Weekly Crypto Market Wrap, 28th February 2022

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Week in Review

• Russian forces invade Ukraine.
• Ukraine’s official twitter page pleads for crypto donations amid the invasion.
• Donations in BTC, ETH and USDT stood around $16 million at the time of writing.
• Bitcoin’s exchange volume spikes 200% in Ukraine following the invasion.
• USDT stablecoin premiums soar on Ukrainian top crypto exchange.
• Biden imposes sanctions on Russia including technology export blocks and freezing over $1T in Russian assets by severing connections to the US financial system  – deploys forces to NATO’s East.
• US and EU impose SWIFT ban on Russian banks – population rushes to withdraw in USD.
• ECB President calls for crypto regulations in response to Russia potentially evading sanctions.
• US Core PCE inflation rose 5.2% in January for the biggest annual gain since 1983.
• US Secret Service launches Cryptocurrency Awareness Hub to provide educational campaigns on digital assets, which “are not inherently criminal.”
• China’s Supreme Court adds cryptocurrencies to the list of illegal fundraising methods.
• Californian bill requests option for residents to pay state services with Bitcoin.
• BNY Mellon is preparing to launch institutional crypto custody services later this year.
• Global stablecoin supply hits $180 billion.
• Sportswear brand Puma rebrands itself to Puma.eth on Twitter in support of the Ethereum blockchain and future crypto plans.

Winners & Losers

• Geopolitical concerns and haven flow dominated the week’s fixed income market. Risk aversion flows intensified with Russian president Putin signing a decree on Ukraine’s Separatist regions. What was an unthinkable event to most of the world became the largest geopolitical eruption since WWII. Bond yields initially traded higher on cautious tag-a-war between inflation and geopolitical concerns. But as Russian troops entered into Ukraine territory and full-scale war began, G7 Govies quickly became haven assets in a panic risk selloff. Ten year UST yield dropping from above 2% to the low of 1.85% before stabilising into the weekend. The market is reacting to constant media updates relating to both escalation of fighting inside Ukraine and retaliatory sanctions by G7 nations on the financial front. 
• Russia Equity index (MOEX) slumped by 28% going into the weekend as Crude approached US100 on the back of geopolitical uncertainties and respective sanctions by the west. Temporary removal of all Russian institutions from the global USD settlement system SWIFT caused unwanted panic throughout the money markets and cryptocurrency world. Russia’s central bank assets located on the worldwide system will also be frozen, limiting its ability to access its international reserves. President Vladimir Putin initiated Russia’s nuclear deterrence forces onto high alert in response to the move. Germany also said they’d set up a €100bn boost in military budget spending to prepare for the elevated geopolitical concerns in the region. 
• Individual company news, including BP, abandoning its stake in Russian oil giant Rosneft in an abrupt and costly end to three decades of operating in the energy-rich country, marking the most significant move yet by a Western company in response to Moscow’s invasion of Ukraine. Binance to donate USD 10 million to Ukraine’s humanitarian effort. 
• BTC and ETH vols jumped on the back of geopolitical concerns this week. With BTC vols breaking out of the recent low to mid 70% range to hit a high of 89% before settling in the low 80s to close the week. While ETH vols shifted from mid 70s range to above the 100% mark as Russian troops moved inside Ukraine, then closing the week in low 90s. 
• Supply-side pressure on commodity prices was also a worry for growth prospects in spite of the current situation. The escalation is pushing commodity and oil prices higher, with Goldman Sachs raising BRENT oil prices forecast to USD 115/BBL in the short term. Wheat prices jumped by 8% since Friday due to global sanctions worsening supply. 

