Q9 Markets: Wake Me Up When September Ends

30th September 2021

Q9 Capital: www.q9capital.com

• Crypto has worst month since May
• Energy crisis and supply bottlenecks push inflation higher
• China bans crypto (again)

Bitcoin and other crypto assets are set to end the month of September on a negative note, thanks to instability in global financial markets, regulatory concerns and China’s decision to blanket ban crypto businesses. BTC has fallen 13% over the month and ETH has seen a drop of 20%. However, BTC has stubbornly held above $40k boding well for the general crypto market.

The positive market sentiment seen at the start of the month has been somewhat bogged down by a flurry of recent headlines. In crypto-land, SEC Chairman Gary Gensler doubled down on his call for crypto regulation and China’s decision to declare all crypto related businesses illegal (again) brought a fair amount of FUD to the market.

Add to this the turmoil in the China property market, the US infrastructure bill being in peril, and the US government facing a shutdown over a row concerning lifting the debt ceiling and there is plenty to talk about this week. Inflation concerns also continue to simmer, with a global energy shortage and rising prices for oil, natural gas and coal adding to the supply chain woes for all industries thanks to Covid etc. These supply bottlenecks have collided with the price of natural gas and coal surging to multi-year highs in the run-up to the Northern Hemisphere winter. The energy crisis, caused by supply restraints from the world’s top producers, has hit Europe and Asia hard and is poised to shutter factories and boost power bills. The energy crunch is also spreading to a sector that alarms Beijing the most: food. The crisis threatens to touch every corner of the global economy, squeezing supply chains and even increasing food prices, all of which means a jump in inflation.

Four of the world’s leading central bankers have warned supply bottlenecks are likely to last longer than expected and said they are watching for as-yet unrealised signs of them spawning a self-fulfilling cycle of higher expected inflation and wage increases. Jay Powell, chair of the US Federal Reserve, said it was “frustrating” that supply-chain bottlenecks were holding back the recovery and have helped to fuel more elevated price pressures.

A sign at a petrol station, in Bracknell England on Sunday Sep 26, 2021

So what does this all mean for crypto?

We have three takeaways from all this FUD…

• Crypto remains uncorrelated… The short-term reaction across all asset classes from negative macro news is always risk-off and crypto is (of course) very much a risk asset, so a brief and minor sell off is always likely. Over a medium-term horizon there is still no proper correlation between crypto and traditional assets such as equities and fixed income. Having a small allocation to crypto is a useful way to diversify a portfolio and dampen overall portfolio volatility.
• Bitcoin as an inflation hedge… The narrative surrounding Bitcoin remains that of a digital gold and an inflation hedge. Yet this hypothesis remains untested. If commodities price continue to explode and inflation hits in faster than expected, it is only a matter of time until Bitcoin’s potential as a store of value is recognized.
• DeFi proves difficult to regulate… One potential winner from the China ban is DeFi. On the news of a “CeFi” ban in China, decentralised exchanges and other protocols rallied. Decentralised exchange protocols can’t be shut down so this could prove an interesting use case for them. They can go after the developers and it is possible to block or shut down their front ends (websites, trading apps, etc) but the back end will live on. Regulating them will be much harder, although not impossible. This particular DeFi rally was short lived as Gensler focused in on the DeFi and broader crypto industry.

And if narratives aren’t your thing then look at the market. Despite some of the pretty marquee bad headlines any long term chart would tell you the market didn’t actually fall that much. Bitcoin is trading around $43k. You don’t have to be into technical analysis to realize, people are buying this market.

The Great Firewall of China (…Part 9)

China’s regulators clarified last Friday afternoon that cryptocurrency transactions and mining are illegal, the country’s strongest stance against crypto to date. In a statement, the PBOC said the rules are necessary to “maintain national security and social stability.” Beijing’s war of attrition with cryptocurrencies has a long history, but with crypto markets booming and the gradual rollout of China’s state-backed digital yuan, the government is getting more serious about cracking down. Nine different government agencies joined the central bank in its statement on Friday.

