Q9 Markets: London Calling

6th August 2021

Q9 Capital: www.q9capital.com

• ETH receives a boost as “London hard fork” activated
• Alts and DeFi also rally
• Senate Infrastructure Bill takes aim at crypto

London Calling

Ether took the reins from BTC this week and printed a 13-day winning streak (a record) and a week-on-week rise of 18.7% to close at a multi-month high of $2,827. Much of this bullish price action can be attributed to ETH playing catchup with BTCs large outperformance over the past two weeks and the much-hyped and somewhat controversial “London hard fork” which activated on Thursday. Many of the Alts and DeFi house-name also rallied this week as UNI rose 30.2%, LINK +24.3%, COMP +20% and SUSHI +17.9% as the market cap of crypto ex-BTC crossed 0.9tn. Bitcoin, meanwhile, seems to have run out of steam and tracked sideways this week, posting a paltry 2.2% rise (see price table at the bottom of this note).

The roll-out of the London hard fork has had a positive impact on ETH both in the run-up to the activation and since. The backward-incompatible upgrade contains five Ethereum Improvement Proposals (EIPs): 1559, 3554, 3529, 3198, 3541, which aim to optimise the protocol and improve the Ethereum network’s user experience, value proposition and more. Of these five EIPs, EIP 1559 has been the most controversial among Ethereum stakeholders due to its radical redesign of the network’s fee market. EIP 1559 introduces a mechanism to burn a portion of fees paid to miners, thereby curbing Ether’s supply growth over time and bringing a store-of-value appeal to the native token of Ethereum’s blockchain — a narrative so far largely focused on Bitcoin. These changes bring ETH another step closer to implementing a proof-of-stake mechanism that will ultimately make Ether mining obsolete (and will help solve environmental concerns).

ETH Performance 14 Days

Source: CoinGecko

Options data shows investors are positioning for continued gains in ETH. Both long-term and short-term put-call skews are flashing negative values for the first time in nearly three months. That’s a sign of greater demand for calls or bullish bets relative to puts. One-week, one-, three- and six-month put-call skews hover below zero, an across-the-board bullish market positioning last observed in early May.

While much of this positioning in options is relatively short term, some analysts have cautioned that the upgrade’s positive effect will be seen over time, and there may be little or no immediate price action. There was, however, a bit of pop last night after the upgrade. We certainly wouldn’t disagree that the importance of the changes are long term, but the overnight move is real, perhaps short covering (and maybe short lived). A corroborating data point to look at is basis. It has been trading negative on Deribit since the May sell off and in recent weeks, indicating pressure on swaps and futures. This has turned around to positive today, something we haven’t seen much of since May. (yes, it could be options flows etc. too).

Deribit BTC Perpetual Swaps Funding

Source: Deribit

The London hard fork is seen as long term positive, but the fact that they pulled it off is one less thing to worry about (and hedge for) as well. It’s been a long time coming and is a clear demonstration that large public blockchains can grow and adapt. One more feather in crypto’s cap.

ETH 25 Day Skew

Source: Coinbase

In Other Data…

BTCs dominance vs ETH and everything else has been waning recently and this trend is likely to continue as alts catch up with BTC. The ETH/BTC ratio has risen to 0.069. ETH is now ‘deflationary’ and has climbed another wall of worry. Keep an eye out.

ETH/BTC Ratio 5 years

Source: Trading View

Bitcoin and Ethereum’s hash rates start have now started to recover as Chinese miners redeploy overseas. The hashing power securing the world’s two largest blockchains is on track of a slow recovery, as some Chinese miners have gradually completed their relocation after the crackdown.

BTC Hash Rate

Source: The Block

But We Can’t Stop Thinking About Regulation

Capitol Hill negotiators released their 2,702 page bipartisan infrastructure bill on Sunday night after a flurry of revisions over the weekend, with one of the more significant last-minute edits concerns cryptocurrencies. To help fund the $1 trillion bill, the Senate has proposed a provision that would impose stricter rules on how “digital assets” are taxed.

The bill aims to require brokers of digital assets to report on gains reaped on trading to the Internal Revenue Service (IRS). It would raise an estimated $28 billion over a decade to help pay for improved roads, bridges, ports and other infrastructure. The Tax Code changes will require crypto “brokers” to comply with IRS reporting requirements and report specific information about crypto transactions, like price points from when users bought in and sold. Most importantly, they have to give Form 1099s to their customers and file them with the IRS.

