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Market Update: On the China Narrative and the Ongoing Institutionalization of Crypto 🟡
Video Podcast: What is needed for Bitcoin to break out? 🟢
A glimpse into the life of a young Crypto CEO 🟢
All you need to know about Bitcoin NFTs (Ordinals)🟡

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🟡 Market Update: On the China Narrative and the Ongoing Institutionalization of Crypto

written by Pascal Hügli

For today's Market Update, we once again turn first to the topic that probably interests most people: The Bitcoin price. Since the beginning of the year, Bitcoin has gained almost 45 percent in price. In view of the still tensed up interest rate situation and recession fears, this price momentum within the first two months of the year has surprised many.

Oftentimes, we in the West tend to make our forecasts just basing our views on what is happening in the Western world. This last Bitcoin movement upwards, however, was probably driven primarily from Asia – at least that is the understandable narrative being portrayed. After all, since the year-end months of 2022, liquidity in Asia – driven primarily by China – has been on an upward trend. While the M2 money supply indicator in the U.S. has remained flat, that in China has moved upward as we can see:

Gaz @defi_gaz

We can see below that monetary supply increase in China and #Bitcoin price have shown some correlation over the past 6 months. This can certainly be interpreted as bullish in the short-medium term.

Of course, the money supply indicator does not equal liquidity, as we have learned in the past – several other factors play into this. For example, a decisive factor is the repo transactions that central banks each engage in with banks. In fact, the PBOC, the Chinese central bank, has provided its banks with more short-term financing than at any time since 2004.

Decoupling: Only short-term, or will it last?

What is astounding is the fact that U.S. equities have also decoupled from U.S. Federal Reserve reserves in recent weeks. Thus, the question arises: How sustainable is this trend? Fed officials at least remain determined to curb this swelling optimism in the stock market. There is still a consensus among them that interest rates must be raised further, which for many market observers can really only mean one thing: Headwinds for stocks and crypto assets.

Therefore, from a trader's or investor's perspective, being cautiously optimistic is probably the right approach at this very moment. Even if the macroeconomic picture still looks bleak in many aspects, it is important to remember: The first half of 2023 can also be interpreted as the phase in which the markets need to go on a relief rally, just to shake off some of the brutality experienced in 2022, and this basically happens under the pretense that the U.S. Federal Reserve will eventually pause its interest rate hike efforts in early summer. It will be interesting to see if things will turn out this way.

In any case, one should not lose sight of Bitcoin's correlation to the Asian markets (more on this in the video podcast below). Still, if the situation in China were to change and liquidity were to trend sharply lower again, any short-term bullish momentum in Bitcoin would likely be quickly lost again.

So it is quite possible that things will be choppy going into March. Looking at Bitcoin, this seems to be the current trading range for the time being. Or rather, Bitcoin is likely to trade in this range until the cryptocurrency’s price closes below or above it and the situation has to be reinterpreted again:

IncomeSharks @IncomeSharks

#Bitcoin - The new range until it closes below or above. #Stock market causing some chop.

As always, we at Insight DeFi don't have a crystal ball and are just trying to read the markets like everyone else does. And yes, right now, this seems especially difficult – after all, there is suspiciously high disagreement between bulls and bears. So far, 2023 is really the year you can turn either way with your predictions and do so with a clean consciousness:

Alf @MacroAlf

The most bearish and bullish Wall Street analysts differ on their 2023 S&P500 prediction by a whopping 40%, most since 2008 2023 is a year where you can make up a narrative to be a bull or bear So nobody knows s**t about what's really going on and we make it up along the way

What’s been happening in the crypto space itself?

The biggest news in the crypto space over the past few days has been the announcement that the largest U.S. crypto exchange, Coinbase, will launch its own blockchain:

Coinbase @coinbase

1/ 🔵 We’re excited to announce @BuildOnBase. Base is an Ethereum L2 that offers a secure, low-cost, developer-friendly way for anyone, anywhere, to build decentralized apps. Our goal with Base is to make onchain the next online and onboard 1B+ users into the cryptoeconomy.

The announcement was met with much fanfare; after all, the crypto exchange has over 110 million users holding over $80 billion on the platform. Furthermore, Coinbase is also listed on the U.S. stock exchange, which gives the company credibility with traditional investors in particular.

