The Weekly #184
Momentum swings swiftly to bullish across crypto markets. Key signals needed to conclude that a fundamental shift in investor positioning is underway over a mini bull cycle in an overall bear market.
To Be Bullish Or Not Bullish? That Is The Question.
Crypto markets have seen an impressive recovery over the past week with global market cap climbing back above $2T. Performance was seen largely across the board but we can see slight dispersion at the asset and sector level.
While BTC has posted a healthy gain on the week (+11.3%) we have seen outperformance for ETH against BTC (~3%) over the same period with more speculative sectors like NFT and Metaverse posting the largest gains (+19.4%).
Bitcoin has cleanly moved back above the key resistance line of $40k and now trading at $43.4k. BTC dominance has also kept relatively steady at 47% despite wider market volatility over the past 3 months.
As highlighted last week, layering on risk should be transitional based on conviction on momentum swings. We outlined just a few of these signals including a break out the upside from the descending price channel and price stability on the short-term momentum indicator - the 50d EMA.
The first has hit with the second still pending but it is hard not to ignore how intense and convincing the move has been. Similar trend is playing out with ETH/USD which is on track to move back above its own 50d EMA.
So if momentum seems to be swinging bullish, where do investors apply risk?
The BTC Case
On-chain short-term momentum indicators are breaking into a bullish trend. The STH-SOPR has broken above 1 where younger coins are now in profit after 2 months of STHs were shaken out driving further capitulation.
Staying above 1 after re-testing that level would increase conviction but it would appear for now demand inflows are absorbing coins. Moving back below 1 and there is insufficient demand to support increased sell-pressure from STHs.
A narrative that has yet to take centre stage this year is around lightning network for Bitcoin payments. Core stats of LN are printing new ATHs:
Capacity = 3,416 BTC (+3 YTD)
# of Nodes = 20,104 (+6% YTD)
# of Channels = 85,777 (+3% YTD)
Like all core development, adoption will take time. Total capacity of LN is still tiny compare to the $821B BTC MCAP. Directionally, it’s promising. ATH grows comes after Block’s Cash App integrated LN in January this year.
We can also see that the recent moves was more likely driven by ‘real demand’ for the asset as opposed to leverage. Short liquidation levels appear minute ($100m 7D) compared to early 2021 squeezes with relative liquidation volumes for shorts to longs also being
As Genesis highlight in their recent market report:
“Perp funding rates in general are now trading around flat, implying positions are fairly neutral while the implied forward rate to June continues to remain around 6% mark.”
The ETH Case
If investors move to risk on, it is reasonable that investors look to more clear catalysts that tailwinds for select assets. In a way, this reflects the growth to value narrative that is likely to play out with the macro backdrop.
One of those assets is Ethereum. Technicals briefly showed bullish momentum for the ETH/BTC ratio having climbed above the 200d MA (although this is now under pressure).
Drivers include commitment in ETH2 staying strong as ever with deposits keeping consistent despite market turbulence - over 9.3M ETH is now staked, representing 9.3% of the total supply.
Another would be the wide range of scalability efforts that are coming to fruition.
The L2 TVL to Ethereum L1 TVL ratio is creeping to new ATHs (4.8%) while L2 TVL itself has largely oscillated around $6B for 3 months.
Exploits like we saw with Womrhole also highlight a bull case for trading Ethereum-based assets directly on L2s rather than through bridges connecting blockchains with heterogeneous consensus and virtual machine layers.
This is not to say bridges won’t be be successful. But their development time will only act as a potential tailwind for L2 infra build out and subsequent adoption.
The Case For Alts
The case for alts should a bullish momentum reversal persist is investors will be looking to deploy down the risk curve. BTC is a bad defensible asset, often underperforming on the ups and downs on arbitrary time scales.
Empirically, we can see that alts have already posted the largest gains with mid-ranked names in the top 100 assets included on the 7D leaderboard.
Highly speculative assets around the Metaverse and NFTs like MANA have bounced hard from their drawdowns from ATHs (70%+)
Alternative ecosystem plays like NEAR and MINA continue to act as proxy plays on future utility growth
These performant assets can often very liquid meaning accessibility for investors is high
From the macro piece too, Powell has clearly stated the need to be ‘nimble’ in light of balancing employment pressures and recession factors with rates hikes.
Raised rates and steepening of the yield curve will put pressure on high growth risk assets but perhaps a better question to ask is how likely The Fed (and the market) is overestimating the need to raise rates 5-6 times?
How quickly could we see a macro environment that becomes somewhat supportive for cryptoassets?
Of course, it is a separate question whether crypto fundamentals can be decoupled with the macro piece altogether.
As always, time will tell.
Top performing assets are more speculative assets indicating a renewed interest by retail traders. Risk appetite appears to have increased dramatically compared to the past 3 months.
Osmosis has been a top performer for the past week, climbing 33%. TVL has increased to $1.3B (near ATHs) while volume is still ~60% lower than highs earlier in January.
