Weekly Crypto Market Wrap, 14th March 2023

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This week’s Weekly Crypto Market Wrap was released on a Tuesday due to the Labour Day public holiday in Melbourne, on the 13th of March.

A notice on recent developments

Given the news around the closure of Signature Bank, we would like to confirm that all of our services and products remain fully operational. Our business is functioning as usual.

We have no exposure to Signature Bank, Silvergate Bank or Silicon Valley Bank. Whilst some of these have been great partners to Zerocap in the past, we took steps to remove exposure to all of them as the US banking environment became increasingly volatile.

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Week in Review

• Silicon Valley Bank (SVB) is shut down by regulators in the biggest banking failure since the GFC – Failed bank reportedly held over $5B for crypto VCs.
• Following SVB collapse, Signature Bank is closed by New York banking authorities.
• US President Biden’s budget proposal seeks to double capital gains tax from 20 to 40% – proposals document states plans to impose wash-trade rules on crypto such as not allowing tax-loss harvesting and a 30% tax on crypto mining facilities.
• USDC stablecoin de-pegs as its company Circle discloses $3.3B exposure to SVB – MakerDAO files emergency proposal to address its USDC exposure following depeg.
• Silvergate reportedly in talks with FDIC looking for ways to salvage itself from collapse – corporation announces intent to voluntarily liquidate the bank.
• Documents reveal Australia’s potential timeline for crypto legislation plans.
• Meta reportedly working on text-based decentralised social media codenamed P92.
• More than 89% of American digital asset investors still trust centralised custodians; Paxos.
• Singaporean authorities open probe into fugitive Do Kwon, Terraform Lab’s founder.
• Ethereum co-founder’s philanthropic fund donates $15 million to UC San Diego.
• FTX’s counsell, lawyers and advisers made approximately $34 million in January – Sam Bankman Fried’s lawyers seek to push back criminal trial date.
• South Korean government launches metaverse fund to drive initiatives in the country.
• FED Chair Jerome Powell warns of further interest rate hikes in report to US Senate.
• UK economy rebounds with stronger-than-expected January GDP report.
• US job openings declined in January but still far outnumber available workers.

Winners & Losers

Macro Environment

• Fresh data released from the Australian Bureau of Statistics (ABS), unveiled an Australian trade surplus contraction to $11.69 billion AUD in January, marking the smallest surplus since August, amid a rise in imports that outstripped exports. Although shipments climbed by 1.4% from the previous month to a three-month high of $58.85 billion AUD, imports grew at a faster rate of 4.6% to a four-month peak of $47.16 billion AUD, fueled by rebounding domestic demand. In stark contrast, China’s trade surplus expanded to an all-time high of $116.88 billion USD established over January-February 2023, far exceeding market expectations of $81.8 billion. The move came despite a -6.8% YoY decline in exports and a -10.2% drop in imports due to sluggish global economic growth and weakened domestic demand. On the flip side, the United States (US) trade deficit widened to a high of -$68.3 billion in January, a significant portion of which stemmed from a -$21.9 billion trade deficit with China. Whilst largely positive for China, Commerce Minister Wang Wentao, cautioned of growing downward pressure on imports and exports as the risk of a global recession and weakened external demand continue to loom in the latter half of 2023.
• The current state of the US labour market has been characterised by mixed economic indicators released throughout January and February of 2023. Whilst US Job Openings (JOLTs) experienced a steep decline of -410,000 in January, attributed to large decreases in construction (-240,000), accommodation/food services (-204,000), available positions increased in transportation, warehousing, and utilities (+94,000)  as well as in non-durable goods manufacturing. Nonetheless, in February, the creation of 311K jobs was unforeseen, with notable expansions in sectors such as leisure & hospitality, retail trade, government, professional and business services, health care, and construction. Despite this, the US Unemployment rate edged higher to 3.6% in February, the labour force participation rate also crawled upwards to 62.5%, alluding to labour market tightness. It appears that US macroeconomic policy is offering some partial relief across specific sectors in the US labour market. 

• Stocks, already reeling from mixed employment results, continued to sell off into the weekend on the news of crypto banking failures: Silvergate, Silicon Valley Bank (SVB) and Signature. The fallout generated a significant sell-off in banking shares, markets also moved to second guess the current path of FED rate hikes – 10 Year US treasury yields falling -6.35% WoW. The CBOE Volatility (VIX) index took off on choppy market conditions, returning +30.13% WoW. The S&P 500 (SPX) experienced a -4.77% weekly contraction, the NASDAQ was surprisingly more resilient with a -4.167% fall WoW. The US Federal Government announced on Sunday they would guarantee all deposits for (SVB) and Signature depositors, stoking confidence, and igniting a small rally in crypto markets.

