Q9 Markets: Signed, Sealed and Delivered
11th March 2022
Q9 Capital: www.q9capital.com
- Markets respond positively to Biden’s executive order on crypto
- Before falling late week on Russia concerns
- Increasing inflows into crypto products signals institutional support
Digital asset markets responded positively to an executive order on crypto published by the White House on Wednesday before falling on Thursday as global markets cooled after negotiations between Ukraine and Russia broke down, signalling a long road ahead to peace.
Oil and other commodities such as Nickel have been on a tear since the conflict started and threaten to send a new wave of inflation worldwide. Bitcoin still appears uncorrelated to commodities and is more sensitive to high-beta and tech stocks. That said, a full-blown commodity crisis could put pressure on both equities and crypto.
Most alternative cryptocurrencies followed Bitcoin lower at the end of the week, with privacy coins taking a bigger hit than layer ones, DeFi protocols and GameFi. BTC ($39.4k) and ETH ($2.6k) dropped -7.1% and -8%. Solana (-13.2%), Cardano (-10.7%) and Polkadot (-5.8%) all nursed late week losses.
Crypto options markets meanwhile saw bullish flows, with buying call options and call spreads being the most popular trades (a call buyer is implicitly bullish on the market)
Funds and Flows
Inflows into crypto investment products totalled $127mn last week, highlighting a steadily increasing upward trend in 2022 and the largest weekly inflow since early December, “suggesting investors remained supportive of digital assets,” according to CoinShares.
Another piece of research on the crypto fund industry sheds light on their top holdings. Messari analysed the top-held assets across crypto funds and found Polkadot to the top holding (they stripped out BTC and ETH in the assumption they all held these two asserts). DOT is held by 24 of the 57 funds surveyed, meaning 42% of the funds they’ve tracked are betting on the success of Polkadot’s smart contract platform.
From the Top
US President Joe Biden directed federal agencies to coordinate their efforts at drafting cryptocurrency regulations in an executive order on Wednesday — marking the first time the White House had weighed in formally. It has widely been viewed as a net positive for the crypto industry.
The order, titled “Ensuring Responsible Development of Digital Assets,” directed agencies across the federal government to produce reports on digital currencies and consider new regulations. It outlined the risks crypto poses to the economy, national security and climate, while also noting their possible benefits.
The measures focus on six key areas: consumer protection, financial stability, illicit activity, US competitiveness, financial inclusion and responsible innovation.
The topic of stablecoins was notably absent from the White House’s announcement Wednesday, though Yellen has made clear she wants to see Congress introducing regulation for the sector.
Key Takeaways of the Executive Order
Zooming in on the executive order, here are the major takeaways:
Protecting Consumers. There have been countless stories of investors falling for crypto scams, or losing huge sums through cyberattacks. The Biden administration is calling on the Treasury to assess and develop policy recommendations on crypto. It also wants regulators to “ensure sufficient oversight and safeguard against any systemic financial risks posed by digital assets.”
Illicit Activity. The executive order also focuses on rooting out illegal activity in the crypto space. It calls for an “unprecedented focus of coordinated action” from federal agencies in mitigating illicit finance and national security risks posed by cryptocurrencies. It is also urging international collaboration on the issue.
Following Russia’s invasion of Ukraine, authorities are now concerned about the possible use of crypto in helping sanctioned Russian individuals and companies evade the restrictions.
Last month, officials seized $3.6bn worth of BTC related to the 2016 hack of crypto exchange Bitfinex.
Climate Change. Biden also dropped a mention of the large energy cost baked into digital currencies like Bitcoin. He wants the government to study ways to make crypto innovation more “responsible,” reducing any negative climate impacts.
US Competitiveness. The executive order seeks to give the US a competitive edge over other countries when it comes to crypto development. This is especially significant now that China has effectively banned cryptocurrencies. Biden has tasked the Department of Commerce with “establishing a framework to drive US competitiveness and leadership in, and leveraging of digital asset technologies.”
This is important. Many countries would love to seize the future of financial services from the United States, and it’s uncertain whether the administration has the leverage to prevent this. The Blockchain Association said Wednesday that Biden “has the opportunity to ensure America remains the global leader for technological innovation for years to come.”
Digital Dollar. The Biden administration also wants to explore a digital version of the dollar. Biden isn’t saying whether the U.S. should launch its own digital currency. Rather, he’s calling on the government to place “urgency” on research and development of a potential CBDC.
The Federal Reserve released a report in January detailing the pros and cons of virtual money, but didn’t take a position yet on whether it thinks the US should issue one, as is being done in China.
Into the Mainstream
The positive reaction is no surprise given that the order contains a way forward and removes a key source of uncertainty for the industry. Ryan Selkis wrote on Twitter that “the devil is in the details, but just read the EO in full, and it’s about as good as it gets. Assuming we avoid WW3, it’s going to be a busy year for crypto engagement in DC!”
This is a really important milestone. Yet whether it promotes its stated objective of “innovation that works for all Americans, protects our national security interests and contributes to our economic competitiveness and growth” depends on the follow through. Coordinating a “whole-of-government” approach will be difficult.
Public engagement in the process should now also be taken into consideration. According to the executive order, over 40mn Americans (or 16% of the adult population) have invested in, traded, or used cryptocurrencies. Their voices should be heard and influence the government’s official position.
Regulation is largely at odds with the founding principles of crypto — a stateless, libertarian alternative currency outside of the system — but this order proves it has now become too large to ignore and is integral technology for the advancement of the global financial system.
In the News…
- EU says Russia, Belarus sanctions extend to crypto
- Monthly web traffic to crypto exchanges fell by 20% in February
- Dubai creates agency for virtual asset regulation
- Sanctions in Russia increase as PayPal, Visa, and Mastercard suspend services
- FBI director: Russia overestimates its ability to bypass US sanctions using crypto
- Europe crypto regulations set to move forward — without Bitcoin ‘ban’
- Crypto mortgage lenders are entering the hottest housing market ever
- Singapore’s strict approach to crypto
- State Street inks institutional crypto custody deal with Copper
- Congress could see stablecoin bill by end of March
- Bain Capital Ventures launches crypto-focused fund worth $560 million
- Skybridge Capital founder doubles down on $100k Bitcoin prediction — expects BTC to reach $500K long-term
Legacy Markets
Global markets saw a risk off sentiment this week. Oil futures slipped -1.6% and the SPX dropped -2.4%. 10-year US treasury yields rose 14bps, the US Dollar index rose +0.8%, and the Gold & Silver index rallied 7%.
Crypto Markets
- BTC/USD and ETH/USD dropped -7.1% and -8%. The total market cap of the crypto universe fell below $1.8tln mark and Bitcoin’s dominance stayed north of 42%
- Among other majors SOL fell -13.2%. CRV plummeted -18.4%
- Annualised realised volatility in crypto markets did not change vs previous week levels: 68% for BTC and 82% for ETH
Flows
- Strongly bid client activity (49x buyers vs sellers) but on muted volumes
- Net buyers in BTC, ETH and SUSHI
- Mild buying activity in SOL and LINK
Q9 Capital: www.q9capital.com
