Tessellations

9 min readApr 22, 2022

22nd April 2022

Bitcoin x equity correlation rises to highest in 10 months
UST becomes 3rd largest stablecoin
ApeCoin rallies 55% on land drop rumours

Crypto markets witnessed an indecisive week as traders weighed up the risks of a gloomy macro backdrop vs another week of positive industry developments (ie, the imminent launch of a spot BTC ETF in Australia and Commerzbank applying for a crypto license). Early week, the #1 crypto dropped to a five-week low below $38,000 briefly before retracing to previous week levels (-0.1% vs previous week) after a strong rebound. Bitcoin’s 300-day volatility slipped to a 17-month low and correlation with equities rose to its highest in almost a year. As a (still) new asset that trades actively 24X7 globally we continue to believe it has pared well while the global macro dynamics are rapidly changing- commodities printing fresh highs, bond yields rallying and supply chain getting disrupted. The latest report from Glassnode indicates that a big fraction of the market has already capitulated and there seems to be a strong demand for inflow between $35k-$42k price range which has quietly absorbed this sell off since the beginning of Nov 2021. What this means is that a large volume of investors who were active between August 2021 and January 2022 have seen the market price plunge significantly below their entry points which has resulted in a redistribution of the BTC supply to new hands that have been accumulating between the $35-$42k price range. Funding rates across exchanges on perpetual contracts remain flattish (or slightly negative), indicating most of the price action has been driven by spot activity. We continue to see an increase in client activity buying the dip through our YIELD product for BTC price range between $37k-$40k which is the lower bound of the price region since the beginning of the war.

ETH also dipped below $3,000 this week, ending the week down -1.8%. However (as we highlighted last week), unlike Bitcoin, funding rates remain firmly negative, and the current market is much more aggressive among shorts. Ethereum has a significantly different market structure than BTC, large amounts of ETH are staked in Beacon chain (where unlock period is currently indefinite) and locked in DeFi ecosystem. This reduces the amount of spot inventory available to trade resulting in traders using derivatives (swaps and options) to exercise their market views.

Yet there is still positive data for cryptos preeminent smart contract protocol. The volatility (both implied and realized) in crypto markets has been low. Implied volatility refers to options traders’ expectations for price turbulence over a specific period. Dropping volatility is somewhat akin to a recoiling spring. As markets become more coiled, buyers or sellers are ultimately forced to front up. This period of shrinking volatility is often met with violent unwinds — in either direction. Both BTC and (specifically) ETH implied volatility have dropped below the realized volatility after the market priced in bad outcomes of the war and fed aggressive hikes to deal with inflation. Implied volatility refers to options traders’ expectations for price turbulence over a specific period. Current price levels combined with the low implied volatility indicate more chances of a sharp move up. Historically, similar patterns have paved the way for big moves in Ethereum, but crypto markets have a habit of surprising you.

Coefficients of Determination

We’ve seen recent weakness in crypto, largely in line with the selloff in equities and other risk assets. Bitcoin’s 30-day correlation to tech stocks has climbed to highs not seen since July 2020. In particular, Bitcoin has been largely correlated with the Nasdaq 100 index, down -16.3% so far this year, while Bitcoin is down -14.6%.

At the same time, Bitcoin’s correlation to gold and commodities has plunged to all-time lows. BTC’s correlation with the Bloomberg Commodity Spot Index remains at a multi-year low, while its 50-day correlation coefficient with gold sits around minus 0.4, the lowest since 2018.

Bitcoin has been penned by many as a digital gold due to its supposed counteraction against inflation.

Bitcoin vs Nasdaq 100, YTD

Bitcoin has been penned by many as a digital gold due to its supposed counteraction against inflation.

It could well be that as Bitcoin is tested in a high inflation, rising rate environment for the first time, investors are choosing tradition over a new frontier. Gold has been an inflation hedge for millennia… Bitcoin for a matter of years. Or perhaps this is more about the player than the game? Crypto’s narrative as Web3 has attracted many of the same investors that use to get really excited about Web2 tech eating the world. And there’s no easier time to attract even more folks over to your narrative then when you are losing money. Anyone have some free time to watch NFLX this week? It’s truly a horror movie. If crypto’s either seen as primarily as “tech” (important) or held by the same paper/diamond hands as tech investors (more important?) than correlation with tech stocks is bound to go up. But what this also means is there is a longer term migration of investors from Web2 to Web3 and these if you can close your eyes and meditate a bit and look at longer time horizon you may just see the migration.

And this also doesn’t mean that BTC isn’t/wasn’t an inflation hedge. Check out the chart from Mar 2020. This is when the Fed and everyone else started throwing all kinds of money at Covid. How much of the BTC gain is inflation? And how much is tech? The whole chart is up. We will never know. Is gold just playing catch up? We could take it even farther back and see Gold rally from 2019. The point is that you can create any story you want if you just play with the chart. (You can make some great friends on Twitter if you are into that).

Short term correlations matter and tell you something. But they are better for traders. As investors we will need some more time to see where the money is moving.