With Base, Coinbase is launching a Layer 2 blockchain, which is based on Ethereum, using Optimism's developer toolbox to build it. Thus, the chain is intended to be scalable and offer low transaction fees. The chain is not yet live, but has already been launched on the testnet. Also, as indicated, Coinbase does not want to merely launch another ghost chain, but a blockchain that will ship with it a living ecosystem of applications from day 1:

Base @BuildOnBase

6/ Base is for Everyone. We’re excited to launch Base with an incredible group of builders from across the crypto ecosystem, with more joining in every day. The best products are built in community and Base will be an open ecosystem where anyone, anywhere can build.

When token?

Well, there is no token in sight – at least not yet. As announced, the Base blockchain will use Ether as its native base money, while Optimism's (OP) token is intended to capture the value created by the Base ecosystem. Accordingly, the OP token is the one that reacted rather positively to this news.

On the other than, Coinbase’s share price (COIN) has barely jumped in regard to the announcement. Many interpret this as a sign that people on Wall Street obviously do not understand the significance of this new blockchain. And others believe: It is not surprising the stock hardly reacted, as general interest from outside the crypto world is currently almost non-existent because of bear markets vibes that are still around.

It is likely though that this could chain in the mid-term as this new blockchain could really turn out to be an exciting option for institutional players. After all, it seems reasonable to assume that Base could become a blockchain for institutions, as a chain to push the adoption of “permissioned DeFi”. Many institutions have been experimenting with DeFi protocols for some time, but traditional regulatory requirements often mean that they can only do so in a shielded area, as KYC and AML controls are mandatory for them.

With this in mind, the question then becomes: how decentralized will this blockchain from Coinbase turn out to be? As it has been announced, the company will provide the only controlling authority (sequencer) at the beginning, in order to then work towards more decentralization over time.

However, a crucial point remains: As a publicly listed company, Coinbase is subject to the regulations in the USA, which can only have one consequence: Users and funds that find their way onto this blockchain will have to be identified. This is likely to result in the loss of precisely one important feature of public blockchains, its so-called permissionlessness… So yes, Base might not be for everyone after all.

Chris Blec @ChrisBlec

Coinbase will be sole sequencer on Base. This means Coinbase will be responsible for processing every tx on the L2. Coinbase is subject to the Bank Secrecy Act, Patriot Act & more. How will Coinbase comply with these laws without requiring KYC on bridged funds?

🟢 Video Podcast: What is needed for Bitcoin to break out?

Podcast with Pascal Hügli and Roman Przibylla

Once again, Pascal Hügli from Insight DeFi made his way onto the What's Next show. Together with Roman Przibylla, he spoke about what it will take for Bitcoin to overcome the important psychological mark of 25,000 US dollars. In particular, they discuss the role of the Chinese central bank and what influence the Chinese markets currently have on the Bitcoin price. The talk is in German.

🟢 A glimpse into the life of a young Crypto CEO

Interview with Norman Wooding

“Every generation has the birthright to reinvent society as they deem fit”

Breaking into the institutional crypto space is not easy, let alone growing a successful company of 20+ employees that weathered many storms over the years. But for Norman Wooding, this came naturally when he founded SCRYPT, driven by his deep passion and knowledge of the world of Web3.

Norman also co-founded Yield 3, a DeFi data analytics firm, and acts as an advisor to several tier 1-regulated entities in the digital assets space.

We at Insight DeFi interviewed Norman to learn how he founded the prime brokerage for digital assets at a young age and what his role as CEO entails.

Norman Wooding, CEO & Co-founder of SCRYPT

When did you first hear about crypto?

I’m an early adopter of crypto and have watched this space develop since 2015. At the same time, I’m an entrepreneur at heart and have always been interested in building value-driven solutions. This is why I joined this space, believing that I want to help realize crypto’s future potential.

How did you enter the crypto/fintech space – what led you to it?

