New Interest
6 May 2022
Q9 Capital: www.q9capital.com
- Bitcoin ends 5.3% down after a rollercoaster week
- Solana witnesses 7th outage of 2022
- Otherdeed mint sends ETH gas prices skyrocketing
Bitcoin dropped more than 7.9% yesterday amid a broad stock market sell off, plunging the most in two months. The Nasdaq tumbled 5% — its steepest decline since the market tumult of 2020 — as prospects of higher borrowing costs and sustained high inflation have threatened the global economy.
ETH slumped as much as 6.5%. Avalanche and Solana were down as much as 11.9% and 8.8% respectively. Coinbase stock fell by more than 11%.
BTC/USD, 5 Days
US gov bonds also faced an intense bout of selling pressure, sending the yield on 10-year Treasury notes soaring 0.18 points to 3.1%. The Bank of England warned the UK will slide into recession this year as higher energy prices push inflation above 10%.
This was a very quick reversal from the relief rally the day before following the Fed announcing its biggest rate hike since 2000, where the benchmark interest rate was raised by 0.5 percentage points to a target rate range of between 0.75% and 1%, with more expected to come. Bitcoin had jumped 5.3% on Weds along with most other coins before falling back yesterday.
Blue Diamond in the dust
While the whole market was down, among crypto blue chips, Ethereum outperformed Bitcoin this week as it only dropped -2.4% vs -5.3% decline in Bitcoin.
A recent report from Jarvis labs indicates that, as of late, BTC whales have been quieter (than you would expect), but surprisingly ETH’s accumulation has been strong. A trending up line in the chart (below) indicates whales are accumulating. The line color going from darker to lighter indicates an uptick in ETH’s prices. The current state indicates that while a strong accumulation has been going on, price has not risen during this period yet. We are not surprised to see a similar trend on our most actively traded product YIELD as well — we have been seeing more interest in clients willing to buy ETH at the dip compared to the volumes corresponding to a view of selling the rally.
Funding rates have been negative for a while (few months), which means nobody is leveraged long and many are short swaps and futures. Historically, this often happens around the range lows setting a good structure for upside opportunity. While the current price action is heavily correlated with macro conditions, when it turns, it’s the assets that have hidden buyers which can often lead. The next data date is the CPI, scheduled to be released on 11th May 2022. If it prints a lower number it will imply that inflation is beginning to cool down which could lead to a rally in price action.
But it’s not inflation that is holding ETH back, it’s the market. So why are we seeing ETH interest? Isn’t it right that when the fees go up too high, the network slows? Yes, but it’s still the only game in town that can handle size. People are buying what works, even if it’s a lot worse than they would like. It’s better than the alternative, a complete outage — which was seen in…..
SOL Long, Farewell
How do you solve a problem like Solana? The Solana blockchain is recovering after saying auf Wiedersehen, goodbye and going dark in a seven-hour outage caused by a significant rush of bots trying to mint NFTs on the crypto network.
The network received a staggering amount of transactions which were as high as 4mn per second. The blockchain also received 100 gigabits of data per second, which added to network congestion, and caused validators to be knocked out of consensus. The outage caused the price of SOL to crash by nearly 7% on the day.
The network has been plagued with issues and outages this year — partially a victim of its own success as so much growth and activity is happening on the network.
FYI, there is some great data in the recently published Messari State of Solana Q1 2022 Report.
Monkey Business
In another NFT minting catastrophe, last weekend’s Otherdeed mint (the largest NFT sale in history) briefly sent gas prices on Ethereum skyrocketing, with some paying thousands of dollars to push transactions through. Yuga Labs, the creator of the popular Bored Apes Yacht Club NFTs, sold around $320mn worth of virtual land (called Otherdeeds) related to its metaverse project, Otherside, on the weekend.
However, the exuberant demand resulted in about $180mn transaction fees in ETH. The trading frenzy caused huge congestion on the Ethereum blockchain and pushed gas fees so high that not only the minters but also other Ethereum-based apps users were unable to perform many activities.
Ethereum Average Gas Price
Many winning bidders on the virtual land rushed to the secondary NFT marketplace OpenSea to flip the assets for a quick profit. OpenSea’s daily sales on May 1st were more than four times higher than the previous day, according to data from Dune Analytics.
Holders of the ApeCoin token who verified their identities jockeyed to buy deeds for 55,000 parcels of virtual land in Otherside. Anticipation that interest would be strong for the plots (called Otherdeeds) had pushed up the price of ApeCoin last week ahead of the sale. Each plot cost a buyer around $5,800 based on ApeCoin’s price of $19 at the time of the auction, plus the gas fees.
Yuga Labs have also tweeted they will refund gas fees to everyone who made a transaction that failed.
Besides the 55,000 Otherdeeds sold Saturday, another 45,000 were allocated to holders of Bored Ape Yacht Club and Mutant Ape NFTs, as well as Yuga Labs and other project developers, with another 100,000 of the tokens expected to be awarded later to certain Otherdeed holders
Due to the bottleneck created on Ethereum, Yuga Labs has proposed that ApeCoin will need its own blockchain, Layer-2/subnet, or other sidechain solution. Conspiracy theorists say Yuga Labs clogged up Ethereum to justify the launch of its own chain (but maybe they just screwed up). Or maybe they see that if you can get the network that works, there are a lot of fees to be paid. Who wouldn’t want some of that? Although SOL remains an example that it is earlier said than done.