Macro, Technicals & Order Flow

Bitcoin

• On Monday, in the absence of US market activity, Bitcoin started strong, reaching levels above 39,000. However, US markets caught up on Tuesday and continued the selloff that started prior to the weekend on the back of anticipated risk.
• Bulls refuted the action, bouncing off 36,500 before reports out of CNN outlining an imminent Russian attack on Ukraine weighed in on the market. Panic took hold, where Bitcoin spiralled to weekly lows under 35,000. 
• Whilst we saw investors choosing to de-risk, others took advantage of the buying opportunity. A lackluster response from world leaders to the geopolitical conflict provided further grounds for a short squeeze. Prices rallied back to as high as 40k shortly thereafter. Bitcoin closed out the week retracing back to lower levels.
• Beyond the geopolitical news, a noteworthy raise by the Luna Foundation Guard of $1B, forming a decentralized UST reserve denominated in BTC, is intended to contain volatility around UST’s peg.

• Breaking down on-chain metrics allows us to more clearly understand some of the aforementioned moves and who was affected. The following figure compares the short term holder supply currently at a loss, as a proportion of total short term holder supply. Notably, short term holder supply has been increasing in recent weeks. 
• This depiction shows short-term holders are accumulating around 35k to 45k and approximately 80% are currently at a loss due to the recent bearish action. 

• In the last 2 months, we’ve seen a decrease in implied volatility. This makes option plays relatively cheaper. As seen last week on the back of the risk move, investors took on protection, increasing implied volatility. 

• Open interest out to 25 March shows that calls are favoured, underpinning a bullish short to medium-term outlook. Key levels are at 50k, 70k and 80k for calls with emphasis growing at 40k due to the current climate. Notably, put option volumes are growing at the 30k level.

• Some investors are choosing to de-risk whilst others are bidding up – call skew for the 25 March has strong and growing interest. We are basically in a time of great uncertainty, and this is reflected across all markets right now.
• How to play the current dynamic? Structured products make sense with implied volatility lifting – Yield Entry and Exit notes providing strongly enhanced yields.

Ethereum

• Early in the week, Ethereum followed the lackluster price action on closed US markets on Monday. However, when US markets returned to the scene, the sell-off continued. 
• The Russian invasion of Ukraine on Thursday and news headlines incited panic, leading to steep selloffs in anything liquid. Risk-off assets including equities, Ethereum and other cryptocurrencies experienced aggressive moves, with ETH setting its weekly lows at 2,300. Gold and Oil subsequently rallied. Following the initial imposition of sanctions on Russia, risk-on markets saw a relief rally, with ETH setting its weekly highs around 2,900. Beautiful bounce off prior levels – but we are in some pretty wild times here. Playing leveraged exposure is very risky right now.
• The Russian government put their nuclear ‘deterrent force’ on high alert, inciting fear amongst investors, causing a further sell-off with ETH closing the week around 2,600.
• ETHBTC trended sideways throughout the week, trading above the trend-line support from Feb 2020. BTC and ETH still showing risk on/off dynamics against each other and the broader geopolitical environment.

ETHBTC Daily Chart

• Implied volatility has remained historically suppressed over the past few weeks. Consequently, options prices remain relatively cheap. Similar to Bitcoin, Ethereum’s option implied volatility spiked to the upside as investors looked to buy protection, or capitalise on the moves. Implied vols are rising to healthy levels again for yield plays.

ETH ATM Implied Volatility

• Pixelmon, an NFT project that raised over $70m by selling 7,750 NFTs at a price of 3 ETH earlier this month, recently revealed the artwork for the project. With promises of creating “the largest and highest quality game the NFT space has ever seen”, buyers were (understandably) disappointed following the reveal, as the floor price on OpenSea plummeted to 0.34 ETH.

Pixelmon NFT Collection

• Net exchange inflows persisted throughout the week, depicting investor caution following the invasion into Ukraine. The supply expansion continues and funding rates are currently contained. 

Ethereum Exchange Net Position Change

• Ethereum staking contracts continue to limit floating supply – the amount of ETH in the ETH 2.0 staking contract currently sits at 9,607,919. This represents 8.02% of the total supply estimated to remain locked for ~ one year, continuing to slowly constrict supply. 

