Q9 Markets: In the Jaws of a Tiger
28th January 2021
Q9 Capital: www.q9capital.com
- Risk assets fall on hawkish stance at FOMC meeting
- Solana suffer another major outage
- Google search for “NFT” overtakes “Crypto” for first time
Crypto was aptly all red as we prepare to enter the Year of the Tiger. The highly anticipated FOMC meeting on Wednesday set the stage for a more aggressive withdrawal of liquidity and Jay Powell refused to rule out more aggressive rate hikes. Investors are increasingly conscious of the risks that the Fed may end up cooling any economic growth with too much monetary tightening after the Fed chair signalled a March lift-off for interest rates.
Yet nothing actually happened. Rates weren’t increased, remain near zero, and Mr Powell said nothing new. At a time of such high inflation, low unemployment and rock bottom interest rates, it is extremely telling that a mere half percent mooted rise is considered dramatic. Milton Friedman may have been right: the longer you wait, the harder it becomes to raise rates.
Bitcoin is now down 22% in 2022. Ethereum (-36% YTD), Solana (-50% YTD), Uniswap (-44%) and many other alt-coins have fared worse. It’s not just crypto markets. The MSCI Asia Pacific Index is down more than 17% from its recent high.
The BTC/ETH ratio has rallied to the highest level in three months as adverse macroeconomic conditions have taken a bigger toll on Ethereum’s blockchain. This reinforces the widely held view that BTC can provide a safe haven over assets such as ETH et al.
BTC/ETH Ratio
SOLar Eclipse
The Solana (SOL) network went down again — this time for an enormous 48 hours. This is the sixth outage this month. The token has fallen -29.5% this week and 50% YTD. The network has suffered multiple issues within the last few months, and this current incident is the second in January. The outage was caused by “excessive duplicate transactions” done by bots.
DeFi users on the blockchain were left to pay the price as they faced heavy liquidations over the 48 hours the network was down. When the network fails, traders are left unable to sell their positions as transactions fail to complete. If they get liquidated because they can’t top up their positions due to degraded performance, it’s hard to see them trusting the network again for these kinds of transactions.
Many are questioning Solana’s reliability and status as a “Wall Street darling,” some think it is no longer part of the blockchain race for the future. Sam Bankman-Fried, founder of FTX and major SOL backer, came to its defence in a string of tweets. He pointed out that although the number of transactions per second (TPS) processed by the Solana network has significantly declined, it is still doing a lot compared to other blockchains.
Crypto is still a nascent industry and a lot of these layer one projects are in their experimental phase. SOL isn’t the only one having issues. ETH is not nascent but continues to be plagued by scaling difficulties and extremely high gas fees, while newcomers like Polygon (MATIC) saw costs spike more than seven times this month as play-to-earn video games clogged up demand.
The Metaverse with Chinese Characteristics
In another sign that NFTs are picking up serious momentum against a backdrop of general market angst, NFT search volume on Google became higher than “Crypto” for the first time ever.
Asia accounts for a significant part of this growth and countries in the region account for six of the top ten sources of search traffic. This is on the back of play to earn games such as Axie Infinity which are insanely popular in the region, and China’s plans to build its own NFT infrastructure (As Google is banned in China, we can safely infer that at least some of the searches routed through Hong Kong and Taiwan may be coming from the mainland via VPNs.)
NFT vs Crypto Search Traffic
This comes as no surprise, as Chinese investors have been active in the NFT space since the early days of the boom, and many collectors have become influential figures in the community. In the past year, more than 1,000 companies including Alibaba, Baidu and Tencent have applied for around 10,000 NFT and metaverse-related trademarks, according to business tracking firm Tianyancha.
But how will China’s metaverse actually evolve? China’s authoritarian approach is completely at odds with how the metaverse is developing in other parts of the world where decentralisation, interoperability and freedom of expression are key drivers of its growth. The infancy of China’s metaverse allows Beijing plenty of room to shape its development. Traditional Chinese internet businesses were developed first and then they became regulated after. Conversely, the “metaverse” will be regulated as it is built. China’s gaming industry is already under a huge amount of regulatory scrutiny and the metaverse will not be spared the same level of scrutiny.
