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Week in Review
- Federal Reserve signals March for first rate increase – “there’s a risk that the high inflation we’re seeing will be prolonged, there’s a risk that it will move even higher,” Fed Chair Jerome Powell stated during the latest FOMC meeting.
- White House is currently preparing an executive order on crypto.
- US’ House of Congress Introduces “America COMPETES Act 2022” bill seeking to boost competition with China. Crypto supporters fight against bill provision that would allow Congress to impose surveillance and prohibitions against “certain transmittals of funds.”
- Vladimir Putin claims crypto mining can greatly benefit Russia – ban on cryptocurrencies now less likely.
- Apple’s CEO Tim Cook states the company is investing in metaverse applications.
- Meta’s Diem crypto project reportedly failed – company weighs in on potential sale.
- The International Monetary Fund urges El Salvador to remove Bitcoin’s legal tender status.
- Ark Invest’s recent report sees BTC hitting $1 million and ETH $180k by 2030.
- Meta files for trademark registration with Brazilian authorities regarding “design, development and implementation […] of digital currencies including, but not limited to,
transactions involving Bitcoin.”
Winners & Losers
- We’ve seen a notable divergence in weekly returns across assets – the ASX down, S&P500 up, and everything in between. The ASX was pulled down by mining heavyweights and the financial sector.
- The fixed income market began the week when it started the year with the yield curve pushing higher across the board. Ten year UST rose to 1.87%, a level not seen since 2019. The 30 year UST climbed to 2.18%, as anticipation for the FOMC and Bank of Canada (BoC) meeting accelerated the hawkish tilt of the market. However, when BoC failed to deliver its first interest rate normalization and the FED did not provide any material indication regarding the unwinding of its balance sheet, the market took hold on short-covering outstanding bond positions into the weekend. Yields came off from the high by around 8-10 bp in the back end, while front end pricing now calls for anywhere between 5 to 8 interest rate hikes for 2022. In contrast to developed market central bank bias, China’s PBoC cut their 14-day reverse repo rate to ease interbank market liquidity. This is following the one-year lending rate reduction from the previous week.
- The US earnings season continued throughout the week, with 33% of all companies from the S&P 500 index reported so far. A total of 78% have beaten estimates, while 18% have missed expectations towards the downside. Apple was one of the bright stars, as both its report and forecast provided a seriously needy lift to the tech sector. Sales climbed 11% to $123.9 billion in the fiscal first quarter, which ended the 25th of Dec. In other equity news, Vaycaychella, Inc. (USOTC: VAYK) today announced the company has entered into a letter of intent (LOI) agreement to acquire Definancial, Inc. This technology firm has developed a proprietary cryptocurrency exchange technology solution. VAYK is an early-stage business building a portfolio of technology solutions to further democratize participation in the tourism market, extending more opportunities to individuals and small and medium (SMB) business operators.
- Volatility levels were well elevated in both equity and rates. The VIX index hit a high of 33 prior to FOMC, only to ease off slightly into the weekend. The yield curve movement fluctuated between bear steepening, as markets sold off long bond holdings to bear flattening. Market participants called for more hikes needed in the front end to cater to the FED admitting being behind the curve. Cryptocurrency implied Volatility eased off as the market consolidated between 36,000 to 38,000 in BTC and 2300 to 2500 in ETH. BTC vol stayed around the low 70s, while ETH vol at the low 80s.
- The FX and commodity markets reflected a bias for strong USD following greater rate hike expectations of the FOMC meeting. Some market participants are now calling for a 50 bp initial move from the FED in March, with at least one single 25bp action during each and every FED meeting in the next 11 months. USDJPY rallied from the low of 113.53 on the 24th of Jan to a high of 115.67 by the end of the week. At the same time, AUDUSD has come off from almost 73 cents in the middle of Jan to fall below 70 cents by week’s end. Oil prices eased off slightly from the seven-year high but were still elevated by tensions on the Russian border and supply-side concerns. Gold prices did very little during the week, failing to achieve their potential as an inflation hedging tool given the higher real yield impact on the asset, as well as stronger USD.
Macro, Technicals & Order Flow
- Following last weekend’s sell off, BTC opened this week slightly over 35,000. Risk assets began the week in a defensive mood with worries over a more hawkish federal reserve and sustained tensions on the Ukraine border, pushing BTC prices down to 33,000.
- A rally in equity markets on Tuesday provided the grounds for BTC to bounce back to the 38,000 mark. The FED failed to rule out the possibility of hikes in every FED meeting this year, generating some volatility in price.
