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Market optimism prevails - for now
It was a good week for cryptoassets with global market capitalization up 6.63% for the past 7 days. Monday morning is directionally the same with markets up a further 0.54%.
Key drivers of performance in risk assets last week included the perceived probability of Fed rate cuts in 2023 as well as pure technical signals.
For the former, easing of monetary conditions or a Fed pivot runs counter to the Fed’s commitment to keeping rates high to combat prices. For officials like Mester, rates don’t necessarily need to increase but to just stay elevated for some time.
The market continues to call the Fed’s bluff:
“You show me your 4% rates during prolonged economic contraction and I’ll show you the sell pressure.”
For the latter, the MSCI AC World Index appears to be in a relief bounce after the daily RSI gauge headed close to oversold territory. As always the relationship between equities and crypto remains strongly positive so moves (up or down) in the former largely informs the latter.
Zooming out, we could actually be seeing cryptoassets simply bounce around within a channel between $760B and $1.72T. A break out of this channel may inform the medium-term direction of the market more clearly.
The synchronicity model of ETH
There are also more endogenous drivers in cryptoasset price action too. The Ethereum merge (expected September 15th) is upon us and its narrative has now carried ETH/USD closer to 3 month highs.
The Merge ‘Premium’ Is Unwinding
However, as we noted last week, ETH/BTC rallied 60%+ from mid-July and traders looking to adjust the macro risks were rewarded well for trading this ratio.
We can see that from the 13th of July 2022 onwards, ETH/USD was no longer moving synchronistically with BTC/USD once both started recovering from summer lows. The former started to show a merge ‘premium’.
This merge premium appears to have largely been driven by the derivative markets.
The 13th of July marked the point where sizeable short liquidations lead to higher volatility which has continued to until today.
This period also marked the notable uptick ETH’s OI leverage ratio (futures open interest/market capitalization). In other words, open interest started outpacing price growth of the underlying asset itself.
This synchronicity framework for ETH’s price action around the merge implies that a full reset and unwind of ETH merge positions takes the asset’s price closer to where BTC trades using the 13th of July as the date benchmark. Today, that would be $1.2-$1.3k ETH.
Fast forward to today, and Bitcoin is reminding everyone who is king. The ETH/BTC ratio showed bearish RSI divergences on the daily and subsequently fell 7.4% from its September peak.
The other signal heading into last week was Bitcoin’s dominance which, when its hovered near 39% since 2021, the asset has bounced back and performed well on a relative basis.
A convincing break below this trendline would likely signal a changing of the guard is in play for the top market cap spot.
This move in ETH/BTC is notable given that last week, on-chain indicators suggested traders were opportunistically selling BTC in any meaningful rally, severely limiting its upside on its USD and ETH ratios. Therefore, this recent move points appears to driven by capital rotation where new demand outweighs the opportunistic sell pressure.
Futures open interest for BTC is outpacing its market cap at an accelerated rate. The futures market may now play a more significant role in price action for BTC alongside ETH.
Looking ahead, a risk for ETH over the coming days is the ‘first to blink’ mentality traders likely have.
The recent reversal in ETH/BTC may be traders making the first blink but those seeking the ETHPOW airdrop (hedged or unhedged) are still in the game up until the actual merge event. Therefore, it seems unlikely that we have seen the full extent of the merge unwind.
Alternative layer 1 blockchains have benefitted from ETH’s recent buckling including NEAR/ETH which is up 7.83% on Monday. The moves comes as the protocol moves ahead with phase one of four to complete its sharding upgrades.
Other ratios like SOL/ETH maintain their descending channel pattern trading on the midline for some time (directionless).
Breaks below the midline likely indicate more significant underperformance will ensue for the ratio.
“The biggest risk is not taking any risk”
On the macro side, traders are betting that inflation is near peaking. This is despite policymakers ramping up their hawkish rhetoric.
The YoY% change in US CPI is expected to cool at 8% tomorrow - a 0.5% decline from July’s print. Despite this, the Fed is expected raise rates by a further 75 BPS this month.
The decline in headline can be attributed to lower energy prices which, looking at WTI crude, looks to be directionally the same so far in September. Dollar strength has aided this move.
However, core measure that excludes food and energy are expected to accelerate so the picture remains somewhat murky for now.
The reality is the Fed has rarely pivoted while interest rates have been below CPI. Today, the gap is still large meaning CPI needs to come down significantly or the Fed needs to do much more lifting in order to cap prices.
Recessions have often lead to a decline in prices but historically a key driver has been a decline in employment which is not the case in the US today. Equally, forward looking economic indicators like the ISM remain in expansion territory.
