Binance’s labyrinthine shady operational dealings have long been crypto’s ‘known unknown’. For that reason, news that the company has been landed with one of the largest corporate penalties in US history came as no surprise.
The crypto industry has been aware its largest exchange has been operating illicitly for years. Binance turned a blind eye to its legal obligations for KYC / AML in its early years, enabling the potential for funds to flow to terrorists and other criminals through its platform. This Tuesday, the industry breathed a sigh of relief as Binance took its hit: $4.3bln fine, and CZ, the CEO stepping down with an expectation of sentencing later. We are pleased action has finally been taken and believe Binance’s settlement with US regulators is a long-term positive development for a number of reasons.
Demand drivers
Firstly, it allows for the industry to move forward as institutional adoption accelerates and new exchange and custody alternatives emerge. The settlement also diminishes the systemic risk of the largest liquidity crypto exchange being taken out. The replacement CEO is a former regulator and marks a potential for a fresh start for the platform to do things the right way.
The saga also underlines the demand for bitcoin. Many commentators had previously forecasted that bitcoin could crash if Binance began to wobble. But in the face of the settlement, bitcoin has demonstrated impressive resilience – after a brief dip off the year’s highs, just 48hours later it was back knocking at the $38,000 level.
There are two strong catalysts for the unique asset looking forward just a few months: firstly, we believe the much anticipated BlackRock spot bitcoin ETF will drive mainstream retail and institutional adoption, but more importantly it unlocks trillions of dollars of 401k money. Even a few basis points of an allocation implies tens of billions in inflows for an already scarce asset that keeps getting scarcer.
To that point, the second seismic demand driver is the next bitcoin ‘halving’ in April 2024. The total supply of bitcoin is capped at 21 million, and as of now, over 19.5 million bitcoins have already been mined, leaving less than 1.5million yet to be issued. Bitcoin’s protocol implements a mechanism known as ‘the halving’, which progressively reduces the number of new coins introduced with each new block by 50% every 4 years, meaning that that last 1.5million will take another 117 years to be issued.
Dwindling supply
This is also the first time in bitcoin’s history that we approach a halving with less bitcoin available on exchanges than the previous halving. Exchange balances are approximately 600,000 bitcoin lower than four years ago. On top of that a further 1.3mln bitcoin have been issued over that period. So, 1.9mln bitcoin have been removed from liquid circulation in four years, all while we are at 3-4% adoption by the global population, less than 1% adoption by corporate balance sheets, and less than 1% adoption by nation states. And only 1.5mln bitcoin left to be mined forever.
This is against a backdrop of traditional financial market players creating a bridge into the industry. Banks the world over have been creating trusted third-party custody alternatives, and trading services. Swiss private and cantonal banks have been active here with names such as Syz, Maerki Bauman, Zuger Kantonalbank and St Galler Kantonalbank all providing services to their clients.
Meanwhile, in the hedge fund space, the recent volatility is providing an abundance of alpha for those employing volatility arbitrage, futures arbitrage, mean reversion and market making strategies. This is opening a door for traditional market investors to dip their toe into an asset class bearing the same opportunities that were harvested in the golden age of hedge funds in the eighties and nineties. Diversified and highly diligenced vehicles like SyzCrest offer investors access to that unique alpha.
We are currently living through the scaling and adoption of a new asset class, bitcoin, alongside an emerging but volatile digital asset industry. Institutional adoption will mean plenty more short-term pain for those participants who break the rules, but this period of industry maturation will benefit the digital asset space over the long term.
