Donovan Choy

This is a segment from the 0xResearch newsletter. To read full editions, <a href="https://blockworks.co/newsletter/research">subscribe</a>.



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The permissionless nature of crypto means anyone with a computer and internet connection can have a bag. That makes it really hard to value tokens.



Price-to-sales multiples of L1s like Cardano or Ripple trade at absurd four to five figure ranges, far above actual value-generating L1s like Solana (32x) and Ethereum (227x).



Then there are tokens like OM (who?) that are clocking in the highest price gains of 47.6% since the industry’s biggest liquidation earlier this month.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">The best advice I can give crypto founders right now is to find the <a href="https://twitter.com/search?q=%24OM&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$OM</a> market maker and hire them. <a href="https://t.co/0NuazFN4N7">pic.twitter.com/0NuazFN4N7</a>&mdash; Lai Yuen (Former .eth) (@0xlaiyuen) <a href="https://twitter.com/0xlaiyuen/status/1888823059584602544?ref_src=twsrc%5Etfw">February 10, 2025</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



No rational explanation exists. It’s all narrative and “speculative premiums.”



But is that going to stop investors from trying to formally value tokens? No, because there is a lot of money to be made from unearthing the gems.&nbsp;



In the short history of this industry, investors have <a href="https://youtu.be/aCHY9iPS8sI">tried to value</a> L1s with a variety of now-abandoned tools like the stock-to-flow model, total-value-locked to market cap ratios or proof-of-stake staking cash flow yields.



The latest shift in investor sentiment around token valuations is doubling down on an emphasis on the importance of fundamentals.



Maelstrom fund <a href="https://x.com/MaelstromFund/status/1889706122107338761">points</a> to Vertex perps DEX, arguing that markets are “underestimating” the DEX’s growth and that it “should” be trading at a 200% to 300% greater valuation in line with its peers.



1kxnetwork fund’s recently <a href="https://x.com/pet3rpan_/status/1887140527310864481">published</a> Ronin chain thesis points to the gaming chain’s deflationary burn of SLP, plus rising daily active users and breakout revenue-generating game Pixels ($20.7 million in 2024).



Applications like Raydium, Hyperliquid, Metaplex, GEODNET, and Jupiter are all trading at reasonably “rational” P/S ratios that are based on consistent cash flows and more measurable growth potential.



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXdXdgcWvGoqtpq_ESTlfJ9JukSDa8GGFbvuPles2tYtLJlUgD_lU5BXqQ7qTOsoEK1zrNsE51XT16BW8vVVmHlV5yCo2UMX3Y_88DSo9Sd4DGc5Bb3GJcyOc5JsV68WB6BGnEk-Qg?key=ttbwXyG5YLiXMxIfjc4w1cbH" alt=""/><figcaption class="wp-element-caption">Source: <a href="https://x.com/artemis/status/1890162713244102993">Artemis</a></figcaption></figure>



Many of these projects are also engaging in huge token buybacks, often perceived as a “fundamentals-driven” strategy to improve the attractiveness of price multiples.



Jupiter’s token <a href="https://x.com/JupiterExchange/status/1890089764218630253">buyback</a> program may quite possibly be the largest (in USD terms) with a commitment of 50% protocol fees. That comes up to a buyback of ~9.4% of JUP’s total circulating supply, based on this rough <a href="https://x.com/alpha_pls/status/1883496465160458659">estimate</a>.



Supporting the point that “fundamentals are back” is also the ugly reality of declining L1/L2 valuations.



The fabled “Layer-1 premium” is slowly evaporating. L1s in the previous cycle like Starknet raised at eye-popping valuations of $8 billion, while newer L1s command less than half of those valuations (Berachain $420 million, Story Protocol $2.25 billion, Celestia $3.5 billion).



The <a href="https://x.com/Febers4/status/1889671466041614568">down-only price action</a> of most L1s/L2s in the last 12 months will likely grind future valuation numbers down even further.



Application revenues are also beginning to outpace the revenues of the underlying L1 and L2 protocols, Blockworks’ <a href="https://x.com/smyyguy/status/1890088127617987066">Dan Smith</a> points out.



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXckuTfvYMVthDMuaxyo0WxSxozxN-4YZwPobsaPPaUmQcT4K2xIruQAn44yJA8BoUb5E6Zfje61ASi_i5aQkpFxQgaNovSof5RToq6Ni6pKsbnVvOBvhcSZ84MaeImh33tyn1u0?key=ttbwXyG5YLiXMxIfjc4w1cbH" alt=""/><figcaption class="wp-element-caption">Source: <a href="https://app.blockworksresearch.com/analytics/l1">Blockworks Research</a></figcaption></figure>



This all hinges on the growing disdain of the industry’s <a href="https://blockworks.co/news/crypto-infrastructure-bloat">infrastructure bloat</a>. The fat protocol thesis is no longer, now is the era of <a href="https://x.com/jon_charb/status/1890210333714960787?s=19">the fat app thesis</a>.



