Q9 Markets: The Luminiferous Ether
3rd September 2021
Q9 Capital: www.q9capital.com
- Ethereum at highest levels since May
- DeFi breaking new records, TVL reaches $165bn
- NFT hype growing at breakneck pace
“Everything Ethereum” outperformed this week with ETH rallying to a 3 1/2-month high and DeFi and NFT tokens and marketplaces (the vast majority of which happen on the Ethereum network) breaking new records. The advance confirms a breakout from ETHs recent two-week trading range of $3,000 to $3,400, setting the stage for an extension of the bullish move from July lows near $1,800.
The latest move higher also represents an optimistic continuation of the Ethereum Improvement Proposal (EIP) 1559-driven rally.
Demand for ETH spiked last month in hopes that the EIP 1559 implemented on August 5th would remove a sizeable chunk of coins from circulation. The amount of ETH burned is now directly linked to network usage because the EIP burns a portion of fees paid to miners. The upgrade has burned a total of 176,103 ETH since activation, taking out 40% of the new coins issued, according to Etherchain. Recently, Ethereum’s daily issuance of mined coins fell below Bitcoin’s, indicating that the path of least resistance for ETH is to the higher side. In another positive signal, more than 781,000 ETH have been withdrawn from exchanges in August.
Daily ETH Burn
Market sentiment for ETH may have also received a boost from Offchain Lab’s rollout of Arbitrum One, an Ethereum scaling solution that uses optimistic rollups technology to process transactions at a higher speed and lower cost than the Ethereum mainnet. The Layer 2 landscape is early, but crucial to the continued scalability of Ethereum.
Recent options market flows also suggest investors are positioning for a range breakout in Ethereum. Options implied volatility has dropped off substantially from previous highs; however, there is renewed interest in ETH call options for September and December expiry.
DeFi-ing Gravity
ETH isn’t the only digital asset enjoying a booming summer. The universe of crypto-based lending, saving, and trading apps known as DeFi has been breaking records of late. This week, the total value locked (TVL) — the total amount of money traders have put to work via various DeFi platforms — broke previous all-time highs set in May, reaching $165 billion, signalling the burgeoning interest in blockchain-based financial applications that do away with intermediaries. Decentralised exchange volume also reached $82 billion in August — up 34% from July.
Institutional investors attracted by high yields are increasingly interested in DeFi — including payment company Square and Wall Street giants like J.P. Morgan and BlackRock. According to the Chainalysis Global DeFi Adoption Index, the share of DeFi transaction volume conducted by large institutional traders rose from less than 10% in mid-2020 to over 60% in the second quarter of this year.
In the last week Chainlink rallied 22.8%, UniSwap was up 17.3%, Compound jumped 14.1% and SushiSwap leaped 13.3%.
Cryptocurrency’s promise is to make money and payments universally accessible — to anyone, no matter where they are in the world. The DeFi movement takes that promise a step further. Imagine a global, open alternative to every financial service you use today — savings, loans, trading, insurance, wealth management and more — accessible to anyone in the world with a smartphone and internet connection. DeFi has emerged as one of the most consequential developments reshaping the cryptocurrency world. This is a movement that is gaining steam in every corner of the planet. Some of these new, exciting and experimental projects will inevitably one day become the global leaders in financial services.
The majority of DeFi projects are built on Ethereum, which has been a huge boost to the network and a tailwind for its price. Whether Ethereum will retain its crown as the go-to DeFi ecosystem, or whether that will change is one of the big questions in crypto. Polkadot and Solana are two popular competitors. In fact they all have promise, but they all won’t make it. Just over 20 years ago you could buy all kinds of internet names like Amazon and Pets.com. Not every name makes it. The internet certainly did however. Perhaps there will be room for all of the top protocols, DeFi projects and NFT platforms. In any event, crypto looks very strong and you can’t pick a winner if you don’t pick at all.
