In this issue
- Crypto hedging: Storm in port
- North Korea: Grim-chi premium
- China mining: No mercy
From the editor’s desk
It’s little more than two months since the Year of the Tiger began in the Asian lunar calendar, and, to adapt an old Chinese phrase, cryptocurrency investors have been quick to learn how to ride the beast.
As the Chinese proverb goes, the person who rides a tiger is afraid to dismount, as being on the ground when the big cat turns around is clearly a more perilous proposition than staying on its back.
In crypto terms, that means HODLing, which many investors are doing, despite the queasy ups and downs of the market.
Both BTC and ETH have since made up lost ground, as have other cryptos. But if recent market movements have taught us anything, it’s that crypto markets are increasingly reactive to the same dynamics that both drive and drag on the performance of other parts of the financial ecosystem.
And although many investors have held onto their cryptos, hundreds of millions of dollars have flowed out of cryptocurrencies as a view takes hold that they’re not quite the hedge against inflation that many had been led to believe, and as geopolitical turmoil takes a toll on markets from blue-chip equities to basic commodities such as energy.
Far be it from us to reach for a crystal ball and offer counsel to nervous members of the crypto community, but riding the tiger didn’t become a piece of ancient wisdom for nothing.
Until the next time,
Founder and Editor-in-Chief
1. Bitcoin blues
By the numbers: crypto crash — 5,000% increase in Google search volume.
The capitalization of the cryptocurrency market fell below US$2 trillion on Tuesday, with Bitcoin dropping to less than US$40,000 and Ethereum to under US$3,000 for the first time this month. U.S. equity markets also slipped. Asianmarketsense.com founder and commentator Andrew Sullivan told Forkast that a number of macroeconomic factors had driven the sell-off.
- A Covid-19 outbreak in Shanghai has prompted authorities in China’s largest city to lock down more than 26 million residents, feeding further concerns over already strained supply chains and demand in the world’s second-biggest economy.
- “A lot of people have bought Bitcoin or cryptocurrencies as an investment, as a hedge,” Sullivan told Forkast. “But when times become tight, they’re going to have to sell to use that income if the rates or the returns that they’re getting aren’t sufficient.”
- Sullivan added that potential monetary policy tightening in the U.S. was another uncertainty on investors’ minds.
- The Federal Reserve raised its benchmark lending rate by 0.25% last month, its first interest rate rise since 2018.
- Sanctions against Russia imposed in response to its invasion of Ukraine are pushing up the cost of critical commodities such as oil.
- “A side effect of crypto markets maturing is an increased correlation with traditional markets,” said Justin d’Anethan, institutional sales director at Amber Group. “As more sophisticated investors and funds allocate to BTC or ETH, they manage that position in relation to others.”
- Almost US$430 million of long positions on crypto were liquidated during the recent sell-off.
- Bitcoin was trading at US$40,205 and Ether was changing hands for US$3,064 at press time.
Forkast.Insights | What does it mean?
Bitcoin was once regarded as a hedge against the risks associated with stock market investment. When equity markets faced headwinds, savvy investors moved assets into crypto to weather them. Not any more. Bitcoin — and by extension, the broader crypto market — now dances to the same tune as equities.
Bitcoin’s slide south is in line with growing unease in the global economy. In the U.S., high inflation is dampening growth. In Europe, war and the prospect of a blockade of Russian oil and gas are stoking a cost of living crisis. In China, a fresh Covid outbreak is closing factories and commerce, squeezing output.
Crypto, like most assets, is hardly immune to such global events. Bitcoin’s correlation with the tech-heavy Nasdaq index is at its strongest since 2010, according to recent data. Its correlation with the S&P 500 is also at historic highs.
As investors peer wearily at forecasts for the remainder of the year, net outflows of capital from Bitcoin have been growing. Although Bitcoin boosters have been exhorting investors to buy BTC while it’s relatively cheap, events suggest that gold, the world’s oldest hedge against geopolitical risk, may be a safer bet.
2. From Pyongyang to prison
By the numbers: Ethereum — over 5,000% increase in Google search volume.
Former Ethereum developer Virgil Griffith was sentenced to 63 months in prison by a New York court on Tuesday. He pleaded guilty to one charge of conspiracy after violating international sanctions by delivering a presentation on blockchain and crypto in North Korea in April 2019.
- The Ethereum developer was arrested in November 2019 and forfeited his earnings from the lecture.
- Griffith was charged with violating the International Emergency Economic Powers Act. His presentation was interpreted as educating North Korea on how to evade sanctions through the use of cryptocurrencies and blockchain technology.
