First Mover Asia: Crypto carbon trading is racing to clean up its act; Cryptos drop even as stocks rise

Carbon credit protocols have had a difficult time in recent months but have been working to improve the way they operate; bitcoin outperformed other major cryptocurrencies in Thursday trading.

Good morning. Here’s what’s happening:

Prices: Bitcoin falls slightly, altcoins fare worse even as stocks rise.

Insights: Crypto carbon trading firms are looking to address problems that have plagued them.

Technician's take: BTC remains in a choppy trading range with limited upside.

Prices

Bitcoin (BTC): $29,134 -1.6%

Ether (ETH): $1,784 -8.4%

Biggest Gainers

There are no gainers in CoinDesk 20 today.

Biggest Losers

Asset	Ticker	Returns	DACS Sector
Cosmos	ATOM	−10.1%	Smart Contract Platform
Solana	SOL	−9.1%	Smart Contract Platform
Ethereum	ETH	−7.5%	Smart Contract Platform

Bitcoin falls slightly, altcoins fare worse even as stocks rise

Most major cryptocurrencies tumbled even as stock prices rose in Thursday trading.

Bitcoin was recently trading at about $29,100, roughly flat over the previous 24 hours after the largest cryptocurrency by market capitalization dropped well below $29,000 earlier in the day. Ether was off more than 8% over the same period and changing hands below $1,800. The second largest crypto by market cap has hovered above $1,900 for much of the past three weeks.

Other altcoins spent most of their Thursday day solidly in the red with SOL, CRO and APE each off at least 11% at certain points as investors continued their recent preference for BTC, considered the least risky of digital assets, amid ongoing concerns about high inflation and an economic downturn. Bitcoin's market cap has recently spiked relative to other cryptocurrencies.

"It's not surprise to me that people are pulling back from crypto," JJ Kinahan, vice president and chief market strategist for trading platform Tastytrade, told CoinDesk TV's First Mover program. "Bitcoin, probably the one [cryptocurrency] being the most established name among retail investors is the one that people trust to hold up."

The Dow Jones Industrial Average of blue-chip stocks has had at least some reason to crow lately, rising for a fifth consecutive day. Other indices also soared as three major retail chains, Macy's, Dollar General and Dollar Tree, reported favorable earnings, suggesting at least temporarily that consumers weren't done shopping. Retail sales helped fuel the U.S. economic rebound that began slowing in recent months.

The tech-focused Nasdaq increased a strong 2.6% with Tesla (TSLA) and Amazon (AMZN) among the winners, and the S&P 500, climbed nearly 2% just two days after hitting bear market territory, a designation reached when an equities index plunges 20% from its most recent high.

Still, other recent news offered stark reminders of the global economy's shaky balance. In China, President Xi Jinping said that the country's economy was doing worse in some ways than during the earlier stages of the COVID pandemic. A government lockdown has slowed China's growth and boosted unemployment rates. And investment giant Sequoia Capital offered a downbeat assessment of economic conditions and encouraged the early stage companies it has financed to focus on cutting costs and increasing profitability.

Crypto investors are likely to remain spooked by economic conditions and geopolitical turmoil, a number of analysts say. The Fear and Greed index rose slightly by early Thursday and remains in "extreme fear" territory, while the total market capitalization of the crypto market has declined.

"That the S&P is trying to break 4,000, while bitcoin's trying to break $30,000 are both very important points, very correlated as to the confidence in the market and in bitcoin and assets overall," Tastytrade's Kinahan said.

Markets

S&P 500: 4,057 +1.9%

DJIA: 32,637 +1.6%

Nasdaq: 11,740 +2.6%

Gold: $1,850 -0.1%

Insights

Crypto carbon credit protocols look to improve

Like all things crypto, blockchain-based carbon credit protocols have had a tough go of it during the last quarter. They have been subject to the same market pressure as the rest of the industry, which is struggling to regain its footing since the Terra collapse.

But the sector’s challenges are not just to do with market dynamics. It’s also facing an internal reckoning after questions emerged about the quality of the credits being traded inside the base carbon tokens (BCT) issued on the Toucan protocol, which led Verra, a hybrid standards agency and registry responsible for carbon credits, to take a hard look at the practice.

In April, researchers at Carbon Plan, a California-based climate data non-profit, published a paper titled “Zombies on the Blockchain,” which outlined how approximately 28% of the Verified Carbon Units (VCU) traded in BCTs on the Toucan Protocol and via carbon trading KlimaDao were from “zombie projects.”

