Research Round-Up: April 2023

Was Q1 2023 a Cycle Turning Point?

by Lumos Capital

The Research Round-Up On-Demand

Market Commentary

The price of digital assets had another memorable month and provided further evidence that the worst of the 2022 bear market may be behind us, highlighted best by bitcoin breaking through historically important levels, such as its 200-week moving average, which brings its year-to-date appreciation to over 80%.

Several new narratives have begun to emerge in tandem with the positive digital asset price action as traditional financial system fragility has highlighted many of the possible benefits of alternative financial networks. While 2022 may have helped investors to increasingly associate owning bitcoin and ether with high volatility technology stocks, arguably for good reason given the elevated levels of correlation, that dynamic has begun to show signs that it may be changing.

In this month’s newsletter, we’ll recap some observations from recent events that our research team attended, summarize the top developing news stories in the digital asset space, and highlight some data points that we’re focused on.

Area chart comparing Bitcoin and Ether returns as of March 29, 2023.

Notes from the Field

Summaries and thoughts from the latest conferences and events attended by Lumos Capital Research.

DC Blockchain Summit, Washington DC

This is now becoming a regular annual event put on by the Chamber of Digital Commerce, a non-profit education and advocacy group that works closely with policymakers, regulatory agencies, and industry members. The event featured panels and keynote speeches by regulators from agencies, such as the CFTC, IRS, FinCen, as well as industry participants.

We particularly appreciated the tone set early in the day by Chamber of Digital Commerce Founder and CEO, Perianne Boring, who made the case we are living through a parallel example of early history and the effort to try to ban the use of the minute hand on clocks. Just as the invention of the minute hand was met with resistance due to giving people more control of their time, blockchain advancement is facing resistance because it gives people more control over their data, privacy, and commodities (and we would argue time as well). We were also in agreement with Ms. Boring that if the U.S. does not get the regulatory framework correct, we are at risk of not only falling behind in blockchain technology, but other industries, such as finance and energy.  

Overall, we heard several positive things from regulators and politicians, who expressed genuine interest in moving the regulatory efforts forward. For example, U.S. Rep. Tom Emmer, Co-Chair of the Congressional Blockchain Caucus, opened the event with a speech that repeatedly emphasized American values of privacy, individual sovereignty, and free markets — values that were prioritized with our policies regarding the Internet and should be prioritized with our approach to blockchain technology.

This sentiment was echoed by others in the industry, who noted that Washington DC is a place concerned with rules and immutable blockchains and protocols are the purest form of rules — rules that operate on the laws of mathematics, rather than on the “squishy” feelings of people. Indeed, a prevalent theme from almost all industry participants is the need for clear rules and guidance so that they can build products and services with confidence.

However, many panelists referred to the fact that, under the current regulatory system, they are increasingly devoting more resources to compliance and regulatory affairs, and even having to position their product based on regulatory factors rather than innovation or consumer-facing features. In fact, one participant noted that builders are increasingly building products anonymously due to fear of getting on the wrong side of regulation. This contrasted with other participants’ viewpoints, such as keynote speaker Him Das, Acting Director of the Financial Crimes Enforcement Network, who recognized the need and value of privacy, but offered stern warnings and concern over the rise in anonymity and the challenges it brings.

A large portion of the day was also dedicated to panels that were more educational in nature, such as exploring how blockchain technology is promoting and enabling humanitarian efforts and charitable giving. We also heard from U.S. Rep. Pete Sessions, U.S. Congressman from Texas, and others in the Bitcoin mining industry, how proof-of-work (PoW) mining is revitalizing communities, creating jobs, and helping to develop clean energy.Rep. Sessions recently introduced a resolution outlining how PoW mining is essential to Bitcoin’s operation and can help advance U.S. energy development and growth.2

Overall, the event demonstrated there is a lot of work currently being done on the regulatory front for digital assets, a positive in our opinion. However, despite many of the participants expressing desire for the many regulatory agencies to “all get in a room together and figure this out,” it doesn’t appear we will be seeing anything substantial soon. Hopefully there will be more clarity by next year’s summit.