As well as tightening capital controls, the rollout of the digital-renminbi is likely a key reason for the prohibition. China is lightyears ahead of other countries around the world when it comes to the development of CBDCs, with the government launching its research efforts in CBDCs back in 2014. The Winter Olympics are just around the corner and expected to begin on February 4th, when many believe the e-CNY will be made widely available.

So what’s new this time?… Unlike its previous restrictions, this time around China is issuing a blanket ban on all transactions and business dealings that touch crypto. In its statement Friday, the PBOC called out bitcoin, ether, and even the stablecoin tether by name, saying they are not “legally reparable” and should not be used. Chinese e-commerce giant Alibaba has announced a halt to selling crypto-mining equipment and related software from Oct 8th.

Now, not only are financial institutions cut off from providing support to crypto-related businesses, but so are marketing and IT providers, the order said. In other words, any crypto holders or miners are now entirely cut off from legal business dealings in China.

Importantly, possession of crypto and P2P transactions are not covered and are not illegal in China.

Yet, despite the ban, the RMB/USDT currency pair continues to post significant volume while OTC desks remain active in the country. China-focused exchanges OKEX and Huobi still offer the RMB-USDT, as do Binance, KuKoin, and Gate.io. According to pricing data, price slippage is stable only down approximately 1% from the official RMB/USD exchange rate.

China Headlines and their Impact on BTC

Source: Kraken

Many of the China based exchanges are reportedly heading to Singapore. Singapore is open and tolerant of cryptocurrencies. Not just Chinese companies, but many international crypto companies are also moving there. Another reason is that Singapore’s culture is similar to China. As for the miners, many of these are heading westwards (Russia, Kazakhstan, Canada, Texas, etc) as we previously reported in Journey to the West.

In the News…

• Sam Bankman-Fried says FTX has moved its HQ from Hong Kong to the Bahamas because of its crypto framework. FTX had been considering the Bahamas for a while, as it is one of the first countries to roll out comprehensive regulation for cryptocurrencies.
• Cardano will soon have its first stablecoin, Djed
• R3, the startup that began with a consortium of banks trying to figure out how to use cryptocurrency technology in a private setting, is now looking to enter the vast expanse of decentralized finance (DeFi)
• Crypto job listings are exploding, with one popular board seeing 1,500% growth in paid postings in a year
• Facebook invests $70 million to build a ‘Metaverse’: What is it?
• First cryptocurrency fund approved in Switzerland. The fund tracks the performance of the 10 largest cryptocurrencies from SIX Swiss Exchange’s Crypto Market Index 10
• Chainalysis’ two-part webinar series, Breaking Down the 2021 Geography Report. Part One: The Global Crypto Adoption Index
• Far-right provocateurs are raising significant amounts of money from around the world through cryptocurrencies, which they are using in ever more secretive ways to avoid the oversight of banks, regulators and courts
• Thailand’s tourism body plans to launch its own crypto coin for visitors

Legacy Markets

Oil futures climbed +3.8% while the SPX dropped -0.8% amid inflation concerns and the continuing debate over the US debt ceiling. The US dollar index gained +0.9% and 10-year US treasury yields rose 22bps. The Gold & Silver index dropped -4.6% from last week’s levels.

Crypto Markets

• BTC/USD fell -4.6% and ETH/USD dropped -7.3% this week. The Crypto All-Cap dropped below the $2tln mark and Bitcoin continued to hold its dominance above 42%.
• EOS/USD dropped -12.9% and COMP dropped -11.8%
• Annualised volatility subsided in crypto markets, dropping to 51% for BTC and 82% for ETH

Flows

• Busy client pad with two-way flow slightly skewed towards clients buying (1.2x buyers vs sellers)
• Buyers in BTC and SUSHI; and sellers in EOS
• Two-way flow in LINK

Q9 Capital: www.q9capital.com