The Weekly #196
Dwindling sentiment, GDP declines, and the Fed Horror Show
I’ve Got A Feeling We’re Not In Kansas Anymore
Crypto markets continue to be in a state of slow contraction with global market capitalization falling 7% over the past week.
Beta assets like BTC and ETH remain below support turned resistance lines. BTC recovered from its $37.7k but the asset as yet to show any convincing move to the upside. BTC finished April in its worth month in 2022 in what has, so far, been a glum year for cryptoassets.
Meanwhile, ETH has largely followed suit, falling 2.8% on the week and failing to keep close to its $3k level.
The second largest asset underperformed BTC. The ETH/BTC has continued falling in its descending channel path since 10th April which investors will likely take as the clear sign of risk-off sentiment in the market.
The Macro Environment
Crypto is shaped by the broader macro environment. Analysts often point to ‘accumulation trends’ continuing but this often negates the macro and short-term holder impacts on cryptoasset prices.
Equity indices have bled out due to hawkishness from the Federal Reserve. Higher rates mean growth stocks have had their future cash flows become discounted more steeply. The S&P 500 is now down 13.8% in 2022 which is the worst performance since WWII.
Regardless of the softening of the market, high inflation continues to cut into costs while consumer spending is sustained. A 9%+ inflation forecast for April is all the Fed needs to remain hawkish. But not so fast.
The most significant US macro data last week was the 1.4% decline in GDP. This means the US is 50% of the way in being in a ‘recession’ (2x quarters of economic contraction).
To muddy the waters further, not all analysts agree on the significance. Imports growing while exports shrinking have lead economists to believe this is temporary.
Ian Shepherdson (Pantheon Macroeconomics) shares this sentiment:
“This is noise; not signal. The economy is not falling into recession”
All eyes will be on May’s FOMC meeting which has often coincided with large positive moves in equities before released minutes drive sharp market drops.
The reality is the Fed the inbound of rate hikes will lead to slower growth. Easing ‘clogged’ supply chains require resolution on a number of fronts including Ukraine. Traders now place near-even odds on 75 BPS rate hike in June which
So while the market is likely already pricing in aggressive Fed rate rises, it’s not clear if the market is pricing in the pace of these rate hikes over the next year. We are now at the cusp of pricing in a more aggressive path against economic slowdown. In this outcome, growth stocks and crypto will feel the heat and it feels like we’re walking this path already.
That being said, a change in The Fed’s tone will mark the path for recovery. In this environment, limited consumer spending after periods of declining GDP may become their north star. What is not clear is when this will be. The complexity fo the macro piece means we have to pay attention to the near-term as much as the longer-term.
So much lands on the Fed’s decision making - the need to create a soft landing during a dark & stormy night.
Since its November 2021 peak, crypto markets have retraced ~43%. YTD lows were even more extreme, printing a 50% decline from its peak. This mirrors broadly similar ranges seen in 2019 and 2021 peak falls where markets contracted 55% and 56% respectively.
While the overall market structure and macro environment is undeniably different from those periods, history often rhymes. Note that all declines also have differing durations from peak to bottom.
A re-trace back to these support lines as the wider market considers a more aggressive Fed would mark a further 12% drawdown from current price levels.
At the sector level, beta has largely outperformed to the upside and downside - recently as well as YTD. Unsurprisingly, more speculative sectors such as NFTs have been hit the hardest with the sector falling nearly 80% YTD.
It would indicate that appetite to deploy capital down the risk continuum for investors remains limited and has been the primary areas for investors to de-risk to safety.
There are also potential cause for concern around long liquidations, potentially adding significant downside volatility if bulls are caught out.
Open interest (the number of open position in Bitcoin’s perpetual futures market) remained elevated at 374k BTC. Aggregate funding rate is also moderately positive (+0.006%) meaning markets is skewed bullish.
A soft market turning prices lower may lead to traders offloading their bullish putting downward pressure on prices. Ratios like OI/MCAP are useful for gauging the degree of concern. OI/MCAP is near annual highs (0.02) but below levels coinciding with more extreme liquidations.
The ratio between decentralized exchanges and their centralized counterparts increased to 10.2% in April. This ratio has been steadily increasing since March 2021 indicating DEXs are becoming a more favourable place to trade relative to centralized platforms.
Orca, a Solana-based DEX is seeing continued growth in daily volume ($160m+) which is competitive to other ecosystem DEXs including Osmosis, and Sushiswap.
The release of Orca’s Whirlpools have been a driving factor where LPs can concentrate liquidity around certain price ranges similar to Uniswap V3.
Anchor protocol’s total value locked has diverged from wider market dynamics - jumping 2x YTD. The vast majority of TVL stems from UST deposits (13.8B) while the total number of LUNA units deposited (borrower side) has fallen over 2022.
The yield reserve that helps supplement UST yield (~70%) is shrinking ~$5m/day with current pace depleting resources in ~40 days.
TVL may show promising growth on the surface, peeling back the onion layers reveals a challenging time for Anchor with solutions often being net negative for growth (growth vs. sustainability). Anchor now also faces competing products like Tron’s $USDD and NEAR’s $USN.
Very few names printing green for the week - globally and within DeFi. Overall indication of broad risk-off rotation by investors.
Top 100 (7d %):
Huobi Token (+0.1%)
DeFi (7d %):
Tornado Cash (+12%)
inSure DeFi (+0.6%)
Optimism announced OP retroactive airdrop for its users. Interacting with Optimism, DAO voting, Gitcoin donations were rewarded, rewards are not claimable yet.