Market Analysis

BTC/USD

• BTC initiated the week with some sideways action and crept alongside the 22,500 resistance. Into mid-week, prices started to taper, sellers pushed prices lower, and a test of the 22,000-support incurred. While initially showing signs of strength, BTC broke lower and rode negative momentum, spiralling downward before the 200d SMA was firmly bid. Price struggled to make notable grounds higher until late on Sunday when BTC was heavily bid, reclaiming 22,000 and closing -1.09% WoW.
• As BTC rolled over into Sunday’s session, and in the context of USDC’s de-pegging event, BTC went into safe-haven mode and heavily bid into this week’s close. While last week, we witnessed a shift in BTC’s behaviour in the presence of a risk event, with the U.S. inflation print looming and BTC’s historically volatile nature in the presence of macro-uncertainty, we can expect short-term action to be dictated by news flow relating to the print.

ETH/USD

• Similarly, ETH’s early week action lingered sideways, with bids being favoured below 1,535 and selling taking place around the 1,580 resistance. During Thursday’s session, alongside broader market movements, ETH sold off. Price found support at the 1,385 level, a level that showed signs of support during early January 2023. Alongside BTC, ETH was heavily bid during USDC’s de-pegging event and prices were quick to bounce higher. ETH closed +1.72% WoW.
• Early week action was predominantly dictated by shifts in rate expectations by the U.S. Federal Reserve. Fed Chair Powell’s Testimony on Tuesday delivered the hawkish promise higher than expected rate hikes, as such risk assets suffered. 
• Later, fear surrounding Silicon Valley Bank’s major restructuring and its ties to Circle, the issuer of USDC, caused market-wide fear to ensue. However, the initial sell-off of risk assets such as BTC and ETH to multi-month lows was followed by a shift, with both assets exhibiting characteristics of safe-haven assets. As such, prices ascended into the weekly close.

ETH/BTC

• ETH/BTC remained consistently bid over the course of the week as BTC underperformed throughout the US debanking saga. It is likely this dynamic will continue as BTC remains the hedge. ETH price action could remain subdued as the BTC safe haven narrative persists in light of recent pressure from US regulatory authorities and USDC’s de-peg scare. 
• Off the back of SVB’s collapse and ties to Circle, the issuer of USDC, we witnessed the largest inflows of USDC into centralised exchanges whereby participants exited their holdings. Correspondingly, USDT was bid far above parity as individuals shifted their USDC exposure to the stablecoin alternative. Likewise, BTC and ETH acted as safe-haven assets with their market capitalisations increasing by approximately 9.8% and 10.9% respectively between Friday and Sunday’s close.

Derivatives

• In past weeks we have commented on the persistent contango in BTC term structures – the crypto options market had been showing a lack of concern for any risk events in the near term (such as the Shanghai/Capella upgrade). In stark contrast, the events over the weekend have pushed BTC’s term structure into backwardation. Given the tendency for BTC’s term structure to fall back into contango in the weeks following short-term spikes in IV, we see an interesting opportunity in calendar spreads at the moment.

• We see that 7-day IV is priced overwhelmingly higher than 30-day IV when comparing BTC’s current term structure to past structures. With the Shanghai/Capella upgrade anticipated for next month, we could see sustained levels of IV for next month’s expiries. If the term structure were to remain in contango after the release of CPI data tonight – a 7/30-day calendar spread would look particularly attractive here.

Ecosystem Highlights

• Forkast Labs, formed from a merger between Forkast News and CryptoSlam, is launching several index trackers for digital assets intended to be the equivalent of indexes such as the S&P 500 or the Nasdaq for cryptocurrencies. The goal of these trackers is to provide a deeper and more substantive view of digital assets’ fundamental performance to help regain trust in cryptocurrencies. Trackers will include Forkast 500 NFT, Forkast SOL NFT Composite, and Forkast ETH NFT Composite. Forkast 500 NFT will be the flagship index, acting as a proxy for the entire NFT market. It will be formed from data gathered from up to 500 eligible on chain smart contracts, extending back to January 1st, 2022. The team intends to expand the product offering in the future, including sector-specific data such as virtual real estate or fashion NFTs
• Scroll, an Ethereum layer 2 network, raised $50 million in its recent funding round. With investors including Polygon Capital and Sequoia Chain, Scroll’s valuation has increased to US $1.8 billion. Relying on zero knowledge rollup technology, the network has achieved one million unique addresses and 16 million transactions on pre-alpha, planning to launch its mainnet in the next three to four months. With the new funding, Scroll plans to build its product, expand its ecosystem and increase its team size from around 60 to nearly 100 members.
• Meta, formerly Facebook, is developing a decentralised text-based app, codenamed P92, for sharing updates. The app is intended to support ActivityPub, a decentralised networking protocol making it easier to connect with other decentralised social media applications such as Mastodon. Intended to be Meta’s solution to compete with apps such as Twitter, P92 plans to let users log in through their Instagram credentials. Nevertheless, Meta has a history of killing off apps and experiences that don’t take off, so the application’s future remains uncertain.
• In the wake of the Silicon Valley Bank (SVB) collapse, several protocols and companies have faced liquidity issues. The stablecoin issuer Circle, creator of USDC, held nearly US $10 billion in regulated banks including SVB. A Circle spokesperson maintained that SVB was one of six banks used for managing approximately 25% of USDC reserves held in cash, and that Circle and USDC continue to operate normally despite SVB’s shutdown. CEO of BnkToTheFuture, an investor in Circle, corroborated this claim, tweeting that most of Circle’s cash is in the Bank of New York Mellon. 
• The Ethereum based lending protocol Euler Finance faced a flash loan attack on March 13. Using a bridge to transfer funds from the BSC to Ethereum, the attacker stole nearly US $196 million in Dai, USDC, staked ETH and Bitcoin, making it the largest hack of 2023. The attacker used flash loans to deposit funds and leveraged them twice to trigger liquidation. While the stolen funds sit in multiple hacker owned addresses, Euler Finance is working with security professionals to resolve the issue. The success of the exploit was contingent on a bug in one of the Euler smart contracts. 

