There’s never a dull moment on the blockchain. Here’s what you need to know this week:

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MARKET BYTES

Crypto markets rebound after worst selloff in two years

Just a week after the worst crypto selloff since 2022, bitcoin recovered by more than 20%, with its price briefly surpassing $61,000 on Tuesday after hitting lows of near $49,000 last week.

Some analysts anticipate more volatility in the coming weeks as investors digest the latest inflation data (Wednesday’s consumer price index reflected the lowest inflation reading since March 2021), as well as any news that could come out of the Jackson Hole Economic Symposium (the annual U.S. monetary policy conference that’s a bit like Coachella for central bankers).

But with venture funds flowing into crypto startups, BTC and ETH ETFs continuing to grow, and international markets ramping up crypto experiments, there’s plenty to be optimistic about.

Here’s what you need to know.

Crypto VC funding continues to rise

Since the end of last year, there have been three straight quarters of increased venture capital investment in crypto startups. The second quarter of 2024 saw $2.7 billion in funding across 503 deals, up from $2.5 billion the quarter prior.  

At the same time, the number of deals fell by 12%, reflecting a trend toward larger deal sizes. And according to the latest PitchBook report, analysts expect “the volume and pace of investments to continue increasing throughout the year.” 

• Who got capital? Infrastructure startups have garnered the most attention from investors lately, with layer-1 blockchain Monad raising $225 million, the DeFi focused blockchain Berachain raising $100 million, and Bitcoin restaking platform Babylon raising $70 million. Another big winner was the onchain social protocol Farcaster, which raised $150 million in a Series A investment, bringing its total valuation above $1 billion. (Disclosure: Monad and Farcaster are Coinbase Ventures portfolio companies.)

International governments are ramping up crypto adoption

Even as the U.S. has seen bipartisan momentum on crypto legislation this year, governments in other regions continue to lead the way and are increasingly moving to create new frameworks. 

Thailand and Indonesia — both top-ten nations in terms of crypto adoption according to Chainalysis — have announced new programs designed to spur innovation in their domestic crypto industries. Thailand has launched a “regulatory sandbox” to “facilitate experiments” in crypto regulations while Indonesia just released a four-year “roadmap” for growing the domestic crypto industry.

• Meanwhile in Europe…  KfW, Germany’s largest state-owned development bank, is working on a program for blockchain-based digital bonds. It’s part of a larger effort from the European Central Bank (ECB) to study the use of blockchains to streamline transaction settlements. This isn’t KfW’s first tokenization effort. Last month, the bank issued a 100 million euro ($108 million) digital bond using the Polygon network. And in a similar ECB trial in July, an Italian state-owned bank successfully issued a blockchain-based bond.

Crypto ETF inflows show “unanimous positive sentiment” 

Last week — while BTC, ETH, and the broader crypto market all saw major declines — crypto investment products ended in the green. According to a new CoinShares report, that resilience is a sign that investors have nearly “unanimous positive sentiment towards the asset class.” 

Bitcoin investment products (mostly made up of spot BTC ETFs) saw around $13 million of inflows last week. And even during the steepest days of the selloff, outflows from crypto ETFs totalled less than half a percent of the class’s assets under management. This represented a major sign of investor confidence, according to Bloomberg ETF analyst Eric Balchunas.

• ETH’s time to shine? Spot Ethereum ETFs saw even more significant inflows during last week’s downturn, with BlackRock’s ETH ETF attracting $188 million of inflows and Fidelity’s ETH ETF adding another $44.3 million. 

SMART MONEY

What is leverage — and how did it impact markets in recent weeks?

As we covered in last week’s Bytes, the factors driving the recent turbulence in crypto markets ranged from Japan’s surprise interest-rate boost to a weaker-than-expected U.S. jobs report. 

But as is often the case when markets see big swings, another important driver was the way that “leverage” (or borrowed capital) works in the economy.

Even if your crypto transactions rarely get more complicated than buying or selling some BTC, it’s good to understand how leverage works to give you a better sense why your HODLings might be going up or down in value at any given time.  

Let’s dig in.

So what is leverage, anyway? 

Leveraged trading, also known as margin trading, is a method where an advanced investor uses borrowed assets to trade assets like crypto. This approach aims to potentially magnify returns, but it can equally magnify losses. 

