Top Stories of the Week

001 Investment Demand for Bitcoin Extends Beyond ETFs

BlackRock files to add Bitcoin exposure in other funds. On March 4, BlackRock filed an amendment with the SEC for its Strategic Income Opportunities Fund, which includes the added ability to purchase shares of Bitcoin ETFs for the Fund. Specifically, BlackRock's filed amendment reads: “The Fund may acquire shares in exchange-traded products (“ETPs”) that seek to reflect generally the performance of the price of bitcoin by directly holding bitcoin (“Bitcoin ETPs”), including shares of a Bitcoin ETP sponsored by an affiliate of BlackRock.” The amended filing also includes the ability for the Fund to invest in bitcoin futures.

According to BlackRock's website, the Strategic Income Opportunities Fund (BSIIX) was launched in February 2008 and is: 1) flexible, core bond complement, 2) diversified across markets and strategies, and 3) seeks total return that is consistent with the preservation of capital. As of 3/6/24, BSIIX's total fund size was $36.7bn with $24.1bn in net assets.

Our Take

Just nearly 2 months since the first Bitcoin ETF products were approved by the SEC, the world's largest asset manager has already filed for the ability to add Bitcoin exposure in other fund products. We argued in our Sizing the Market for a Bitcoin ETF report that there will likely be a much larger impact on BTC demand from second-order effects of bitcoin ETF approval as a wide range of other investment vehicles would be likely to add bitcoin to their portfolios (e.g., mutual funds, closed-end, and private funds, etc.) across various investment objectives and strategies. For example, Bitcoin exposure could be added by alternative funds (e.g., currency, commodity & other alts) and thematic funds (e.g., disruptive tech, ESG & social impact). (See our report The Impact & Opportunity of Bitcoin in A Portfolio for an examination of different bitcoin allocation strategies).

These filings from BlackRock helps strengthen the case for bitcoin in a portfolio for the potential diversification benefits and enhanced returns. In the near term, we still expect managed wealth platforms in the US to open access to bitcoin ETFs (the majority of which have yet to do so), as well as other global / international markets to follow the US in offering similar bitcoin ETF offerings to a wider population of investors. However, with further validation from the world’s largest asset manager based on its latest filed amendment, acceptance for bitcoin as an asset class should accelerate. - Charles Yu

002 Memecoin Volumes Surge Following Bitcoin All-Time High

The past week saw a significant increase in trading volumes for memecoins, coming just on the heels of bitcoin reaching a new all-time high. Currently, seven so-called “memecoins” boast market capitalizations exceeding $1 billion, and six rank among the top 100 cryptocurrencies by market cap. Memecoins are a loosely defined category of tokens that incorporate a memeable cultural element. Although some may have additional features, their primary offering is ownership of a coin that symbolizes a meme and fosters a sense of community. 

Dogecoin was the first memecoin ever launched. It was created in 2013, four years after the genesis Bitcoin block (refer to these Galaxy Reaearch reports for a history of Doge and its recent performance). Its community is famous for antics such a sponsoring the Jamaican Bobsled Team and being Elon Musk’s token of choice.

Since then, tens of thousands (possibly even hundreds of thousands) of memecoins have been launched. Dogs have been one of the most popular inspirations for tokens and six out of seven of the largest memecoins are dog-inspired. However, cats, animated characters, and even presidential candidates have also gained prominence.

Despite a major downturn in memecoins following the FTX crash, they were one of the first categories to see a return in volume during the bear market and several tokens went viral during the Spring and Summer of 2023. Every chain, old or new, now has memecoin offerings and they are often found in the top ten tokens by market cap for every chain.

Our Take

The fact that memecoins are surging is not surprising. This is a pattern seen emerge every cycle. What’s different this time is their prominence so early on. There are several factors driving this.

The approval and launch of the Bitcoin ETFs has been instrumental. These developments have attracted new investments into Bitcoin, pushing it to reach new all-time highs last week. While ETF inflows don't directly lead to increased on-chain activity—where memecoins are typically launched—they have bolstered market confidence, spurring further experimentation. Moreover, with Bitcoin's value at an all-time high and its market dominance holding firm, traders have begun to rotate into other projects.

Another factor is a lack of crypto products with use cases. Infrastructure development continues to drive a majority of investment in the space, leaving users with few onchain products and amplifying the presence of memecoins. Memecoins are often some of the first tokens launched on new chains because they are quick, cheap, and easy to deploy relative to more substantive applications. All they require is a token standard and a basic DeFi primitives. Indeed, in recent months founders of leading chains have increasingly begun tweeting about memecoins to drive engagement and bring in new users. Again, this dynamic is not necessarily new, as we saw similar dynamics with NFTs in the past, but its timing this early in the cycle is noteworthy.

Lastly, some market participants have argued that cultural shifts such as the emergence of the attention economy and financial nihilism have made it easier for new users to understand the value of memes. While there may be elements of truth to these theses, they do not alone explain the resurgence and are only applicable to this specific moment. Without the momentum generated by ETF inflows, it’s likely that memecoin activity would remain muted. - Lucas Tcheyan

003  Largest Block Builder on Ethereum Beaverbuild Surpasses 40% Marketshare

As of Friday, March 1, close to 40% of all Ethereum blocks are produced by a single entity, Beaverbuild. Among Ethereum block builders, Beaverbuild now boasts a 43% market share, up from 37% at the start of 2024 and 25% at the start of 2023. Beaverbuild is one of three major block builders on Ethereum responsible for creating blocks containing maximal extractable value (MEV), which is additional block rewards apart from transaction tips and issuance earned from reordering user transactions according to lucrative trading strategies such as frontrunning, backrunning, and sandwiching. The other two builders, Titan Builder and rsync, each control 29% and 15% of the block building market. Of the three major builders, only Titan Builder does not actively censor user transactions.