The provision’s definition of a “broker,” however, has sparked concern within the crypto community and whether this will capture everyone in the ecosystem. This was clarified yesterday with a last minute amendment. Sen. Toomey elucidated on Wednesday “By clarifying the definition of broker, our amendment will ensure non-financial intermediaries like miners, network validators, and other service providers — many of whom don’t even have the personal-identifying information needed to file a 1099 with the IRS — are not subject to the reporting requirements specified in the bipartisan infrastructure package”.

SEC Chairman Gary Gensler this week said he believes that the vast majority of crypto tokens and ICOs violate U.S. securities laws. In a speech at the Aspen Security Forum on Tuesday, Genser said he agreed with Jay Clayton, his predecessor at the SEC, who said that in this view, “every ICO I’ve seen is a security.” Mr. Gensler outlined his desire to regulate digital assets and other crypto products to the same extent as stocks, bonds and commodity-related trading instruments. He stated that his priorities include newer innovations such as stablecoins and decentralized finance, products that are beginning to draw more mainstream investors. He also revealed there is no timetable is set for a BTC ETF.

However, Mr. Gensler also gave a thumbs up to digital assets: “Before starting at the SEC, I had the honor of researching, writing, and teaching about the intersection of finance and technology at the Massachusetts Institute of Technology. This included courses on crypto finance, blockchain technology, and money. In that work, I came to believe that, though there was a lot of hype masquerading as reality in the crypto field, Nakamoto’s innovation is real. Further, it has been and could continue to be a catalyst for change in the fields of finance and money.” This quote seemingly didn’t get picked up by large swathes of the mainstream media who appear to have an axe to grind with crypto.

As we have stated before, crypto regulation will likely bring uncertainty and volatility to the markets in the short and medium term, but is long term very positive for the asset class as it is embraced and bought into the mainstream.

In the News…

• Wells Fargo, one of the largest wealth managers in the U.S., has reportedly started offering crypto investments to its wealth management clients. The bank’s private wealth arm has about $2T under management and has been reportedly looking for a “professionally managed solution” since May. Wells Fargo’s view is the large and growing crypto market cap not only lends it legitimacy but its evolution and maturation of its development make it a viable alternative asset class.
• Even more news surrounding crypto gaining acceptance on Wall Street … State Street Corp. is set to offer cryptocurrency reporting, reconciliation and processing services to its private-fund clients and JPMorgan Chase began pitching an in-house Bitcoin fund to its Private Bank clients, completing its transformation from the “never-bitcoin” mega-bank to a participant in the digital assets market.
• The leading opposition party in Spain has introduced a bill that would allow for the payment of mortgages with cryptocurrencies and create a national crypto assets council to analyze the implications of the use of crypto and blockchain in that country.
• HSBC is blocking UK customers from using credit cards to make payments to crypto exchange Binance “wherever possible,” the banking giant said Tuesday.
• The Ukrainian government is moving forward with its central bank digital currency (CBDC) plans, as the National Bank of Ukraine (NBU) is now officially authorised to issue a digital currency
• The Economist runs a thought experiment: What if Bitcoin went to zero?
• Legendary Argentinian soccer forward Lionel Messi has announced the upcoming release of his first non-fungible token (NFT) collection. The project, known as “The Messiverse” will allow fans to invest digitally in their favorite player.

Traditional Markets

Oil futures dropped -5.8% over the week while the SPX printed fresh highs led by strong earnings and positive unemployment data. Elsewhere, 10-year US treasury yields slipped 4bps, the US dollar index climbed +0.4% and the Gold & Silver index fell -3.1%.

Crypto Markets

• BTC/USD rose 2.2% while ETH/USD jumped +18.7%. Bitcoins dominance retreated to sub 45% as the total market cap ex-BTC crossed 0.9 tn
• Among other majors EOS/USD posted modest gains of +5.8%. Among large cap DeFi names LINK extended its rally from previous week posting +24.3% but UNI outperformed the sector with a standout +30.2% rally
• Annualised volatility rose in crypto markets to 70% for BTC and 71% for ETH this week

Flows

• Our client pad was better to sell (15X sellers vs buyers) during last week
• Net sellers in ETH on strong volumes
• Two-way activity in LINK and BTC

Q9 Capital: www.q9capital.com