Q9 Markets | Finding Value

5 August 2022

Q9 Capital: www.q9capital.com

Finding Value

• Sentiment turning positive, July best month since Oct ‘21
• Ethereum open interest rockets, put/call ratio falls
• Thousands of Solana wallets hacked

Market sentiments are slowly coming off the bottom amid better than expected earnings from tech giants and the widely anticipated Ethereum merge. Bitcoin enjoyed its best month of trading in July since last October and the market cap of all crypto has risen to $1.1bn, adding over $250bn since the end of June.

The recent rally is in step with broader gains in risk assets as investors bet that economic weakness could deter the Fed from aggressively tightening monetary policy. As all boats have risen together, Bitcoin’s correlation with equities has inevitably increased. BTC’s 40-day correlation to the tech-focused Nasdaq now stands at 0.90 — up from 0.41 in January.

Coinbase (COIN) shares surged over the week (+47.6%) as it announced a tie up with BlackRock that will allow investors to access crypto via the Aladdin network, a system that supplies essential plumbing to the global investment industry. Among household DeFi names yearn.finance enjoyed a strong run this week with a +16.8% standout rally this week. Markets also appeared unaffected after the Bank of England announced its biggest interest rate rise in 27 years.

Returns Since June 18 2022 Market Bottom

However, trading has been thin — indicating plenty of investors gauge it may be too early to turn bullish in a deeply uncertain macro backdrop. Last week’s trading volumes were $24.3bn, compared with the last 3 months’ weekly average of $34.5bn… But maybe seasonality is also at play here and everyone’s away from the desk enjoying their first proper summer holiday in three years!

Put/Call Me Maybe

Ethereum’s open interest has flipped Bitcoin’s for the first time ever. As of Aug 1, the open interest of Deribit Ethereum options valued at $5.6bn exceeded the open interest of Bitcoin options valued at $4.3bn on all exchanges.

BTC and ETH Options Open Interest

Source: Glassnode

Ethereum options are also heavily dominated by calls, with the Put/Call ratio at 0.26. A falling put-call ratio is considered a bullish indicator — It means more calls are being bought versus puts. Data indicates that the call options period is concentrated on September 30 and December 30, at 1.2 billion and 1.8 billion respectively.

ETH and BTC Open Interest Put/Call Ratio, YTD

Source: The Block

The spot ETH/BTC ratio also points to a bullish Ethereum, breaking an eight-month bearish trendline. The ratio’s breakout may indicate the eight-month bear market has ended and could suggest continued ETH outperformance ahead.

ETH/BTC Ratio

Source: CoinDesk

The ongoing Ethereum network upgrades have pushed some analysts to speculate that the second-ranked cryptocurrency might even overtake Bitcoin in the future. This possibility has been partly realised after Ethreum flipped Bitcoin in the options market this week for the first time in history.

And it’s not just ETH that’s undertaking a gargantuan upgrade in Q4. Cardano is set for a refurb with the Vasil Hard Fork (here’s what to expect). It was announced this week that it has been delayed by a few weeks to ensure a smooth transition.

Wallet Drain

Thousands of Solana wallets were drained in a blow to the crypto network. Solana and several other platforms linked to the blockchain were on Wednesday investigating an apparent hack that affected at least 7,767 digital wallets. Elliptic, a blockchain consultancy that helps clients combat crypto-related crime, said the attack began on 2 August and $5.8m had been taken so far.

The apparent hack marks a fresh setback for Solana which has suffered numerous processing glitches. The blockchain’s eponymous native coin has tumbled almost 80% this year, bigger than the drops sustained by many of its rivals.

The hack will definitely cast a shadow over Solana’s credibility as a better alternative to Ethereum, especially when it comes to security. It may even give Ethereum some additional boost from the narrative perspective as the safest and most reliable DeFi ecosystem.

Raising Hope

Despite the recent bear market there was more venture capital invested in the first half of 2022 than all of 2021 — over $30bn. Another sign that crypto firms are still raising and institutions are in for the long haul.

