Q9 Markets | To Ethereum and Beyond

29 July 2022

Q9 Capital: www.q9capital.com

To Ethereum and Beyond

• ETH rally continues, option open interest reaches new record
• Institutional net flows into crypto funds +$371mn in last two weeks
• Uniswap rallies as DEX market share rises

The Ethereum led rally continued this week with the #2 digital asset posting gains of +9.4%, climbing to $1,725.47. Bitcoin closed at $23,843.89 and mixed results for other cryptocurrencies.

Ethereum, Bitcoin, Nasdaq, % 1 Month

Source: TradingView

Risk assets rallied mid-week after the widely expected 75bps Fed rate hike (a cumulative 225bps this year). Fed Chair Jerome Powell said a similar move was possible again and brushed off any recession speculation — even as US GDP declined at an annualised pace of 0.9% in the second quarter, marking two consecutive quarters of economic contraction.

The crypto options market is now abuzz as traders scramble to place bets ahead of Ethereum’s upcoming Merge, with open interest in the contracts reaching a new record of 4mn according to data from major exchanges. This demand is expected to continue as we approach the Merge in September.

ETH Total Open Interest All Expirations

Source: CoinDesk

The Ethereum to Bitcoin ratio has risen sharply over the last couple of weeks as the protocol rallied vs everything else. However, Vitalik Buterin has said that the Merge narrative is “not priced in” and will only start to gain momentum once the update actually happens.

ETH/BTC Ratio YTD

Source: TradingView

Surging demand for Ethereum is also highlighted by the number of addresses holding 10+ ETH reaching an all-time high of 309,787.

ETH Number of Addresses Holding 10+ Coins

Source: Glassnode

Two Sides of the Same COIN

A big watch over the next few weeks is the release of Coinbase’s quarterly results (to be published on Tuesday August 9th after markets close). The earnings report will provide details on the health of one of the worlds largest crypto exchanges, and further insight into the state of the market.

Coinbase has faced negative headwinds this week after a report from Bloomberg revealed the Securities and Exchange Commission, the regulator, is investigating the exchange operator for improperly allowing trading in tokens that should have been registered as securities. Cathie Wood’s Ark Invest has ditched over 1.4mn Coinbase shares worth $75mn — — reversing course on one of its most prominent investments.

The share price of Coinbase has fallen -75.2% year to date.

Coinbase (COIN) Share Price, YTD

Source: TradingView

Ebbs and Flows

Institutional demand for digital asset funds is picking up again. Crypto investment products saw inflows totalling $30mn last week, and $341mn the previous week — the largest single week of inflows since Nov ’21. Ethereum funds saw net inflows of $128mn, the largest since June ’21. These inflows imply a turning point in sentiment after a recent 11-week run of outflows for ETH funds. It also highlights investor confidence returning to the market as we near the Merge.

Weekly Crypto Asset Fund Flows by Asset (US$mn)

Source: CoinShares

Digital Asset ETP & Mutual Fund Net New Assets US$mn, Log scale

Source: CoinShares

UNIquely Positioned

Uniswap posted weekly gains of +28.6% and is up +88.8% over the month. The decentralised exchange continues to dominate the DEX market with its share of volume rising to 65%.

Uniswap’s 24-hour trade volume is a little over $1.2bn. This number is still significantly less than top centralized exchange Binance’s 24-hour trade volume, which sits at $25bn, implying that traders are still prioritizing centralized exchanges over decentralized ones.

UNI/USD, 1 Month

Source: TradingView

DEX Volumes on Ethereum with Uniswap’s Market Share

Source: Messari

Up in the Ether

Optimism has returned to Ethereum ever since developer Tim Beiko announced September 19th as a tentative date for the completion of the Merge — where the mainnet will coalesce with the Beacon Chain. However, the impact of the move to a Proof-of-Stake consensus mechanism may only become apparent once the upgrade ships.

Ethereum founder, Vitalik Buterin, claims “once the Merge happens, morale is gonna go way up… In narrative terms I think it’s not gonna be priced in until after it happens”.

There are a number of reasons for optimism. A major post-Merge evolution will be a shift of Ether to a deflationary asset. The amount of Ether issued will drop by approximately 90% as it will no longer be needed to incentivize miners. Falling Ethereum net issuance could cause a pump in its price due to the lowered circulating supply and strong structural demand. While inflation in many global economies remains at high levels, ETH may become the largest deflationary currency.

The Merge also signals the start of an era of a more sustainable, eco-friendly Ethereum. It eliminates the need for energy-intensive mining and instead secures the network using staked ETH.

It will also set the stage for further scalability upgrades not possible under Proof-of-Work, bringing Ethereum one step closer to achieving the full scale, security and sustainability outlined in the Ethereum vision.

The upgrade however is not without its risks. It isn’t easy to tinker with an engine while it’s running, and that’s essentially what Ethereum needs to do. It’s analogous to changing the engines of a rocket ship mid-flight with no downtime.

It is a complex operation with lots of money at stake and even with heavy testing that’s taken place, there may still be technical glitches on D-Day. Proof-of-Stake is a newer concept than Proof-of-Work and we can’t discount the possibility that there may be unexpected problems. It’s still an experimental technology.

However, if liftoff goes according to plan, the sky’s the limit and the upgrade will move crypto into a new epoch, ready to put in some serious lightyears and take on the universe.

In the News…

• European banking regulator ‘concerned’ about finding staff to oversee crypto
• Barclays joins list of investors backing crypto custodian Copper
• Binance CEO CZ sues Bloomberg subsidiary for defamation
• California overturns ban on political crypto donations
• Web3 digital identity startup Unstoppable Domains raises funds at $1bn valuation
• SEC lists nine crypto tokens as securities following Coinbase insider trading charges
• FTX in talks to buy South Korean crypto exchange Bithumb
• Podcast: Who should regulate the crypto industry?
• Kraken investigated for allegedly servicing crypto traders in Iran