ALTSLA 2023, Los Angeles CA

ALTSLA is an educationally-focused alternative investment conference designed to bring the professional investor community together for dialogue and discussion on the most relevant topics facing investors today.

The event was comprised of a mix of panels, keynote speeches, and roundtables, with most speakers and attendees focused on private capital and ongoing macro challenges from rising interest rates and falling valuations. Despite the short-term headwinds, many iterated a patient and opportunistic market outlook for the future. Additionally, there was heavy emphasis on how investors are planning for the future through shifting portfolio construction away from the traditional 60/40 portfolio that has been the foundation of investing for decades and increasingly seeking allocations to alternative investments to balance their portfolios during these uncertain times.

While focus on digital assets made up only a small portion of the event, it was not ignored entirely. Jenny Johnson, CEO of Franklin Templeton, and Cathie Wood, Founder, CEO, and CIO of Ark Investment Management, echoed positive sentiments towards leaning into disruptive innovation across sectors, including opportunities using blockchain technology and transparent content ownership via NFTs and smart contracts.

Perhaps the most enlightening digital asset-focused content of the event was a panel focused on what’s next for digital assets and how these assets will navigate headwinds in 2023. The panel comprised of Joseph Marenda of Cambridge Associates, Client Sorensen of WealthShield, Michael Wu of Aspiriant, Robert Bogucki of Brevan Howard, and Sebastian Pedro Bea, President of Coinbase Asset Management. The panelists spoke on how the growth of the digital asset ecosystem is impacting the alternatives space and how FTX, Three Arrows Capital, Celsius, and others have affected investors’ perception of the landscape. While not all panelists were in agreement, they mostly left the audience with a vote of confidence, highlighting how they believe the asymmetry of the assets in this space presents massive upside that is difficult to find in other asset classes at the moment. They also spoke to why these assets may play an important role in portfolios now rather than later. Some noted there is currently too much risk with traditional assets, underpinning the ability for digital assets to play a key role as both a diversifier and alpha generator in portfolios going forward.

News and Editorial

A curated list of the most relevant news and developments along with Our Two Sats.

Are Bank Failures Sparking Interest in Bitcoin’s Core Value Proposition?

The month of March saw three U.S. regional bank closures, including the second-largest recorded bank failure in U.S. history with the FDIC takeover of Silicon Valley Bank.3 Most cite a mismatch between bank deposit liabilities and long-duration assets, which have been temporarily impaired due to rapidly elevated interest rates. As of Q4 2022, unrealized losses on available-for-sale and held-to-maturity securities for U.S. banks exceeded $620 billion.4 These events drove fiscal and monetary authorities to take action — highlighted by the implementation of a new facility created by the Federal Reserve, dubbed the “Bank Term Funding Program."5 This new program enables banks to receive liquidity against treasuries, agency debt, and mortgage-backed securities at 100% of par value regardless of their current impairment level.

Two of the banks affected by recent events, Silvergate Capital and Signature Bank, offered banking services to several digital asset companies and operated interbank settlement networks that enabled a better alignment for digital asset companies to interact with traditional payment rails, which were both faster and provided 24/7 settlement.

Additionally, impacts were seen from the Silicon Valley Bank closure for crypto’s second-largest stablecoin, USDC. Circle held $3.3 billion of the U.S. dollar-backed token’s roughly $43 billion in assets with the now-closed California-based bank.6 As a result, USDC traded below its $1 peg for a period of about two days before news finally came, ensuring that all deposits at both Silicon Valley Bank and Signature Bank would be backstopped.7 Note that Silvergate Capital opted to wind down operations and voluntarily liquidate their assets to ensure depositors would be made whole.8

Our Two Sats:

Recent events have highlighted certain areas of fragility within the global financial system as the rapid increase in interest rates appears to be having unintended consequences in certain market areas. Thus far, the policy response has been swift and represents the first form of dovish action taken by the Federal Reserve in over a year. Markets have begun to reprice their expectations of future rate hikes and question whether the narrative of interest rates remaining “higher for longer” will come to fruition. As noted earlier, bitcoin has performed exceptionally well in recent weeks as a possible new narrative begins to emerge. Bitcoin was born amidst the 2008 financial crisis and stands in contrast to the legacy financial system, which frequently relies upon central planning and requires trust in large institutions to function properly. Recent weeks highlight Bitcoin’s core value proposition rooted in self-sovereignty, transparency, and immutability. Perhaps we will see more interest in these core value propositions if the banking crisis continues.

