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Thanksgiving’s Quiet Period
It has been a relatively quiet Thanksgiving weekend for the cryptoasset markets, falling ~2% since Friday with most of the volatility seen on Monday morning.
Global market capitalization appears to have found support at the $770B-$750B zone and still holding up above the 2018 peak.
For the bulls, we are starting to see a potential bullish divergence on the daily RSI but given market contagion fear post-FTX, it is unclear if such a positive outlook will materialise near-term.
Global exchange volume has also reached approximate support levels of $14.7B. Stability in trading volume may translate to stability in price action. This is because a a potential ~$15B floor in trading volume may market the remaining level of market interest regardless of what new headlines emerge relating to contagion and fallout.
For BTC, price action has been stale within the $16-$17k zone for ~3 weeks. Despite the severity of the uncertainty in the market, this has been somewhat impressive and may indicate the only sellers left are the ones with forced hands.
Around $15.7k seems to be the support zone with the mid range area of $17k-$17.1k being the next upside target to break.
The orange coin still trades below its 200w MA but it is likely the market is looking for some resolve in the cases such as DCG/Genesis to add to their deep value conviction.
For other traders, that deep value conviction can already be measured and identified.
On-chain metrics such as adjusted MVRV show BTC profitability is nearly at the worst it’s ever been. The average BTC investor has an unrealized loss of 37% with only 75 days have investors been worse off (i.e. 1.6% of days)
BTC’s outlook becomes even more positive for those using mean reversion modelling where there would be a 98.4% chance of BTC showing more positive price action.
However, the drawback of these models is they do not account for the unique macro environment we find ourselves in or market fallout risk.
In other words, they are narrow focused and deterministic.
Realized vol measures for BTC do indicate a potential sizeable move could occur short-term. Bitmex’s 7D VOL index is still within the low zone that has corresponded with higher vol moves. Again, key market updates such as DCG/Genesis are the most likely catalysts for price action (in both directions).
ETH’s relative performance to BTC is coming under pressure once again. ETH/BTC tends to oscillate around it’s 200d MA throughout 2022 as the market ‘ebbs and flows’ on ETH’s ability to lead the market. A period of weakness for ETH could see ETH/BTC revert closer to the MA level (-5-10%) for initial support.
A key driver in ETH’s price action has been large ETH holders moving assets to centralized exchanges. On Monday, it was reported that a ‘whale’ moving 73,224 ETH to Binance was to potentially result in significant sell pressure, driving ETH down by ~4% to $1,170. This move is still dwarfed by the earlier drawdown in mid-November.
The problem with these catalysts is the whale are only one part of the forecasting. The other is how the market perceives and positions before potential selling occurs. It can create a short-term negative feedback loop.
This is also amplified with more skittish market dynamics which we see today.
Assets down the risk curve have still generally struggled to outperform beta.
Assets like LINK have benefited from roadmap catalysts. LINK staking is to be released ~6th December which the market has already been positioning around.
Meanwhile SOL trades back closer to $13 - support found March-April 2021. Alameda still holds 13.25% of total SOL in circulation, preventing investors from seeing an attractive risk/reward at current distressed levels.
Binance-related BNB has benefited from FTX’s downfall and stated rescue plans for the market.
The good: CZ remains committed in providing transparency and assurance for the market.
Can this dynamic change? Absolutely:
The bad: The market hasn’t tied off concerns around Binance’s solvency. While this risk may be relatively low, it’s the market perception and current anxiety which is the true overhang on the market.
The ugly: The market starts acting and stress tests the system. Just like Terra, Tether, FTT, stETH, and FTX. Notice a pattern?
Using DCG/Genesis as the largest overhang on the market, scenario analysis can be applied to ETH price levels with the macro dynamics adjusting levels higher or lower:
The macro seems for favourable for the bears than for the bulls.
As highlighted in previous weeks, equities were at risk of overshooting and making the Fed’s job harder at manufacturing a tighter market environment.
