CeFi Trending in "CRYPTO THESES 2024" (Part 1)

Compared to the credit contagion of 2022, this year seems more manageable. Coinbase has performed exceptionally well in difficult markets, delivering great success to its shareholders. Binance continues to survive under new leadership. OKX, Kraken, and ByBit are all net winners, but many other exchanges have lost their positions. In September 2023, exchange trading volumes fell to their lowest levels since the end of 2020, with poor market sentiment, delistings, and regulatory barriers all contributing to the contraction of the CeFi sector. But it seems we're heading back up again.

What doesn’t kill us makes us stronger.

1. Coinbase

Currently, Coinbase is operating at an extraordinary level and remains the best-positioned company in the cryptocurrency space.

Coinbase has gone through layoffs, lawsuits against the SEC, secured licenses, formed a strategic partnership with Circle regarding USDC insurance, launched perpetual contracts (Perps), released L2 Base (profitable by $7 million in the first quarter), upgraded its own wallet, and launched the RWA platform "Diamon" project.

Repaying loans at reasonable prices, generating revenue several times higher than expected, earning income from non-trading businesses, maintaining break-even status even during bear markets. Coinbase Ventures is one of the three most active Web3 funds, making acquisitions when startup funding is tight.

2. Binance

Reaching a settlement with the U.S. government and pleading guilty to money laundering and violations of sanctions laws has several positive aspects for Binance.

The outcome could have been worse. The alleged actions of Binance were bad, but what they ultimately admitted to may not be as terrible as imagined. The final result is that Binance continues to operate and still dominates global trading volume.
We now have a "surveillance-sharing agreement." Now, major ETF applicants have formal agreements with Coinbase, and an independent compliance monitor might reassure U.S. regulators that Binance's global operations are compliant. CeFi has been legitimized in unprecedented ways overnight.
Real competition for American giants. Companies complying with U.S. rules no longer feel like total losers when building domestically.
Customer funds are safe, but what about tax filers? One point in the Binance settlement brings significant pain to U.S. users who failed to properly report their cryptocurrency holdings or gains.
The beginning of the end. Finally resolving the Binance settlement feels like the beginning of the end, a stone off our chest, allowing us to move forward.

3. Other CeFi Winners

This year, Binance lost 25% of its market share in international trading volume, mainly losing out to Kraken (Europe) and OKX and Bybit (other regions).

4. ETF

A spot Bitcoin ETF is a product long overdue. Institutional fund managers will love the narrative of the fastest horse/digital gold, Bitcoin's Sharpe ratio, its explosive growth years (performance fees), and volatility (trading fees).

We know that the fees on these products will quickly decrease, and the market is about to become more liquid.
As the primary custodian for most ETF issuers, Coinbase is destined to see billions of dollars in new custody demand overnight.
Michael Saylor, owning 25% of MicroStrategy, can retain the company’s current $5 billion worth of Bitcoin (and the $1.6 billion in realized gains so far on this leveraged bet) even if $MSTR loses its "kind of an ETF" luster. Michael played an all-in wealth creation game in simple mode. Respectful.

5. DCG

They had good businesses, substantial liquid assets, profitability, and a good reputation, but ultimately got into trouble due to poor timing choices around the product that made them kings, GBTC, and inadequate counterparty risk management.

Hedge funds flooded into this "arbitrage" trade in 2020 and 2021, leveraging bets that they could create new shares and sell them to public market investors when a premium to NAV existed, and redeem for Bitcoin when the stock traded at a discount, especially once approved spot ETFs allowed daily redemptions. But almost no one anticipated that the GBTC stock premium could turn into a deep negative discount for an extended period. As a result, there was a bloody massacre between 2021-2023. In December last year, GBTC's stock discount to NAV reached 50%.

Genesis has collapsed, its wealth management division headquarters closed. DCG just sold CoinDesk to the crypto exchange Bullish, and many of DCG's investment assets seem to have been sold or pledged as collateral to Genesis or its counterparties. This leaves Grayscale as DCG's crown jewel, along with Foundry (the operator of the world's largest Bitcoin mining pool). It's hard to imagine DCG continuing without Grayscale.