The Market or the Network?
Bitcoin has become one of the instruments for macro traders globally to express their views due to its nature of being a 24x7 liquid asset. Going into the Fed announcement, traders were positioned short/bearish expecting a hawkish stance from Fed. The market was expecting 300–325bps at the Dec 14th meeting at the end of this year. In the announcement the Fed signalled an expectation that rate hikes won’t exceed 50bps and also suggested that 25bps hikes would be more normal.
Post announcement the consensus on interest rates expectations dropped to 225–250bps, which is significantly lower than expectations pre-FOMC. The drop in expectations resulted in the short squeeze, pushing prices higher which felt like a relief to markets. But then we had yesterday which gave it all back and then some. So it does beg the question, why did the market rally only last a day if the Fed in fact came out dovish compared to expectations?
We don’t know, but it feels like more unwinding simply needs to be done. Bonds also performed terribly, which means that asset managers were selling both stocks and bonds, and crypto for that matter. It’s one reason ETH probably outperformed BTC. BTC is more widely held by institutions. They were unwinding. Furthermore, the fed coming in as hawkish, but not as hawkish as some expected should have been good for bonds, or at least short dated ones. But it wasn’t. Alternatively one could make the argument that the Fed being a little slower to raise means I really don’t want a 10-year rate that’s too low, because it will be eaten up by inflation. But that should be good for stocks. But it wasn’t. So it’s back to unwinding and market clearance, which could take some time, but is at least observable.
Perhaps yesterday’s dramatic crypto slide is a bit of a reality check on the state of the global economy as well. The market still needs to digest the impact of tighter monetary policy on all risk assets and crypto might take a hit as correlations with stocks are at record levels. Plus, bake in the cost of multi-decade high inflation. Shipping costs have increased 9x over 2 years due to the pandemic. Steel plants are under attack in Ukraine, while China’s biggest steel town is in lockdown pushing up the price of steel. The list goes on. It will be interesting to see if these interest rate increases from the Fed will really bring inflation down given its cost-push nature and the fact it’s a global phenomenon rather than a US-specific one.
This is all super important, and commodity supercycles, de-globalization and the new regime of monetary policies will be the story of our future. But until the market gets its risk right it can’t think about fundamentals. But ultimately they will be what matters most.
Do the Work
If you think about the ultimate dream of crypto, it’s a borderless internet where all of a sudden, you have blockchain as the verification code to allow anyone on the internet to instantly connect and transfer value. In a world where we’re starting to de-globalize, the ability to have a borderless internet and a store of value outside of fiat currencies is very attractive. Rising inflation and interest rates have dampened expectations for returns on stocks and bonds. This, combined with the recent trend of de-globalization, should at least in theory, make crypto more and more attractive. But what we can see is that it’s always about the money first. If we don’t have cash it doesn’t matter which investment we like more.
However, behind all this market mumbo jumbo there remains real business. I still use ZM and watch NFLX. And real business is happening in the Metaverse too. Spending some (digital) money to get a higher return in crypto/DeFi or buy some digital art is also business. (and even if you don’t think it’s real, many others do and they have money, are the young and growing). ETH relatively outperforming lately is because the Ethereum network is relatively (but sub-optimally!) outperforming in the metaverse. If you have the right position you can have the luxury of buying what works. Which ultimately is what should work for your investment portfolio.
In the News…
- France becomes first big EU nation to grant Binance regulatory approval
- Dorsey, Saylor, Fidelity and others defend environmental impact of Bitcoin mining in letter to EPA
- A third of Brits have bought crypto
- Tron’s new algorithmic stablecoin USDD goes live
- Cryptoasset realization: How cryptocurrencies are frozen, seized, and forfeited
- Virginia county looks to crypto yield farming for pension system investments
- Polkadot now lets you natively send tokens across parachains
- Dubai’s crypto regulator to launch metaverse headquarters in The Sandbox
- Argentina’s largest private bank launches crypto trading feature
- Samsung Group investment arm to list blockchain ETF on Hong Kong Exchange
- Three Arrows Capital to move HQ to Dubai from Singapore
- A16z invests $500mn in Indian startups
- Gucci to begin accepting Bitcoin in some stores
- Starbucks to launch Web3 platform, NFTs
Crypto Markets
- BTC and ETH dropped -5.2% while ETH fell -2.4% this week. The total market cap of crypto dropped below $1.7tln and Bitcoin’s dominance rose above 41.5%
- SOL dropped -10% this week, while CRV extended its gains with a +10.4% rally
- Annualised realised volatility in markets continues to hover below 40% for BTC and ETH
Legacy Markets
- US Equities (SPX) declined -3.3% largely driven by the sharp drop yesterday as markets priced concerns on the Fed’s ability to fight inflation
- Oil futures rose over +3.5% on supply worries after the EU laid a plan for new sanctions against Russia on crude
- 10-year US treasury yields jumped 23bps and the US Dollar index slipped -10 bps
Our Flows
- Two way flow on client pad, slightly skewed towards buying (1.1x buyers vs sellers)
- Flow dominated by buyers in ETH and sellers in BTC. Even sided flow on APE
- Modest buyers of AVAX and EOS
Q9 Capital: www.q9capital.com