• As investors remain focused on the latest geopolitical developments, the attention has shifted from the 40-year high inflation levels. With the co-founder of ETH, Vitalik Buterin, publicly expressing his disgust with the Russian government tweeting “Ethereum is neutral, I am not”, it is likely that given his Russian background, his social media activity could play a small factor in short-term sentiment for ETH holders.

DeFi & Innovation

• Metaverse land sales hold steady despite crypto market sell-off over global instability.
• President of El Salvador to offer citizenship to foreign Bitcoin investors.
• Manchester City partners with Sony to build the first digital football stadium in the metaverse.

What to Watch 

• Russia x Ukraine conflict updates.
• Biden’s executive order on cryptocurrencies – it has been delayed and rightfully so, but for how long?
• Fed Chair Powell testifies before the Senate, Wednesday and Thursday.
• US Unemployment Rate, on Friday.

Insights

How Crypto Exchanges Work: The mechanisms at play: In this article, we provide the fundamentals of how crypto exchanges work; their order books, examples of market executions, comparisons with decentralised exchanges and how these platforms turn a profit on their services.

FAQs

How did the Russian invasion of Ukraine impact the crypto market, and what were the notable reactions in the crypto space?

The Russian invasion of Ukraine led to a spike in Bitcoin’s exchange volume in Ukraine by 200%, and USDT stablecoin premiums soared on Ukrainian top crypto exchanges. Donations in BTC, ETH, and USDT for Ukraine reached around $16 million. The geopolitical concerns also caused volatility in BTC and ETH, reflecting the risk-on/off dynamics in the market.

What were the significant market reactions to the geopolitical concerns, and how did various assets respond?

The invasion led to risk aversion flows, with bond yields dropping and Russian Equity index (MOEX) slumping by 28%. Crude oil approached US$100 due to uncertainties and sanctions. The removal of Russian institutions from SWIFT caused panic in money markets and the crypto world. BTC and ETH experienced volatility, and commodity prices, including oil and wheat, were pushed higher.

What were the key developments in Bitcoin and Ethereum during the week, and how did the geopolitical situation influence their price action?

Bitcoin started strong but faced a selloff due to anticipated risk and panic following the invasion, spiraling to weekly lows under $35,000 before rallying back to $40,000. Ethereum followed a similar pattern, with steep selloffs leading to weekly lows at $2,300 and a relief rally to $2,900. Both assets showed risk-on/off dynamics against each other and the broader geopolitical environment.

What were the notable innovations and partnerships in the DeFi and Metaverse space during the week?

Despite the crypto market sell-off, Metaverse land sales held steady. El Salvador’s President offered citizenship to foreign Bitcoin investors, Manchester City partnered with Sony to build a digital football stadium in the Metaverse, and sportswear brand Puma rebranded itself to Puma.eth in support of the Ethereum blockchain.

What are the key events and factors to watch in the coming week that could influence the crypto market?

Investors should watch for updates on the Russia-Ukraine conflict, Biden’s executive order on cryptocurrencies, Fed Chair Powell’s testimony before the Senate, the US Unemployment Rate, and other geopolitical developments that could influence market sentiment and price action in the crypto space.

Disclaimer

This document has been prepared by Zerocap Pty Ltd, its directors, employees and agents for information purposes only and by no means constitutes a solicitation to investment or disinvestment.  The views expressed in this update reflect the analysts’ personal opinions about the cryptocurrencies. These views may change without notice and are subject to market conditions. All data used in the update are between 21 Feb. 2022 0:00 UTC to 27 Feb. 2022 23:59 UTC from TradingView. Contents presented may be subject to errors. The updates are for personal use only and should not be republished or redistributed. Zerocap Pty Ltd reserves the right of final interpretation for the content herein above. 

* Index used:

Bitcoin	Ethereum	Gold	Equities	High Yield Corporate Bonds	Commodities	TreasuryYields
BTC	ETH	PAXG	S&P 500, ASX 200, VT	HYG	CRBQX	U.S. 10Y