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Crypto fundamentals are back

Katherine Ross

This is a segment from the Empire newsletter. To read full editions, <a href="https://blockworks.co/newsletter/empire">subscribe</a>.



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Blockworks’ head of research, Ryan Connor, thinks that we’re at a “crossroads” with fundamentals in crypto.&nbsp;



“It&#8217;s because the marginal investor coming into crypto as a result of legalizing crypto in the United States is going to be a traditional financial professional, not a degen,” he told me.



It can be boiled down to either the amount of market participants or those who control the capital. Both of these lead to the same outcome: Folks who want to see fundamental value in tokens.



“A lot of people in crypto still believe the primary driver of token price is ‘vibes.’ There’s ample evidence over the past, let’s say 18 months, that that’s increasingly not true,” he explained. That doesn’t mean that vibe trading isn’t a thing — and probably will still linger for a while yet — but those will remain in smaller pockets of the market, like memecoins.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">If tokens don’t trade on fundamentals then why is crypto correlated to Nasdaq&mdash; Ryan Connor | BWR 🟪 (@_ryanrconnor) <a href="https://twitter.com/_ryanrconnor/status/1886476222005202973?ref_src=twsrc%5Etfw">February 3, 2025</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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When you have scenarios of a “silly” token soaring and then crashing, it opens the door for fundamentals to play a bigger part as crypto matures.&nbsp;



“Most token projects are early-stage, and because there&#8217;s some opacity around governance models, we tend to just look at the top line first. As a general rule in TradFi, the earlier stage the project, the more you care about the top-line fundamentals as opposed to the bottom-line fundamentals. If you’re a high-growth tech company, you’re looking at sales growth, you’re looking at the [average revenue per user], and rate of change on those metrics,” Connor said.



Other fundamentals to look at, depending on the project, would be earnings, cash flows and dividend yields. For the most part, the TradFi metrics carried over will reflect what we see in high-growth tech firms.&nbsp;



Right now, though, revenue is “probably the most important thing today,” and then you can pick and choose other metrics to apply depending on the token.&nbsp;



One thing’s for sure: There’ll always be a place for vibes in crypto, but adding in metrics to monitor the success of a project only levels crypto up.



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Crypto’s at a ‘crossroads’ with fundamentals: Blockworks Research

Sam Martin

Ethereum and Bitcoin Price Action, Fundamentals Diverge: Markets Wrap

<div id="highlights-block_60c9fc7f1690b" class="highlights">
 <ul>
 <li>Macro backdrop, on-chain fundamentals and regulatory outlook are making bitcoin an easy buy and hold</li>
 <li>It&#8217;s important to remember the environment we are in and not forget about the digital pet rock: bitcoin </li>
 </ul>
 
</div>



<h3 class="wp-block-heading">Markets Wrap Highlights</h3>



<ul class="wp-block-list"><li>The macro backdrop is very favorable for bitcoin. </li><li>On-chain fundamentals look great for Bitcoin. </li><li>Regulators seem less concerned with bitcoin and more worried about stablecoins and other tokens that are function in similar ways to securities. </li></ul>



Latest in Macro:



<ul class="wp-block-list"><li>S&amp;P 500: 4,391, -.19%</li><li>NASDAQ: 14,579, -.51%</li><li>Gold: $1,757, +.05%</li><li>WTI Crude Oil: $79.52, +1.56%</li><li>10-Year Treasury: 1.61%, +.041%</li></ul>



Latest in Crypto:



<ul class="wp-block-list"><li>BTC: $54,378, +0.27%</li><li>ETH: $3,599, -.73%</li><li>ETH/BTC: .0662, -.69%</li><li>BTC.D: 43.88%, +.18%</li><li>DPI (DeFi Pulse Index): $341.62, +.66%</li></ul>



<h3 class="wp-block-heading">Macro Backdrop </h3>



While other protocols such as Ethereum offer incredible innovation and interesting applications, it is important to remember the environment we are in and not forget about the digital pet rock: bitcoin. 



