Bitcoin leaves the rest of the crypto market behind

Hello and welcome to this year's final edition of the FT Cryptofinance newsletter. This week, we look at the digital currency that Bitcoin threatens to leave behind. We will return on January 13.

A common, and not always unfair, criticism made by cryptocurrency enthusiasts is that the world at large confuses bitcoin and cryptocurrencies.

If the topic comes up during Christmas, family and friends are likely to use them interchangeably. In his opinion, bitcoin IS the cryptocurrency market. However, people who work around this, or even have more than a passing interest, know that there is a lot more going on.

Right now, Bitcoin is in a happier place than it has been in 18 months, supported by speculation that the SEC will approve a Bitcoin exchange-traded fund after Christmas. But the rest of the market doesn't have that same warm and fuzzy feeling.

A large part of the “rest” is ether, the second largest cryptocurrency on the market, due to the blockchain it represents, ethereum.

Ethereum has always been a more ambitious project than the bitcoin blockchain, which is a database for transactions. It can contain assets and allows programmers to code functions for buying and selling in smart contracts. That means it's the foundation for much of non-Bitcoin industry activity, from decentralized finance (DeFi) and NFT projects to gaming.

Historically, these markets have given Ethereum a unique position of strength over competing blockchains: if one industry sector blows up, so should Ethereum.

But while ether is up a respectable 93 percent this year, it has underperformed bitcoin (up 162 percent), Solana (up more than 550 percent), and Cardano (up 154 percent).

“This year ether has been completely overshadowed by the excitement around bitcoin,” said CK Zheng, co-founder and chief investment officer of crypto hedge fund ZK Squared Capital.

For ether, the problem is that these cutting-edge crypto projects, such as decentralized finance, NFTs and gaming (the bread and butter of the ethereum network), have not yet shaken off their past.

Projects like the DeFi cryptocurrency exchange Uniswap have yet to generate any widespread buzz, cryptocurrency-inspired games like Axie Infinity are today synonymous with North Korean hacking exploits, and NFTs have recently made headlines Blinded partygoers in Hong Kong.

When it comes to the non-bitcoin cryptocurrency market, the coins that have performed best this year are those that explore the links between cryptocurrencies and artificial intelligence.

“The demand for AI investments has reached cryptocurrencies,” said Ram Ahluwalia, CEO of investment advisor at Lumida Wealth Management. “AI-linked crypto tokens have become one of the strongest cryptocurrency investment themes,” he added.

Whether there are overlaps between cryptocurrencies and AI is a topic for another day. For now, it's the kingfishers catching the sunlight. “It is not surprising to see the much higher returns of AI-related tokens compared to other tokens,” Zheng added, adding that these tokens will be “the most exciting topic heading into 2024.”

But Ethereum's lackluster year behind Bitcoin isn't entirely because it has been superseded by the latest tech hype cycle. US regulators are still investigating cases that could end up defining ether and other crypto tokens as securities.

And ethereum also has to face its own disappointments. In September of last year the network underwent supposedly revolutionary surgery with the “Merge.” It was a technical operation, combining one Ethereum blockchain with another, but it carried great promises.

Before the merger, if the Ethereum network were a country, it would have ranked in the top 35 in the world for energy consumption, surpassing nations like Belgium and Finland.

The merger virtually eliminated the network's carbon footprint and when I dedicated 2,500 words to the supposed ethereum revolution, everyone I spoke to told me it was removing the biggest obstacle to widespread adoption. Ether would even enter the radar of ESG-conscious investors.

In fact, anticipation for a record-breaking future was so intense that YouTube's former head of gaming, Ryan Wyatt, told me that cryptocurrencies could soon focus on "onboarding the next billion users."

But the price of ether fell in the months after the merger, and although it recovered, those billion users have not materialized.

“If the expectation was that the merger would boost investments from ESG-minded investors, I think it would be premature,” said Alex de Vries, co-founder of Digiconomist, a website that tracks the environmental impact of the crypto industry.

Instead, ether risks being eclipsed by bitcoin. At the time of the merger, bitcoin's market capitalization represented about 40 percent of the entire cryptocurrency market and ethereum's share was 18 percent, according to industry data aggregator CoinMarketCap.

Today, ethereum accounts for 17 percent, while bitcoin's share has expanded to 52 percent.

If conversations with family and friends this Christmas veer down the path of cryptocurrency, good luck explaining it. And even better luck explaining that it's not all about bitcoin.

What is your opinion on the future of ether? As always, email me your thoughts at scott.chipolina@ft.com.

Weekly highlights

Earlier this week, failed crypto exchange FTX reached a settlement with its debtors after its collapse in November last year. The deal, subject to approval by the U.S. bankruptcy court and the Bahamas Supreme Court, will pool the assets of FTX debtors and the exchange's Bahamian unit to ensure clients receive "substantially relative distributions." identical."
ETF speculation intensified once again this week when BlackRock, the world's largest asset manager, revealed in a new filing with the Securities and Exchange Commission that its proposed fund would only allow the creation of new shares with cash, in bitcoin place. The move, while hardly groundbreaking, was taken as yet another sign that the Wall Street giant is making progress with the regulator.

Snippet of the week: a big freeze in the British Virgin Islands

Remember Kyle Davies and Su Zhu, founders of the collapsed crypto hedge fund Three Arrows Capital? Unfortunately the courts will not leave them alone. keep painting and browsing.

A court in the British Virgin Islands this week issued a global freezing order affecting more than $1 billion of his assets. The order also goes against Kelly Chen, Davies' wife, representing the liquidators' last-ditch effort to return assets to creditors of the collapsed business.

The order increases pressure on disgraced founders by closing as many possible avenues available to access funds. Zhu he was imprisoned in Singapore in September for four months for failing to cooperate with investigations into the Three Arrows failure; Davies' whereabouts are unknown.

"The order is specifically designed to prevent the founders and Ms Kelly Chen from disposing of or dealing with assets in any way that could frustrate eventual enforcement by the liquidators."

Data mining: Tether's Christmas naughty list

Last month, Tether, the company behind the largest stablecoin, hired the US Department of Justice, the Federal Bureau of Investigation and the US Secret Service to help prevent illicit use of its USDT token.

Unsurprisingly, the number of blacklisted Tether wallets has skyrocketed. The total number of banned wallets has increased 20 percent to 1,236 so far this month, according to CCData.