Q9 Markets | Everything on Sale
2 September 2022
Q9 Capital: www.q9capital.com
Everything on Sale
- Multiple ETH vs BTC spreads widen
- NFT volumes fall 99% since May high
- Private markets pick up massive bargains as public markets sell off
Markets suffered a rough start to the week on fears of aggressive rate hikes by the Federal Reserve. The UK, US and EU are all on track for 75 basis point interest-rate hikes next month, making it unsurprising that investors are taking a more cautious stance. There’s a general short-term lack of conviction now in markets following the hawkish central bank commentary at Jackson Hole.
From Friday’s peak to Sunday’s low, Bitcoin lost 10% whilst Ether lost 17%. Both have moved sideways since and closed the week at $20.1k and $1,586. Market conditions will remain choppy as we enter the final third of the year — the open interest leverage ratio for ETH and BTC has soared to a record high, increasing the risk of large price swings (traders love volatility).
Source: Decentral Park Capital
Everything ETH
For the past 4-weeks, weekly ETH trade volume has been greater than BTC volume, the longest stretch of time ever.
Source: Kaiko
…and the spread between ETH and BTC volatility is also at its widest level in more than a year.
Source: Kaiko
These stats reinforce the narrative of “everything ETH” as we approach the Merge this month. As do these:
· Total staked ETH has more than doubled ahead of the Merge.
· Ethereum based investment products witnessed inflows of 2.4% in August (whilst BTC products witnessed outflows).
· Greyscale’s Ethereum Trust (GETH) has become the #1 traded trust product, overtaking Grayscale’s Bitcoin Trust (GBTC) for the first time.
Source: CryptoCompare
However, it’s not all rosy… Ethereum’s funding rate has recently been turning more negative, indicating the market is getting more bearish on its price action around the Merge window, perhaps as traders buy the rumour and sell the news.
This is also happening because investors will end up holding both ETHW (the original proof of work) and ETH (the next-gen proof of stake) after the Merge as it forks. Traders are buying ETH on spot to collect ETHW and immediately sell it after the network shifts. They are hedging their delta by selling futures, resulting in the negative funding.
In converging fortunes, Bitcoin has been notably disappointing. Data from Arcane Research shows that BTC underperformed all indexes in August, seeing a monthly loss of 13%. The #1 digital asset underperformed a range of market-cap weighted indices (see chart below), all of which fell in a range of -12% to -10%. Ethereum fell only 2% in August.
Source: Arcane Research
Bitcoin’s mining difficulty rose by 9.3% on Wednesday, hitting the second highest level ever recorded. This matched industry expectations as North America begins ramping up production ahead of its cooler months, increasing competition between Bitcoin block producers. Analysts say the uptick is a likely result of more and newer machines coming online, as well as the waning impact of heatwaves. The spike is also one of the largest jumps since August 2021, when miners began to come back online after the industry was banned in China, which at the time was home to 44% of mining activity.
The AVAX token dropped 11% on Monday after a self-described “whistleblower” accused Avalanche of paying lawyers to hurt competitors and keep regulators at bay.
Declining Sea Levels
Many articles have been published this week that trading volume on top NFT marketplace OpenSea is down 99% in USD from May peak — however these are slightly disingenuous, given the enormous surge during that one particular month. If you look at the chart below, volumes have just returned to levels seen in November 2021.
Source: MilkRoad
On May 1st, OpenSea processed a $2.7bn in NFT transactions; on Sunday the marketplace recorded $9.34 million worth, according to data compiled by DappRadar.
Despite the drop off in volumes, there’s still a lot of activity in the NFT space and they’re definitely not going away:
· Meta announced it will let users post their NFTs across both Instagram and Facebook.
· Ticketmaster will let event organizers issue NFTs tied to tickets on Flow
· OpenSea announced the integration of the layer two scaling solution Polygon into its Seaport protocol implementation.
Summer Sales
Investors with deep pockets (particularly those in North America) are taking advantage of the sale in markets and picking up deals at great valuations. Just this week the VC of Reddit co-founder Alexis Ohanian announced it will invest $177mn into the crypto sector as ‘everything is on sale’. Singapore’s Temasek also invested $100mn into Metaverse giant Animoca Brands.
