Q9 Markets: Scales & Arpeggios
21st January 2021
Q9 Capital: www.q9capital.com
- BTC volatility and dominance decrease
- Grayscale sees outflows and widening discount
- Microsoft acquires Activision Blizzard in metaverse play
The sideways/downwards movement of Bitcoin masked an incredibly interesting week in crypto markets with developments that saw the largest ever tech deal by Microsoft, several major economies crack down on crypto ads, Cardano’s transaction volumes soaring, and Russia suggesting a blanket ban on the asset class.
The total market cap of crypto dipped below $2tn in a bearish move this week and markets sold off aggressively this morning. BTC’s dominance has decreased to 38.2%, a level not seen since May 2018, indicating a continuation of capital moving from BTC into rival cryptocurrencies. Its dominance dropped in the first part of the year and has been trending down since.
BTC and ETH Dominance %
The one-month implied volatility (which reflects investors’ expectations for price turbulence over the next four weeks) has dropped to an annualized 57%, the lowest since November 2020. The metric has come off sharply from 85% in mid-December. Derivatives have been increasing in popularity from crypto investors, especially selling volatility through dual currency products and DeFi option vaults. Liquidity providers are hedging their exposure by selling options on centralized exchanges, in turn driving the implied volatility lower (implied volatility is influenced by demand for options).
Transaction volume of the Cardano (ADA) network briefly surpassed Ethereum ahead of the launch of a highly-anticipated decentralised exchange on Cardano called SundaeSwap. Cardano’s daily transaction volume was at one point above the $7bn mark, surpassing the daily transactions volume seen on Ethereum of around $5.4 billion. Both networks remained far below BTC’s $16.8 billion. The price of ADA exploded last year ahead of the rollout of the widely anticipated Alonzo hard fork, which brings smart contracts into the network and allows it to compete with the Binance Smart Chain (BSC), Ethereum (ETH), and Solana (SOL).
Solana and EOS both dropped -12.9% and -5.8% respectively from last week’s levels. Chainlink and Sushiswap also plummeted -18.8% and -17.5%.
A Minor Scale
One of the biggest casualties of the cryptocurrency selloff is the Grayscale Bitcoin Trust. The $27bn fund has plunged nearly 17% so far in 2022, outpacing Bitcoin’s nearly 9% decline. As a result, GBTC’s price closed 26.5% below the value of the Bitcoin it holds this week, widening GBTC’s discount to record levels.
GBTC has been the preferred venue for institutional investors to gain exposure to crypto without having to purchase Bitcoin directly. The discount has steadily widened due to several factors including institutional sentiment and alternatives such as futures backed ETFs and the launch of spot-based ETF in Canada.
GBTC doesn’t allow for share redemptions in the same manner as an ETF, meaning that the supply of shares can’t be created and destroyed with shifting demand. As such, it’s price has dislocated from Bitcoin to an even greater degree than the ProShares Bitcoin Strategy ETF (BITO), which is also vulnerable to tracking errors given that it holds futures contracts instead of actual Bitcoin. While BTC rallied 1.6% on Tuesday, BITO and GBTC fell 3.3% and 6.4%, respectively.
Investors have pulled money out of cryptocurrency funds for a fifth straight week. Digital-asset investment products saw $73 million of outflows during the seven days through Jan 14th, according to CoinShares.
Grayscale Bitcoin Trust Premium
Grayscale Bitcoin Outflows
Grayscale Bitcoin Trust AUM
The DEX Report Uni’d
Messari published a “State of Uniswap Q4 2021” report. It’s worth a read and you can get it in full here, but here are their key takeaways:
- Uniswap hit an all-time high transaction volume in Q4 2021 behind $238.4bn worth of trades, more than 61% above the previous quarter.
- The launch of V3 on Arbitrum and Polygon helped kickstart new liquidity pairs, resulting in the total number of markets increasing by 17%.
- The governance decision to enable a 0.01% fee tier helped drive stablecoin trading activity. Transaction volume between USDC/USDT increased more than 100% in Q4.
- A frothy trading market in Q4 benefitted Uniswap’s liquidity providers, who earned 54% more in fees than in Q3.
Call of Duty: Content Warfare
Microsoft has agreed to buy video game maker Activision Blizzard for $75bn in cash in the biggest-ever deal by the tech company. Microsoft will pay shareholders of the company behind Call of Duty and World of Warcraft a 45 per cent premium on the closing price last week. The news sent Sony’s share price tumbling 10% lower.
