Silvergate, a Crypto-Friendly Bank, Amid a Post-FTX Hangover

Audy Castañeda
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<strong>Silvergate, a Crypto-Friendly Bank, Amid a Post-FTX Hangover</strong>

Crypto winter puts Silvergate in a tricky position.

Silvergate is on the list of the of FTX´s bankruptcy victims and its affiliated entities. The Bank is in the crosshairs of American regulation due to its connections with Sam Bankman-Fried’s companies. The report on its performance in the fourth quarter of last year shows that the collapse of FTX and Alameda had a significant impact on the company financial health.

The company’s financial position figures illustrate the extent of this exposure. 90% of the bank’s deposits come from crypto companies. At the end of the third quarter of last year, half of the bank’s deposits came from its top ten clients, which include Coinbase, Paxos, Crypto.com, Gemini, Kraken, Bitstamp, and Circle.

Silvergate Faces Changes at FTX and Alameda

The crypto winter puts Silvergate in a difficult position. The bank held funds from Alameda and FTX. Some observers pointed to the risks associated with possible exposure of Silvergate to crypto lending firm BlockFi, which has also filed for bankruptcy.

In light of these growing concerns, Silvergate CEO Alan Lane attempted to reassure the company’s stakeholders in a November 11 statement, asserting that FTX deposits only accounted for less than 10% of $11.9 billion in total client deposits in the bank, as of September 30.

Lane also noted that Silvergate has “no outstanding loans or investments in FTX.” Furthermore, the bankrupt crypto exchange would not be the custodian of SEN leverage loans, which are collateralized by bitcoin (BTC). FTX would not be more than a simple depositor close to the bank.

Silvergate had also tried to minimize its exposure to BlockFi. In a November 28 statement, the company revealed that it had $20 million in customer deposits on the crypto platform, but had no investments in BlockFi. The crypto lending firm would also not be a custodian of Silvergate’s leveraged loans, which are collateralized by bitcoin.

Deposits in Plunge, Sales at a Loss, and Mass Layoff

The abovementioned crisis announcements apparently failed to allay investor and customer fears. The collapse of Terra, Three Arrows Capital, Celsius, FTX, and Alameda has created a crisis of confidence, the consequences of which can be fatal for third-party custodians, whose reserves are insufficient in the event of massive withdrawals of funds by their clients.

According to a January 5 financial statement from Silvergate, total deposits from clients whose activities are related to digital assets amounted to $3.8 billion as of December 31, compared to $11.9 billion. dollars as of September 30. During the last quarter of last year, these deposits decreased by $8.1 billion.

Faced with this significant drop in deposits, Silvergate decided to sell $5.2 billion in debt securities to obtain cash. The sale of these securities and related derivatives resulted in a loss of $718 million during the fourth quarter of 2022.

To sum up, the crypto winter continues at the beginning of 2023. Silvergate and other crypto companies are forced to carry out budget cuts at the expense of their staff. The race for cash continues during these bear markets that have seriously damaged the finances of the giants… with feet of clay for some.

By Audy Castaneda

The FTX Case and the Automated Trading Strategy

Audy Castañeda
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<strong>The FTX Case and the Automated Trading Strategy</strong>

Even with an automated strategy, market share could happen at the wrong time.

In the last few months, there has been a very strong shock throughout the crypto world. The reference is to the FTX case, until recently, among the best-known cryptocurrency exchanges in the world, second only to Binance, which has currently filed for bankruptcy before the competent authorities.

Investor confidence in the world of cryptocurrencies is weakening. This is due not only to the FTX case, which adds to the LUNA case that shocked the industry last spring but also to how these events occurred in a very short time.

History of the FTX Crash and Market Dynamics

The founder of FTX is Sam Bankman-Fried (SBF). Their exchange was widely used by cryptocurrency traders around the world. It was also regulated in many countries; unfortunately, traders who had invested in said exchange from trouble could not be spared from the harsh consequences of the FTX’s collapse.