SPX closed in on its 200d MA (+ 40W MA) into Thanksgiving but looks to reverse gains amid fresh Chinese lockdown protests weighing on sentiment. SPX printed a weekly gain of 1.5%, seeing new highs since early September.
The equity market has not yet fully reflected the risk of a US recession. After all, there are labor market signals that indicate the US is some way from a recession.
The air becomes thin >4,100.
Now, lockdowns measures have renewed concerns around issues including supply chains.
The VIX is also bouncing off its 2022 lows, marking a potential transition period from risk-on to risk-off.
Note, dollar is bucking the trend and continued to fall which could minimise equity drawdowns slightly.
It’s not all doom and gloom though.
All eyes will be on the job reports this week, where there is an expectation of job growth deceleration for a 2nd month - something the Fed would be pleased about.
We can also see large increases in Fed net liquidity measures which is now higher than levels seen in August likely due to the reverse repo market.
Higher liquidity *should* translate to positive action for equities and therefore crypto. Bitcoin’s fair value is brought closer to $30k by early December but yet we see little movement in the orange coin.
We also see the same dynamic with NDX (to a lesser degree).
Digging deeper, we can see the real response in the equity market is through the Dow Jones Industrial Average which made a 7-mont high. Dow Jones tracks blue chip household names vs. high growth tech stocks.
The issue may therefore not be a crypto-to-equity one but one about a growth-to-value rotation heading into a recessionary period. Even when liquidity conditions improve, we see little positive impact on the cryptoasset market in general.
Taken together, it appears crypto has more of an uphill battle when it comes to price than downhill. It should be no surprise that investors await further signals from the market to add conviction.
Then again…the best buys are often the most scary buys.
Peak Fear (That Keeps Peaking)
The battle for investors now is discerning what real risks exist in the market and what discussions have been a misrepresentation of the actual underlying risks. Let’s break list of the salient ones today:
WBTC
Wrapped BTC, the ERC-20 token meant to trade in line with BTC’s price, has dipped below its peg slightly.
BitGo who custodies BTC on the Wrapped BTC protocol has been slow at fulfilling redemptions for WBTC users. Other concerns are around Alameda being the largest WBTC minted.
The market is overlooking the fact that Alameda is a merchant (not a custodian) for WBTC and WBTC redemptions have been crowded lately driving reasonable delays in completing manual operational processes on the BitGo side.
BitGo showcase their custody addresses, highlighting the extent of market due diligence before participants jump to conclusions.
WETH
The market has been incorrectly asserting that WETH could be insolvent by no longer backing ETH.
With what started as a joke, has driven real market behaviour. What hasn’t helped the situation is that prominent voices have had difficulty unwrapping WETH to other assets.
Again, this illustrates how skittish the market is.
Mean transfer volume has spiked off fear that redemptions may not be fulfilled by the WETH smart contract.
Total transfer volume has also spiked (9m WETH) to the second highest reading in H2 2022.
The market is selling off WETH which has driven a minor peg deviation. It is expected that arbs will limit drawdown on the WETH/ETH ratio.
AAVE
The AAVE protocol was left with $1.5B of bad debt after an attack by an individual.
While some analysts call for a ‘win’ as the staked AAVE was able to cover the total bad debt amount (<$200m), they miss the bigger picture.
The staked value of AAVE backstops the protocol in case of shortfall events (30%) with the rest being backstopped by new AAVE issuance.
The bad debt event has caused AAVE stakers to withdraw their assets, with total AAVE staked falling from 3.2m to 2.4m ($144m). Withdrawing assets means those stakers are no longer at risk of losing value in the case of a short fall event (jump ship).
The bigger risk here is a reduced staked value translating in a higher likelihood of AAVE issuance for future shortfall events (even though these may be ‘unlikely’).
Aave has also paused lending markets for 17 Ethereum-based tokens which may limit any potential growth until new risk changes are made or market liquidity improves.