- Powell’s motivations to battle inflation head on spooked investors, pushing short-term perpetual funding rates deeper into the negatives early before recovering to neutral levels. Short-term players are clearly running bearish here.
BTC Perpetual Funding
- Despite signals of underlying fear, crypto on-chain data is conversely very bullish. Longer-term holders continue to accumulate thereby exaggerating the supply squeeze on exchanges.
Exchange Net Position Change
- URPD shows the prices in which BTC supply was last on-chain. Large volumes of BTC realised at certain levels can provide indication of support and resistance levels. Increased bids into the monthly weakness are establishing growing support at the 37,000 level.
UTXO Realized Price Distribution
- The discrepancy between bullish on-chain indicators and the underlying bearish market sentiment make directional plays unclear in the short-term. However, with implied volatility moving back to healthy levels, structured products such as entry notes paying 20% annualized at 10% below the current market, are attractive alternatives for those looking to take advantage of the volatility whilst minimising exposure to the downside.
BTC Implied Volatility
- All in all, on-chain signals bode too well for BTC’s structure to ignore. This market is feeling more oversold every week and we are cautiously optimistic, and harnessing volatility yield entries to capture value along the way.
- Anticipation surrounding the FED meeting caused tensions to build early in the week. Monday was host to increased volatility as investors de-risked, causing liquidations and setting weekly lows at 2,150. Uncertainty still loomed for the remainder of the week, but we saw a relief rally alongside key equity markets. Weekly highs were set around 2,700, with levels leveling off toward the end of the week.
- ETHBTC continued to decline as BTC outperformed ETH during risk-off moves, finding some loose support at the ascending trendline from May 2021.
ETHBTC Daily Chart
- Implied vols spiked on the initial downward moves, and is now slowly turning back to healthy (crypto) levels.
ETH ATM Implied Volatility
- Jan 2022 is set to be ETH’s lowest ETH-emitting month since the launch of EIP-1559, primarily due to the large influx of volume on OpenSea NFTs. Assuming this trend continues, we may see a net burn in ETH supply.
Daily Net ETH Emissions (Delphi)
- Despite recent market volatility, certain NFT collections continue to be bid as a speculative store-of-value during uncertain periods, as floor prices continue to increase despite the depreciation in ETH. We do not think the NFT market will fare well for the whole of 2022 – the tech is amazing, but we fear that the hype and speculative capital in there right now is a recipe for an explosion at some point.
Price performance of top ETH NFT’s (Delphi)
- The two largest money markets on ETH have seen a decline in the utilization of stablecoins, as investors repay their loans. The deleveraging can also be attributed to the rising liquidations on Ethereum money markets, reaching a new high of $200m in a single day, earlier this month.
Utilization Rate for Stablecoins on Aave and Compound (Delphi)
- The CFO of Wonderland has had his true identity revealed – Michael Patryn, co-founder of QuadrigaCX who disappeared with $169m. Following this, Wonderland, alongside projects with any relation to its founders experienced sharp drawdowns, with TIME down 97% from its ATH.
TIME, SPELL and ICE
- Net exchange inflows persisted for the majority of the week, flipping during the weekend suggesting some short-term shifts in sentiment as we head toward the new week.
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 9,248,242. This represents 7.75% of the total supply estimated to remain locked for ~ one year, continuing to slowly constrict supply.
- ETH is likely to continue mimicking BTC’s directional volatility, but we still see a further decoupling of risk moves between these two assets. Upcoming price action will likely be driven by macro news flow – particularly unemployment data set to be released later this week.
DeFi & Innovation
- Ethereum Foundation ditches “Ethereum 2.0” upgrade name, now called “Consensus Layer.”
- LeBron James and Crypto.com team up for educational initiative to teach blockchain technology in schools.
- Youtube CEO hints that NFT tools may be added to the platform.
- Bank of Korea completes their first phase of CBDC pilot.
- Google Cloud launches Digital Assets team.
What to Watch
- Further details on White House’s crypto executive order.
- Biden to speak with European leaders this week regarding Russia x Ukraine tensions.
- US’ JOLTS job openings and ISM Manufacturing PMI, on Tuesday.
- US’ hourly earnings and unemployment rate, on Friday.
Zerocap Research Analyst Joe Wilson provides a thorough breakdown of Illuvium (ILV) and how it could become one of the most popular Metaverse projects of the crypto space.
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 24 Jan. 2022 0:00 UTC to 30 Jan. 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|