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Monthly Market Review - February 2023

There was strong price resilience, interesting regulatory action, and a new token launch in February.

Bitcoin

Ethereum

Price (1 Feb. 2023)

$23’139

$1’586

Price (28 Feb. 2023)

$23’180

$1’612

% Return

0.18%

1.6%

February saw a choppy market, with market volatility at the same level as the middle of 2022 and trade volume near its lowest level over the past two years. Despite the low market activity and a drop in the broader equities market, prices remained elevated, which shows the market's resilience at these levels.


In February, the SEC fined Kraken, a US-based regulated exchange, for offering “Staking as a service” to their US-based customers. This service allowed users to ‘stake’ their digital assets via the Kraken platform to participate in securing various proof-of-stake protocols and receive interest in return. Kraken allowed users to do this easily via their website and took a portion of the interest earned. The SEC deemed this an illegal offering without the required disclosures, and they settled with Kraken stopping the service and paying a fine.


Although regulatory action is painful for the industry in the short term, we believe a clear regulatory framework is positive over the longer term. At this stage, there is a turf war between the various US regulators regarding who is best positioned to regulate digital assets and where the split should be. Prior SEC regulation has targeted illegal and bad faith market action, which didn’t help solve more technical questions, such as whether the SEC deemed ETH a security. This is one of the first cases in which the SEC has started indicating which good faith services fall under their purview and what they believe is required to offer them. In time, this will create a regulatory framework through enforcement that digital asset companies can use to guide their actions. This framework and the further development of digital asset policy will create more regulatory certainty and, in turn, help the space flourish.


The NFT space was awakened in February when Blur released its token on the 14th. Before this release, the biggest exchange for the trading of NFTs was OpenSea, which charged 2.5% on all sales. As the chart below shows, OpenSea was the more dominant force until the release of the token; since then, Blur has matched its trade count.

Blur exceeded the trade count of OpenSea by targeting professional NFT traders who prefer low fees and high volumes. However, these traders have helped Blur grow its market offering, which has caused a step change in its daily active users. Therefore, in attracting the ‘power users’ by using a token, Blur has also lured the casual NFT traders who have followed the professional traders.

OpenSea reacted quickly to this threat by decreasing their fee to 0% for the foreseeable future. The user war between OpenSea and Blur is just another example of the power of using tokens to attract users. Uniswap, the largest decentralised exchange, had to contend with Sushiswap doing the same thing last year and was eventually forced to release a token to remain dominant. We believe OpenSea may have to do the same.


Traditionally, once internet companies have built a strong community, they are hard to usurp; however, in Web3, tokens have proven an effective tool to bootstrap network effects and grow a strong community. Overall, this is good for users as it prevents major marketplaces from becoming rent-seeking as they grow in dominance; rather, they are forced to share some of the value they generate with their most valuable users to prevent them from being lured away by a competitor.


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