Censoring behavior on-chain can be tracked by evaluating the percentage of blocks that are produced over a period that do not contain transactions interacting with OFAC-sanctioned cryptocurrency addresses. There are hundreds of OFAC sanctioned cryptocurrency addresses across 17 blockchains including Bitcoin, Ethereum, Arbitrum, Binance Smart Chain, and others. On Ethereum, one of these sanctioned addresses that end-users continue to be interact with on-chain is the Tornado Cash smart contract, a cryptocurrency mixer. Over the last month, between 20 to 140 transactions interacting with Tornado cash have been processed daily on Ethereum. According to censorship.pics, a website tracking the censoring behavior of validators, builder, and relays on Ethereum, the vast majority of builders have built zero blocks over the past month containing OFAC sanctioned content. In comparison, roughly 2% of blocks built by Titan Builder over the last 30 days have contained OFAC sanctioned content.

Concerns about growing censorship behavior from builders on Ethereum have sparked discussion on protocol-level code changes to reinforce the network’s censorship resistance. One of these code changes, inclusion lists, has gained the most support from Ethereum client teams and may be included in the next major Ethereum upgrade after the Dencun upgrade, dubbed Pectra. Inclusion lists force inclusion of a list of transactions curated by validators that third-party block builders must include in their block for the block to be considered valid. The idea is controversial in the Ethereum community given that it may not be feature that many validators can support given that these validators are operated by regulated entities who, if given the choice, would also choose to censor user transactions.

Alongside concerns of increasing centralization and censorship in the block building market on Ethereum, crypto data analytics firm Coin Metrics released analysis on Tuesday, March 3 highlighting the centralization of mining hashrate to two mining pools on Bitcoin – Foundry and Antpool. According to the analysis, Foundry and Antpool received 53% of all Bitcoin mining rewards over the course of 2023. Coin Metrics Solutions Engineer Parker Merritt wrote, “Mining pool centralization remains a top-of-mind concern in the Bitcoin community. Even at face value, the overwhelming majority of mining rewards being funneled to just two pools (Foundry & AntPool) elevates risk factors like censorship and network disruption. Though the remaining allocation of hashrate is relatively well-distributed among smaller pools, on-chain links between pool addresses warrant concern, pointing towards a hidden consolidation of power in the mining ecosystem.”

Our Take

Centralization and censorship go hand-in-hand. The former creates opportunities for the latter on a public blockchain and, because of this, many developers in the Bitcoin and Ethereum communities view decentralization as one of the most important, if not the most important, quality of a blockchain to maximize, over and above other qualities such as scalability. However, unlike Bitcoin, Ethereum, due to its heightened programmability, is vulnerable to stronger forces of centralization because of the types of activity and applications that are built and used atop its network. Namely, the financial activity that occurs on Ethereum through decentralized finance (DeFi) applications create lucrative opportunities for block proposers to earn additional block rewards in the form of MEV that does not exist to the same magnitude on Bitcoin. As highlighted by the Coin Metrics analysis, this does not mean there is no centralizing forces on Bitcoin. Bitcoin block production relies heavily on two regulated intermediaries, Foundry and Antpool, for paying out block rewards to the majority of Bitcoin miners. This type of centralization also exists on Ethereum in the form of staking pools and liquid staking providers. We have written on this topic at length in prior newsletters.

However, in comparison to pool centralization, the centralizing forces of MEV on Ethereum are proving to be much more insidious and resulting in actual censoring behavior on-chain. Over the past 30 days, 992 transactions were excluded from blocks by censoring actors such as builders that should have otherwise been included. These transactions do eventually land on-chain but on a delayed timeline. On average, these transactions are included by a non-censoring builder or a vanilla validator (i.e. a validator that does not run MEV-Boost software) 64 seconds later than other transactions. The primary reason for censorship on Ethereum is due to regulatory concerns. The types of transactions that are actively censored from blocks by builders and relays are transactions interacting with addresses that are on the U.S. Treasury’s OFAC sanctions list. Though it is unclear to what extent miners, mining pools, validators, and staking pools are liable by the U.S. Treasury for the transactions they include in a block, the majority of entities responsible for block production on Ethereum are erring on the side of caution and censoring blocks.

The appropriate response from Ethereum protocol developers to this fear and behavior from block producers, be it builders or validators, should not be to force the hand of either party to take the onus of engaging in potentially criminal behavior in the eyes of the U.S. government as the proposal for inclusion lists suggests. The response should target the decentralization of block production by promoting diversification of the profiles of users that are engaging in block production and their geographic diversity. Granted, this latter response is significantly harder, likely to take more time, and certainly not executable through one network-wide upgrade. But then again, the scale of the issue should dictate its solution. MEV and its centralizing effects can only truly be mitigated and Ethereum made more resilient to these forces incrementally over time. - Christine Kim

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