Q9 Markets: Fear and Loathing in Washington DC
19th November 2021
Q9 Capital: www.q9capital.com
- Crypto pulls back on infrastructure bill and strong $
- Fear & Greed Index tumbles
- Taproot becomes first major BTC upgrade since 2017
Traders have taken some risk off the table this week in the wake of the rising dollar, the controversial crypto tax reporting requirement introduced by the $1 trillion bipartisan infrastructure bill signed by Joe Biden on Monday, and China’s state planner warning of its ambition to further clean up “extremely harmful” crypto-mining in the country.
BTC slid back below $60k, closing the session at $56.9k (-12.3%) and Ethereum dropped to $4k (-15.4%), ending a 7 consecutive week run, the longest run since February 2020. On Wednesday BTC suffered a 10% pullback, the biggest daily loss in weeks.
Institutional investors appear to be taking a breather and retail traders are taking over. Although blockchain data shows long-term investors are staying resilient, over-the-counter (OTC) market flows suggest otherwise. B2C2, a crypto liquidity provider clarified “Our latest data indicates a strong selling bias [in major coins] on the institutional side while retail continues to buy the dip”. While the coin stash of small Bitcoin addresses continues to rise, the combined balance of addresses holding 100 to 10,000 BTC has dropped. According to BTC futures data from CME, institutional participation peaked in the last week of October, handing over the baton to small investors.
Alts and DeFi generally fared worse than the large caps: Litecoin fell -22.3% from last week’s levels; while Chainlink and Uniswap both nosedived, posting -23.9% and -21.4% in losses.
While major coins, alts and DeFi look toppy, the party is still on for gaming tokens like SAND, DVI, YGG et al. SAND, the native cryptocurrency of metaverse platform The Sandbox, has rallied 73% this week to new record highs above $4.20. Most other gaming and metaverse tokens also rallied.
Diverging Fortunes: Metaverse vs Majors, 5 Days
Fear & Greed
The recent rally in the Crypto Fear & Greed Index has reversed and dropped quickly in the past week from 74 to 34 as exuberance disappeared from the market. A month ago we saw “Extreme Greed” as the first futures based BTC ETF hit the market. The index has fallen to “Fear” as Bitcoin has ebbed below $60k and other negative news hits the headlines.
The crypto market behavior is fairly emotional. People tend to get greedy when the market is rising, resulting in FOMO. On the flip side, people often sell their coins in an irrational reaction of seeing red numbers. Extreme fear can be a sign that investors are too worried and could be a buying opportunity. Conversely, when investors are getting too greedy, that means the market could be due for a correction.
The crypto Fear & Greed Index is multifactorial market sentiment analysis made up of Volatility (25%), Market Momentum/Volume (25%), Social Media (15%), Surveys (15%), Dominance (10%) and Trends (10%)
Sentiment Swings to Fear
Fear & Greed Index , 1 Month
The Taxman Cometh
President Joe Biden signed into law on Monday the $1 trillion bipartisan infrastructure bill, which contains a controversial cryptocurrency tax reporting requirement. The Act predominantly allocates funding and other resources focused on roads and bridges, water infrastructure, resilience, internet and cybersecurity, among other areas. However, the 1039-page Act also contains three pages adding new reporting requirements for certain cryptocurrency transactions that have little to do with infrastructure, but could have potentially dramatic implications for millions of US based businesses and consumers who have embraced cryptocurrency for its efficiency, transparency, and accessibility.
According to the Joint Committee on Taxation the new law is supposed to bring in about $28 billion in tax revenue over a decade. The IRS have published a plain-English FAQ describing how the tax code treats crypto.
Starting in 2023, cryptocurrency brokers will be required to record transactions, tracking them for customers and the IRS, similar to the way stock and bond brokers currently do via tax form 1099-B. They’ll have to disclose the names, addresses and phone numbers of their customers, the gross proceeds from sales and any capital gains or losses. Also, businesses that receive payments of $10,000 or more in crypto must report the identity of the sender to the government, mirroring a similar anti-money laundering rule for cash transactions of that amount.
Industry proponents worry the definition would be too broad, capturing entities such as miners and other parties that don’t actually facilitate transactions. Some lawyers have also pointed out that when applied to cryptocurrencies and other digital assets like NFTs, it would be nearly impossible to comply with the law.