Capitulation Signal of the Week
Decentral Park Market Pulse
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Global Market Cap
$774B; Global market gained 3.4% last week and is finding support at the 2018 peak. Potentially bullish divergence on the daily that has yet to materalize. Bearish outcome from DCG/Genesis as largest overhang will be catalyst to likely break below current support.
DeFi MCAP
$34B; DeFi market cap oscillating around the $34B mark still. Potentially good entry for longer-term investors. Ceiling to break ~$45B for those seeking higher conviction.
Bitcoin Dominance
40.17%; Little change in Bitcoin dominance over the past week as volatility remained largely muted.
Trader Positioning
Little change in BTC-denominated futures OI in November. Aggregate futures flicking between positive and negative in what appears to be an indecisive, low interest market at present.
On Deribit, most of the call options for the monthly expiry have been placed below $18k. Most put options put between $16-$16.5k (550 BTC total).
Traders continue to take a predominantly bearish stance on ETH while aggregate futures OI is flat at 3.8m ETH.
Grayscale GBTC
Slight narrowing of discount to NAV over the past week, now standing at 40.23%.
Catalysts to narrow discount:
Conversion to spot ETF - most likely unlikely scenario for Grayscale given ongoing SEC lawsuit and recent rejection of ARK 21 Shares Bitcoin ETF.
Sale of trust - Grayscale sold to buyer to aid in DCG’s $2B debt. Question mark over incentive to buy Grayscale if conversion to ETF/Reg M ultimately impact the cash cows revenue potential. New owner does not change trust structure or its shortfalls for investors all else equal.
Dissolving the trust - unlikely given the independence of Grayscale to DCG and Genesis. 600k of BTC would hit market if pursued.
Reg M relief - unlikely as not in interest of Grayscale (or DCG) to pursue given high revenue potential.
Grayscale ETHE
ETHE discount narrowed to 40.8% before widening back to 42.67%. Discount bounced off support.
Unclear what the realistic drivers for discount narrowing short-term are aside from visibility of a structural change of trust (e.g. ETF conversion).
Volumes
Volumes falling to forecasted support of ~$14.5B. May imply a level of stability in price if we see continued support.
Aggregate Order Books
Order books look heavier on the bid side. Stronger support below $15.5k.
Miners
Bitcoin hash rate plummets to new lows since summer as mining revenue falls to lowest in 2 years. This comes as Bitcoin mining difficulty increased to new ATHs. Miners are winding down operations as
Bitcoin hash rate/price ratio looks to have topped out in a zone which has historically market bottoms in BTC price over the past few years. Peak miner capitulation is upon us.
No real theme across highest performing assets. Some catalyst driven (LINK) while others are liquidation driven (CRV):
Top 100 (7d %):
Huobi (+43.4%)
Curve DAO (+26.3%)
ApeCoin (+25.8%)
Dogecoin (+22.6%)
Chainlink (+18.1%)
DeFi Top 100 MCAPs (7d %):
Ren (+51.4%)
Tellor (+31.1%)
Covalent (+28.9%)
Ribbon Finance (+28.7%)
Nest Protocol (+27.5%)
🎙️ Distressed Crypto Investing [Empire]
🎙️ This is What Happens to Silicon Valley In A Downturn [Odd Lots]
🎙️ Weekly Roundup [On The Brink]
🎙️ How GoldenTree Invests In Crypto [Block Crunch]
🎙️ The End of Magical Thinking [On The Margin]
📚 Regulatory Changes in 2023 [Alex Kruger]
📚 Ethereum Staking-as-a Service Startup Kiln Raises $17.6M [CoinDesk]
📚 A ‘false messiah’ captivated crypto, Jump’s Kariya says in FTX tweetstorm [The Block]
📚 A forgotten banking scandal suggests FTX is the tip of the crypto iceberg [Dirty Bubble Media]
📚 The need to purge bad actors [Nic Carter]
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.