FTX, through subsidiaries such as Alameda, invested the money deposited by clients by committing a large sum of FTT tokens (issued by FTX itself). A type of maneuver that would appear to constitute fraudulent activity that puts customer deposits at serious risk.

As if that were not enough, with two days to go, one of FTX’s main competitors, Binance, announced plans to sell $2.1 billion worth of FTT on the market. Such news generated panic, creating a kind of virtual ‘bank run’. Therefore, the FTX exchange was faced with large withdrawals; as a result, it ran out of liquidity within two days, and it blocked withdrawals.

Many other exchanges sought cover by activating an audit mechanism called ‘Proof of Reserves’, circulating various reports on Twitter confirming its strength, as well as disclosing the assets held. This was an attempt to stop the ongoing withdrawals that were triggered in November, which continued, although to a lesser extent, in December.

Automated Trading Strategy: Some Conclusions

Unfortunate cases occur regardless of the strategy used. That is, even with an automatic strategy, investors may find themselves participating in the market at the wrong time. Certainly, the use of a stop loss or, in any case, a condition to exit the trade after too long bearish movements, in itself limits significantly the risk, because in any case, the profit could be reduced immediately.

In contrast, “buy and hold” strategies generally work without stop loss or other exit conditions. In any case, investors should monitor their positions, keep their eyes open, and stay as far away from fraudulent brokers as possible. The goal is to avoid being put in the position of trading in an illiquid and extremely volatile market.

By Audy Castaneda

Polygon Prepares for Hardfork to Win Fees

Audy Castañeda
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<strong>Polygon Prepares for Hardfork to Win Fees</strong>

The update is scheduled for January 17, 2022.

The developers of Layer 2 Polygon propose a hardfork of the Blockchain, whose goal is to smooth out gas load spikes, thereby reducing the time for potential Blockchain reorganizations.

The first change is related to adjusting how the network sets the gas fee to include a transaction in a block. During periods of high demand, the value traditionally increases, but sometimes it happens exponentially.

To smooth out gasoline spikes, the team proposed increasing the Base Fee Change Denominator (sets the base fee) from the current 8 to 16. This is expected to help smooth the rate of increase/decrease in gasoline prices.

Layer 2s are an obvious success in the world of public Blockchains. Polygon is an example of this in the Ethereum ecosystem. Its developers like to point this out, citing in particular the figure of 207 million unique addresses.

However, like the L1, Polygon is due for technical updates, one of which is coming very soon. In fact, the Blockchain plans to carry out a hardfork, classified as ‘critical’, starting on January 17, 2023. This is how Polygon tweeted about it:

“The proposed hardfork for the Polygon PoS chain will make key upgrades to the network on Jan 17th. This is good news for devs & users — & will make for better UX. You will NOT need to do anything differently.”

Gas Peaks Smoothed over Time

This development is part of the “more immediate steps to improve the performance and predictability of Polygon PoS,.” and for its deployment, “network approval” is required.

The announced hardfork has two main goals. One is therefore, “to reduce the severity of gas spikes, that is, increases in transaction fees paid by Blockchain users.”

The second goal consists of “reorganizations of the process chain (reorgs) with the aim of reducing the completion time.”

Blockchain reorganizations occur when a validating node receives information that temporarily creates a new version of the chain, the developers recalled.

Simulations performed using Polygon PoS mainnet history data suggest significant gains in fee predictability. “The basic gas rate exchange rate is expected to increase from 12.5% ​​(100/8) to 6.25% (100/16) to smooth out sharp fluctuations in gas prices.”

Unchanged Block Rewards

The developers highlight that the upgrade does not mean cost stagnation. The mechanism will be “more in line with how Ethereum’s gas dynamics works.” They further explain that such change “will not affect the total time or number of blocks produced by a validator, so there will be no change to global rewards.”