Private markets are picking up the slack as public markets sell off — and finding massive bargains in the process. Long term professional investors still have high conviction in the space and have time horizons of 5, 10, 20 years. They don’t operate in days, weeks or months like many retail investors do.
There are now 20 Crypto VCs in North America alone with “Unicorn” $1bn+ funds. These twenty funds in total have an aggregate fund size of $40bn.
Top 50 North American Crypto VCs by Fund Size
Source: Coinstack Research
Top 50 North American Crypto VCs by Investment Count
Source: Coinstack Research
The San Francisco Bay Area dominates with 65% market share among all North American Crypto VCs and more than $34bn under management, more than all other cities combined.
The first eight months of 2022 saw over 1,900 VC/PE deals in the blockchain and cryptocurrency space, exceeding the pace for 2021. It’s pretty incredible that even in a bear market like 2022, we’re on pace to set a new record for the number of venture investments into the blockchain/crypto sector.
Source: Pitchbook
Median deal valuations are also way up this year. The median post-money valuation for deals (across all stages) so far in 2022 has risen to $35mn and the median deal size is $4.4mn.
Source: Pitchbook
The largest VC deals of 2022 (according to Coinstack Research) so far have included:
1. Epic Games — $2bn in April 2022 — Metaverse & Gaming
2. Trade Republic — $1.15bn in Jun 2022 — European Crypto Brokerage
3. Robinhood — $600mn in May 2022 — Crypto/Equity Brokerage
4. Fireblocks — $550mn in April 2022 — Crypto Infrastructure
5. Copper — $500mn in April 2022 — Crypto Infrastructure
6. Consensys — $450mn in April 2022 — Crypto Infrastructure
7. Polygon — $450mn in February 2022 — L1/L2 Blockchain
8. Yuga Labs — $450mn in March 2022 — Metaverse/NFTs
9. FTX — $400mn in January 2022 — Crypto Exchange
10. Circle — $400mn in April 2022 — Stablecoins
11. Compute North, $385mn in Feb 2022 — Crypto Mining
12. NEAR — $350mn in April 2022 — L1 Blockchain
13. Crusoe — $350mn in April 2022 — Clean Energy Crypto Mining
14. Blockdaemon — $253mn in Aug 2022 — Crypto Infrastructure
15. Dapper Labs — $250mn in March 2022 — Crypto Gaming
Smart Capital
There are some very smart capital managers betting big on the multi-decade long vision for the next generation of the web, finance, gaming, and money itself being built on top of the rails of blockchains, smart contracts, and tokenized assets.
Many VCs (traditional and crypto native) see ongoing market volatility as a perfect opportunity to enter the sector… their analysts maintain the prevailing market conditions are only temporary and part of the growth trajectory.
“This is the best time to buy if you’re really long on the industry. It’s on sale. Everything is on sale,” says Katelin Holloway, Founding Partner at Seven Seven Six. Established firms like Alphabet have also emerged as leading entities betting on the crypto sector.
It’s going to be a choppy ride but those who keep their heads and look further out have the potential for large gains as almost every industry on earth in reimagined. Rising intertest rates, high inflation, Covid, potential hiccups around the Merge — these are generally short-term risks. The smart capital is investing for the long term.
In the News…
· Argentinian province starts accepting tax payments in crypto
· Whale spends 10,000 BTC worth $203mn, Bitcoins stem from infamous 2011 Mt Gox hack
· Coinbase CEO Brian Armstrong warns investors to buckle in for a long crypto winter
· Singapore’s central bank wants to foster digital assets, restrict crypto speculation
· DC suing MicroStrategy founder Michael Saylor for tax fraud
· Crypto mixers and AML compliance
· Will this be the first country bankrupted by crypto?
· Iranian businesses get the green light to use crypto for imports
· Mobile gaming firm Limit Break raises $200mn across two rounds
· Mastercard to launch BTC, ETH, XRP, ADA payments card for millions of users
· Bank of Korea calls for institutional issuance of crypto ICOs, signalling an end to bans
· 3AC co-founder fears jail term over liquidator’s misrepresentation
· Professor re-uploads Tornado Cash code to GitHub for research purposes
· Crypto.com mistakenly transfers $7mn to woman owed $70 refund
· MTV awards feature Snoop Dogg and Eminem as Bored Apes, first metaverse category