What to Watch 

• US  CPI report, on Tuesday.
• UK’s annual budget release and US’ PPI reports, on Wednesday.
• EU’s ECB press conference and monetary policy statement, on Thursday.
• US’ preliminary consumer sentiment, on Friday.

Insights

• Head of Trading Toby Chapple discusses Silvergate on the AFR:

“It’s a classic story of your short-term liabilities not matching your long-term assets.” Toby Chapple discusses the Silvergate Bank collapse in this The Australian Financial Review piece by Jessica Sier.

Research Lab

• What is Account Abstraction?:

Account abstraction is a critical innovation that transforms how we develop and interact with smart contracts. In this Research Lab article, Innovation Analyst Finn Judell covers the concept of account abstraction in detail, with a focus on account abstraction in the Ethereum network, its history, security and user advantages and what it entails for the future of the practice.

• NFTs 101: What are NFTs and How do they Work?:

As the world of digital finance and blockchain technology continues to evolve, non-fungible tokens (NFTs) have emerged as a groundbreaking innovation that is capturing the attention of investors, creators, and collectors alike. With that in mind, Innovation Lead Nathan Lenga wrote a straightforward breakdown article on NFTs – providing a comprehensive overview of the concept, its functionality and growing impact on the economy.

• Maximal Extractable Value: Concepts, issues and solutions:

In the fast-evolving world of blockchain technology, understanding Maximal Extractable Value (MEV) is becoming increasingly crucial. MEV is a complex but important concept that has the potential to revolutionise the value extraction process in the blockchain ecosystem. With that in mind, Zerocap Innovation Lead Nathan Lenga wrote a thorough two-part article that explores MEVs to the fullest.

* Index used:

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

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FAQs

What recent developments have occurred at Zerocap?

Zerocap confirms that all of their services and products remain fully operational despite the news around the closure of Signature Bank. They have no exposure to Signature Bank, Silvergate Bank, or Silicon Valley Bank. They assure that if you’re concerned about exchange counterparty risk, you can consider their insured digital asset custody solution.

What were the significant events in the crypto market during the week?

The week saw the shutdown of Silicon Valley Bank (SVB) by regulators, marking the biggest banking failure since the Global Financial Crisis (GFC). Following SVB’s collapse, Signature Bank was closed by New York banking authorities. US President Biden’s budget proposal seeks to double capital gains tax from 20 to 40%. USDC stablecoin de-pegs as its company Circle discloses $3.3B exposure to SVB. Silvergate is reportedly in talks with FDIC looking for ways to salvage itself from collapse.

What were the macroeconomic indicators during the week?

The Australian trade surplus contracted to $11.69 billion AUD in January, marking the smallest surplus since August, amid a rise in imports that outstripped exports. China’s trade surplus expanded to an all-time high of $116.88 billion USD established over January-February 2023. The United States (US) trade deficit widened to a high of -$68.3 billion in January.

What was the market analysis for BTC/USD and ETH/USD?

BTC started the week with some sideways action and crept alongside the 22,500 resistance. By the end of the week, BTC was heavily bid, reclaiming 22,000 and closing -1.09% WoW. Similarly, ETH’s early week action lingered sideways, with bids being favoured below 1,535 and selling taking place around the 1,580 resistance. ETH was heavily bid during USDC’s de-pegging event and prices were quick to bounce higher. ETH closed +1.72% WoW.

What are the ecosystem highlights for the week?

Forkast Labs is launching several index trackers for digital assets intended to be the equivalent of indexes such as the S\u0026P 500 or the Nasdaq for cryptocurrencies. Scroll, an Ethereum layer 2 network, raised $50 million in its recent funding round. Meta, formerly Facebook, is developing a decentralised text-based app, codenamed P92, for sharing updates. The Ethereum based lending protocol Euler Finance faced a flash loan attack on March 13.