Q9 Markets: The Long and Short of It
27th August 2021
Q9 Capital: www.q9capital.com
- Crypto down/flat after longest run in 9 months
- Number of short term indicators signal a cooling
- But 73% of financial professionals think their business should adopt blockchain and crypto
Cryptocurrencies were mostly lower or flat this week after a period of extreme bullish sentiment has started to wane. After breaking above $50,000 last week for the first time in three months, Bitcoin closed the week below $47,000 (+0.5%). ETH closed at $3,100, dipping -2.6%. BTC has reached nosebleed heights after its longest run in 9 months. Just like in mountain climbing, a period of acclimatisation is often required before ascending to new altitudes.
High beta Alt-coins and DeFi generally took a bigger hit than BTC and ETH this week. Some of the coins like UNI, SUSHI and ZRX have been highly big in past weeks, having recently rallied to record highs and outperformed Bitcoin and other majors. A pullback at some point was inevitable as investors reduce exposure and take profits. The move seems typical of a breather often observed after previous notable rallies. Sushi was the notable underperformer, falling -17.1% over the week.
There are now a number of indicators that signal Bitcoins ascent may slow…
- Exchange inflows. In a reversal of the trend we noted last week, there has been a pickup in exchange inflows. The number of Bitcoin held in exchange wallets is rising, departing from the recent trend of outflows and a signal of renewed investor intention to sell. Over the past week more than 29,000 BTC have been moved to exchanges. Investors typically move coins from their wallets to exchanges when they plan to sell.
- Funding rates are still relatively low. This is most likely because fewer people are keeping their coins in exchange to use them as leverage. This means most of the rally has been driven by demand in spot rather than from leveraged speculators. Relatively low funding rates in Bitcoin’s futures market indicates less exuberance among investors.
- Declining internet search. Google Trends indicates that searches for the phrase “Bitcoin” are at a 9-months low and retail interest in this bull market has yet to break through the late 2017 peak. However, Searches for “Cardano” are surging strongly as ADA approaches $3.
- Whale accumulation falling. Whales, or large investors with an ability to make or break market trends, who accumulated coins after the mid-May price crash, have begun running down their inventory. The supply held by entities with a balance of 1,000 BTC to 10,000 BTC has declined by nearly 75,000 BTC over the past three weeks, diverging from the rising price.
- Options markets indicate caution. The options markets skew and open interest change for short tenor BTC options are more concentrated on puts than calls indicating some caution. Typically we might see more euphoria and leverage to the upside following the recent move.
However, the medium and long-term prospects of crypto still look extremely promising, with institutional demand being a major driver. Just this week alone Citigroup, Wells Fargo, MUFG and Walmart began their ascent into crypto (see “In the News” below). And as we wrote about last week in “Banking on Crypto”, 55% of the world’s largest banks are now invested in crypto and blockchain-related companies. This trend is likely to accelerate into 2022 as crypto truly becomes mainstream.
Financial Professionals Bullish on Adoption
Deloitte’s annual global blockchain survey certainly agrees with this sentiment. It found that 76% of finance professionals think digital assets “will serve as a strong alternative to, or outright replacement for, fiat currencies in the next 5–10 years”. 81% of respondents agreed that the technology is “broadly scalable and has achieved mainstream adoption.” 73% thought that their business should adopt blockchain and digital assets, and would lose a competitive advantage if they do not adopt the technology.
In terms of potential barriers, 65% considered existing financial infrastructure among the biggest obstacles to the acceptance of digital assets. 63% thought cybersecurity is another barrier, and 60% saw regulatory obstacles.
Trading and Investing
While we normally emphasize that one should remember what is really being built to separate the signal from the noise it’s not to say that there aren’t many of you out there with a much more tactical approach. Perhaps this week’s bearish indicators are interesting enough to make something out of your short term views. This can easily coexist with seemingly contradictory news of the continued adoption of crypto, and peacefully sitting with contradiction is an essential part of grace. However, these short and long term views may not be contradictions at all. We’d propose that they can perhaps be the natural development of the market, one that is going from trading to investing and who’s players are changing. If I had to choose one for now though it would be the long view. We are still so small with much growing to do.
DeFi Adoption Is Still Far From Mainstream
Mainstream adoption of decentralised finance (DeFi) protocols remains at an early stage relative to the wider crypto industry, a Chainalysis report released Tuesday said.
In its “Global DeFi Adoption Index,” the blockchain data firm found that while DeFi adoption has increased significantly over the past 18 months in both emerging and developed markets, most of that growth has occurred in countries and regions with middle and higher incomes and more professional investors and traders. DeFi adoption “has primarily been powered by experienced cryptocurrency traders and investors looking for new sources of alpha in innovative new platforms, even when we weight our index to favor grassroots adoption,” the report said. Standout countries exemplifying these trends are the United States, China, Vietnam, the UK, and several other Western European countries that rank high on the DeFi Adoption Index.
The firm also released their 2021 Global Crypto Adoption Index, which we covered in our previous weekly.
In the News…
- Bitcoin in Afghanistan: In a recent investigative report, CNBC looked into the use of cryptocurrency in Afghanistan. The country primarily operates on a cash economy, but some Afghans are adopting cryptocurrency; in fact, in the last year, the country ascended from being among the lowest in grassroots crypto adoption last year to number 20 on Chainalysis’ Adoption Index this year.
- Citigroup is gearing up to sell CME Bitcoin futures. The bank is said to be fielding a surge in client demand for cryptocurrency exposure as bitcoin again mounts a climb toward $50,000.
- Coinbase has struck a deal with Mitsubishi UFJ Financial Group, betting the Japanese bank’s vast customer base (34m domestic customers) will help it secure a foothold in one of the world’s centers for digital asset trading.
- PayPal launches crypto buying and selling in the UK. The roll-out, which marks the first international expansion of PayPal’s cryptocurrencies services outside of the United States, could inspire further mainstream adoption of the new asset class.
- Wells Fargo on Thursday registered a private bitcoin fund with U.S. regulators, becoming the latest mega-bank with an indirect crypto investment vehicle for its wealthiest clients.
- Walmart is the latest Fortune 500 Company hiring a cryptocurrency expert. The position is responsible for developing the retailer’s “digital currency strategy and product roadmap” as well as identifying “crypto-related investment and partnerships,” according to the job posting
- There was good news for Doge fanatics this week as the Dogecoin Foundation resurfaced after several years of total media silence. According to an announcement on Tuesday, the foundation stated it was reestablishing itself in a bid to support the fiery-eyed Dogecoin (DOGE) community.
- Police in Victoria have seized nearly $8.5M in cryptocurrency, a record seizure for Australian law enforcement, as part of an investigation into online drug trafficking.
Legacy Markets
Oil futures rallied +6.5% over the week and the SPX advanced +1.5% on strong corporate earnings and optimism of an economic recovery fuelled by a commodity rally. The US Dollar index declined -0.5% and 10-year US treasury yields climbed 11bps ahead of the Fed’s speech on Friday morning US hours.
Crypto Markets
- BTC/USD was unchanged (+0.5%) while ETH/USD slipped -2.6%. Bitcoins dominance continues to hover below 44% as the total market cap ex-BTC stayed above 1.1tn
- EOS/USD declined -9.7% and SUSHI/USD was the key laggard among large cap DeFi names with a -17.1% decline
- Annualised volatility dropped to 67% for BTC and 61% for ETH this week
Flows
- Two-way activity on client pad slightly better to buy (1.1x buyers vs sellers)
- Rotation out of BTC to ETH and EOS
- Mild buying activity in LINK
Q9 Capital: www.q9capital.com