- State-backed North Korean cybercrime group Lazarus has been accused of stealing around US$400 million of cryptocurrencies in at least seven cyber attacks, according to Chainalysis, a blockchain forensics firm.
- North Korea has been funding its nuclear and ballistic missile programs using stolen cryptocurrencies, reported Reuters, citing the United Nations.
- Cryptocurrencies have been in the spotlight since Russia invaded Ukraine, as Western nations take a hard look at whether Bitcoin and other tokens offer a way of evading sanctions imposed in response to Russia’s invasion.
Forkast.Insights | What does it mean?
It was clearly unwise for Virgil Griffith to go to North Korea to talk about crypto. But the Ethereum developer’s punishment has become politicized.
Griffith has been described by pundits as handing North Korea blueprints for avoiding sanctions. Yet the so-called Hermit Kingdom had been dabbling in digital asset theft long before Griffith attended the conference at which he spoke in Pyongyang.
In the decade since Supreme Leader Kim Jong-un came to power, North Korea’s army of hackers had been stealing and engaging in extortion on the state’s behalf with increasing effectiveness.
In 2018 — a year before Griffith rolled into Pyongyang — North Korea had built and deployed a piece of malware called AppleJeus, which posed as a cryptocurrency trading platform in order to steal funds from people attempting to use it.
According to recent reports, AppleJeus hackers have stolen virtual assets worth nearly US$320 million. Pyongyang has long regarded cryptocurrency as a means to finance its miserable economy and didn’t need Griffith’s knowledge of blockchain to do so.
Griffith’s conviction should be seen as a warning to other developers looking to spread the crypto gospel to first do their homework on where they want to preach.
3. China whacks anew at crypto mining
China is continuing its campaign to stamp out what’s left of the country’s cryptocurrency mining industry, six months after it imposed a crypto ban last September, with the provinces of Guangdong, Heilongjiang and Shanxi reporting mining equipment seizures and other measures against mining operators.
- Dongguan, a major industrial city in Guangdong Province, recently reported earlier this month that authorities had seized 2,957 crypto mining machines in a campaign lasting from October 2021 to March 2022, during which a 2,000-square-meter crypto mine with around 1,000 mining machines was shut down.
- Yunfu, a mid-sized city also in Guangdong Province, reported last week the seizure of a crypto mine with 554 mining machines that had been disguised as a stationery workshop.
- Mudanjiang, the third-largest city in the northeastern province of Heilongjiang, reported the seizure of more than 60 mining machines last month, a case in which miners stole electricity from the public supply to power their operation.
- Shanxi, a landlocked northern province with abundant coal resources, announced that it would raise electricity prices for mining farms by 1 yuan (US$0.16) per kilowatt-hour starting from May 10.
- In September 2021, the National Development and Reform Commission (NDRC) jointly announced with 10 other authorities that it planned to implement the crackdown on crypto mining, eliminating existing mining operations and preventing new ones from opening. The NDRC officially designated crypto mining an “obsolete” industry in January.
- To ferret out crypto mining operations, Chinese authorities typically look for unusually high levels of electricity consumption and IP addresses associated with mining pools to locate crypto mining farms.
Forkast.Insights | What does it mean?
The blanket ban on mining introduced in September has not stopped Chinese data center operators from betting on their lucrative business and keeping it running on the sly. That means the Chinese government has had to get creative to identify hidden mining operations.
Several local governments are raising electricity prices for those who have mined crypto as a punitive measure. It’s worth noting that the provinces that have jacked up electricity prices are located mostly in eastern China, where power consumption volume typically surpasses that in the west of the country. Provinces such as Yunnan and Sichuan — which boast abundant power resources and used to be hotbeds of crypto mining — have not introduced such price hikes.
China’s long-running anti-corruption campaign has also been part of the picture, as government officials and state entities have pocketed “dirty money.” The country’s anti-graft watchdog said last month that its branch in the eastern province of Zhejiang had discovered 48 suspects in illegal crypto-mining cases after “randomly” raiding 20 state entities and the locations of 36 IP addresses. A former provincial-level official was removed from office and expelled from the Communist Party last year after he was accused of abusing his power to support mining activity.
Bitcoin miners who opted not to move abroad during the exodus of their peers last year to which the crackdown gave rise will struggle to survive amid ramped-up government efforts to wipe them out. Or, perhaps like the Chinese crypto traders who have found ways to bypass the government ban on their activity, determined miners will figure out a way to keep plying their trade in the shadows.