Bitcoin leaves the rest of the crypto market behind

Hello and welcome to the final edition this year of the FT Cryptofinance newsletter. This week, we’re looking at the digital coin that bitcoin is threatening to leave behind. We’ll be back on January 13th.

One common — and not always unfair — criticism made by crypto enthusiasts is that the wider world conflates bitcoin and cryptocurrencies.

If the subject comes up over Christmas, chances are family and friends will use the two interchangeably. In their minds bitcoin IS the crypto market. Yet people working around it, or even have more than a passing interest, know there is much more going on.

Right now, bitcoin is in a happier place than it has been for 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 quite have that same warm fuzzy feeling.

A large chunk of “the rest” is ether, the second largest cryptocurrency on the market, because of 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 hold assets and lets programmers code functions for buying and selling into smart contracts. That means it is the foundation for so much of the industry’s non-bitcoin activity ranging from decentralised finance (DeFi) projects and NFTs to gaming.

Historically, these markets have given ethereum a unique position of strength over competing blockchains: if one sector of the industry explodes, so should ether. 

But while ether has climbed a respectable 93 per cent this year, it has underperformed bitcoin (up 162 per cent), Solana (up over 550 per cent), and Cardano (up 154 per cent).

“This year ether has been totally outshined by the excitement related to bitcoin,” said CK Zheng, co-founder and chief investment officer at crypto hedge fund ZK Squared Capital.

For ether, the problem is that these cutting-edge crypto projects, like decentralised finance, NFTs and gaming — the ethereum network’s bread and butter — still haven’t shaken off their past.

Projects like DeFi crypto exchange Uniswap have yet to generate any mainstream buzz, crypto-inspired games like Axie Infinity are today synonymous with North Korean hacking exploits, and NFTs have only recently made headlines for blinding party goers in Hong Kong.

As far as the non-bitcoin crypto market is concerned, the coins that have performed best this year are the ones exploring the links between crypto and artificial intelligence.

“The demand for AI investments has found its way into crypto,” said Ram Ahluwalia, chief executive at investment adviser at Lumida Wealth Management. “Crypto tokens linked to AI have emerged as one of the strongest crypto investing themes,” he added. 

Whether there are overlaps between crypto and AI is a theme for another day. For now, they are the kingfishers catching the sunlight. “It’s not surprising to see the far superior returns of AI-related tokens compared to other tokens,” added Zheng, adding that these tokens will be “the most exciting theme going into 2024.”

But ethereum’s lacklustre year behind bitcoin is not all down to being superseded by the latest tech hype cycle. US regulators are still pursuing cases that could end up defining ether and other crypto tokens as securities.

And ethereum also has to face up to its own disappointments. In September last year the network underwent a supposedly revolutionary surgery with the “Merge”. It was a technical operation, blending one ethereum blockchain with another, but came with big promises.

Before the Merge, if the ethereum network were a country, it would have ranked in the world’s top 35 by energy consumption, surpassing nations like Belgium and Finland.

The Merge virtually eliminated the network’s carbon footprint, and when I dedicated 2,500 words to ethereum’s supposed revolution, everyone I spoke to told me it was the removal of the biggest obstacle to mainstream adoption. Ether would even come on to the radars of ESG-conscious investors.

In fact, the anticipation for a record-setting future was so intense that YouTube’s former head of gaming Ryan Wyatt told me that crypto could soon focus on “onboarding the next billion users.”

But the price of ether fell in the months after the Merge, and while it has recovered, those billion users haven’t materialised.

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

Instead, ether is at risk of being eclipsed by bitcoin. At the time of the Merge, bitcoin’s market capitalisation represented roughly 40 per cent of the entire crypto market and ethereum’s share was 18 per cent, according to industry data aggregator CoinMarketCap.

Today ethereum accounts for 17 per cent while bitcoin’s share has expanded to 52 per cent.

If conversations with family and friends this Christmas do veer down the cryptocurrency road, good luck in explaining it. And even better luck in explaining how it’s not all about bitcoin. 

What’s your take on ether’s future? As always, email me your thoughts at scott.chipolina@ft.com. 

Weekly highlights

• Earlier this week failed crypto exchange FTX settled with its debtors after its collapse in November last year. The agreement, subject to the approvals of the US bankruptcy court and Supreme Court of The Bahamas, will pool the assets of the FTX debtors and exchange’s Bahamian unit to ensure customers receive “substantially identical relative distributions.” 

• ETF speculation heated up yet again this week when BlackRock — the largest asset manager in the world — disclosed in a fresh filing with the Securities and Exchange Commission that its proposed fund would only allow new shares to be created with cash, instead of bitcoin. The move, while hardly groundbreaking, was taken as yet another sign that the Wall Street giant is making headway with the regulator. 

Soundbite of the week: A big freeze from the BVI

Remember Kyle Davies and Su Zhu, founders of collapsed crypto hedge fund Three Arrows Capital? Sadly the courts won’t leave them alone to continue painting and surfing.

A court in the British Virgin Islands this week issued a worldwide freezing order hitting over $1bn of their assets. The order also goes after Kelly Chen, Davies’s wife, representing the latest effort by the liquidators to return assets to creditors of the collapsed business.

The order turns up the heat on the disgraced founders by closing as many possible avenues available to access funds. Zhu was imprisoned in Singapore in September for four months for failing to co-operate with investigations into Three Arrows’ failure; the whereabouts of Davies remains unknown. 

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

Data Mining: Tether’s Christmas naughty list 

Last month Tether, the company behind the largest stablecoin, signed up the US Department of Justice, 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 shot higher. Total numbers of banned wallets are up 20 per cent to 1,236 so far this month, according to CCData.

FT Cryptofinance is edited by Philip Stafford. Please send any thoughts and feedback to cryptofinance@ft.com.