We are starting to see application chains that leverage Tendermint like Osmosis start to make headway.
We are seeing a larger divergence between total value committed to the Anchor protocol and ANC/USD. Anchor will be raising LTV for bLUNA to 80% today.
This theoretically increases the capital efficiency of the lending market and drive further protocol revenue (all else equal).
Pika Protocol, a perpetual swap exchange on Optimism, has increased vault capacity to 5 mil USDC. Current APY is 5% with 7% utilization.
Hop, a multichain bridge, partnered with Gnosis to boost liquidity on Gnosis Chain (ex xDAI). 150 GNO will be distributed to ETH, DAI and USDC LPs, current APY is 13.8%, 16.0%, 16.5% respectively.
Stake DAO launched Passive USD Strategy on Harmony Network leveraging Curve 3pool. Current APY is 27.5% including wONE rewards.
Lido and Saber renewed rewards for stSOL / SOL pool, 4\0,000 LDO and SBR are allocated for the month of February.
Futureswap, a perpetual swap exchange on Arbitrum, updated their incentive program. 92,400 FST will be distributed to traders and LPs in the new epoch.
Big wins this week point to US regulators maturing and lawmakers supporting smart legislation. SEC Approves First National Blockchain-powered Boston Security Token Exchange (Blockworks). Provision in House Bill Allowing Treasury Secretary to Block International Crypto Transactions to Be Removed (CoinDesk). Provision in House Bill Allowing Treasury Secretary to Block International Crypto Transactions to Be Removed (CoinDesk)
SEC opens accelerated 30 day comment period regarding proposed ATS regulations. SEC’s Lone Republican Warns of Threat to Crypto DeFi Platforms in New Agency Plan (Bloomberg)
Russia is positioning as a global crypto market leader and shifting rhetoric from an outright ban to active regulation and transparency. Russia Values Local Crypto at $200 Billion as Rules Near (Bloomberg). Russia's Minister of Finance Suggests Letting Banks Sell Crypto: Report (CoinDesk)
Global market cap: $2.01T; Global market cap has increased 18% but still down 22%, fully recovering its losses over the past 30D.
DeFi: $152B; DeFi market cap has increased 14% but DeFi dominance has fallen 7% as the sectors lags slightly to the wider market.
Market shares; Bitcoin dominance has stayed around 47%. Dominance has kept relatively steady despite wider market volatility over the past 3 months.
Price action; BTC/USD and ETH/USD above $40k and $3k respectively. BTC RSI (14d) fast approaching overbought while ETH/USD is neutral. ETH/BTC under pressure to keep above 200d MA. FTM and NEAR outperforming against other ecosystem assets YTD.
Volatility (BTC & ETH); BTC 30D vol has crept higher for both ETH and BTC over the past week.
Combined order books; Order books heavier on the ask side. Heavier resistance up to $45.4k (Source: Bitcoinity).
Crypto vs. SPX; Correlations between crypto and equities is falling driven by performant cryptoasset prices relative to their equity counterparts. Wall street shares are starting the week up.
GBTC premium; No noticeable recovery in discount over the past few days with premium remaining near ATL levels. GBTC volumes kept flat over the past week.
ETHE premium; Similar dynamic with ETHE with the discount at 24%. Overall descending trend with limited evidence of buyers stepping in. 30D volumes nearly 50% lower than November highs.
Bitcoin Mempool activity (Size in MB); The mempool size for the Bitcoin network has spiked along with the recent volatility although remains much lower than 2021 levels (higher congestion).
On-chain real (BTC) & off-chain volume; BTC on-chain volume has increased 3% over the past week. BTC and ETH spot volumes have fallen 28% over the past week (7d MA).
Hashrate & Difficulty; Bitcoin hashrate is just under ATHs with small increase in mining difficulty (+0.18%).
Active addresses (BTC); Active addresses (30d MA) has fallen 1.8% over the past week and is at lows since September 2021.
Trader positioning; Aggregate perpetual funding rates remains very slightly positive for BTC markets while OI while BTC-denominated OI has fallen 3% in the past week (-4%) while ETH-denominated OI has increase slightly (<1%) over the same period.
Higher put/call ratio for BTC and flat for ETH (divergence).
Omenics Sentscore (BTC); Elevated sentiment given spot action and recovering from multi-year lows.
Exchange inflow/outflow (BTC, ETH); Exchange flows have moved from net positive to net negative, particularly for BTC. This would indicate BTC has gone through an accumulation phase.
🎙️ Where Could The Bull Case Be Wrong? [Between2Chains]
🎙️ Agoric [Epicenter]
🎙️ A Dip Into The Mempool & MEV [Zero Knowledge]
🎙️ Contemporary Proofs of Reserves [On The Brink]
🎙️ Consciousness, Panpsychism, And The Philosophy of Mind [Lex Fridman Podcast]
The information above does not constitute an offer to sell digital assets or a solicitation of an offer to buy digital assets. None of the information here is a recommendation to invest in any securities.