Before SCRYPT, I started as a hobbyist mining Bitcoin at university, which aligned well with my social, economic, and political beliefs – buying ASIC hardware devices made me feel like I owned a ‘mini central bank’ and I was rewarded for validating transactions and adding to the supply of this new ‘economy’. After some time, I conducted academic research on the use of smart contracts in corporate governance, and also began trading (pulling off arbitrage strategies) as well as hosting various masternodes. I quickly became immersed in all things crypto – so much so that I taught courses at the London School of Economics on cryptocurrency and disruption.

Crypto is a constantly changing space. Does this cause complications in terms of leadership?

Being a good leader is always a journey, whether it be in fintech, alternative investments, or education. While it is true that crypto is developing at a faster pace than many other industries, as experienced entrepreneurs, Sylvan Martin, SCRYPT Co-Founder, and I thrive in dynamic environments. It's what we live for – that being said, the industry is extremely volatile compared to others, partly due to its nascency and regulatory developments.

How does one manage crypto’s extreme volatility as an entrepreneur?

You need to adapt, pivot, and follow your intuition – I wouldn’t be in any other position, nor would my co-founder, albeit to the detriment of sleep and social life. I also believe being a good leader is surrounding yourself with the best people, and listening, assimilating, analyzing, and processing all forms of input. Having a strong strategy in place, supported by a dedicated team and fool-proof technology, allows us to improve agility and defend against the unknown.

What changes would you like to see taking place in your particular sector this year – and why?

As a British national, I was excited by the prospect of London becoming a world-leading crypto hub. Unfortunately, the Financial Conduct Authority (FCA) has failed to provide clear regulations and oversight for businesses operating in the sector in the UK. Progress has been slow and the lack of clarity is turning away many UK fintech business owners, who see more advanced regulatory environments in other countries as more attractive. This is a shame. Regulation is becoming increasingly essential in the crypto market and I wish the UK government would start taking note and bring a certain amount of stability to the DeFi sector, particularly after the fallout from last year’s crypto scandals.

What jurisdictions could be a good role model for the UK?

I wrote a piece on how Switzerland as this jurisdiction is a leading example of a global crypto hub, featured in UK’s City A.M. magazine.

Anything else you wish for?

I’m hoping to see a shift in the market towards self-custody and the ability to trade without giving up ownership of assets, as a result of market maturity and innovation sparked by crises. This trend would be a positive sign of the market maturing and becoming more secure for investors, and something we at SCRYPT are working on.

What inspires you in the crypto/fintech space as of right now?

Something I’ve repeated since pursuing my Bachelor’s in Economics and Politics is that every generation has the birthright to reinvent society as they deem fit – this is what trends like DLT (smart contracts, new protocols, supply chain, voting, digital assets, tokenization, self-custody, AMM etc…) and AI are – I believe that financial systems are the nucleus of everything and that to bring change and for shifts in all paradigms, Fintech and crypto are the catalysts.

What exactly is it about this space that you think can bring fundamental change?

To me, fintech is about the possibility to disrupt and transform legacy structures and entrenched ways of doing things. By seizing the ample opportunities in this space, we can open the financial world to millions of people who were previously locked out. New developments like Proof-of-Stake are changing consumers’ perceptions of the blockchain, strengthening trust through the security it provides in consumer trading. Banks have been using the KYC registry by incorporating blockchain to save time when validating data whilst staying in the regulatory framework. Even simple contracts have been transformed. Smart contracts offer a more streamlined approach, reducing risk by ensuring security for both parties involved in a transaction by automating actions across time and space.

About SCRYPT

SCRYPT acts as the trusted partner for institutions by building and providing infrastructure that delivers digital Assets services (trading & investments) in a robust regulatory framework. Their product line is designed to cover every institution’s crypto needs, removing the complexity of crypto finance with technology and innovative products. They allow you to manage all your crypto strategies through a single interface and seamless workflows.

🟡 All you need to know about Bitcoin NFTs (Ordinals)

written by Trygg

Everyone in crypto has likely heard of Ordinals by now, but many are left wondering: “what are they?”

Ordinal Inscriptions are, on the surface, relatively similar to NFTs: They are pieces of data – whether it be images, audio, GIFs, video or anything else that can be digitally owned.

But Ordinals are different from NFTs in one key way: Ordinals are written directly onto the Bitcoin blockchain – yes, Bitcoin’s base layer.