Validator Unlocks: Available on a Network Near You

The long-awaited Shanghai upgrade, which allows staked ether to be unstaked and withdrawn from validators, was implemented on the Ethereum mainnet on April 12.9 This comes just over six months after the network successfully shifted its consensus mechanism from proof-of-work to proof-of-stake and follows a series of testnet practice-runs, including a final Goerli testnet upgrade of the Shanghai upgrade, which took place in mid-March.

Our Two Sats:

Validator unlocks are the final piece needed to fully complete Ethereum’s transition to proof-of-stake. Initial withdrawal queues may be long and there may be bouts of fear surrounding how much ether will be withdrawn and sold; however, we think these fears will subside and the ability to withdraw will dramatically increase the number of people willing to stake their ether. Ethereum’s staking ratio, currently roughly 15% of total supply10, could be double over the next year and the network would still have a far lower percentage of supply staked than comparable networks. An increased staking ratio has multiple impacts on the network, including lower levels of overall liquidity at any given time, slightly higher inflation rates, and lower yields for stakers assuming no increase in transaction volume.

Want to learn more about Shanghai and its potential impact to the Ethereum network? Check out our recent research report detailing the upgrade.  

Account Abstraction = Greater User Satisfaction

The Ethereum Foundation announced the launch of ERC-4337, known as account abstraction, on Ethereum and other EVM-compatible blockchains. This upgrade, which was added via smart contracts rather than an actual change to the protocol, offers the opportunity for various enhancements for crypto wallet usability and utility. Potential uses include the ability to schedule automatic payments, spending limits, two-factor authentication for transactions, and the ability to create additional recovery methods for users who lose their seed phrase. Additionally, contract accounts which use these smart contracts enable users to generate session keys that remove the need to sign individual transactions, which is useful for user experience in blockchain-based applications, among other things.  

Our Two Sats:

The conversation around the Ethereum network and its future upgrades are going to be centered around improving usability and user experience following the Shanghai implementation in April. This recent upgrade, ERC-4337 or “account abstraction,” is likely going to be a concept with which followers should familiarize themselves. The potential improvements from this new smart contract-enabled feature for wallets, alongside innovation in the Ethereum layer 2 ecosystem, are likely going to make using Ethereum cheaper, faster, and more user friendly.

News Quick Hits

  • CFTC charges Binance and its founder with willful evasion of federal law and operating an illegal digital asset derivatives exchange.11
  • World record set for highest number of peer-to-peer transactions; next plan is to break it and get it in the official Guinness Book of World Records.12
  • Yuga Labs, one of the largest and most recognized studios behind the popular Ethereum NFT collection “Bored Ape Yacht Club,” auctioned an inaugural Bitcoin Ordinals NFT collection for a total of $16.5 million that sold out within 24 hours.13

Data to Watch

Data we are currently keeping an eye on and our commentary.

Bitcoin Price Now Above Realized Price and 200-Week SMA
Line chart comparing the price of bitcoin and realized price versus the 200-Week SMA as of March 30, 2023

Bitcoin’s price now sits comfortably above two key levels: realized price and its 200-week simple moving average (SMA), indicating these may now both act as support levels rather than resistance levels as they have in past months.

The significance of realized price is due to the fact that it represents the average value that each bitcoin was last moved on-chain, while the 200-week moving average roughly aligns with Bitcoin’s four-year halving cycle.

Historically, bitcoin’s price rarely traded below the 200-Week SMA for a prolonged period. Looking back approximately nine years, bitcoin has traded below this metric for only 9% of all days. What’s more interesting is that the vast majority of those days have occurred in the most recent bear market that started at the end of 2021. We think it makes the recent rise above the 200-week SMA all the more significant.