If the path to the metaverse runs through today’s video games industry, then Microsoft’s agreed acquisition could turn out to be one of the defining deals for the next era of consumer technology. The huge deal promises to turn Microsoft into one of the biggest creators of interactive entertainment, shake up the existing networks of alliances and competitive rivalries that shape the global gaming industry, and help to lay the foundations for the virtual worlds of the future.
In other gaming M&A news, Animoca Brands, a metaverse start-up focused on NFTs and gaming, raised $358.88mn and is now valued at over $5bn.
The company’s major blockchain game projects include The Sandbox, the upcoming Phantom Galaxies game, the REVV token ecosystem (including REVV Racing, F1® Delta Time, and Formula E: High Voltage), the Arc8 platform, as well as the TOWER, LMT, BONDLY, and PROSPER token projects, among others. As for its investments, Animoca Brands has already invested in more than 150 NFT and metaverse-related companies, including OpenSea, Dapper Labs, Yield Guild Games, and Axie Infinity.
Games are an important ingredient in creating the metaverse. Immersive and interactive digital worlds of the future will be a collection of communities and individual identities anchored in strong content franchises, accessible on every device. Gaming is the conduit and rivals are battling it out to stake their claim — there had never been more competition than there is today.
Ad-hoc Regulation
Many major economies banned or regulated crypto advertisement this week — and Russia’s central bank suggested an all-out ban. Crypto companies will face stricter advertising rules under plans set out by the UK Treasury, Spanish regulators and Singapore’s MAS. You can check out the details in the links below:
- UK Treasury to crack down on ‘misleading’ crypto promotions
- Spain places regulations on crypto ads, outlines penalties
- Singapore looks to curb crypto ads
In addition, Russia “must ban cryptocurrencies”, the country’s central bank said in a report. The report says cryptocurrencies are volatile and widely used in illegal activities such as fraud. By offering an outlet for people to take their money out of the national economy, they risk undermining it and making the regulator’s job of maintaining optimal monetary policies harder, the report said.
Facing the Music
Global and crypto markets follow beats and rhythms. The tune has been a bit somber from the end of ’21 through the start of ’22. When the Fed shrinks it’s balance sheet is it the swan song of risk assets? Does slamming the breaks on inflation silence the use case for BTC and drown out the story off true crypto innovation? Underneath the melody, which seems a bit out of tune, the harmony hums along. NFT’s (not just in gaming) continue to print record volume as people (investors, traders, consumers, players, and creators) look for something interesting as well as returns. Private investment and fundraising in crypto has raised enormous sums and their balance sheet will continue to draw talent and products into crypto. What this capital will probably do less of is hold the latest altcoin on its balance sheet. It probably won’t buy treasury assets either (who would now anyway!?). It will sing a familiar tune and will stay in crypto, digital assets, NFT’s and probably invest directly into the companies creating new things. To pick winners stick with standards and a few choice potential smash hits. There is plenty of song left to play.
In the News…
- BNY Mellon IM to launch Singapore’s first retail blockchain fund
- Facebook and Instagram may help you create and sell NFTs
- Crypto.com CEO admits hundreds of customer accounts were hacked
- EU regulator calls for ban on proof-of-work mining used by Bitcoin
- BitMEX looking to acquire one of Germany’s oldest banks
- Andreessen Horowitz plans to raise $4.5 billion for new crypto funds
- Google creates blockchain unit, hires new ‘founding leader’
- OpenSea acquires crypto lending platform Dharma Labs
- South Korea’s presidential candidates look to reintroduce ICOs following 4-year ban
- CEO of finance giant Charles Schwab calls crypto ‘hard to ignore’
- Walmart filed documents to launch a cryptocurrency and join the metaverse
- JPMorgan executive says crypto is in the ‘Napster’ phase of its life cycle
- NBA Top Shot maker Dapper Labs set to launch NFT platform for UFC
Legacy Markets
Oil futures rose +2.8% while the SPX dropped -3.8% week on week. 10-year US treasury yields rose 8bps, the US Dollar index rose +1% and the Gold & Silver index advanced +3%.
Crypto Markets
- BTC/USD fell -4.5% and ETH/USD dropped -7.6%. The total market cap of the crypto universe dropped below $2tln while Bitcoin’s dominance hovered around 40%.
- SOL/USD and EOS/USD dropped -12.9% and -5.8% from last week’s levels, among top DeFi names LINK/USD and SUSHI/USD plummeted -18.8% and -17.5% while YFI/USD was unchanged
- Annualised volatility in BTC rose to 57% while it dropped to 73% for ETH
Our Flows
- Client pad strongly skewed towards buying (6.3x buyers vs sellers) on muted volumes
- Net buyers in BTC, ETH and SOL
- Net sellers in EOS and LTC