How do they work?

The data is permanently “inscribed” onto a Satoshi – the smallest denomination of Bitcoin – and thus lives directly on the blockchain for eternity. This has been made possible through Ordinal Number mathematics, which allows us to identify individual Satoshis on the network based on the order in which they were first mined. Since each Sat now has its own, unique number, we can pick one out and assign data to it with a simple BTC transaction.

This stands in stark contrast to NFTs, which are tokens living separately from the network’s underlying base currency. As a matter of fact, most NFTs today don’t live on-chain: they are stored on servers (or decentralized storage solutions in the best case) maintained by the artist or a community, with the on-chain NFT simply “pointing” to that server location online.

As an example, Bored Ape tokens exist within the Ethereum network via a smart contract, and are separate from Ethereum’s native base currency: ETH. Those tokens on-chain simply provide the link to the server, where the JPEGs of every BAYC token are actually stored. Ordinals, by comparison, are downloaded directly onto every node connected to the network – the users who download, store and maintain the entirety of the chain with each new block – alongside all the regular transaction data.

Using Bitcoin Punks – the first 10k collection of Ordinal Inscriptions – as an example: each image is attached to an individual Satoshi and stored directly on the blockchain; no separate servers, cloud databases, or decentralized storage networks. The blockchain itself, as a decentralized memory database, is where Ordinals are stored and will live forever.

Pictured: Bitcoin Punk #7273 (Inscription #18,998). This image lives directly on the Bitcoin blockchain, inscribed upon Satoshi Ordinal #991,784,435,103,466; which was first mined on September 11, 2012. This individual Sat will carry this JPEG across Bitcoin’s network for the rest of time.

Yes, Ordinal Inscriptions are literally “chiseled” onto Bitcoin’s blockchain. Once inscribed onto a Satoshi, it exists there forever, regardless of what journey that individual Satoshi embarks on in the future.

Note: This is an important thing to keep in mind: since Ordinal Inscriptions are attached to the Bitcoin network’s native currency (Satoshis), more care should be taken in creating, storing and trading them as it can be very easy to accidentally “spend” the individual Satoshi your Ordinal is inscribed upon. But don’t fret: countless applications to solve this for users are already being built (more on them below).

This is a big deal: never before in the history of blockchains has it been possible to identify the individual units of a network’s fungible currency; before a few weeks ago, each and every Satoshi was ubiquitous and valued the same. Now that we can attach data to individual Sats, they carry something which has not been done before in the digital space: Numismatic Value.

The advent of numismatic digital coins

In the tangible world, a numismatic coin is a coin whose value depends on its date, condition, rarity, history, aesthetic attraction and/or mint mark of the coin, rather than – and usually beyond – its face value. For example, a 1933 Saint-Gaudens Double Eagle gold coin is considered one of the most valuable coins in the world due to its rarity and history. Thus, it carries a numismatic value far above and beyond the $20 face value, or the current spot price of the ounce of gold used to cast it. The last 1933 Double Eagle was sold at auction for over $18 million in 2019.

Coins of numismatic value have existed for almost the entirety of human history; currencies over thousands of years old are still out there and actively traded by collectors. In the digital realm, numismatic coins are just now getting started. We’re actually witnessing history in the making: just a few weeks in, there are ~150,000 inscriptions… but Bitcoin is made up of 2.1 Quadrillion Satoshis. This is only the beginning.

Pictured: Inscription #38,343. This hand-drawn piece is by Chilean artist Florencia Montoya Salvadores, inscribed onto Satoshi #851,156,796,589,291; which was first mined on March 8, 2012.

What is really powerful: A physical coin or bill can be damaged, lost, stolen, or destroyed. By contrast, Bitcoin’s biggest strength has always been its provenance, permanence, and immutability, and Ordinals brings these qualities to everything users choose to inscribe onto its blockchain: the Satoshis which exist on the network today will always exist, as will the data inscribed upon them.

Thus, Ordinal Inscriptions represent a finality of data: once marked onto a Sat, it will live there forever.