Charts showing the days when the price of bitcoin was below and above the 200-week SMA  as of March 29, 2023.
Bitcoin Mempool Sees Higher Demand Than Usual

Bitcoin’s mempool (a “waiting area” where transactions wait to be picked up by miners to be included in blocks) is seeing higher than usual levels this year. Originally, we suspected this was due to the creation of ordinals, an indexing system that allows digital inscriptions, or more commonly referred to as NFTs, pushing out smaller fee-paying transactions. Now, it may be a combination of uncertainty around the traditional banking sector leading to more speculation in the bitcoin price and causing users to increase their fees. This transaction backlog, combined with rising prices, is surely a welcome sight to miners as they can generate more revenue by selecting the highest fee transactions from the mempool.

Charted below, we see the “0-1” and “1-2” fee cohorts being completely pushed out (fees are priced in the amount of bitcoin per space the transaction uses on the blockchain, more specifically as sats per virtual byte or vByte.) Put simply, users are having to compete with ordinals for block space at the lowest fee level. The combination of uncertainty outside of the network and this new competition with ordinals dictates that users must increase their fees if they want quick final settlement. With March ending and fears around the banking system settling, we’re seeing the total amount of transaction fees fall and an increase in the smaller cohorts (1-2 cohort), signaling that we may be returning to the historical norm.

Area chart showing the total amount of bitcoin fees in mempool by vByte cohort as of March 31, 2023.
Ethereum Net Issuance Remains Negative

Ethereum’s net issuance (new supply less burned supply) has remained negative since earlier this year. While the transaction count has not significantly changed this month, we do note a change in gas fees overall. It’s hard to say where exactly this burn is coming from because of all the different places fees can occur and the fact that ether has yet to find its “product market fit.” We suspect the uncertainty around the banking system and the news that Circle had 3.3 billion dollars stored at SVB14 could have caused users to flee out of USDC stablecoin and into others, such as Tether. Trading stablecoins still requires base fees to be paid in ether and thus are contributing to the burn rate. Ethereum also had a few layer 2 protocols airdropping funds to users and new ones coming online.

Dual axis chart showing Ethereum's supply dynamics post The Merge as of March 30, 2023.
In Case You Missed It

What exactly are Bitcoin mining pools — and are there centralization concerns given the top-two pools accounting for over 50% of Bitcoin’s total hash rate? In Bitcoin - Keeping Proof of Work Decentralized, analyst Daniel Gray examines this question and dives into upcoming mining pool protocol changes that could help keep Bitcoin’s proof-of-work mechanism more decentralized.


Christopher Kuiper, CFA, Director of Research, Lumos Capital

Jack Neureuter, Research Analyst, Lumos Capital

Matthew Hogan, Research Analyst, Lumos Capital

Daniel Gray, Research Analyst, Lumos Capital

Max Waddington, Research Analyst, Lumos Capital
















The information herein was prepared by Lumos Capital Services, LLC and Lumos Capital, Ltd. It is for informational purposes only and is not intended to constitute a recommendation, investment advice of any kind, or an offer or the solicitation of an offer to buy or sell securities or other assets. Please perform your own research and consult a qualified advisor to see if digital assets are an appropriate investment option.

Borrowing of digital assets are provided by Lumos Capital Services, LLC, a Singapore-chartered, limited liability trust company or Lumos Capital, Ltd. Lumos Capital, Ltd. is registered with the U.K. Financial Conduct Authority for certain cryptoasset activities under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. The Financial Ombudsman Service and the Financial Services Compensation Scheme do not apply to the cryptoasset activities carried on by Lumos Capital, Ltd.

This information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Persons accessing this information are required to inform themselves about and observe such restrictions.

Digital assets are speculative and highly volatile, can become illiquid at any time, and are for investors with a high-risk tolerance. Investors in digital assets could lose the entire value of their investment. 

Lumos Capital Services, LLC and Lumos Capital. Ltd. do not provide tax, legal, investment, or accounting advice. This material is not intended to provide, and should not be relied on, for tax, legal, or accounting advice. Tax laws and regulations are complex and subject to change. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

Some of this information is forward-looking and is subject to change. Past performance is no guarantee of future results. Investment results cannot be predicted or projected.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Lumos Capital or its affiliates. Lumos Capital does not assume any duty to update any of the information.

Lumos Capital and the Lumos Capital logo are service marks of Lumos LLC. © 2023 Lumos LLC. All rights reserved.