Crypto Market Week in Review (23 September 2022)
The Week of Central Banks
This week's market news was dominated by the Central Banks. The Federal Reserve, Bank of England, and Bank of Japan presented their monetary policy decisions. All the Central Banks continued to be more or less hawkish with no major surprises. The Fed policy statement was in line with the forecast with a higher-than-expected future rate path (so-called “dot plot”). Bank of England chose to hike by about 50 bp, which was moderately below forecasts (split between 50 bp and 75 bp) but said that a deep recession might be avoided because of the new energy plan, and that was taken by the markets a hawkish signal. Bank of Japan continued its zero rates policy but announced interventions to support the plunging yen. However, the interventions make more harm to the US bond market than they actually support the yen, due to investors anticipating bond selling by the Bank of Japan and Japanese funds (both are big holders of dollar bonds).
Despite in-line monetary policy news, the markets were in sell-the-everything mode during the week with most assets being in red, albeit moderately. It looks like gradual liquidity tightening with no major moves yet.
Cryptocurrencies were down for the week too. Despite the dip, Bitcoin was strong compared with other assets, as of the Thursday close outperforming both the S&P 500 and the Nasdaq 100 indexes (normally, Bitcoin is far more sensitive to both up and down moves than these stock indexes).
Ethereum continued to underperform most major cryptocurrencies after the Merge, and its offshoots were down even more. Ethereum Classic slumped by 16% since the last Friday close, although it remained an outperformer this year. The year-to-date drop of Ethereum Classic is approximately the same as during the last week. Ethereum’s proof-of-work offshoot was decimated, plunging by about 6 times after the Merge.
Ethereum proof-of-work (ETH pow/USD)
Implied volatility of Ethereum options traded sideways after the big drop immediately after the Merge.
Ethereum DVOL index
But implied volatility of Bitcoin options almost fully recovered after the Merge.
Bitcoin DVOL index
Thus, the implied volatility ratio of Ethereum to Bitcoin declined this week immediately after the Merge, reaching 1.3 as of September 22 compared with 1.4 as of September 16 (immediately after the Merge) and 1.5 as of September 15 (just before the Merge). Interestingly, will it return back to about 1.1, the level we’ve seen at the beginning of the year?
Colorado Is Now Accepting Tax Payments in Cryptocurrency
Governor Jared Polis of Colorado announced on Monday that the American state of Colorado now accepts cryptocurrency for tax payments.
The tax payments will be processed via the PayPal Cryptocurrency Hub for a service fee of $1 plus 1.83% of the total payment. The current caveat is that payments are only accepted for personal accounts, as taxes for businesses cannot currently be paid using cryptocurrency.
Although the transfer will take three to five days to complete, payments will become effective the day they are initiated.
The governor of Colorado has made good the promise he made early this year, predicting that the state would start accepting cryptocurrency payments. At the start of Denver Startup Week, he said:
“We’re just showing again, from a customer service perspective, how Colorado is tech-forward in meeting the ever-changing needs of businesses and residents.”
Other states have attempted to implement cryptocurrency tax payments to no avail. Ohio was the first to do so in 2018, but a year later, it discontinued the program because of legal issues. States like Georgia, Illinois, and Arizona have thought about adopting cryptocurrency tax payments, but the proposals, however, never made it out of the state legislature.
Private Key Vulnerability, the Likely Cause of $160M Wintermute Hack
A report from blockchain analytics company, Certik, showed that the recent $160M Wintermute hack was due to a private key exploit.
The Profanity app's private keys had a flaw that was exploited, but in a turn of events, it was discovered that the vulnerability has existed since January.
Over-the-counter and centralised financial operations were unaffected, according to the U.K.-based algorithmic crypto market maker. A leaked or brute-forced private key, not a smart contract weakness, was to blame for the breach, according to a blog post by Certik:
"The company went on to say that the attack was presumably caused by a flaw in the Profanity vanity address generator."
1inch exchange was the first to notice the flaw, and according to a September 13 blog, the hack has been noticed since a scam June airdrop was launched. According to 1inch's blog:
“Profanity is one of the most popular tools due to its high efficiency. Sadly, that could only mean that most of the Profanity wallets were secretly hacked.”
Private key compromise has cost blockchain companies $273.9 million so far this year, according to Certik, making it "one of the major attack vectors." So far, the Harmony Protocol hack in June, which cost $97 million, is in second place to the Wintermute attack with respect to the amount hacked.
White Hat Hacker Grumbles Over Arbitrum Bounty Reward After Saving Network From $475M Loss
White hat hacker, Riptide, claimed that his discovery of a vulnerability on Arbitrum qualified for the maximum bounty award of $2 million rather than the 400 ETH ($53,000) he received.
Riptide helped Ethereum’s popular layer-2 blockchain, Arbitrum, escape a multimillion-dollar hack by discovering a flaw on the bridge that connected the network to Ethereum. If it had been undiscovered, the vulnerability would have specifically affected transaction submissions and processing.
The white hat hacker claimed that unscrupulous players could have altered incoming transactions to Arbitrum across the bridge and designated their address as the recipient address.
According to Riptide, the vulnerability would have gone undetected if the hacker had only targeted large ETH deposits or front-run the following significant ETH deposit.
Exploiting the flaw might have resulted in a loss of hundreds of millions of dollars, given that the greatest deposit on the inbox contract in the previous 24 hours was 168,000 ETH.
The white hat hacker later claimed that his work merited the highest bounty of $2 million, despite the fact that Riptide had previously commended Arbitrum for the 400 ETH prize.
“My point is that if you post a $2mm bounty — be prepared to pay it when it’s justified. Otherwise, just say the max bounty is 400 ETH and be done with it. Hackers watch which projects pay out and which do not. IMO not a good idea to incentivise a whitehat to go blackhat.”
Riptide’s new comments were made after a Twitter user showed that the bridge was recently used to transfer over $400 million.
MicroStrategy Buys 301 Additional Bitcoin in the Wake of Market Downturn
According to a Form 8-k filing with the U.S. Securities and Exchange Commission on Tuesday, MicroStrategy (MSTR) purchased 301 Bitcoin (BTC) between August 2 and September 19 for nearly $6 million.
According to the filing, the software firm co-founded by businessman and vocal supporter of cryptocurrencies, Michael Saylor, purchased the cryptocurrency for an average price of $19,851 per coin.
The well-known bitcoin holder MicroStrategy keeps the digital money in its reserves. With an acquisition cost of $3.98 billion, or $30,639 per coin, it already holds almost 130,000 bitcoins.
Nasdaq Is Preparing to Launch an Institutional Crypto Custody Service
According to numerous persons briefed on the matter, securities exchange operator, Nasdaq, is planning an entry into institutional crypto custody space.
The company, which runs markets for U.S. and international equities, is not new to the cryptocurrency business; they have provided market surveillance technology to crypto exchange sites since 2018 and also launched the Hashdex Nasdaq Crypto Index ETF, which is based on its own index, in February 2021.
According to a source, regulatory permission for the new offering is pending, but along with its investigation into crypto custody, Nasdaq is also launching a new subsidiary, Nasdaq Digital Assets, that is only dedicated to cryptocurrencies.
Ira Auerbach, a senior vice president at the company who transferred from Gemini to Nasdaq, is in charge of the new division.
“Nasdaq Digital Assets builds upon the successful solutions we have introduced in recent years to serve the digital assets ecosystem, including marketplace technology for digital asset exchanges, crypto-native anti-financial crime offerings, and crypto-related index solutions for tradable products,” Nasdaq CEO Adena Friedman said in a press release.
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