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Week in Review
- US’ CPI shows the fastest consumer price inflation acceleration since 1982.
- US Congress hearing on digital assets deemed positive by crypto CEOs, as leaders request regulatory clarity on digital assets – policymakers present.
- Australia is set to lead the world in crypto regulation reforms, as the government approves 6 out of 9 proposals on several frameworks for digital assets including a BNPL system and having the Treasury lead research on creating a Central Bank Digital Currency.
- China’s Evergrande property development holding officially defaults on it’s outstanding dollar debt coupon payment. More borrowers downgraded by rating agencies.
- At least 25% of US households surveyed hold bitcoin; Grayscale survey.
- US’ JOLTS report shows job openings jump from 10.4 to 11 openings in November, combined with fewer employees quitting their jobs.
- WhatsApp launches a crypto payments pilot in the US using Meta’s Novi wallet.
- The IMF outlines the need for a global approach towards crypto regulations.
- The Banque de France and the Swiss National Bank announced successful trial of their CBDCS.
- Visa announces crypto consulting service for merchants and banks.
- The current US CIA director claims the agency has “a number of different projects” focused on crypto.
- Forbes’ “30 under 30” list for this year includes 21 names from the crypto industry.
Winners & Losers
- Bitcoin and Ethereum led relief rallies in the first half of the week before trade volumes subsided. Spot volume remains elevated following the recent price stabilisation, while futures open interest has seen little momentum as traders remain sidelined for more definitive price action and stronger sentiment. Bullish conviction amongst crypto natives appears to be returning, while their traditional counterparts remain cautious going into the holiday period. Overall, BTC returned 1.29% and ETH -1.59% Wow.
- Global Stocks began the week on the defensive following the FED flip on inflation – now having a longer-term impact to the US economy. Accelerated bond tapering velocity could be announced during this week’s upcoming FOMC meeting. The anticipation of Friday’s CPI data dominated momentum as growth stocks underperformed against the industrial sector. Tesla shares weakened throughout the week as the market anticipated some major announcements or breakthroughs which never materialised. Energy stocks also traded to the downside, with Oil and other commodity prices weakening with a strong DXY.
- Volatility in the credit market remained elevated following Fitch downgrading China’s Evergrande Group to ‘restricted default’ following their failure to service the latest USD coupon payments. Another Chinese developer, Kaisa, was also downgraded as its USD bond payments came due. The latter has a USD 12 billion debt restructuring proposal in the pipeline. Fantasia, a third developer, sought legal advice on creditor claims, shares at a five-week low. Despite credit and interest rate worries, stock volatility eased off from recent highs. The VIX dropped from a peak of 35 in November to the 20 levels to close the week at the lows following S&P 500’s record high closing.
- Concerns over the Omicron variant eased following a report from Pfizer Inc. (PFE) and BioNTech SE (BNTX) that testing results from an “initial laboratory study” showed that their COVID-19 vaccine neutralised the omicron variant of the coronavirus after three doses, or the full two-dose regimen plus a booster shot.
- Geopolitical concern on two major fronts with Group of Seven foreign ministers meeting to discuss potential sanctions on Russia, following a buildup of over 100,000 Russian troops along the Ukrainian border. For the first time, New Zealand alerted their concern over China’s military presence along the South China sea as conditions along the Taiwan strait worsened.
- Macroeconomic data from China was strong following the rise in import and export figures, which both beat expectations. Exports for November jumped 22% YoY, while Imports climbed by 31.7% YoY. US CPI came out just before the end of the week at 6.8% YoY for November. This was right on expectation, leading to some short covering on the bonds market. 2 year UST yield jumped by 10bp at one stage as the market repriced the risk of the FED’s normalisation time-line being brought forward. 10-year UST climbed from 1.35 to a high of 1.50 at one stage, while the back end out to the 30 year was fairly steady (flattening curve) given the prospect of FED over-tightening and driving the economy towards a recessionary environment.
Macro, Technicals & Order Flow
- Following the inflation shift from the Fed over the past few weeks, BTC open interest decreased 50% from its peak a month ago. Lower levels of leverage, encouraging headlines on the Omicron variant, and El Salvador buying BTC on the dip provided buoyancy – pusing BTC back toward 52,000 before settling in the range.
- As anticipation surrounding Friday’s CPI report release grew, BTC maintained consolidated price action around the 49,000 mark. Friday revealed that inflation rates, fuelled by strong consumer demand for goods and supply chain bottlenecks, rose in line with estimates, keeping BTC in it’s weekly range.
- The upcoming FOMC meeting will provide insights into the FED’s tapering plan, guiding sentiment and price action towards the EOY.