Into the Mainstream
Taxing and regulating crypto is another indicator of crypto becoming mainstream and that authorities now recognize it as an (important?) asset class. However, bringing crypto into the current system is a bit of a “square peg and round hole” situation. The current regulatory framework is complex and was developed for banking in the twentieth century — it is unlikely to effectively handle the needs of the government, businesses, and individuals in the twenty-first century with respect to cryptocurrency and other digital assets. Another important takeaway from the implementation of this new law is that crypto needs to develop a unified, strong and robust lobbying group to represent the industry in DC and match those seen in the TradFi and pharmaceutical industries. Relying on public outreach and tweeted prayers in the future won’t be enough.
We don’t know if the institutional sellers are responding to the new regulation or simply taking outsized profits, or both. We do know that the continued mainstreaming is bringing in both retail and new institutions. Crypto has few detractors left as an asset class, but those that are more skeptical of froth or valuation remain. That’s not unreasonable. Not every coin will survive. It’s easier to see if something looks promising or great than to price it and it’s super hard to call tops. We’ve seen this many times in crypto and traditional markets. Ask yourself which ones will survive and how much upside they might have.
NASDAQ, 1996 to 2000
Spinal Taproot
Bitcoin just underwent its first major upgrade since 2017. Taproot, a highly anticipated upgrade to BTC, went into effect on Sunday. It is a particularly big upgrade (also called a “soft fork”) — which isn’t executed all that often in Bitcoinland. The development brings the oldest cryptocurrency in closer competition to ETH, ADA and SOL and widens its use cases by unlocking its smart contract potential. It also introduces a new digital signature scheme (Schnorr signatures) which is designed to make Bitcoins more secure, efficient, and less expensive.
Smart contracts are the most significant thing about the Taproot upgrade. They are the primary driver of innovation on the Ethereum network. This really opens a breadth of opportunity for entrepreneurs interested in expanding Bitcoin’s utility.
Taproot also matters as it is a clear demonstration that large public blockchains with millions of stakeholders can grow and adapt over time. One more feather in crypto’s cap.
The Addressable Metaverse
The metaverse is the next big investment theme and some stock sectors are already benefitting from it, Morgan Stanley said in a note Thursday. Thus far, companies are building their own thriving versions of the metaverse, MS said. But a “true” metaverse is only when interoperability across all the companies is possible, he added. And this will take time.
“This will take many years and cross-company collaboration to allow users to seamlessly move across millions of experiences and take their digital avatars and possessions around with them,” they said. “Newsflow around the metaverse concept has been high and companies are embracing it in growing numbers,” he said. “Of any major theme, companies and analysts have greater interest in the metaverse than any other theme at present.” The strategist also highlighted the importance of South Korea and how its more than 400 tech companies could accelerate the interoperability of metaverse.
Below, Morgan Stanley detail the addressable market of the metaverse by sub-theme.
In the News…
- Grayscale hits $60B AUM, overtaking the top Gold ETF (SPDR Gold Shares)
- Ethereum address activity grows almost 50% in October amid growing demand
- India will ban the use of cryptocurrencies for making payments, but will allow and regulate trading of crypto as assets
- Santander to launch Spain’s first Bitcoin ETF despite regulatory challenges
- 16% of Americans have invested in, traded or used cryptocurrency (Pew Research)
- Crypto venture firm Paradigm announces $2.5B fund. The industry’s largest
- Galaxy Digital reports Q3 earnings of $517M
- Cosmos, Solana Ventures join $725M Series B for crypto gaming Platform Forte
- LA’s iconic Staples Center to become Crypto.com Arena in $700M naming rights deal
- Investors offer OpenSea $10B valuation in new round
- Beginner’s Guide To NFTs: How To Buy An Ethereum NFT
- Barbados to Become First Sovereign Nation With an Embassy in the Metaverse
Legacy Markets
Oil futures dipped -3.7% while the SPX rallied +1.2%. 10-year US treasury yields were unchanged +1bps, the US Dollar index rose +0.4% and the Gold & Silver index declined -1.8%
Crypto Markets
- BTC/USD dropped -12.3% and ETH/USD declined -15.4%. The total market cap of the crypto universe dropped below the $2.5tln mark and Bitcoin’s dominance held above 43%
- LTC/USD fell -22.3% from last week levels, LINK/USD and UNI/USD nosedived posting -23.9% and -21.4% in losses
- Annualised volatility subsided a bit for BTC slipping to 57% while it rose to 69% for ETH
Flows
- Two-way client flow slightly skewed towards selling (1.1x sellers vs buyers)
- Net buyers of ETH and even sided flow in BTC
- Net sellers of LINK in modest volumes
Q9 Capital: www.q9capital.com
