-market), reflecting an increasingly fearful investor landscape.

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BTC/DXY Correlation 💵📈

The DXY provides an indication of the value of USD relative to a basket of U.S trade partner currencies. Having fluctuated around its 3-month high, the DXY posted its biggest daily loss this week with US treasury yields facing a pullback after February’s unemployment report suggested that the Fed still has some way to go in curtailing inflation. At the week’s end, Bitcoin’s YTD correlation with the DXY stood at -0.44, as crypto markets faced significant volatility this past week, offsetting its 2023 gains.

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Market Dominance 📊👑

Bitcoin dominance: 41.6% (-0.6%)
Ethereum dominance: 18.5% (+0.0%)
BTC EU Crypto ETP dominance: 50.8% (-0.7%)
ETH EU Crypto ETP dominance: 28.0% (+0.9%)

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Risers & Fallers 📈🚀

⬆️ Kava ($KAVA) rose 9% this week, trading at $0.87 as of Friday morning. The Layer-1 blockchain combines the flexibility and speed of Ethereum smart contract development with the interoperability of the Cosmos SDK. Utilising a developer optimised co-chain architecture, Kava features a translator module that connects both its Ethereum and Cosmos co-chains into a single network. Its recent rise comes as the network launched validator incentives to migrate their cloud infrastructure to the decentralised computing network Akash who pledged some of their own native token to Kava’s strategic vault to advance the network’s decentralised infrastructure.

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⬇️ Stacks ($STX) dropped 35% over the last 7D, taking a larger hit than other crypto assets as the hype surrounding Bitcoin-based dApps waned. Having boasted parabolic growth last month in the wake of surging demand for Bitcoin NFTs (Ordinal inscriptions), $STX saw a significant correction as the general market for crypto assets took a dive following recent industry developments.

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Upcoming Conferences

13/03/23 - 16/03/23: ETHDubai, Dubai
15/03/23 - 19/03/23: Solana Hacker House, Ho Chi Minh City
16/03/23 - 18/03/23: ETHPorto, Porto
20/03/23 - 24/03/23: Paris Blockchain Week, Paris
23/03/23 - 25/03/23: Art Basel, Hong Kong

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That’s all for this week!

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