Q9 Markets: The Real World

13th August 2021

Q9 Capital: www.q9capital.com

• Crypto passes $2tn mkt cap, shrugging off some bad news
• High beta Alts and DeFi outperform
• +$600mn stolen (and returned) in Poly Network hack

The Real World

The combined value of the world’s cryptocurrencies hit $2 trillion on Wednesday afternoon for the first time in nearly three months, reflecting a wave of renewed optimism in the space.

This all seemingly happened during a week where bad news followed bad news, including a major exchange hack and US regulatory and tax changes. It appears that we are back in bull mode territory where the market can brush off any bad news and doesn’t seem to care much about any negativity — this is exactly the opposite of what we saw in June, when all good news somehow appeared to be received as bad news and the market tanked/stagnated. It’s never as bad, or as good, as it seems…

The third consecutive week of this fresh crypto rally saw a whopping gain of $182bn in the total crypto market cap. BTC and ETH post weekly gains of 8.7% and 7.6%, bringing their 30-day run to 36% and 57%. On Wednesday BTC touched a 3-month high of $46,735 and reached ETH $3,269. The total market cap surge above $2tn now means that crypto is larger than all but two companies (Apple and Microsoft). However, after the gains seen early week, the market tailed off late slightly. BTC is lower for a third straight day, slipping toward $44,000. Prices for ETH are also marginally down holding just above the $3,000 level. The Greyscale discount has also returned to -10%, suggesting a cooling demand.

High beta ETH and DeFi names (SUSHI, UNI, YFI, etc) have now taken the reins and are outperforming. As such, BTCs dominance has started to wane again, now fliting with 45% as total market cap of the crypto universe ex-BTC crossed $1tn. We have seen this pattern multiple times before — first Bitcoin rallies, then Ethereum rallies, and then the Alts rally. The rotation from BTC to ETH and other Alts could impact the price of BTC — the trading volume of BTC has already declined, and its momentum indicators are slowing down as well.

Daily funding rates on Deribit listed Bitcoin perps spiked over the weekend before dropping again below historical mode of 3bps as the momentum lost steam giving up some of the gains. When the funding rates are low it normally indicates that this rally has been led by spot purchases, meaning market participants are buying physical coins instead of jumping into the market using leverage.

Basically, we’ve seen a renewed strength in the market the last few weeks that has changed the mood but cooled off in the last couple days. None of this is new (see chart below), we’ve been here before a couple of times.

Total Crypto Market Capitalisation and Volume, USD, 1 Year

Source: Trading View

How different did you feel when we passed this mark on the way up and on the way down previously? The first couple times were euphoria followed by despair and now is it cautious optimism? Perhaps it’s time to zoom out again and see all this as just the short term price on the continued adoption of crypto. Adoption means crypto being part of the framework of people’s lives, not an alternative universe. This week’s news continues to show how mainstream crypto has become.

Meanwhile, in the real world…

No longer in Kansas (or Texas or Alabama)

Senators voted on Wednesday to support a $3.5 trillion blueprint for President Joe Biden’s agenda. The bill paves the way of expansion of federal involvement in reducing poverty, protecting the environment and improving care for the elderly, Bloomberg reported. However, it includes some controversial amendments to crypto reporting and taxation (as we discussed last week). This sparked major figures in the Senate like Ted Cruz to do what they do and stand up and talk. This has to be the most times the word ‘cryptocurrency’ was ever uttered on the Senate floor in regards to a bill. In the end, the changes were blocked by Alabama Senator Richard Shelby who also wanted include more defence spending (also a Republican btw). And to take a peak back at the markets, we saw only strength and little FUD. There must have been a few buyers.

As it stands, the bill aims to require crypto “brokers” to comply with IRS reporting requirements and report specific information about crypto transaction, with the intention of raising $28bn over 10 years. It also means “brokers” have to give Form 1099s to their customers and file them with the IRS. The House will be in recess until September 20 and so for now, the taxation requirements on crypto-related businesses are still in limbo.

PolyGone

Hackers stole $610m in what appears to be one the largest cryptocurrency heists ever. The cybercriminals exploited a vulnerability in Poly Network, a platform that looks to connect different blockchains so that they can work together. They ended up taking thousands of digital tokens such as Ether. In an incredible twist, the hackers have now returned all of the stolen crypto tokens. Transaction details can be seen here. A person claiming to be the hacker behind the heist says the theft was done “for fun”.

The theft illustrated the risks of the mostly unregulated and nascent DeFi sector. DeFi has become a key target for attacks. Since the start of the year until July, DeFi-related hacks totaled $361 million — an increase of nearly three times from all of 2020, according to cryptocurrency compliance company CipherTrace. DeFi-related fraud is also on the rise. In the first seven months of the year, it accounted for 54% of total crypto fraud volume versus 3% for all of last year.