Bitcoin Futures Open Interest
- Bullish indicators for BTC persist. On-chain indicators show the sustaining supply squeeze on exchanges and last week’s negative funding rates have turned positive. Rates now hover around 0.005%.
Bitcoin Net Position Change
BTC Perpetual Swaps Funding
- Going out to December 31, strikes are weighted towards calls at the 80,000, 100,000 , 120,000 and 200,000 levels.
- Notably, since late November, open interest for options at the 60,000 level have grown approximately 50% whilst weightings at the 64,000 and 70,000 levels have slightly decreased. This adjustment can likely be attributed to the change in short term price expectations given monetary policy concerns and the potential risk of the Omicron variant.
- Likewise, out to Mar 25, 2022, strikes are heavily weighted at the 100,000 mark. There is also growing interest at the 60,000, 70,000 and 80,000 levels.
OI Interest by Strike – Dec 31, 2021
OI Interest by Strike – Mar 25, 2022
- While most exchanges remained stable due to the lackluster volatility, the CME went negative on the date of the CPI data release.
BTC Futures Annualised Rolling 1 Mth Basis
- The low levels of short-term holder supply that bottomed in late October have since shown consistent signs of growth. Conversely, long-term holder supply continues to support signs of rotation.
BTC Total Supply Held by Short-Term Holders
Bitcoin: Total Supply Held by Long-Term Holders
Bitcoin: Long-Term Holder Net Position Change
- In summary, inflation is no longer ‘transitory’ and the market cycle is clearly shifting to tightening. We are entering a period of lower liquidity, which has seasonally fared well for BTC. However, short-term volatility has potential impact given event risk, inflation data, and the growing understanding of the Omicron variant..
- Early in the week, the weekly high at 4,500 was established on the back of moderating event risk. As the Friday CPI data release inched closer, ethereum saw price levels drop where it consolidated around the 4,000 level.
- Upcoming short-term price action will likely be driven by investors de-risking or adding risk from intermarkets, given potential accelerated tapering timelines as well as institutional rebalancing and the realisation of profits before the EOY.
- DeFi Total Value (TVL) Locked continues to grow. Notably, this week Terra became the third largest blockchain by TVL. Despite TVL above $250B a few weeks ago, VC interest has clearly shifted towards NFT-related projects and the Metaverse, as hype continues to build, indicating a potential consolidation phase for DeFi majors.
DeFi TVL in Competitor Chains (Delphi)
Breakdown of VC Funding by Category (Delphi)
- We are still seeing strong derivatives interest in higher ETH prices.
ETH Open Interest by Strike: Dec 31, 2021
- ETHBTC set a 3.5 year high early in the week, hitting the ascending resistance from April, followed by reversion in price action for the pair. The risk-on/risk-off divergence continues to be apparent despite correlating on immediate news shocks such as the CPI data.
ETHBTC Daily Chart
- On-chain data is still showing a supply squeeze on exchanges, although this is continually moderating.
Ethereum Exchange Net Position Change
- Perpetual funding rates remain relatively stable across most exchanges.
ETH Perpetual Funding Rates
- The futures basis saw a wild drawdown into the negatives, followed by a sharp recovery into the positives on the day of CPI data release in the CME.
ETH Futures Annualised Rolling 1 Mth Basis
- Ethereum staking contracts continue to limit floating supply – the amount of ETH in the ETH 2.0 staking contract currently sits at 8,597,908. This represents 7.24% of the total supply estimated to remain locked for ~ one year, continuing to slowly constrict supply.
- In summary, a further divergence between the two largest assets by market cap is still possible, however the short-term sentiment will be highly driven by the upcoming FOMC meeting and further insights into the Omicron variant.
DeFi & Innovation
- Ethereum co-founder Vitalik Buterin released an “endgame” roadmap for ETH 2.0, arguing that the network is already sufficiently trustless and censorship-resistant.
- Bank of International Settlements calls DeFi growth an “illusion” in a recent report, despite $246B total value locked in the market.
- DEX aggregator trading volumes surge to new highs.
- Coinbase launches open-source cryptography library.
- Gaming giant Ubisoft launches in-game NFTs.
- Binance Australia becomes the world’s first Digital Currency Exchange to commence ESG reportage.
What to Watch
- Fed’s economic projections, Federal Funds rate and other relevant statements at Wednesday’s FOMC.
- US Retail Sales report, also on Wednesday.
- The next steps for Evergrande – how will the Chinese government avoid a market fallout?
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 6 Dec. 2021 0:00 UTC to 12 Dec. 2021 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|