Here’s a simple example of how it works: If a trader believes the price of Solana will rise, they can borrow money to buy a bunch of SOL. If the price rises as expected, their returns are amplified, and they can use some of the money they made to pay back the loan. But if the price falls, the trader is now on the hook for all the money they borrowed, meaning they can lose both their investment and the collateral they put up to secure the loan.

It’s a very high risk strategy that can result in impressive returns or major losses, which is why it’s generally a strategy best left to professional traders who understand how to hedge their risk. 

What are long and short positions?

Margin trading is usually used by speculators to bet on the price of an asset — we’ll use cryptocurrency as our example — either going up or down. This is done by opening a long or short position.

“Long position” is just a fancy way of saying you believe that prices are going to rise, so you buy or borrow cryptocurrency at its current price with plans to sell it when the price rises, aiming to generate returns.

“Short position” means you believe that prices are headed downward, so you buy or borrow cryptocurrency at its current price with plans to repurchase it when it drops, aiming to generate returns.

What happens if a trader gets things wrong?

You can lose a lot of money via margin calls or by having your positions liquidated.

A margin call is a notification from your trading platform that your “margin level” — the amount of assets the platform requires you to hold in your margin account —  is inadequate, and assets need to be added to prevent liquidation.

Liquidation is the forced sale of your collateral to cover negative returns. Because this is generally automated by trading platforms, it's also known as forced liquidation. 

So how did this all apply in recent weeks?

According to a new Wall Street Journal report, markets are currently experiencing one of the biggest deleveraging cycles in years. Throughout most of 2024, as prices for a wide variety of assets trended upward, more and more traders piled into long positions. 

But when unexpected headwinds arrived in the form of a weaker-than-anticipated U.S. jobs report, Japan’s surprise increase in interest rates, and other factors, billions of dollars in long bets were wiped out overnight.

The impacts rippled through markets of all kinds, and will likely take a while to fully unwind. As the Wall Street Journal noted, “Changes in economic or financial conditions can force investors to sell one piece of their portfolios, such as U.S. or Japanese equity holdings, to deal with losses from another, such as leveraged bets on a weak yen. The messy process to reduce risk takes time before traders can reload.”  

What happened with crypto specifically?

As the Wall Street Journal reports, over the first five days of August, crypto traders saw more than $3 billion in liquidations, helping drive BTC down 18% and ETH down 24%.

One factor that accelerated the dip was the use of derivative products like futures contracts that allow traders to make highly leveraged bets (sometimes as much as 100x) on the future price of BTC and other cryptocurrencies. 

The bottom line…

Trading with leverage is risky and best left to professional investors. But even for regular day-to-day traders, leverage is an important concept to understand because small market movements in an unexpected direction can result in liquidations that ripple through the global economy.

So what’s the next big potential trigger that analysts are anticipating? Another U.S. jobs report is due on September 6, and as the Wall Street Journal notes, “A second straight disappointment could confirm the worst fears of economic skeptics, sparking a new round of deleveraging. A strong report could show that July’s report was a one-off slowdown.”

NUMBERS TO KNOW

$250 million

Value of corporate bonds crypto mining giant Marathon Digital is selling in order to buy more BTC. As Bloomberg notes, the firm is “adopting a strategy similar to the one employed by MicroStrategy … which has been accumulating [BTC] for several years in part on a bet that the price will rise.” As of July, Marathon held 20,818 BTC, worth around $1.3 billion.

$50 million

Amount in revenue that the decentralized exchange Uniswap has earned since enacting a small user transaction fee last fall. Uniswap is the most widely used DEX, accounting for more than 25% of all DEX activity.

$6.8 million

Dollar value of a loan that the Japanese investment firm Metaplanet recently took out in order to purchase bitcoin. Earlier this year, the company revealed plans to begin accumulating BTC as part of its strategic treasury. 

43%

Percent of self-identified Democrats (polled by crypto VC firm Paradigm in July) who said it was either very important or extremely important that the “United States leads the world in high-tech software innovations such as cryptocurrency and fintech.” The key takeaway from the new survey (which followed a similar poll of Republicans in June): “Democratic voters are increasingly gravitating towards crypto.”

TOKEN TRIVIA

A pension fund from which state recently invested in a BTC ETF?

在下面查找答案。

琐事答案