Sebastian Sinclair

Digital asset markets are reeling from revelations that top exchange Binance may soon gobble up its major rival FTX, causing havoc among crypto stocks.



On Coinbase, bellwether crypto bitcoin fell 15% to $17,500 on Tuesday afternoon, its lowest point in almost two years. Number-two ether dropped by 22% at its worst while Binance’s native token BNB shed 12%.&nbsp;



Most top tokens have recovered slightly since their local lows. Still, the crypto market has shaved 10% from its total capitalization over the past 24 hours, breaking below the $1 trillion mark and representing $100 billion in nominal losses.



More than 69% has been wiped from a peak of $2.97 trillion witnessed 12 months ago, with roughly $1.9 trillion lost year to date. By comparison, the bursting of the dot-com bubble at the turn of the century erased <a href="https://money.cnn.com/2000/11/09/technology/overview/" target="_blank" rel="noreferrer noopener">$1.7 trillion</a> from equities markets, although adjusted for inflation that figure would be closer to $3 trillion.



Most of the sources Blockworks spoke to agree — the past 24 hours have been “insane.”



Core Scientific, one of the largest publicly listed miners, plummeted nearly 16% on Tuesday, the worst hit among bitcoin mining stocks, followed closely by Hong Kong rival Bit Mining. Core Scientific did however regain 3% during pre-market trade on Wednesday.



Hut 8 Mining Group and Digihost Technology both tumbled 12%, while Marathon Digital gave up 5% and a further 5% in the early morning session.



Surprisingly, New York-based Stronghold Digital managed to brace the impact climbing 2% on the day to finish up at $0.83 per share. The stock has however given up those gains and then some this morning.



Coinbase, practically the only pure-play crypto exchange that’s publicly-listed, took a 11% hit on Tuesday and another 5% during pre-market. Robinhood, the controversial discount brokerage which also supports crypto trading, tanked 19% to $9.74 and remains somewhat steady leading into today’s session.



Both Coinbase and Robinhood have experienced shrinking trade volumes, <a href="https://cms.blockworks.co/robinhood-layoff-costs-q2-losses-wont-delay-crypto-product-launches/" target="_blank" rel="noreferrer noopener">contributing</a> to reductions in their workforces this year, alongside both crypto-native firms and tech giants.



For scale, the tech-heavy NASDAQ 100 rose nearly 1% on Tuesday while the broader S&amp;P 500 gained more than half a percent.



<h3 class="wp-block-heading">Crypto bank Silvergate hardest hit among digital asset stocks</h3>



Digital asset managers Galaxy Digital and Bakkt Holdings sank 17% and 2.5% respectively on the day, with the latter falling another 2% during pre-market.&nbsp;



Both stocks have slumped by about 80% of year to date. Digital asset financial services firm Eqonex, a nano-cap stock which shuttered its exchange operations in August, also dropped nearly 9% on the day to $0.40.



Galaxy, spearheaded by Wall Street maverick Mike Novogratz, is rumored to be cutting its workforce by 15% following a <a href="https://cms.blockworks.co/galaxy-digitals-stock-rises-despite-posting-555m-q2-net-loss/" target="_blank" rel="noreferrer noopener">$555 million net loss</a> posted for the second quarter. Galaxy’s third-quarter earnings call is slated for Wednesday at 8:30 am ET.



Crypto custodians Silvergate and Signature Bank each ended more than 22% and 4% in the red, now down 73% and 57% respectively this year. Silvergate was the worst performing crypto-related stock on Tuesday of the 50 Blockworks analyzed. It fell an additional 7% during pre-market.



San Diego-based Silvergate, which collects demand deposits from crypto infrastructure providers and exchanges, posted a loss of $13.5 million in third-quarter deposits <a href="https://www.forbes.com/sites/emilymason/2022/10/18/silvergate-stock-tumbles-as-3q-deposits-retreat-for-banker-to-crypto-exchanges/?sh=4ff4e6275902" target="_blank" rel="noreferrer noopener">compared to Q2</a>.



Software company (and pseudo bitcoin ETF) MicroStrategy wasn’t far behind, sliding 20.5% and another 8% before Wednesday’s open. MicroStrategy owns <a href="https://cms.blockworks.co/are-companies-aside-from-microstrategy-still-buying-bitcoin/#:~:text=With%20the%20purchase%2C%20MicroStrategy%20now,return%20a%20request%20for%20comment." target="_blank" rel="noreferrer noopener">130,000</a> BTC ($2.31 billion), acquired for nearly $4 billion at an average of $30,639 as of late September, putting its paper losses at around 40%.



