Q9 Markets | Grin and Bear It

15 July 2022

Q9 Capital: www.q9capital.com

Grin and Bear It

• Markets shrug off highest inflation reading in 40-years
• Celsius files for bankruptcy
• Crypto exchange volumes down, FTX market share rises

Annual inflation in the US hit 9.1% in June, more than analysts had expected, and up from 8.6% in May, reaching the highest level in over 40-years. But… one major takeaway from the latest CPI report: High inflation doesn’t scare the market anymore.

Stocks took the news with equanimity. The S&P 500 ended a touch down and the Nasdaq was flat. The Treasury market kept its cool. And it looked like another normal week in crypto.

Year-Over-Year Percentage Change in Consumer Price Index Since 1965

Source: Bureau of Labor Statistics

But there’s no spinning it — June’s headline inflation reading was bad. Here’s quick rundown of the horror:

• Energy prices rose 7.5% (month-over-month, seasonally adjusted)
• Core inflation (excluding food and energy) stayed hot at 0.7%, with stickier components like core services (0.7%), rent (0.8%) and owners’ equivalent rent (0.7%) all hot
• Categories that many thought would moderate soon refused to do so. Durable goods prices rose 0.7%, used cars and trucks 1.6% and transportation services 2.1%
• Alcoholic beverages rose 0.4%, making for a 6% annualised increase in the first half of the year

Fed-fund futures traders are now betting on an 80% chance of a 100bps rate hike this month after the red hot CPI data. The higher and faster that the Fed goes increases the risks for a potential US recession, which several economists see in the next 12-months.

Inflation is bad for an economy for a lot of reasons. Most fundamentally, inflation creates uncertainty among investors and spenders because it makes it harder to plan ahead.

But financial markets, whether crypto or equity, are generally less worried about inflation’s direct impact on Main Street than about the Federal Reserve’s response via the money supply. The muted market response so far, even on higher-than-expected numbers, reflects that the Fed has already announced an aggressive schedule of interest rate hikes, plans that have already pushed equity markets down nearly 15% since their January peak. It’s likely that it’s already baked into the spot price.

Bitcoin / USD, 1 Month

Source: TradingView

Symptoms of Hypothermia

Crypto lender Celsius has filed for bankruptcy, blaming “extreme market conditions” during the crypto winter. The filing comes roughly a month after it froze customer assets, trapping billions of dollars across more than a million accounts.

Lenders such as Celsius took in customer deposits and lent out the funds at higher interest rates, making a profit from the difference. To lure investors, Celsius offered high-interest rates and claimed its risks were small. But, as the Financial Times reported in an investigation, Celsius took on increased financial risks as demand for loans from institutional investors waned.

Bloomberg has written a feature on how Three Arrows Capital (3AC) set off the crypto contagion. Lawyers representing the creditors are saying that the founders of 3AC cannot be located.

In other related crypto company updates: Voyager says it may not be able to return full amounts to affected users after declaring bankruptcy; Genesis revealed they also had exposure to 3AC; and Vauld’s CFO has exited the struggling Singapore-based crypto lender after it was forced to halt client withdrawals last week.

Celsius Network Token (CEL) Price, 1 Year

Source: Coingecko

Shop Til You Drop

How are exchanges like FTX and Binance able to go on a shopping spree whilst everyone else is suffering? Why don’t they have the same liquidity issues as others in the crypto industry?

The main answer is that while crypto trading volumes have fallen, the top exchanges have been relatively active during the recent market downturn. This is their primary driver of revenues rather than lending. The Block’s index of daily volume on all exchanges is around $17bn, far from peak bull market volume of $89bn, but still well above pre-coronavirus pandemic levels ($2bn in Feb 2020).

Over the last couple of months, FTX has seen a significant rise in its share of spot trading volume. Binance remains the dominant exchange with a market share of 49.7%. However, in comparison to its other competitors (excluding Binance) — Coinbase, OKX, Bitfinex and Bitstamp — FTX has become the leader in trading volume for the last two months. Its market share among the five has risen to 36.8% in June from 18.7% at the start of the year.

Healthy volume translates into revenue for crypto exchanges, which means real cash for real bailouts. There are still lots of people interested in trading crypto. And that means there are funds available and deals to be had.

Daily Total Exchange Volume (7DMA)

Source: The Block

Rise of FTX Market Share vs Competitors (ex-Binance)

Source: Crypto Compare

Historical Monthly Exchange Volume, 3 Months

Source: Crypto Compare

Bear With It

Bear markets can be difficult to stomach, but they also present those who stick around with amazing opportunities. One of the worst things you can do is tune out. Crypto is a foundational technology that will continue to be relevant and thrive over a multi-year time horizon.

Sticking around is important. It helps you level up your knowledge, build frameworks to identify projects with strong fundamentals that are trading at distressed prices, and spot the next themes to emerge when the market starts to recover.

Bull markets amplify attention to the space, bear markets drain it. This creates opportunities for those who pay attention. With today’s tight liquidity conditions, entities with poor risk management are getting flushed out, turning into forced sellers. This is good for the health of the market long term.

Being able to identify great companies, tokens and projects that keep building but are trading at distressed prices is an edge you can only get from researching and staying on the pulse — Just bear with it.

In the News..

• Hong Kong to introduce licensing for crypto platforms through AML law
• Bitcoin miners shut as Texas power grid nears brink
• XRP Lawsuit: Ripple scores more ‘tactical wins’ against SEC as legal drama reaches climax
• UK government explores DeFi with a focus on staking and lending
• Shanghai included blockchain, NFTs and Web3 in its 5-year plan
• NY State slings another arrow at Bitcoin mining
• Ukraine seizes assets from crypto brokers working with Russians
• Polygon scores deal with Reddit for mew NFT marketplace
• Ex-Coinbase exec raises $30mn led by a16z for decentralized social network protocol
• US trademark and copyright offices to study IP impact of NFTs
• Terra projects begin moving to Polygon after UST debacle
• Volumes surge 205% in Axie revival as co-founder claims project is ‘healing’
• Meta captures 90% of the VR headset market