The developers proposed to reduce the transaction completion time from the current ~128 seconds. up to ~32 sec. This is planned to be achieved by reducing the sprint duration (the number of blocks created by the validator continuously) from 64 to 16.

By Audy Castaneda

Crypto Exchanges Continue to Fight Private Banks for the Right to Open Bank Accounts in Chile

Audy Castañeda
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<strong>Crypto Exchanges Continue to Fight Private Banks for the Right to Open Bank Accounts in Chile</strong>

Banks refuse to include cryptographic companies as clients due to the risks that are otherwise managed when serving other types of clients.

The conflict between banks and cryptocurrency exchanges in Chile is still unfolding, as some banks are reluctant to serve these types of institutions.

A new report produced by the exchanges shows that most of these banks refuse to list crypto companies as clients due to the risks that are nevertheless managed in the case of serving other types of clients.

Cryptocurrency Exchanges Versus Banks in Chile

Cryptocurrency exchanges, as well as other cryptocurrency-related companies, continue to fight private banks for the right to open and manage bank accounts in Chile. The legal fight, which began in 2018, when several exchange houses closed their bank accounts by various banking institutions, will be defined this year before a national court of free competition.

Buda.com, a Chilean exchange house, produced a document concluding that banks are colluding to deny their services to cryptocurrency exchange houses, for reasons applicable to other businesses, such as companies that operate with jewelry, watches, vehicles of all kinds, works of art, or antiques.

Regarding these businesses, the document states that “are universally recognized as a possible means for money laundering – and who, moreover, are regulated by being obligated subjects in comparative law, but not in Chilean law.” The document also criticizes the use of money laundering, as well as the lack of clear regulations in crypto, as mere pretexts for taking non-competitive actions.

Explaining the Conflict

The defense of private banks focuses on the fact that there are still no defined protocols to manage the risks associated with cryptocurrency operations, and that money laundering activities, if they occur, could not be detected or managed. However, exchanges dispute that banks act against exchanges without clear laws, and 79% of shutdown or denial-of-service events occur within a three-month period.

Bice Bank, one of the banks included in the lawsuit, claims that it had defined that it would not operate with companies based on cryptocurrencies three years before the trial began, establishing that it would do so only when there was due diligence and anti-money laundering and terrorism financing regulator.

On the other hand, Security Bank, another financial institution, pointed out that its decision derives from the fact that cryptocurrency exchanges “do not have the necessary regulation to adequately prevent these risks, and will not have it in the short term either.”

However, regulation in the field is slowly unraveling, as Chile recently passed and sanctioned a fintech law that includes cryptocurrency in its scope. In addition, some exchanges have already opened accounts after signing due diligence agreements, as Buda did with BCI bank in October.

By Audy Castaneda

El Salvador – A New Crypto Law Paving the Way for “Volcanic Bonds”

Audy Castañeda
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<strong>El Salvador – A New Crypto Law Paving the Way for “Volcanic Bonds”</strong>

El Salvador continues its journey as a pioneer country in the field of cryptocurrencies.

For better or for worse, Nayib Bukele, President of El Salvador, took Bitcoin to another dimension in 2021, when it became an official currency for the first time in its short history, a status that some economists and politicians, visibly gifted at denying the obvious, yet still refuse to acknowledge.

Be that as it may, El Salvador continues this adventure against opposition and criticism. The last step has just been officially voted by its Legislative Assembly, with the adoption of a new law favorable to cryptocurrencies besides Bitcoin. More specifically, it is a framework to legally protect transfers and debt issuances.

A Legal Framework for All Cryptocurrencies

The information was obviously transmitted on the official Twitter account of Nayib Bukele. “The Legislative Assembly of El Salvador has just approved, by an overwhelming majority, the new digital securities law.” A text that therefore opens the borders of this country to all altcoins, that is, “to all digital assets that are not bitcoins. As well as those issued in bitcoin”, in the words of the National Bitcoin Office (ONBTC):

“Today, El Salvador is leveraging its first-mover advantage by passing landmark legislation that establishes a legal framework for all digital assets other than bitcoin, as well as those issued in bitcoin. The law also paves the way for Volcano bonds that we will soon begin issuing.”