In other major NFT news (there is a lot of it), OpenSea is alleged to be adding Solana NFTs on its platform, according to the leaked screenshots from a well-known hacker/blogger Jane Wong. The screenshots showed support for Phantom, a popular Solana wallet, and displayed Solana as one of the supported blockchains
Mind the GAAP
MicroStrategy has taken its biggest tumble in two decades amid scrutiny from the SEC over the firm’s US GAAP accounting of Bitcoin. The regulator took issue with how the firm reflected BTC’s price volatility in its recent filing.
The shares fell as much as 15% before recovering most of the losses as equity markets rebounded late Monday. At one point, the two-day drop was almost 30%, the most since it tumbled 42% over two days in June 2002. The shares are down more than 55% from their November peak.
Miners to the Majors
Crypto mining firms are rushing to become publicly listed. North Americas largest Bitcoin miner went public with a SPAC merger. Core Scientific Inc. started trading on Nasdaq through an estimated $4.3 billion merger with Power & Digital Infrastructure Acquisition Corp. The Texas-based miner is the largest in the USA in terms of processing power with a combined mining capacity of 6.6 exahash. In comparison, Marathon Digital Holdings has a 3.5 exahash output, while Riot Blockchain provides a 3.1 exahash.
BitFuFu, backed by industry giant Bitmain, is also slated to go public in the US via SPAC merger valuing the company at $1.5bn. A month ago, TerraWulf (another US miner) raised $200 million in debt and equity financing and also revealed plans to become Nasdaq listed. Marathon Digital, which is already a publicly-traded entity, spent almost $900 million to acquire 78,000 Antminer S-19 XP Miners from the Chinese manufacturer, Bitmain.
Crouching Tiger
The Year of the Tiger is about making big changes, risk-taking and adventure. Everyone is fired up, generosity will be at an all-time high and social progress will feel possible again. Expect things to rapidly change this year. CNY is all also about gifting to loved ones — perhaps give your friends and family a laisee of Bitcoin this year.
There are still several wild cards in the pack for crypto markets. What happens if Russia invades Ukraine? or the Chinese property market implodes? or the FED crushes risk assets with tightening monetary policy? But there are many many positive developments in the works in the next twelve months.
Anything can happen in the short term, but the real winners in crypto have a long term view. Holding through multiple cycles is one of the keys to getting massive returns on digital assets. Consider this old proverb this CNY: successful investors buy low and sell high.
In the News…
- Facebook gives up on crypto ambitions with Diem asset sale
- Robinhood posts $423mn net loss, shares sink after hours
- BlackRock plans ‘blockchain and tech’ ETF
- Kazakh crypto miners cut off from electricity supply until end of Jan
- Crypto custody firm Fireblocks confirms $550m funding at $8bn valuation
- VC giant Andreessen Horowitz plans to raise $4.5bn for two new crypto funds
- Grayscale considering 25 more crypto assets for investment products
- IMF directors urge El Salvador to remove Bitcoin as legal tender
- Rio de Janeiro plans to allocate 1% of treasury reserves to crypto
- Messari: State of Avalanche Q4 2021
- Trump Family discovers TrumpCoin: ‘Legal action will be taken’
- Crypto and Music: Jamming into Web 3.0
- YouTube wants to help content creators capitalize on NFTs
- Walmart planning NFTs, tokens, shopping in 3D metaverse
Legacy Markets
Oil futures rose +3.9% (vs previous week) while the SPX dropped -3.5%. 10-year US treasury yields were unchanged (+1bps) and the US Dollar index rose +1.5%. The Gold & Silver Index dropped -8.8%.
Crypto Markets
- BTC/USD fell -8.7% and ETH/USD dropped -19.3% over the past week. The total market cap of crypto universe dropped below $1.6tn. Bitcoin’s dominance rose to 42%
- SOL/USD and EOS/USD dropped -29.5% and -15.6% from last week’s levels. LINK/USD, SUSHI/USD and YFI/USD plummeted -24.8%, -30%, and-23.8%
- Annualised volatility rose to 61% for BTC and to 78% for ETH
Flows
- Balance flows on our client pad and an increase in volume during the last week
- Net buyers in ETH, SOL and AVAX
- Net sellers in BTC, LTC and COMP
Q9 Capital: www.q9capital.com