 &#8220;There is no ability for the Fed to tighten. They can&#8217;t. And the reason they can&#8217;t is because if you look at US treasury spending plus US entitlement payments, it&#8217;s over 100% of tax receipts. So the US&#8217; real interest expense is still more than 100% of tax receipts with tax receipts at all time highs and with bubbles in every freaking market. So if they tighten, they&#8217;re going to drive tax receipts lower, and then unless the Fed prints the difference the US will default on entitlements or treasuries.&#8221; &#8211; Luke Gromen, founder and president of <a href="https://fftt-llc.com" target="_blank" rel="noreferrer noopener">FFTT</a>



The following chart shows real central bank rates, or the difference between nominal rates and the prevailing inflation rate:



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="728" height="1024" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/real-rates-728x1024.jpg" alt="" class="wp-image-9142" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/real-rates-728x1024.jpg?w=728 728w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/real-rates-728x1024.jpg?w=213 213w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/real-rates-728x1024.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/real-rates-728x1024.jpg?w=1091 1091w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/real-rates-728x1024.jpg?w=183 183w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/real-rates-728x1024.jpg?w=185 185w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/real-rates-728x1024.jpg?w=156 156w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/real-rates-728x1024.jpg?w=57 57w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/real-rates-728x1024.jpg?w=1284 1284w" sizes="auto, (max-width: 728px) 100vw, 728px" /></figure>



&#8220;The United States, with the global reserve currency, hollowed out its industrial base at a far faster pace than our peers, as we shut down domestic factories and opened them up abroad (to take advantage of cheaper labor).&#8221; &#8211; Lyn Alden, macroeconomist and <a href="https://www.lynalden.com/august-2021-newsletter/" target="_blank" rel="noreferrer noopener">equities strategist.</a> 



One can easily spot the decoupling between productivity and wage growth in the 1970s when President Nixon announced the greenback would no longer be exchangeable for gold, thus giving birth to the petrodollar system. 



<figure class="wp-block-image size-full"><img loading="lazy" decoding="async" width="803" height="471" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-08-at-3.26.46-PM.png" alt="" class="wp-image-9143" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-08-at-3.26.46-PM.png?w=803 803w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-08-at-3.26.46-PM.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-08-at-3.26.46-PM.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-08-at-3.26.46-PM.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-08-at-3.26.46-PM.png?w=445 445w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-08-at-3.26.46-PM.png?w=373 373w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-08-at-3.26.46-PM.png?w=80 80w" sizes="auto, (max-width: 803px) 100vw, 803px" /><figcaption>Source: <a href="https://www.epi.org/productivity-pay-gap/" target="_blank" rel="noreferrer noopener">EPI</a></figcaption></figure>



To summarize, we have increasing inequality within the US due to the lack of wage growth and increasing asset prices, combined with negative yielding debt instruments on a real basis and a whole lot of capital in the system with no where to hide. 



Historically speaking, gold was the place to park your money in these environments. But in a digital era, Bitcoin has become a viable alternative. It&#8217;s worth noting that gold&#8217;s established history and the fact that it sits on central bankers balance sheets are two important factors worth considering. 



<div class="wp-block-image"><figure class="aligncenter size-full"><img loading="lazy" decoding="async" width="448" height="550" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/btc-v-gold.jpg" alt="" class="wp-image-9146" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/btc-v-gold.jpg?w=448 448w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/btc-v-gold.jpg?w=244 244w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/btc-v-gold.jpg?w=209 209w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/btc-v-gold.jpg?w=213 213w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/btc-v-gold.jpg?w=178 178w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/btc-v-gold.jpg?w=65 65w" sizes="auto, (max-width: 448px) 100vw, 448px" /><figcaption>Source: <a href="https://medium.com/@samikkurty/fiat-gold-and-bitcoin-comparison-e878fa2292bc" target="_blank" rel="noreferrer noopener">Medium</a></figcaption></figure></div>



<h3 class="wp-block-heading">Bitcoin Fundamentals</h3>



Per JPMorgan, there are tentative signs that the previous shift away from gold into bitcoin seen during most of Q4 2020 and the beginning of 2021 has begun to re-emerge in recent weeks.



<div class="wp-block-image"><figure class="aligncenter size-full"><img loading="lazy" decoding="async" width="500" height="398" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/cumulative-flows.jpg" alt="" class="wp-image-9147" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/cumulative-flows.jpg?w=500 500w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/cumulative-flows.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/cumulative-flows.jpg?w=323 323w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/cumulative-flows.jpg?w=328 328w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/cumulative-flows.jpg?w=275 275w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/cumulative-flows.jpg?w=80 80w" sizes="auto, (max-width: 500px) 100vw, 500px" /></figure></div>



Long term holders (LTHs), or entities who have held onto their coins without moving them for 155 days or more, continue to accumulate. Over two million coins have aged into LTHs since the May correction.