The Impact on Bitcoin’s Network

Since all this extra data is being inscribed onto Sats, pictures must be downloaded by the nodes as part of the ledger, Ordinals have increased the size of blocks and thus, the memory required to maintain the chain. But this increase is negligible, as Ordinals do and cannot change a block’s size limit; any data which exceeds the limit is simply rejected from the mempool. In short: Bitcoin’s memory usage cannot increase beyond what was already the maximum prior to the first inscription.

One awesome benefit from the creation of Ordinals: there is significantly more competition for getting your transaction into a block. This competition has led to full blocks, and miners realizing a large increase in fees from the additional activity. The next difficulty adjustment is currently estimated to increase by ~11% (per mempool.space), signaling a huge boost in mining hash rate and network security. Also, in the long-term Bitcoin might profit from something like Ordinals as there is another demand for Satoshis beyond the pure monetary demand the network already has. This might help miners find a bid in the market, and thus stay in business more easily.

In essence, people are using Bitcoin again…and having fun with it.

Pictured: Inscription #69 (for the culture). Inscribed onto Ordinal Satoshi #1,368,034,374,207,537; first mined on January 3, 2015.

What’s the role of Stacks in all of this?

The Stacks network – a Bitcoin layer focused on bringing smart contract capability to Bitcoin – is already leading the way to make Ordinal Inscriptions easy to create, store, and trade.

As a smart contract platform whose blockchain is written directly onto the Bitcoin main chain (via their novel Proof-of-Transfer consensus mechanism), Stacks is uniquely positioned to tap into Ordinals, which – as stated above – live on Bitcoin. In fact, when a new Stacks wallet address is created on the network, an attached Bitcoin wallet is also created on the mainchain and your keys unlock both; the two are one and the same. No other smart contract chain has this advantage.

We’re seeing this now with Xverse and Hiro, Bitcoin and Stacks wallets where you can safely store and transact your Ordinals; and Gamma.io, an early Stacks NFT exchange, which has built a tool where you can mint your own Ordinals. The Satoshibles NFT community on Stacks has also stepped up with another Ordinal minting tool, ordinalsbot.com. Neoswap AI, an NFT trading protocol built on Stacks is also getting into the Ordinal game in a big way, with support for Inscription trading which will also be cross-chain, allowing users to collect OI's with currencies from other chains such as ETH, MATIC, and SOL in addition to STX and BTC.

The imminent Stacks 2.1 upgrade is also only mere weeks away, which will bring the Stacks network closer to Bitcoin and provide STX apps with new and exciting ways to interact with and write to BTC’s main chain.

We’re still in the early days of Ordinal Inscriptions, so expect to see these kinds of apps from the Stacks network only improve and grow in the coming months; again, this is really just the beginning.

Where can you get started?

A great and easy place to start is with a wallet, like Xverse or Hiro, and some Bitcoin. From there, you can use a service like Gamma to create an ordinal and store it right in your wallet.

Marketplaces for trading Ordinals are still in the early stages, with platforms like Gamma, Ordinals.market, Ordswap.io and Ord.city (by Scarce.city) building out their Ordinal Inscription platforms now. Be sure to keep an eye out for when they go live.

For a deeper dive into Ordinals and Ordinal Theory which makes them possible, Ordinals.com – by Casey Rodarmor, the Bitcoin developer behind Ordinals – has all the docs as well as a blockchain explorer specifically designed for finding inscribed Satoshis. You can also check out this video for an in-depth overview with Casey Rodarmor.

Pictured: Inscription #127,700. This simple text was inscribed onto Ordinal Satoshi #1,304,345,874,590,749; which was first mined on June 20, 2014.

Finally, and most importantly, make sure to have fun with it. Welcome back to Bitcoin.

About the Author:

Trygg is a veteran, storyteller, researcher, and believer in Bitcoin since 2015. He has been an active part of the Stacks community since the launch of STX 2.0 in January 2021. His written works can be found here (published on Sigle, a decentralized web3 writing platform built on Stacks).

Thank you for your support of Insight DeFi.

Disclaimer

The content does not constitute an individual investment recommendation or an invitation to buy or sell crypto assets. Insight DeFi disclaims any liability as a result of actions based on the contents of the newsletter. The Insight DeFi team holds some of the crypot assets featured in this newsletter in their private portfolios.

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The first beams of an early crypto spring