Elon Musk’s automaker Tesla, which held 9,720 BTC ($172 million) per its latest disclosures, tumbled 3%, although it’s more likely the stock was impacted by Musk dumping <a href="https://www.bloomberg.com/news/articles/2022-11-09/musk-sells-3-95-billion-of-tesla-stock-after-twitter-takeover" target="_blank" rel="noreferrer noopener">$3.9 billion</a> in company stock following his buyout of social media platform Twitter.



The negative price action across crypto stocks amounted to hurting digital asset ETFs. Bitwise’s Crypto Industry Innovators ETF (BITQ), which is weighted considerably towards MicroStrategy, Coinbase and Silvergate, stumbled 10%.



<h3 class="wp-block-heading">Crypto industry caught off guard by FTX collapse</h3>



The volatility felt Tuesday is reminiscent of past events this year following a contagion that had gripped some of the industry’s largest lenders including Celsius Network and Voyager Digital — now undergoing bankruptcy proceedings.



With public <a href="https://twitter.com/LucasNuzzi/status/1590122590206824448?s=20&amp;t=1ROZBsSFtb3lAWV99IQopA" target="_blank" rel="noreferrer noopener">speculation mounting</a> over whether FTX <a href="https://twitter.com/AriDavidPaul/status/1590027413937090561?s=20&amp;t=L8h4QiopjfCJkEUoAerzLA" target="_blank" rel="noreferrer noopener">rehypothecated</a> client crypto to bail out its sister firm Alameda Research in Q2, investors are fleeing for the exit. Users have decided against the risk of keeping their crypto on FTX and have decided to <a href="https://www.coindesk.com/business/2022/11/08/ftxs-bitcoin-balance-plunges-to-just-one/" target="_blank" rel="noreferrer noopener">pull their funds</a>.



Despite the <a href="https://www.coindesk.com/business/2022/11/02/divisions-in-sam-bankman-frieds-crypto-empire-blur-on-his-trading-titan-alamedas-balance-sheet/?outputType=amp" target="_blank" rel="noreferrer noopener">leak</a> of Alameda’s alleged partial balance sheet late last week, most in the industry have been caught off guard. Developments have escalated quickly and within a few days FTX CEO Sam Bankman-Fried could soon be forced to sell.



Questions remain as to why FTX —- which was valued as much as $36 billion at its last funding round just nine months ago — is grasping at a bailout from its biggest rival. Proponents are now asking whether FTX <a href="https://twitter.com/AriDavidPaul/status/1590027413937090561?s=20&amp;t=L8h4QiopjfCJkEUoAerzLA" target="_blank" rel="noreferrer noopener">deployed</a> its customer and partner capital to fund other ventures.



“In general, it’s poor practice for exchanges to be utilizing their customers’ tokens for other purposes, which exposes said tokens to unnecessary risk,” CoinGecko’s co-founder Bobby Ong told Blockworks.



Exchanges should strive to have customer tokens fully custodied, with the totals and wallet addresses made transparent for public scrutiny, he said. “All crypto exchanges should do Merkle-tree <a href="https://cms.blockworks.co/news/what-are-proof-of-reserves-and-can-they-build-back-trust/">proof-of-reserves</a>,” Binance’s CEO Changpeng Zhao tweeted Tuesday. 



Read more: <a href="https://cms.blockworks.co/news/what-are-proof-of-reserves-and-can-they-build-back-trust/">What Is Proof of Reserves and Can It Build Back Trust?</a>



“Banks run on fractional reserves. Crypto exchanges should not.” The Binance head said his exchange would start to implement proof-of-reserves “soon” in an attempt to provide “full transparency.”



Tony Chapple, head of trading at Australian digital asset firm Zerocap, told Blockworks that the event will escalate consolidation through the crypto space, which he reckons had been on the cards for a while.



“Consolidation to firms with proven ability to control their balance sheet risk and employ economies of scale will be the long-term winners here,” Chapple said.



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FTX Contagion Hits Crypto Stocks Following Binance Buyout

Ben Strack

<div id="highlights-block_6227b74b85b0c" class="highlights">
 <ul>
 <li>Marathon Digital expects to have 199,000 bitcoin miners producing approximately 23.3 EH/s by early 2023</li>
 <li>Stronghold Digital Mining, which owns its power, seeks to buy additional plants and scale its mining equipment and operations this year</li>
 </ul>
 
</div>



Cryptocurrency miners will diversify their revenue streams and business models from one another this year, according to Compass Point Research and Trading.&nbsp;



The cryptocurrency research firm estimates the global hashrate will rise to 327 exahashes per second (EH/s) by the end of 2022 — a nearly 60% year-over-year increase, <a href="https://compasspoint.bluematrix.com/links2/secure/pdf-viewer/36c024b3-5d83-4e8c-af91-e7c207a26a67" target="_blank" rel="noreferrer noopener">according to a note</a> by Chase White. Hashrate could reach 587 EH/s by the end of next year, he added.



