Cryptofinance: Circle of life on Wall St

Hello and welcome to the FT’s Cryptofinance newsletter. This week we’re looking at the industry’s less-than-inspiring record on Wall Street.

Famed investor Benjamin Graham’s verdict that the stock market is short-term voting machine but long-term weighing machine could have been delivered with crypto in mind.

This week Circle, which runs the USDC stablecoin, abandoned its bid to list on the New York Stock Exchange when it called time on a $7bn-$9bn deal to merge with Concord Acquisition, a special purpose acquisition vehicle chaired by former Barclays chief Bob Diamond.

The deal was announced in the summer of 2021 but suffered constant delays as crypto’s reputation and prices plummeted. On Monday it was confirmed the deal was off. No diamond hands here, if you can pardon the multi-layered pun.

This fits in to an inglorious interaction between crypto and Wall Street. For reasons never fully explained, many investors who saw a world of opportunity in crypto decided they needed to tap equity investors for cash and credibility.

With rock-bottom interest rates, money on tap and inflation consigned to the history books, the conditions were in place for a bubble.

Some of them, like Circle and Bullish Global, were pulled into the headlong rush into special purpose acquisition vehicles. Signs of mania were everywhere. Many projections were laughable and should have raised a red flag, but stock market investors seemed happy to be seduced.

For example, Bakkt, the crypto custody service, predicted it would go from no users to 18mn in two years. By now it would have made $224mn in revenues. It made $13mn in the last quarter, slightly lower than the previous quarter.

Coinbase’s risk disclosures mentioned that “many of our employees and service providers are accustomed to working at tech companies which generally do not maintain the same compliance customs and rules as financial services firms”. It still managed to debut with a $76bn market capitalisation, more valuable than the New York Stock Exchange’s parent company, Intercontinental Exchange.

As we know, those dreams have long faded. Coinbase’s shares have tumbled 83 per cent this year. The declines would have happened even without crypto’s self-inflicted wounds this year. The Federal Reserve’s rapid raising of interest rates has made it a poor year for stock and bond investors.

But crypto had its own special irrational exuberance. A plethora of mining companies listed to help fund expansion plans, based on prices of bitcoin and ethereum still going up. Now they are deep in the red and sitting on equipment that is unused for fear of racking up huge energy bills. The weighing machine is whirring.

“I’m still recommending a couple of them . . . but for the rest of the industry, a lot of money was raised at the peak of the market and now . . . we’re seeing a big cleansing in the mining space,” Chris Brendler, senior equity analyst at DA Davidson, told me.

Circle still entertains plans to list, although it has nothing firm in mind.

Its USD Coin is still the second-largest stablecoin, and these coins make for the pillars of the digital assets market. Little mind is paid to overtaking its chief stablecoin rival Tether.

“I don’t know if our business proposition, nor goal, is to become the largest stablecoin in circulation. That would mean that our competitive set is merely digital asset companies,” chief strategy officer and head of global policy Dante Disparte told me hours after its failed Spac deal hit the news wires.

A weighing machine is designed to give accurate measurements. If crypto is to become grown up and respectable, it will want to come back to the equity market. It had better bring a more credible story than last time round.

What’s next for Circle, and what might 2023 bring for listed crypto companies? Email me at scott.chipolina@ft.com.

Weekly highlights

• The heat is (very, very slowly) turning up on Sam Bankman-Fried in the US. Next week the House financial services committee is holding a hearing into FTX and feels his input could be useful. SBF said he wasn’t ready yet but chair Maxine Waters felt he had enough to say in his round of media interviews. She threatened to subpoena him and SBF came round to the idea.

• But one no-show: Taylor Swift! FTX wanted to get her on board with a sponsorship deal, to no avail. Read all about it.

• My colleagues Mercedes Ruehl and Primrose Riordan have taken a fine look at what’s happening at Singaporean crypto trader Amber Group. It’s not been an easy time, with the sudden death of their 30-year-old co-founder. They’re also cutting jobs and have put expansion plans on hold. Read the story here.

• How FTX got its break in Hong Kong. With bonus SBF wigs!

• The market price of the Grayscale Bitcoin Trust (GBTC) is nearing a 50 per cent discount to its net asset value and investors are getting anxious. Hedge fund Fir Tree is suing Grayscale Investments to seek information on potential mismanagement and conflicts of interest at the trust.

• The implosion of marquee trading shop FTX has injected fresh urgency into the UK government’s pledge to regulate the “wild west” crypto sector. Check out this week’s story from my colleagues Daniel Thomas, Laura Noonan and George Parker on the Treasury finalising its plans for a package of sweeping crypto rules.

Quote of the week: Gary Gensler steps up the pressure

Gary Gensler, chair of the Securities and Exchange Commission, has long talked tough on crypto and sought more regulatory powers.

Now the midterms are out of the way in Washington and FTX imploded, his language is getting tougher.

He told Yahoo! Finance crypto needed to start playing ball.

“The storefronts or the casinos need to come into compliance with our time tested laws. What that means is not using customer funds as many of them do. Their business model right now is offering the public . . . an interest return in crypto . . . and then possibly trading against their customers . . . anywhere else in finance, these conflicts are not allowed.”

Data mining: The most liquid crypto tokens

In cryptoland, market capitalisation is often taken as the leading indicator of the liquidity of a token. As the collapse of FTX’s FTT token showed, it’s a metric that can be highly misleading.

“Wash trading or other types of market manipulation can make a token appear very liquid without having deep order books,” noted analyst Conor Ryder at Kaiko, the crypto research group.

He’s screened for what he thinks are the industry’s “real” most liquid tokens. It’s no surprise to see that bitcoin and ethereum are way out in front. But after that?

In volume terms it’s Binance’s BNB coin, dog-inspired Shiba Inu and Ripple’s XRP. The picture changes for market depth, which Kaiko describes as the number of buy and sell orders on either side of the mid price. The deeper a market, the easier it is to do deals.

Here XRP and the joke Dogecoin score highly. Binance’s BNB comes in 10th.