Volume on Decentralised Exchanges
Spot the Rebound
August spot exchange volume breaks $1 trillion for first time since May. Spot exchanges have remained under $1 trillion since June, during which volumes weighed in at $958.3 billion. July saw $651.2 billion. However, the month-over-month increase from July to August was 64% — enough to push spot exchanges above the trillion-dollar mark again. Binance boasts the majority of the market share, coming in at 70.1%. Coinbase followed with 9%, with FTX coming in next at 5.7%.
NFTy Business
The NFT market has recorded exceptional growth over the past year following an illustrious list of reputable brands, celebrities and public figures contributing to the space. Again, this is all a big with for the Ethereum network where most of the action is happening.
- CryptoPunks, a 10,000-strong collection of Ethereum-based NFTs, just surpassed $1 billion in sales
- Last week credit card giant Visa made a statement NFT purchase of a $150,000 CryptoPunk.
- This week, Japanese tennis star Naomi Osaka announced a collection of NFT tokens in the lead-up to the US Open championships.
- Clip art of a rock just sold for 400 ETH, or about $1.3 million. The transaction marks the latest sale of EtherRock, a brand of crypto collectible that’s been around since 2017 — making it one of the oldest non-fungible tokens (NFTs) on the block.
- Sotheby’s is hosting a sale of NFTs including Bored Ape Yacht Club (BAYC), a series of computer-generated monkey-themed avatars, from Sept. 2–9, which is expected to fetch between US$13.5 million and US$20 million.
NFT Marketplace Monthly Volume
In the News…
- Crypto platforms need regulation to survive, says SEC boss. Gary Gensler warns $2tn industry is too big to exist outside of ‘public policy framework’.
- Vast Bank has become the first bank in the U.S with FDIC insurance and a Federal Reserve charter to offer Bitcoin services. This comes after it was approved by the Office of the Comptroller of the Currency (OCC) in the United States.
- MetaMask, the non-custodial digital wallet that has become a key gateway to the world of decentralized finance (DeFI), said the number of its monthly active users hit 10 million in July, with the Asian market leading the growth.
- Christine Lagarde, president of the European Central Bank, said all cryptocurrencies, in which she included stablecoins and speculative assets, “are not currencies at all.”
- The Monetary Authority of Singapore (MAS) has placed crypto exchange Binance on the investor alert list. The investor alert list of the MAS provides a list of unregulated entities which may have been wrongly perceived as being regulated or licensed by the authority.
- SEC charges global crypto lending platform, BitConnect, and top executives in $2bn fraud.
- Cuba’s government said Thursday it will recognize — and regulate — cryptocurrencies for payments on the island.
- Central banks back CBDC project to affirm sovereignty. “Project Dunbar” could become the SWIFT of digital fiat currencies — if central banks can work together.
- Twitter could soon enable users to tip content creators using Bitcoin following the latest update to its “Tip Jar” feature.
Legacy Assets
Legacy assets saw a risk-on sentiment this week. Oil futures rallied +2.8% and the SPX printed fresh highs led by industrials at positive jobless claims data. The US dollar index dropped -0.9% as it took a cautious stance ahead of the US payrolls report. Elsewhere, 10-year US treasury yields slipped 10bps while the Gold & Silver index rose +2.9%. The US payrolls report tonight might help in solidifying views on the possibility of the Fed tapering, and how soon.
Markets
- BTC/USD rose +5.1% while ETH/USD jumped +22.3%. Bitcoins dominance dropped below 42% as total market cap ex-BTC tested the $1.3tn mark
- Among other majors EOS/USD rallied +9.2% and LINK/USD and UNI/USD were the top performers among large cap DeFi names posting gains of +22.8% and 17.3% respectively Annualised volatility rose to 95% for ETH but dwindled to 54% for BTC
Flows
- Evenly distributed flow on client pad slightly better to buy (1.1x buyers vs sellers) during last week
- Rotation from ETH to BTC
- Buying in EOS & LINK at modest volumes
Q9 Capital: www.q9capital.com