This is a “historic legislation”, presented as favorable to cryptocurrencies. Generally speaking, it is a desire to protect transfers made with these digital currencies, in order to provide unprecedented consumer security against bad actors in the crypto space. Everything happens under the supervision of the National Commission of Digital Assets, in charge of enforcing this law, and “protecting the rights of buyers of digital assets as well as issuers in El Salvador.”

1 Billion “Volcanic Bonds”

There is also a second aspect to this “historic legislation”. The regulatory framework thus defined will allow El Salvador to issue its famous Bitcoin bonds, also called “volcanic bonds”, a process that started as soon as the project was officially announced, in November 2021. This was completed through the issuance of one billion dollars in bonds backed by BTC.

This is how the National Bitcoin Office describes it:

“El Salvador is the epicenter of bitcoin adoption and therefore of economic freedom, financial sovereignty, resistance to censorship, and nonforfeitable wealth. When we issue the first volcano bonds, we will once again pave the way for this new monetary revolution.”

In short, it is an approach that will once again make El Salvador a pioneer country in the field of cryptocurrencies. This is a result of having President Nayib Bukele whose politics with a strong Bitcoin maximalist tone questions, as much as fascinates, the ranks of fans of this decentralized digital economy. One thing for sure is that, for both fans and opponents, the history of this ecosystem is being written before our eyes.

By Audy Castaneda

Bitcoin Forecast for Q1 2023

Audy Castañeda
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0
<strong>Bitcoin Forecast for Q1 2023</strong>

In the first days of the new year, the price of Bitcoin managed to rise above $17,000 again, which improves the forecast for the coming weeks.

In the last few days, the price of Bitcoin has been able to rise above the $17,000 mark again, and a break above the resistance is “threatening”. This $17,000 resistance held the Bitcoin price back for a long time. The $20,000 mark could soon follow.

In recent weeks, the price of Bitcoin has experienced a sideways movement. This started after the FTX crash, which briefly pushed the price of Bitcoin below the $16,000 mark. After that, the price quickly rallied back above $16,000 and settled between that level and the overhead resistance at $17,000.

After stabilizing, Bitcoin has been stuck below $17,000 for the past few weeks. Only once in December was the price able to break out, and the cryptocurrency rose above $18,000 for a few hours. However, the latest interest rate hike in the US caused the rate to drop back below $17,000.

Why Bitcoin Price Could Rise More in 2023?

The year 2023 has started with prices going up again. Could this be a sign of a bullish 2023? In general, we are still in the bear market, and this should continue until the Bitcoin Halving in 2024. But that does not mean that stronger gains may not be seen throughout the year.

Already in 2019, in the second year of the bear market at that time, there was a stronger increase in the price of Bitcoin. In the first 6 months of the year, the Bitcoin price rose from $3,500 to $10,500. This tripling of the Bitcoin price could also be repeated in 2023.

In the early days of 2023, many positive signals were observed for the Bitcoin price. The price has risen above $17,000 and a strong breakout is imminent. The Bitcoin price could rise above the $20,000 mark in the coming days. If this happens, Bitcoin could rise to $25,000 as early as January.

Such a breakout could trigger a bullish momentum in the market. This would mean that the price could continue to rise in the coming weeks. But there should also be several dips and stabilizations in the next 3 months that stop the Bitcoin price from rising.

How High Can the Price of Bitcoin Go?

Bitcoin could even go as high as $25,000 in the coming weeks, significantly improving the forecast for the first quarter. This momentum could continue into February and March.

However, a continued rise in the price of Bitcoin over the 3 months is unlikely, as there were several resistances, for example at $21,000 or $25,000. A further increase in the key interest rate in the US could also cause the price of Bitcoin to fall again.

By Audy Castaneda

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