Q9 Markets: Betting the House
24th September 2021
Q9 Capital: www.q9capital.com
- Evergrande crisis rocks traditional and crypto markets
- Rotation from alts into BTC
- US regulators concerned with stablecoins
Fears that the cash-strapped Chinese property giant Evergrande would default on its interest payments rocked global markets on Monday, sending Bitcoin, the S&P 500, and growth-sensitive risk assets lower. Investors took risk off the table on fears that a crisis may become a systemic problem to global markets. This led to the total market cap of crypto plunging below 2tn earlier this week, reflecting over $250bn of value being wiped out as BTC fell to a 6-week low. Speculation that the US government may declare stablecoins as a risk to the financial system also contributed to the negative sentiment.
Annualised volatility shot up, rising to 103% for BTC and 139% for ETH.
Crypto markets then recovered to a certain degree on Wednesday after news that Evergrande’s onshore entity has negotiated a deal over a bond interest payment due this week. The Chinese central bank also pumped in $18.6bn to provide liquidity and managed to provide support and relief to the financial markets as a whole. Shares of China Evergrande Group in Hong Kong jumped 17%, although its year-to-date plunge is still more than 80%. However, at the time of writing, investors say they still have yet to receive the interest payment just hours before the deadline. The Evergrande bond on which the interest payment is due is trading at about $0.28 on the dollar, a signal of substantial distress. A failure to make an interest payment could spark China’s biggest-ever debt restructuring.
Many economists believe Chinese authorities will step in and organize a restructuring of its debt rather than allow the company to fail — given the millions of employees, customers, suppliers and investors who stand to be affected. The question is when. Evergrande’s debts amount to 2tn yuan ($300bn) — equivalent to around 2% of China’s GDP. Real estate and related industries make up 29% of Chinese GDP. These are huge numbers and a systemic failure in this sector would be calamitous.
Digital assets have been trending higher again in the last few days, with BTC closing the week at $44.8k (-6.0%) and ETH at $3,155 (-11.6%).
Bitcoin Price, 7 Days
High growth alt-coins and DeFi tokens generally fared worse, with many seeing double digit declines. Investors seem to be rotating back into BTC as a safe-harbor. Bitcoin’s dominance touched higher to 42% suggesting more people are moving back from alt-coins to hold BTC. There was also a surge in demand for GBTC shares as the discount jumped from -17% to -11% within two days, taking it to the narrowest level in a month.
Call Me Maybe
Major crypto options exchanges are due to settle billions of dollars’ worth of BTC options contracts today (Friday). Data provided by Skew shows a total of 73,700 options contracts worth $3.14 billion due for expiry, of which nearly 50,000 are call options and the rest are puts. Deribit alone will be settling more than 85% of the total open interest.
Unstable Relationship
An article published by The New York Times said US regulators are concerned that stablecoins may become a source of volatility and may bring the dollar-pegged currencies under regulatory purview by declaring them as a risk to the financial system, or treat them as securities, money market mutual funds or as banks. While Washington’s discomfort with stablecoins is not new, the fact that mainstream media outlets ran a cover story suggests regulation is coming soon.
A recent Bloomberg report said officials are considering launching a formal review by the Financial Stability Oversight Council into whether stablecoins pose an economic threat, a process that could bring more severe oversight on the rapidly expanding industry. The total market capitalization of all stablecoins, including tether, has seen a near 10-fold rise to $115 billion over the past 12 months. A regulatory crackdown will likely bring short-term pain to crypto markets.
Something Fishy
SUSHI sank -29% this week after a white-hat hacker has reported a $1 billion bug in the software of the decentralised exchange. However, the developer behind the exchange openly denied the reports. The hacker said that they reported the bug to the exchange, but as it did not react in any way, they decided to draw the attention of the public to it.
The supposed vulnerability was reported in the emergency withdrawal function in two contracts on SushiSwap. These are the contracts in charge of governing the platform’s 2x reward farms, as well as the pools on chains other than Ethereum, including BSC, Avalanche, and Polygon.
There is a long way to go before DeFi is as reliable as, say, JPMorgan Chase or PayPal, but it has the potential to rewire how the financial system works, with all the promise and perils that entails. Finance is entering a new era. As with the internet in the 1990s, no one knows where the revolution will end. But it stands to transform how money works and, as it does so, the entire digital world.
Last Week’s News
Despite the ups and downs crypto has really been on a tear over the past year. First it was BTC and then ETH. DeFi had an act two and lately it’s all been about NFTs. This week we saw risk off again and crypto folks rotated back into BTC for safety. Trends will come and go within crypto and digital assets, but what the public has probably been the most convinced of over this last year is that crypto, digital assets and blockchain are here to stay. If that is the case then we are just getting started and the most important thing is to be in the market… and in for the long term.
Maybe its not smart to bet the house on last week’s trend or one particular theme/sector — diversification is crucial in crypto. The traders love last week’s news, and the traders will trade. But investors play the long game and look for some skin in the game. What’s your exposure?
Returns of BTC, ETH, LINK, UNI, 1 Year
In the News…
- U.S. President Joe Biden is reportedly moving forward with the nomination of a crypto critic to run a federal bank regulatory agency. The Biden administration intends to nominate Cornell University Professor Saule Omarova to be the next Comptroller of the Currency (OCC)
- The Federal Reserve is pushing ahead with its study into whether to implement its own digital currency and will be releasing a paper on the issue shortly
- The U.S. government has sanctioned a cryptocurrency exchange for the first time as part of its ongoing fight against ransomware attacks.
- Crypto exchange Coinbase has dropped plans to launch its crypto lending product, dubbed Lend, in light of the SEC’s view that it would constitute a security
- Three U.S. states issued cease-and-desist orders or otherwise took aim at crypto lender Celsius for violating state securities laws
- Major New York real estate company now accepting BTC as payment
- The President of Turkey declares war on crypto
- Dapper Labs, the company behind popular fantasy basketball NFT game NBA Top Shot, has raised another $250 million in funding. The funding round values the company at $7.6 billion.
- Iceland-headquartered Bitcoin mining firm Genesis Digital Assets has raised $431mn in a strategic funding round led by investment firm Paradigm.
- TIME magazine’s NFT collection sells out in one minute, bot activity suggested
Legacy Markets
Global stocks rallied on Thursday as the fears of contagion from Evergrande faded and investors digested the Fed’s tapering plans. Elsewhere, the US Dollar index rose +20bps and 10-year US treasury yields rose 10 bps. The Gold & Silver index dropped -3.6%.
Crypto Markets
- BTC/USD fell -6% and ETH/USD dropped -11.6%. The total market cap of crypto universe is just north of $2tln mark and Bitcoin continues to hold its dominance above 42% at the end of this week
- EOS/USD dropped -12.8% and SUSHI nosedived -29%, triggered by fears on a report claiming a billion-dollar bug vulnerability
- Annualised volatility picked up in crypto markets, rising to 103% for BTC and 139% for ETH
Flows
- Active client pad with two-way flow slightly skewed towards clients selling (1.1x sellers vs buyers)
- Buyers in BTC and sellers in ETH
- Two-way flow in EOS
Q9 Capital: www.q9capital.com