“Toucan appears to be generating entirely new demand for long-neglected credits that have experienced little or no demand in recent years,” the researchers wrote. “When the crypto market places higher value on BCTs and KLIMA tokens, these products can bring formerly defunct offset projects back to life.”

CarbonPlan highlights in its post that carbon credits under Article 6 of the Paris Agreement prohibit the trading of credits from carbon offset projects registered before Jan. 1, 2013. Yet, these older projects are being actively traded on the Toucan protocol and were still being tokenized as late as November 2021.

“Rather than eliminate supply from the voluntary market, however, zombie projects show that BCTs are bringing new supplies into existence – not in the form of new projects, but of old credits that weren’t previously able to find any buyers,” CarbonPlan’s researchers wrote. “Thanks to demand from blockchain buyers, however, these low-quality credits found new life.”

Aside from the issue of “zombie projects,” the other problem with these projects is structural. The industry has been commodifying what’s called “retired” credits.

When firms want to offset their emissions, they use this process to purchase credits and retire them from the market. In turn, they get a receipt that makes the basis of their published carbon offset and BCT tokens.

In an interview with S&P Global, Robin Vix, Verra’s chief legal, policy and markets officer, called this entire process “mind frying” as the company plans to disconnect the Toucan protocol from buying retired credits.

"Verra will, effective immediately, prohibit the practice of creating instruments or tokens based on retired credits on the basis that the act of retirement is widely understood to refer to the consumption of the credit's environmental benefit," Verra's statement said.

Vix said to S&P Global that Verra will start scrutinizing stakeholders' requests for retired carbon credits and block anything it suspects of being associated with tokenization.

“Carbon credits themselves are abstract intangible things based on counterfactuals of things that you can't actually see – emissions. And then crypto is another layer of abstraction on top of that,” Vix said.

But all this isn’t to say that Verra is entirely opposed to the tokenization and trading of carbon credits or that Toucan is not cognizant of the structural flaws of the arrangement.

Verra said that it is exploring ways to "immobilize" current – not retired – carbon credits so they can be bridged over to Toucan or other exchanges to trade.

"The initial thinking is that the best way of doing this is if these tokens somehow tie back to live, unretired credits so that the environmental benefit hasn't yet been used," Rix said to S&P Global. "In other words, if you're acquiring tokens or coins, you always know that the underlying [offset] is there."

In an interview with CoinDesk, Rob Schmitt, one of Toucan’s core developers, emphasized that this isn’t about Verra blocking tokenization; rather, Verra just wants to make the process better.

Schmitt said that bridging and trading retired carbon credits weren’t ideal but just a first step. Once Verra introduces the ability to immobilize credits it would mean that credits could be sent bi-directionally from Toucan back off-chain, creating price parity.

“This will be very positive for the on-chain markets,” he said.

Schmitt is also aware of Carbon Plan’s paper on zombies. He points to a post from Toucan called "Raising Standards in the On-Chain Carbon Market" that outlines the protocol’s filtering plan to only offer credits less than 10 years old.

“The obsession over age isn’t necessarily what’s correct here … if you took a climate action one year, it’s the same action the next. It’s not going to be different,” he said. “The issue with these credits is it's questionable whether these projects needed the funding from carbon credits to get going.

“But it’s an issue we inherited from Vera.”

Technician's take

Bitcoin daily price chart shows support/resistance, with RSI on bottom. (Damanick Dantes/CoinDesk, TradingView)

Bitcoin (BTC) recovered from a low of around $28,000 earlier in the New York trading day. The cryptocurrency remains in a tight trading range, anchored at the $30,000 price level over the past two weeks.

BTC was roughly flat over the past 24 hours, and down by 2% over the past week.

The relative strength index (RSI) on the daily chart is rising from oversold levels, although it remains below the 50 neutral mark. A reading above 50 could indicate a brief recovery phase.

For now, there is strong resistance on the chart, initially at $33,000 and then at $35,000, which could stall an upswing in price. Momentum will need to improve on the weekly and monthly charts in order to sustain a price rise.

Most indicators are neutral over the short term and bearish over the long term, which means upside is limited from here.

Important events

Blockchain & Sustainable Economic Growth conference

World Economic Forum Annual Meeting

6:35 p.m. HKT/SGT(11:35 a.m. UTC): Speech by Richard Lane, executive board member of the European Central Bank

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