Bitcoin Price from March 2020

Terra-torial Gains

Terra is on a tear. The protocols UST flipped BUSD this week to become the third-largest stablecoin in the world — with a market cap of >$17bn. Tether (USDT), the world’s largest stablecoin, meanwhile has a market cap of a whopping $82bn, and USDC ranks second with a market cap of $49bn.

Besides the difference in market caps, there’s also a fundamental difference in how these stablecoins are designed. USDC and USDT are built similarly, with attestations claiming that each company holds a dollar-equivalent asset for every stablecoin in circulation.

Terra’s stablecoin is, however, built much differently. Instead of a centralized entity holding traditional assets, be it cash or bonds, this stablecoin is designed to keep its peg to the greenback via a mint-and-burn mechanism and market arbitragers.

Here’s how it works: To create one UST, users must first buy and then destroy $1 of LUNA (Terra’s governance and staking token). The inverse is also true: Each time you swap $1 of LUNA for UST, you destroy one UST.

Because one UST always equals $1 worth of LUNA, there are many opportunities to make a profit whenever the stablecoin deviates from its peg. If, for example, UST drops to $0.99, arbitragers can always swap that UST for a $1 of LUNA and bag a small profit. They also destroy that UST in the process (which reduces supply and makes the asset scarcer).

Going Bananas

ApeCoin (APE) rose nearly 55% in three days as a ‘BAYC land drop’ rumor went viral. Owners of the popular Bored Ape and Mutant APE NFTs could receive virtual lands on the Yuga Labs’ upcoming “Otherside” metaverse.

Otherside will be an MMORPG game where players can employ their NFTs as native avatars or characters. A leaked investor pitch deck showed that Yuga Labs expects to earn $178 million by selling virtual lands, with APE acting as the de-facto token to process these purchases.

Some BAYC NFT owners claimed that Yuga Labs would sell the Otherside virtual lands via a Dutch auction. In doing so, the firm could set the minimum bid at 600 APE, about $10,700 at April 20’s price.

Given this potential use-case, demand for ApeCoin may grow higher, which could partially explain APE’s upside momentum in the last three days.

We will be adding support for APE coin very soon.

What’s Your Investment Horizon?

It’s very difficult to view tessellations and patterns when zoomed in closely. You need to take a big step back to view an intricate tapestry or a mosaic in its entirety. How long crypto’s high correlation with tech stocks, its negative reaction to rising interest rates, or its volatility persists is anyone’s guess. But in the grand scheme of things, these are minor details that will persist for ‘the short term’.

You need to ask yourself, what is your investment horizon? It’s possible that crypto tracks sideways or upwards or downwards over days, weeks or months, but over the long term the picture looks a lot different.

Bitcoin’s ability is to transfer value across both space and time. Transferring a billion dollars from where you are to Japan is easy. Transferring a billion dollars from where you are to the year 2040 is very very difficult. With inflation as it is, you’re not going to be able to do this with cash.

We are also starting to see adoption even from some of the most conservative players in the market, such as Germany’s second-largest bank, Commerzbank. These moves are the beginnings of a race to gain a competitive edge by being the first entity in its local market to offer crypto services.

These kind of moves will only speed up the adoption of crypto as a mainstream financial service. It also shows that the demand is already so high across the whole spectrum of banking clients that it compels entities that were previously hostile to crypto to completely change course. With press clippings like this coming out almost on almost a daily basis, you need to ask yourself… how big will the industry be and what will the market look like if you aggregate these headlines over a period of years or decades?

“If crypto succeeds, it’s not because it empowers better people. It’s because it empowers better institutions” — Vitalik Buterin

In the News…

North Korean hackers responsible for last month’s Ronin theft, FBI confirms
IMF publishes global financial stability report discussing Bitcoin
Goldman Sachs eyes collaboration with FTX as CEOs meet
YFI creator slams crypto culture, pivots to ‘regulated crypto’
Russia proposes using crypto as a foreign trade payment tool
Report: Germany is the most crypto-friendly country
Portugal grants first crypto license to Bison Bank
The Sandbox gears up to raise $400mn at a $4bn valuation
Hackers are stealing more crypto from DeFi platforms than ever before
Why an Argentinian town is investing in crypto mining
NBA teases Ethereum NFTs for playoffs after launching Discord server
Louis Vuitton releases new NFTs as fashion brands continue experiments in gaming

Crypto Markets

BTC was unchanged (-0.1%) while ETH slid -1.9% respectively on the week (8am). The total market cap of the crypto market just shy off $1.9tln mark and Bitcoin dominance hovered above 41%
Among other majors, EOS rallied +3.8% driven by EVM support launch this week, among dexes SUSHI rose +4.7% this week
The annualized realized volatility in crypto markets did not change- 67% for BTC and 78% for ETH this week

Legacy Markets

US Equities (SPX) dropped -1.2% as investors priced in more aggressive tightening measures by Fed to fight inflation
Treasuries sell off resumed,10 year US treasury yields rose +21bps as Fed endorsed possibility of two or more +50bps hike in interest rates while addressing labor market
The US Dollar index climbed +80bps while the Gold & Silver index plunged -6.6%

Our Flows

Heavily bid client pad (only buyers) during last week
Flow dominated by buyers in ETH and SOL
Buyers of BTC and EOS in modest volumes

Tessellations

Written by Q9 Capital

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