Q9 Markets: Never Meta Stranger
5th November 2021
Q9 Capital: www.q9capital.com
- BTC tracks sideways as Fed to unwind emergency stimulus measures
- ETH reaches another ATH
- Everybody’s talking about the “Metaverse”
Bitcoin and Ethereum had divergent fortunes this week, with BTC flat and ETH continuing its 6-week bull run. The uncorrelated returns of the two major cryptos further emphasise their opposing investment rationales, with BTC widely considered a store of value and ETH as a growth coin and “global computer”.
Following an exceptionally bullish October (+40%), Bitcoin moved sideways this week and traded lower on Wednesday as traders digested the Fed’s decision to start unwinding the emergency stimulus measures put in place last year when the coronavirus struck global markets. Some investors and analysts characterised the move as a “dovish taper,” since Jerome Powell declined to commit to a timeline for raising interest rates once the asset purchases conclude as scheduled in mid-2022.
Ultra-low rates and record money printing since March 2020 have triggered unprecedented risk-taking across all corners of global markets. So, monetary tightening is widely considered bearish for risk assets. The money-printing program has fuelled bets on BTC as a potential inflation hedge, however there are few signs of any rush by traders for the exits as the Fed starts to taper the $120-billion-a-month of asset purchases.
Ethereum, on the other hand, extended its run of gains to six straight weeks and set another all-time-high of $4,600. ETH is now eyeing the psychologically significant mark of $5k. Some analysts say Ethereum is still ‘massively undervalued’ despite the recent ATH.
Annualised volatility continued to slide down for the top-two assets, dropping to 42% for BTC and 56% for ETH this week. Dropping volatility is somewhat akin to a recoiling spring. As markets become more coiled, buyers or sellers are ultimately forced to front up. This period of shrinking volatility is often met with violent unwinds — in either direction.
Bitcoin Historical Volatility (BVOL), YTD
Unlike how Bitcoin hit its all-time-high of $64K in April 2021, we haven’t seen a significant spike in search queries related to keywords such as “Bitcoin” or “Buy Bitcoin” on Google Trends. This suggests that the latest BTC run-up most likely didn’t have substantial retail participation. They haven’t disappeared from crypto though — instead, retail trades seem to have shifted their attention to meme coins such as Shiba Inu and are hunting for the next big thing amongst micro coins and NFTs.
Many DeFi names and alt-coins posted double digit gains this week. Basic Attention Token (BAT) rallied 40.6%, ZRX rose +22.5%, COMP jumped +18.2% and Sushi leaped +22.5%. As we wrote about a few weeks ago in most previous rallies Bitcoin usually leads, followed by ETH and then by “everything else”. This rally doesn’t seem to be an exception.
Enter the Metaverse
Everybody is now talking about the “Metaverse”. Leaders in technology, entertainment and fashion have rushed to stake their claim in it. Although few seem to agree about what exactly it is, the important thing is that it’s coming.
Last week, during a keynote presentation at Facebook’s annual virtual reality conference, Mark Zuckerberg appeared in a feature-length video detailing his plans for “the metaverse,” an immersive digital world powered by his own products, and subsequently announced the firm is rebranding itself as Meta (apparently not an acronym for “Marks Evil Tracking Apps”). One of Facebook’s earliest investors has labelled the social media giant’s plans for a metaverse as “dystopian”.
Facebook, Mark 2
Firms like Nike, Baidu, Microsoft and many others are now also jumping on the bandwagon. Microsoft says it is adding 3D virtual avatars and environments to its Teams chat system, as part of its push towards the “metaverse” (this might not seem new to the many people who have already been interacting with cartoon like characters at work for years).
Zuckerberg has said the concept will cost $10 billion this year — then more in future years — and expects the metaverse to lose money for the foreseeable future. The numbers are big, but Facebook can stomach those losses: it netted $29.1 billion in profits on $86 billion in sales last year.
Yet Zuckerberg’s project isn’t earth shatteringly new. Fragments of it have kicked around Silicon Valley for years. The metaverse has been and gone before. In the noughties Second Life made it seem like the metaverse had finally arrived in our own world. It hadn’t. 2007 marked Second Life’s peak popularity. After that, its user count plateaued, then ebbed steadily lower.
But Facebook does have a couple things going for it that others in the past didn’t. While Second Life still plods on today, reportedly with around 600,000 users, Facebook now has 2.9 billion. It also has the ability to deploy more money in the next two or three years than the total of all the dollars spent on the metaverse during the prior 30 years. Another reason is the simple fact that we’re all a great deal more comfortable with virtual communication now after working from home for much of the past 20 months and that the technologies which will enable the metaverse has also come a very long way over the past decade.
What is the Metaverse?
The metaverse describes the way in which several emerging technologies — cryptocurrencies, NFTs, online game platforms like Roblox, and mixed and virtual reality hardware, including Facebook’s Oculus — may grow and overlap to create new digital worlds.
It is the hypothesised next iteration of the internet, supporting decentralised, persistent online 3-D virtual environments: a boundless, 3D digital world where we do things like hang out in parks, play games, see a concert or suffer through a work conference. These virtual spaces will be accessible through virtual reality headsets, augmented reality glasses, smartphones, PCs, and game consoles.