“While we believe our hash rate growth estimate is relatively aggressive compared to consensus, we see it as a more conservative approach given that miner revenues and per-BTC costs are directly related to global hash rate share, potentially suggesting upside to our estimates if growth is lower than expected,” White wrote.



Bitcoin traded around $38,800 at 2 pm ET on Tuesday.



Compass Point expects bitcoin prices to average roughly $49,000 this year — ending the year at $65,000 — and rise to an average of $81,000 in 2023. The expected rise is driven in part by BTC’s resilience during Russia’s invasion of Ukraine and expected increased adoption globally, especially among retail investors, White wrote.



“We do not believe all miners are created equal, and we believe 2022 is the year that investors will start to look at the differentiators between the companies and their businesses,” he wrote. &#8220;These factors lead us to favor Marathon (MARA) among the scaled miners and Stronghold Digital Mining (SDIG) among the small miners.&#8221;



<h3 class="wp-block-heading">Marathon versus Riot Blockchain</h3>



Marathon has 35,510 active miners producing approximately 3.8 EH/s, the company reported last week. It increased hash rate 8% from the prior month after deploying 2,800 miners.



Marathon mined 360.3 bitcoins in February — a 730% increase from 43.4 bitcoins in February 2021. The company now holds 8,956 bitcoins, currently valued at nearly $350 million.



While many miners are going the vertically integrated route by owning infrastructure and power sources, Marathon has taken the opposite tactic, according to Charlie Schumacher, vice president of corporate communications.



The company owns its machines but partners with other companies that provide infrastructure, as well as power companies that offer primarily renewable energy, he said. Buying infrastructure was not an attractive return on Marathon’s investment, Schumacher said.



“We could have spent $750 million to build a data center, but instead we spent $750 million to go out and buy machines and increase our hashrate,” Schumacher said. “We would rather buy assets that generate revenue than own assets that don’t.”



Hut 8 Mining, a company not included in Compass Point’s report, recently acquired five data centers as it looks to <a href="https://cms.blockworks.co/bitcoin-miner-targets-gaming-web3-with-cloud-services-expansion/" target="_blank" rel="noreferrer noopener">build out its cloud computing business</a>.



Marathon’s focus this year is to deploy the miners it has purchased. Marathon expects to have 199,000 bitcoin miners producing approximately 23.3 EH/s by early 2023, Schumacher said, and expects its mining operations to be 100% carbon neutral by the end of 2022.



The company’s status as a scaled miner with ample access to capital likely gives it the first look at any available hosting capacity, White wrote. He lowered Riot Blockchain’s rating from buy to neutral, noting that Marathon offers better upside.



Riot produced 436 bitcoins in February, bringing the total it holds to 5,783 BTC, the company reported last week. Riot, which has a fleet of 38,310 miners with a hashrate of 3.9 EH/s, anticipates a total self-mining hash rate capacity of 12.8 EH/s by January 2023.



As for other miners featured in the report, Compass Point retained its buy rating for Argo Blockchain and downgraded its rating for Iris Energy from buy to neutral.



<h3 class="wp-block-heading">Stronghold’s 2022 focuses</h3>



Compass Point’s preference of Stronghold compared to fellow smaller miners is driven by its relatively low power costs, diversified revenue streams and low-cost options on additional power capacity.



“We acknowledge there is execution risk on the path to capacity,” White wrote.



The company, which <a href="https://cms.blockworks.co/stronghold-digital-mining-ipo-opens-55-8-above-expected-stock-price/" target="_blank" rel="noreferrer noopener">went public last year</a>, generates power from the waste byproduct of legacy coal mining operations. It’s focused on maximizing the benefits of owning its power, which is typically the largest cost for miners.



“In owning our own power assets, we can continue to grow our mining operations and clean up the environment at the same time,” Stronghold CEO Greg Beard told Blockworks in an email. “It also allows us to stabilize the electricity grid in the region at a time of questionable energy security, not just locally and regionally, but globally.”



The company acquired its second plant, the Panther Creek Energy Facility in Pennsylvania, last November. It reported having about 14,000 miners with 1.3 EH/s of capacity in January.&nbsp;



“We are plugging in miners and expanding our mining power as fast as we can,” Beard said. “That will truly unlock the growth potential of our vertically integrated operation, as we will have the lowest cost of power in the industry.”



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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



The Lightspeed newsletter is all things Solana, in your inbox, every day. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to daily Solana news</a> from Jack Kubinec and Jeff Albus.