The full Messari and Dove Metrics H1 2022 Crypto Fundraising Report can be found here. Here’s there executive summary:

• Non-Ethereum NFT projects take a leg-up in Q2: Fundraising totals for non-ethereum ecosystem NFT projects outpaced Ethereum ecosystem NFT projects in Q2 2022 by a margin of $1.8bn
• The gaming NFT vertical stands in a class of its own: The gaming NFT vertical raised more than four times as much capital as any other NFT vertical in H1
• DeFi ended H1 on a strong note: Raising $624mn in the month of June, more than two times as much as any month in the past six months
• DAO participation continues to concentrate in early-stage rounds: Of all funding rounds that included DAO participation, 71% were at the at the seed stage
• CeFi remains king of capital: Reigning in $10.3bn in the first six months of the year, with almost half of all funding rounds totaling more than $10mn

H1 2022 Fundraising Overview

Source: Messari and Dove Metrics

H1 2022 Monthly Fundraising Overview

Source: Messari and Dove Metrics

Bottoms Up

Predicting a bear market bottom is like catching a falling knife. Any time the market begins to decline, investors wonder how far down it’ll go — but that’s nearly impossible to predict. Markets hate uncertainty, and with so much up in the air, it’s hard for investors to make sense of what’s happening day-to-day. That translates to a volatile market situation that will last for a while with more Fed meetings scheduled this year.

But there are many signs that the worst is now behind us. Hopes have risen that the Fed may ease up on monetary tightening. The war in Ukraine appears contained. Though consumer confidence and CEO sentiment are weak, consumer behavior has not changed: consumer and corporate spending outlooks are strong. Q2 corporate earnings have largely beaten analyst expectations. Durable goods orders have continued to beat expectations, and housing-sector activity levels are nowhere near recessionary.

Institutions are still piling into digital assets, financial mega-corps are turning on the crypto taps, and VCs with a long term horizon are still deploying. Many bearish technical indicators are reversing. The bankruptcy filings of fallen crypto stars has also provided needed clarity over who owes who and the extent of the crypto contagion crisis. Bitcoin will likely continue to trade in a tight range of around $20k plus or minus 10% to 15% until there is further clarity over the economy’s trajectory — but this will come.

When stocks and crypto go on sale, everybody wants to sell. It’s at their peak prices that people want to buy in. The psychology of money can be emotional for investors. Crypto has, up to the this point, been a speculators and long term HODLers market. With new tech it takes to quantify the value, even if investors intuitively think it’s there. And it takes a long time to build consensus on value. Look at the repricing of tech stocks over the last 12 months! However, each day we see new data points that show value creation in digital assets: the largest public crypto company meets the largest traditional asset manager, the merge may be finally here, and the biggest banks say yes, there ‘is’ value. The future of crypto is ‘investing’, because crypto is now an investable asset.

Even if you still can’t quite value it exactly, if you can keep investing on a regular basis then you have a chance. Dollar-cost averaging works in environments like this. Always tell yourself why you’re investing — that’s something to keep in mind when things feel uncertain. Our Auto-Invest product is designed specifically for markets like this — it takes care of the ups and downs of investing over the long term, so you don’t have to.

In the News…

• Bank of America says blockchains have intrinsic value, citing transaction fees
• MicroStrategy’s Michael Saylor drops CEO role as company posts $1bn loss
• Robinhood cuts nearly a quarter of staff
• Japan’s central bank shelves plans for CBDC due to a lack of public interest
• $2mn and counting: How dozens of pro-Russian groups are using crypto donations to fund the war in Ukraine
• Crypto wallet maker Ledger eyes fresh $100mn raise
• US Fed, FDIC accuse Voyager Digital of ‘false and misleading’ insurance claims
• City of Miami to launch 5,000 NFTs with TIME, Mastercard, Salesforce
• Singapore’s watchdog urges financial firms to ‘discourage’ retail crypto trading
• Crypto startups are becoming VCs. Their backers are not amused
• Crypto VC firm Hashed confirms losing more than $3bn in Luna crash
• Tiffany offers exclusive jewelry NFT to CryptoPunk owners