The actual term “metaverse” comes from a best-selling 1992 sci-fi novel, Snow Crash. Its author, Neal Stephenson, imagined a dystopian world where the book’s main character, a hacker/pizza delivery guy named Hiro Protagonist, travels back and forth from his grim reality to a 3D virtual cityscape, the Metaverse, that stretches for over 40,000 miles. Stephenson’s work later influenced The Matrix.
Crypto x NFTs x Metaverse
Much of the metaverse will be underpinned by crypto and NFT technology. NFTs have, for the first time, made it possible for users to actually own digital property, and crypto tokenomics have enabled individuals to profit from partaking in games and owning.
- Sandbox is one example. The metaverse start-up is an Ethereum-based platform where players can “play, create, own, and govern a virtual world. Players can own in-game assets in the form of non-fungible tokens (NFTs), such as plots of land that they can build on. The price of the coin has jumped over 200% after Facebook announced it would change its name to Meta last week. Sandbox has just closed a $93 million Series B funding round led by SoftBank.”We are creating this open metaverse. We are positioning the Sandbox against those giant tech companies who are claiming the metaverse to be theirs, offering an alternative where users are first” said the firms COO Sebastien Borget
- Axie Infinity is another project turning gaming on its head. Axie is interesting because it’s using cryptocurrency to stand up a new kind of video game, one in which you can earn meaningful income just by playing. The game is surrounded by a community that holds a financial stake in Axie via the game’s two currencies, which they can use to influence its development. In short, it’s a social network where all the participants are buying and selling goods with real money. The company, which was founded in 2018, is now valued at $3 billion and its token has rallied 103,220% over 12 months.
- Decentraland is a decentralised 3D virtual reality platform which uses the Ethereum blockchain. It allows users to create, experience, and monetise content and applications. In this virtual world / metaverse, users can buy plots of land that they can navigate, build upon and monetise. They can also be used to buy avatars, wearables, names, and more. A virtual plot of land recently sold for nearly $1million.
- Mythical Games is another metaverse gaming company on the up. The firm has just raised $150 million in a Series C round led by Andreessen Horowitz (a16z) at a $1.25 billion valuation.
Axie Infinity, 1 Year (Gains of 103,220%)
NFTs Meet a Virtual World
Hype or Hope?
Think back 10 years to when smartphones and apps were new, and social media was on the rise. Lots of people believed that the supercomputer-in-your-pocket era would change a lot of things, even if they didn’t quite know how. Metaverse bulls, who can seem eager to just jettison the last era’s baggage, believe we’re on the cusp of even bigger changes.
FOMO is a big driver of this current run. If you have an internet connection, you’re probably familiar with the feeling. Something new starts happening online. People seem really excited about it. Suddenly you’re curious. (Sure, I’ll join TikTok.) Or maybe you feel dread. (Am I too late to buy crypto?) Everyone at some point fears missing out on something. The metaverse is no exception. Its unlikely to be a fad, or to fizzle out like Second Life did. The world’s largest tech firms and private equity players are piling tons of cash into this space and innovation is happening at breakneck pace.
A lot of people are suddenly asking how to get involved and how to profit from this latest phenomenon. There are a dizzying number of metaverse, gaming, and NFT projects being developed. Finding the next winner will be like finding a needle in a haystack. There will of course be winners, but there will be many more failures and betting the house on the next Axie Infinity would be a gamble. One way to play this theme is to simply buy a smart-contract protocol like Ethereum, Solana or Polkadot where all these new digital worlds will be built.
In the News…
- New York’s next mayor wants to be paid in Bitcoin. Eric Adams, mayor-elect for New York City, has said he would like his first three pay checks in bitcoin.
- China’s central bank digital currency (CBDC) has been used to conduct 62 billion yuan ($9.7 billion) of transactions as of the end of October.
- Chainlink, the biggest provider of data to smart contracts, said the value of smart contracts dependent on its feeds has climbed to $75 billion
- Australia’s largest bank, Commonwealth Bank, is reportedly planning to add crypto support to its app
- The US Department of Justice (DOJ) is seeking a director to head its new National Cryptocurrency Enforcement Team (NCET). The NCET will be focused on supporting, investigating, and prosecuting crimes involving cryptocurrency
- Happy Birthday: It’s thirteen years since Satoshi Nakamoto released the Bitcoin Whitepaper
- The President’s Working Group on Financial Markets released a report and recommendations on stablecoins
- Binance is investigating the SQUID token crash and considers it a scam
- FC Barcelona, the world’s second-most valuable soccer club, is joining the rush to issue non-fungible tokens with a plan to offer NFTs based on photos and videos from the club’s 122-year history.
Legacy Markets
Oil futures dropped -3.6% amid rising US crude inventory and the SPX printed fresh highs this week pushing it +1.8% higher. 10-year US treasury yields slipped 5bps and the US Dollar index rose +1% while the Gold & Silver index fell -2.3%.
Crypto Markets
- BTC/USD rose +1.4% while ETH/USD rallied +5.8%. The total market cap of the crypto universe crossed $2.7tln while Bitcoins dominance dropped below 43% at the end of the week
- LTC/USD rallied +6.8%, BAT jumped +40.6% and SUSHI was the outperformer among large DeFi names, posting +18.2% gains
- Annualised volatility continued to slide down, dropping to 42% for BTC and 56% for ETH
Flows
- Reversal of flow skew on client pad (4.6x buyers vs sellers) on decent volumes
- Buyers in SUSHI dominated the pad
- Two-way flow on BTC and net buying on ETH in modest volumes
Q9 Capital: www.q9capital.com