Anchor is going to whitelist bSOL (Lido's wrapped stSOL on Terra) as collateral. Relevant improvement proposal was recently approved, along with a proposal to implement veANC escrow tokenomics.
Lido enters current Votium bribing round with 500,000 LDO ($1,680,000) for stETH pool. In order to be eligible for this incentive vlCVX holders have to vote for this pool.
Curve launched boosts on sidechains, now veCRV holders can increase their APRs on other chains, action required.
Balancer launched veBAL tokenomics. In order to receive veBAL users have to add liquidity to BAL/WETH 80/20 Pool and lock LP tokens.
The Regulatory State #31 - 5/1/22
US House bill proposal would extend CFTC’s reach over crypto exchanges. Pressure from the CFTC and certain legislators to further diversify agency oversight away from the SEC is gaining steam, and may force Gensler and the SEC to approve a spot BTC ETF sooner and ramp up regulation by enforcement this summer in an effort to rapidly expand the SEC’s scope of power.
Crypto Bill in U.S. House Would Limit SEC’s Reach Over Exchanges (Bloomberg)
CFTC Sets May Roundtable to Weigh Ideas Sparked by FTX’s Derivatives Push (CoinDesk)
Broker-dealers’ investment strategy to build integrated native web 3 tech stacks (custody, brokerage, and market making) is starting to bear fruit in anticipation of regulatory clarity and the not too distant opportunity to extend prime broker balance sheets into crypto.
French Bank, Delubac & Cie, First to Offer Regulated Digital Asset Services (Blockworks)
See PolySign to Buy Digital Asset Fund Administrator MG Stover for Cash and Stock (CoinDesk)
Banks and law firms are being dragged into the labor fight as bankers and lawyers flood into crypto, with firms ramping up their own books of business and pushing digital assets to the top of the corporate strategy pile.
Wall Street Firms Make Crypto Push to Catch Up With ‘Cool Kids’ (Bloomberg)
Crypto Industry Can’t Hire Enough Lawyers (WSJ)
Labor Department Criticizes Fidelity’s Plan to Put Bitcoin on 401(k) Menu (WSJ)
Global Market Cap
$1.88T; Global market cap has fallen by 2% with risk-off sentiment extending.
DeFi MCAP And Dominance
$108B; DeFi market cap has fallen 8%, more than global MCAP over the past week. DeFi dominance has fallen 6% over the same period. It appears macro factors has led DeFi, which lies further down the risk continuum, to be a less attractive place for investors to deploy risk.
Relative Market Caps
Slight increase in Bitcoin dominance to ~47%. Bitcoin keeping relative value to most other cryptoasset names for now.
BTC/USD and ETH/USD
Bearish technical set up for BTC and ETH. BTC/USD unable to keep support at $40k with next support line likely ~$34k. ETH/BTC keeping in descending channel. Daily RSIs in neutral zones with room for further declines before a more sustained recovery.
BTC & ETH; BTC and ETH 30D vol has kept flat. Implied volatility remains low for BTC and ETH (1-6M) indicating traders continuing to bet on further price consolidation in general.
No notable change in put/call ratios for BTC or ETH. Last Fridays’s option expiry favoured bears keeping price below $39k ($350m profit). Increased leverage for Bitcoin with open interest climbing to annual highs. Funding rate remains positive for both BTC and ETH as traders take a predominantly bullish stance.
Combined Order Books
Order books much heavier on the bid side. Slightly heavier resistance up to $39k. (Source: Bitcoinity).
Crypto vs. Equities vs. Gold; Cryptoassets maintaining a very strong positive relationship to equities (0.95+ 30D). Bitcoin and crypto assets at large are being traded as growth stocks. For Gold, prospects of higher rates and strong dollar is driving interest away from the non-yielding asset.
GBTC; Trading sentiment became more bullish in early April for Grayscale’s GBTC product as pressure mounted for the SEC to approve its transition to a spot-based ETF. This has since reversed reflecting bearish sentiment trickling back in for investors. GBTC discount now stands at 25.62%.
ETHE; No significant change in ETHE discount over the past week (-26.93%). Discount is hovering above YTD ATHs and remains to be seen if traders step in closer to these levels if we see continued weak spot action.
Bitcoin Mempool Activity
Size in MB; The mempool size for the Bitcoin network has kept low indicating relatively low congestion on the network.
Bitcoin hashrate (7D) has increased 5% over the past week. Bitcoin mining difficulty has increased 5.56% - a new ATH for the network.
Bitcoin Electrical Cost
Bitcoin is trading above is production cost (see here for description of this metric by Charles Edwards). Price drops below the Bitcoin production cost are brief with the electrical cost of Bitcoin (cost to product Bitcoin) has represented a good price floor for BTC during bearish periods. Electrical cost is ~$20k and could be the price target if we saw a severe capitulation event.
On-chain real (BTC) & off-chain volume; BTC on-chain volume has increased 70% over the past week. Spot volumes falling to same degree - BTC spot volumes (7d MA) has increased 19% while ETH spot volumes has increased 18% over the past week.
Active User Base
BTC; Active entities (30d MA) has fallen by 02.42% over the past week.
BTC, ETH; Strong net outflows for BTC and ETH from exchanges ($3.8B and $3.26B respectively) - more assets are being withdrawn from exchanges than being added. The rate of net outflows continues to fall over the past week. Negative outflows has not been a reliable leading indicator for price.
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.