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="576" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/LTH-supply-1024x576.jpg" alt="" class="wp-image-9148" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/LTH-supply-1024x576.jpg?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/LTH-supply-1024x576.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/LTH-supply-1024x576.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/LTH-supply-1024x576.jpg?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/LTH-supply-1024x576.jpg?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/LTH-supply-1024x576.jpg?w=464 464w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/LTH-supply-1024x576.jpg?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/LTH-supply-1024x576.jpg?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/LTH-supply-1024x576.jpg?w=1800 1800w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></figure>



With every cycle, there are momentum traders/speculators who hop on board, but there are also a number of people who dive deep into bitcoin and decide they agree with the philosophical ideas behind its existence, thus creating more lifetime holders who do not plan to sell. This point is best illustrated by the chart below. Bitcoin UTXO (unspent transaction output) age distribution is a fancy way of saying &#8216;the last time bitcoins were moved&#8217;. 



<figure class="wp-block-image size-full"><img loading="lazy" decoding="async" width="1010" height="672" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/BTC-UTXO-Age-Distribution-Unchained-Capital.png" alt="" class="wp-image-9149" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/BTC-UTXO-Age-Distribution-Unchained-Capital.png?w=1010 1010w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/BTC-UTXO-Age-Distribution-Unchained-Capital.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/BTC-UTXO-Age-Distribution-Unchained-Capital.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/BTC-UTXO-Age-Distribution-Unchained-Capital.png?w=386 386w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/BTC-UTXO-Age-Distribution-Unchained-Capital.png?w=392 392w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/BTC-UTXO-Age-Distribution-Unchained-Capital.png?w=329 329w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/BTC-UTXO-Age-Distribution-Unchained-Capital.png?w=80 80w" sizes="auto, (max-width: 1010px) 100vw, 1010px" /></figure>



We also see the number of bitcoin on exchanges such as Coinbase, Binance, etc., decreasing in a dramatic way since the crash in March of 2020. This indicates that retail investors are buying cold storage wallets and taking custody of their bitcoin. Often times, people who take the time to <a href="https://www.lopp.net/bitcoin-information/security.html" target="_blank" rel="noreferrer noopener">learn about self-custody</a> have no intentions of selling their bitcoin. 



<div class="wp-block-image"><figure class="aligncenter size-full"><img loading="lazy" decoding="async" width="700" height="393" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/premium-2021-10-3-btc-exchange-balance.png" alt="" class="wp-image-9150" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/premium-2021-10-3-btc-exchange-balance.png?w=700 700w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/premium-2021-10-3-btc-exchange-balance.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/premium-2021-10-3-btc-exchange-balance.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/premium-2021-10-3-btc-exchange-balance.png?w=465 465w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/premium-2021-10-3-btc-exchange-balance.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/premium-2021-10-3-btc-exchange-balance.png?w=80 80w" sizes="auto, (max-width: 700px) 100vw, 700px" /><figcaption>Source: Lyn Alden / Glassnode</figcaption></figure></div>



Perpetual funding rates have eased on the highest volume exchanges over the last few days. This indicates that traders aren&#8217;t frantically attempting to take a long position. Emotions do not represent healthy moves, regardless of their direction. 



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="105" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-08-at-4.39.13-PM-1024x105.png" alt="" class="wp-image-9153" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-08-at-4.39.13-PM-1024x105.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-08-at-4.39.13-PM-1024x105.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-08-at-4.39.13-PM-1024x105.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-08-at-4.39.13-PM-1024x105.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-08-at-4.39.13-PM-1024x105.png?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-08-at-4.39.13-PM-1024x105.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-08-at-4.39.13-PM-1024x105.png?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-08-at-4.39.13-PM-1024x105.png?w=1437 1437w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /><figcaption>Source: https://app.laevitas.ch/dashboard/btc/derivs</figcaption></figure>



Lastly, bitcoin is the only cryptocurrency that has been repeatedly stated as the least of regulators&#8217; concerns. In the past week, we saw Fed chairman Jerome Powell <a href="https://www.bloomberg.com/news/videos/2021-09-30/powell-says-fed-has-no-intention-to-ban-cryptocurrencies-video" target="_blank" rel="noreferrer noopener">clarify</a> that he does not want to ban the use of digital assets but that regulation on stablecoins is necessary. We have also seen Gary Gensler <a href="https://www.businessinsider.com/gary-gensler-sec-chair-crypto-cop-blockchain-regulation-2021-8" target="_blank" rel="noreferrer noopener">classify</a> bitcoin as a commodity. When compared to other digital assets, bitcoin undoubtedly carries the least amount of regulatory risk. 



That&#8217;s all for this week, my friends. Have a great weekend! 



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