So net, the US may already be in a recession but it feels we are a long way off from a severe one. Even in crypto we still see high speculative activity around retail names including Luna, Luna Classic and Ravencoin.
For now, market are risk-on. The dollar is weakening from its recent annual highs while US equity futures are rising 6% above their September lows.
As we noted in our Market Pulse channel, we see significant (~6-7%) breathing room in $SPX before a reset may be more appropriate and a healthy drop in CPI on Tuesday would be that perfect market drug for getting $SPX there.
However, QT acceleration, earnings re-rate, sustained higher rates to cap prices, and a strong labor market are all key considerations for evaluating the downside risk from current levels.
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Top performers over the past week are not fundamentally driven and are due to intense retail speculation or oversold on the technicals:
Top 100 (7d %):
Terra (+171%) - retail driven speculation
Ravencoin (+53.5%) - GPU bet heading into ETH merge
Terra Luna Classic (+50%) - driven by speculation around new supply burn rule
Rocket Pool (+38.1%) - illiquid high beta ETH play heading into merge
Helium (+23.8%) - relief bounce from its 30D 40% drawdown
DeFi Top 100 MCAPs (7d %):
Anchor Protocol (+65%)
Terra Luna Classic (+48.5%)
Mirror (+45.1%)
STP Network (+39.1%)
Rocket Pool (+38.1%)
Stride, liquid staking protocol on Cosmos, launched stATOM / ATOM pool on Osmosis with STRD rewards. 8,333 STRD will be distributed daily.
Diffusion Finance, AMM on Evmos (EVM-compatible chain on Cosmos), launched 3 pools with Celer assets: ceUSDC / ceUSDT (34%), ceWETH / WEVMOS (75%), WEVMOS / ceUSDC (108%).
Aave closed the ETH lending market in preparation for the ETH Merge. Supply APR is 8.4%.
Global Market Cap
$1.03T; Global market cap increased by 6.6% last week. Cryptoassets are extending gains (+0.7%) from increased risk-on sentiment.
DeFi MCAP
$48B; DeFi market cap kept flat over the past week but seeing a bounce in the week’s open (+0.75%). Potentially kept range bound between $43B and $60B.
DeFi Dominance
4.71%; No notable moves in DeFi dominance which indicates the sector is moving in line with the broader market for now.
Bitcoin Dominance
41%; Bitcoin dominance bouncing off its 2021/2022 bottom (39%). Momentum indicators signalled that the asset was oversold on a relative basis.
The BTC implied vok term structure less stepp over the past few days with short-dated (<1w) vols increasing over the longer-dated tenors which remain firm at ~70-72.
Trader Positioning
Largest call OI for Bitcoin options is $34,000 followed by $25k while largest puts OI is $15k.
Aggregate futures funding rates for Bitcoin remains firmly positive since the asset’s recent bounce indicating bullish trader positioning.
Aggregate futures funding rates for Ethereum paints a different picture - firmly negative as traders continue to hedge their spot positions heading into the merge this week.
Grayscale GBTC
Slight discount narrowing for GBTC (-31.25%) as BTC gets lift towards the end of last week.
Grayscale ETHE
ETHE discount narrowing too (-23.45%) heading into the merge but still kept within its descending channel for now.
Volumes
Global spot volumes have picked up 20% over the past week. Increased speculative activity and liquidations from the merge to Luna classic have likely been key drivers. On-chain volumes for Bitcoin remain elevated since its annual low in June.
Aggregate Order Books
Order books looks heavier on the bid side. Good support down to $21.6k and stronger resistance until $23k.
Bitcoin Hashrate
Bitcoin hash rate is up 4% over the past week. This strong recovery supports the idea of the end of miner capitulation in 2022.
This recovery comes as Bitcoin miners have been struggling with lower BTC/USD prices and rising costs. In Q2, 2022, Core Scientific Inc. and Marathon Digital Holdings Inc. each reported net losses topping $100 million.
📚 Solana NFT Sales Volume [Christian (33.3%)]
📚 For the War Dissection [RNR_0]
📚 Sudoswap, Fractionalization, and The Problem of NFT Liquidity [10Xdegen]
📚 Crypto Platform Launches ‘Dark Pool’ Citing Growing Institutional Interest [Blockworks]
📚 An Overview of Post-Merge Milestones for Ethereum [The Block]
🎙️ Gensler’s Latest Take on Crypto and Securities Rules [The Block]
🎙️ How to Build a Sustainable DeFi Protocol [Empire]
🎙️ Secular Inflation & the End of the Great Moderation [Hidden Forces]
🎙️ Building the Data Layer for Crypto [The Curious Leaners]
🎙️ Liquidity Matters [Real Vision]
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.