Portfolio Macro Strategy

MicroStrategy and Bitcoin mining stocks also rally as the BTC price rebounds. Companies that specialise in Bitcoin mining have generated immense profits, and a handful are listed. Meanwhile, MicroStrategy has amassed a Bitcoin portfolio in excess of 105,000 BTC in its treasury as a way to hedge against inflation, making its stock somewhat correlated with BTC. Institutional investors are typically restricted from investing directly in Bitcoin and other cryptocurrencies and obtain exposure to the crypto sector by investing in mining stocks, MicroStrategy, Greyscale and other proxies.

Feel the Burn

Since the “London hard-fork” upgrade last week, the Ethereum network has now burned $100mn in ETH due to the introduction of a transaction fee burning mechanism. According to burn tracking site WatchTheBurn, 35,800 ETH has been destroyed so far since the upgrade occurred. This represents about half of the amount of ETH that was issued in this time to miners as a reward for creating blocks (and processing transactions). About 66,700 ETH ($200mn) was issued in this timeframe. The London upgrade contained a change referred to as EIP-1559, which was focused on simplifying the transaction fee process. It split the fees into two: a base fee that gets burned and a priority fee that is effectively a tip to the miner.

A Sea Change

The market for non-fungible tokens (NFTs) appears to be more than just a flash in the pan. NFT trading platform OpenSea’s Ethereum transaction volume overtook that of long-time league-table leader Uniswap, the biggest decentralised exchange on the network and becomes the network’s top gas guzzler. OpenSea users have collectively pitched in close to US$3mn worth of ETH transactions over the past 24 hours, while Uniswap users have paid US$1.6mn. The NFT exchange also hit another milestone on Sunday with its daily NFT trading volumes hitting a record high of over $78 million. The peer-to-peer marketplace for crypto collectibles and NFTs, last month raised US$100 million in a funding round led by Andreessen Horowitz.

This insane growth puts OpenSea as one of the most preferred destinations to launch NFTs. OpenSea alone grabs a massive 90% share of the NFT market. Simultaneously, the NFT gaming market has seen exponential growth with trading volumes surpassing that of the DeFi market.

OpenSea Daily Volume, USD

Source: Dune Analytics

In the News…

• U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler wants his agency to have greater authority and resources to crack down on the crypto sector. In a letter to U.S. Sen. Elizabeth Warren (D-Mass.), Gensler said Congress should grant the agency with additional oversight and enforcement abilities to monitor “transactions, products and platforms” in the U.S. crypto sector.
• Coinbase brought in roughly $2 billion in second-quarter revenue, with the vast majority of that amount coming in the form of transaction revenue from its retail customer base.
• Elon Musk, Jack Dorsey, and Ted Cruz are among those criticizing planned crypto tax rules, which could help fund the infrastructure package.
• PNC, the fifth-largest commercial bank in the U.S. by assets, plans to offer crypto investment services to clients. The bank is partnering with crypto exchange Coinbase as well as Tesla CEO Elon Musk to complete the project.
• A commodity-focused fund managed by Neuberger Berman, an asset manager with $400bn AuM, has opened the door to exposure to Bitcoin and Ether derivatives and investment vehicles, according to a regulatory filing on Wednesday.
• The Helium Network, a decentralised peer-to-peer 5G wireless network, has raised $111 million in a token sale led by Andreessen Horowitz.
• Lionel Messi’s transfer to Paris St. Germain (PSG) from FC Barcelona included a payment in crypto fan tokens. The tokens are designed to spur fan engagement by offering them voting rights on minor decisions in their clubs’ operations.
• James Quinn, Managing Partner at Q9 Capital, spoke with Henri Arslanian about “Why and How Private Banks and Wealth Managers Are Entering the Crypto Space”. Listen to it here on Spotify, Apple, Google or Stitcher.

Traditional Markets

10-year US treasury yields climbed 14bps and the US dollar index rose +0.8% on the recent tapering debate while the Gold & Silver index dropped -4.8% from its previous week levels. Oil futures slipped -0.3% on concerns that the delta variant spread might slow demand recovery while the SPX printed fresh highs rising +0.7% week-on-week. While most of the global stock bourses have been hitting new highs, the MSCI AC Asia index has dropped more than 10pct from its February high.

Crypto Markets

• BTC/USD & ETH/USD rallied +8.7% & +7.6% respectively. Bitcoins dominance continued to flirt with 45% as the total market cap ex-BTC crossed the 1tln mark
• LTC/USD and EOS/USD rose +15.1% and +10.9%. Among large-cap DeFi names-SUSHI/USD & YFI/USD saw an uptick of +25.8% & 12.3%
• Annualised volatility subsided to 66% for BTC while it rose to 94% for ETH this week

Flows

• Our client pad was bid up (3.2x buyers vs sellers) during last week
• Net buyers of BTC and EOS and net sellers of ETH
• Mild buying activity in LTC and LINK

Q9 Capital: www.q9capital.com