Q9 Markets: Network Effect
10th December 2021
Q9 Capital: www.q9capital.com
- Crypto markets steady following weekend sell-off
- ETH/BTC ratio rises sharply following EIP-1559 upgrade
- Whatsapp testing new crypto feature for sending money
Last Saturday was a gloomy day for crypto as BTC nosedived by 20% within an hour, dropping from $52k to as low as $42k at one point. The shockwave wiped off over $600bn from the crypto markets and turned traders’ screens into a sea of red. Bitcoin has since failed to hold for long above the $50,000 mark and is down 15% on the week. The sell-off pulled down most other digital assets such as ETH (-8.7%), SOL (-22.6%) and LTC (-25.4%). Most DeFi names also posted weekly losses over 20%.
Some attributed the sharp plunge to the uncertainty over the Federal Reserve’s hint at higher interest rates and global fears over the new Omicron variant.
Risk appetite somewhat returned to crypto markets on Tuesday, with BTC moving back above $50,000 and ETH topping $4,400 — but both have failed to keep gains. While the spot crypto market briefly bounced, the options markets continued to show persistent bias for downside protection or put options in BTC.
Following the weekend’s drop and the resulting spike in volatility, many traders have taken short straddles and strangles. These strategies are taken when the implied volatility is expected to drop.
The recent pullback is likely a healthy shake-out of leverage if you look at Bitcoin’s dominance which has remained unchanged. This suggests that the capital outflow took place evenly across the industry.
BTC, 1 Week
The Crypto Fear and Greed Index has risen since the weekend, although it remains in the “Extreme Fear” range. As we wrote about previously it can be opportunistic to take the contrarian approach and stock up when the crowd are selling.
Crypto Fear & Greed Index, 1 Month
Many investors are currently focusing on the ETH/BTC trading pair, the ratio between prices for both assets which is used to track the relative strength between the two major cryptos. The ratio rose even when the market crashed last weekend, rising around 13%, reaching a 3 1/2-year high and registering its best weekly performance since May.
Analysts pointed to several factors to explain the upward trajectory, one of them being Ethereum blockchain’s EIP-1559 upgrade implemented in August. That change has effectively reduced the net new supply of ether from the Ethereum blockchain, and it appeared to help ETH/BTC make gains in a risk-off environment.
ETH/BTC Ratio, 1 Year
One App to Rule Them All
Meta (formerly Facebook) owned WhatsApp has launched a new pilot that lets a “limited number” of people in the US send and receive money from within a chat using cryptocurrency. The feature is powered by Novi, Meta’s digital wallet that launched as a pilot six weeks ago, with payments made using Pax Dollars (USDP), a stablecoin pegged to the US dollar issued by Paxos.
This follows a US–Guatemala remittance pilot with USDP and the Novi wallet that launched in October.
Facebook wanted to revolutionise finance with a global digital currency — but then came the regulators. The firm has faced an immense regulatory backlash for its digital currency plans, resulting in it rebranding and downscaling its original stablecoin vision from Libra to Diem. The project lost major backers including Visa and Mastercard. and rebranded its digital wallet subsidiary from Calibra to Novi. It has also come under criticism for its dystopian reimagination of the future through its metaverse and concerns around users ‘ data privacy.
Nevertheless, one thing Meta has achieved is igniting a global race among central banks to figure out their own digital money strategies. The People’s Bank of China is leading the way, trialing a digital version of the yuan in a number of cities, while Britain’s central bank is exploring whether or not to issue its own digital currency.
The Social Network
Despite all the criticism, the social media giant has a key advantage vs upstart competitors: the “network effect”. Facebook now has 2.9 billion users. Whatsapp boasts 2 billion. What you get with an institution like Facebook backing a stablecoin is much better distribution. You can also integrate it into apps, add it to a lot other places. It will basically enable more people to easily get into crypto. Another advantage is that Meta has the ability to deploy more money in the next two or three years than most other businesses can.
Network effects exist in many industries. Social media platforms have very strong network effects. Matching platforms, such an Uber, depend heavily on their network effect to crush competitors. iMessage plays to the iPhone’s network effect, to prevent users from switching to other phones.
This principal is also crucial for the health of crypto protocols and ecosystems. Network effects have huge implications on Bitcoin’s utility as a currency and as a store of value. Like all major currencies, Bitcoin’s value depends on somebody else being willing to accept it as payment or buy it as an investment. As more people accept Bitcoin, it becomes more valuable to somebody looking to spend Bitcoin. Currencies that are well-established with large user bases have strong lock-in effects, incentivizing people to continue using them.
Bitcoin adoption has consistently been increasing since its creation in 2009. The number of people using crypto worldwide is now estimated at 300mn, with tens of thousands of businesses also using digital currencies. Every new adopter makes it more compelling for the next person to join the network and every person who follows the existing adopters creates a positive feedback loop, triggering more people to follow. In theory, there is a point where BTC could have a sufficient network effect such that it can trigger everyone to have to accept the currency in a rapid move, including everyone who has yet to make the transition. Best to get in early before you’re forced to.
In the News…
- No, Craig Wright did not prove he’s Satoshi in court
- Japan puts new restrictions on stablecoins
- FTX to seek $1.5B in new funding round at $32B valuation
- FTSE Russell plans to develop Crypto Index with over 40 digital assets
- Visa launches Crypto Advisory Services for banks as demand for digital assets grows
- From a meme to $47 million: ConstitutionDAO, crypto and the future of crowdfunding
- OpenSea walks back on IPO plan following community backlash
- BitMart to compensate victims of $196M hack with own funds
- CIA confirms the rumors: It really is working on cryptocurrency projects
- Amazon invests in Dibbs for fractional sports collectibles as NFTs
- Crypto Theses for 2022: Key trends, people, companies, and projects to watch across the crypto landscape
- Rarible plots multi-chain NFT future with Ethereum, Flow, Tezos and more
- NFTs take top spot in Art Review’s ‘Power 100’ art world power list
Legacy Markets
TradFi markets witnessed some recovery in risk assets this week. Oil futures rose +4.7% and the SPX gained +2%. Elsewhere, 10-year US treasury yields rose 7bps, the US Dollar index held (+0.1%), and the Gold & Silver index was flat.
Crypto Markets
- BTC/USD dropped -15.6% lower while ETH/USD fell -8.7%. The total market cap of crypto fell below the $2.3tn mark, while BTC’s dominance dropped to 40%
- Among other majors, LTC/USD and EOS/USD dropped -25.4% and 18.7%. Among DeFi coins, COMP/USD and UNI/USD were down -28.5% and -27.5%
- Annualised volatility subsided in crypto markets, dropping to 75% for BTC and 86% for ETH.
Our Flows
- Client pad was skewed towards selling (1.6x sellers vs buyers) on lighter volumes
- Sellers on ETH dominated the pad. BTC saw a two-way flow
- Net buyers in SOL and EOS on mild volumes
Q9 Capital: www.q9capital.com
