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  -  Weekly Wrap   -  Weekly Crypto Market Wrap, 5th September 2022

Zerocap provides digital asset investment and custodial services to forward-thinking investors and institutions globally. Our investment team and Wealth Platform offer frictionless access to digital assets with industry-leading security. To learn more, contact the team at [email protected] or visit our website www.zerocap.com 

Week in Review

  • FED’s DeFi discussion paper releases on concerns of crypto volatility as an inhibitor to DeFi’s growth, while assessing actual risk to traditional finance as small at present.
  • Binance US gets a federal request to urgently disclose adherence to safety protocols. 
  • Ethereum miner balance reaches four-year high as miners in anticipation for Merge.
  • Meta announces Facebook and Instagram users can now post NFTs from their wallets.
  • California State passes bill for licensing and regulating crypto firms.
  • Crypto.com accidentally transfers $10.5M to Australian client instead of $100 refund.
  • IMF publishes articles on CBDCs and tokenised assets – claims “possibilities are infinite.”
  • Ethereum Layer 2 Arbitrum completes Nitro update for faster and cheaper transactions.
  • a16z proposes NFT-focused US licences based on Creative Commons (CC) model.
  • Celsius files to reopen withdrawals, after customers file lawsuit for $22.5M in custody.
  • UBS raises US recession odds to 60%, up from 40% in June.
  • USD jumps to 20-year highs following strong employment data to support FED’s hikes – FED President John Williams says rates will stay high for a while.
  • Eurozone inflation hits record 9.1% as energy and food prices soar – ECB urges steady rate hikes to minimise risks.

Winners & Losers

Macro Environment

  • The International Monetary Fund (IMF) came to the aid of Pakistan and Sri Lanka earlier in the week, following months of environmental and socioeconomic duress. Pakistan, in the middle of one of its worst floods on record, has seen over one third of the nation plunged underwater. Resulting in an estimated $10 billion in flood damages, also claiming the lives of over 1,100 residents and adversely affecting another 33 million people.  The South Asian nation, prior to the floods, was already struggling to pay off its mounting foreign debt obligations, and now facing another setback. Pakistan has since received a $1.1 billion bailout from the IMF. Sri Lanka also received a $2.9 billion funding package from the IMF on Monday, in an attempt to restore financial stability to the local economy. Sri Lanka, currently experiencing one of its worst economic crises to date, with inflation levels hitting an all-time high of 64.3% in August this year. Economic and political instability following President Gotabaya Rajapaksa’s fleeing from the country in July, has resulted in many locals being unable to afford basic necessities such as food, medicine and fuel. Moreover, a lack of foreign currency reserves has prevented the importation of these necessities from abroad. Evidenced in Sri Lanka’s entering into its first-ever default on foreign debt in May this year.
  • Europe, sourcing approximately 40% of its natural gas from Russia last year, will begin one of its most challenging winters yet, with Russian state-operated “Gazprom” indefinitely suspending gas supplies to Europe via its Nord Stream 1 gas pipeline. Gazprom cited technical difficulties, and its inability to fix an oil leak in its Portovaya gas turbine as reasons for the closure. The announcement came mere hours after the G7 nations agreed to a price cap on Russian oil exports, in an effort to curtail future funding towards Russia’s war effort in Ukraine. TTF Natural gas futures jumped close to €280 per megawatt hour on Monday as a result of the closure, however, settled the week lower at around €210 per megawatt hour.
  • As a result of Russia’s ongoing tightening of natural gas supplies, the United Kingdom’s (UK) Ofgem recently increased its energy price cap to £3,549 per year (for average households utilising dual fuels). Ofgem’s price cap, representing a lawful max cost-per-unit of energy of the average UK household. The new price cap will go into effect from October 1, and is projected to reach as high as £5,386 by January 2023, according to a Cornwall Insights forecast.
  • Speculation surrounding a softening demand for oil corresponding with globally rising interest rates, saw oil sell-off on Tuesday. WTI and Brent reached weekly lows of $85.73 and $91.57 respectively. However, Monday’s looming OPEC+ meeting saw oil move higher at week-end. Saudi Arabian minister of energy Abdulaziz bin Salman is rumoured to be under the pump by the crown prince to cut back supply, in order to maintain cost per barrel around the $100 mark.
  • End of the week saw United States (US) 10 Year Treasury bonds hover at 3.19%, the 2Y & 10Y inversion sitting at -21 basis points. In forex, the USD/JPY pair broke above ¥140.10, with the governor of the Bank of Japan Haruhiko Kuroda stressing it’s still too early to cut back on monetary easing due to the BOJ’s ongoing concerns surrounding deflation. The EUR/USD dipped below parity – $0.9965 at the time of writing. Gold recovered from its weekly low of $1688, to close the week at $1734.80.

Technicals & Order Flow

Bitcoin

  • Early in the week in the presence of lighter selling pressure, Bitcoin pushed higher, marking weekly highs above 20,500. Action was quick to revert lower with the 19,660-level halting Bitcoin’s descent. Notably, the 19,660-level marks the top of the 2017 bull run and thus far has acted as firm downside support in 2022. Subsequent moves higher were met with resistance at the 20,440-level suggesting relevance. A late-week sell-off was followed by dampened volatility during the weekend’s session. Consequently, Bitcoin closed at 20,007, returning 2.23% WoW. 
  • Coming off heavy selling out of the prior week’s Jackson Hole meeting, the price eased as Bitcoin entered the new week. Alongside a rebound in equities and other risk assets, Bitcoin pushed toward weekly highs before heightened tensions in Taiwan dampened sentiment. Equities and Bitcoin stumbled shortly after.
  • Later, in light of unemployment rates missing expectations, markets reacted positively to NFP data out of the US. The premise of relieved inflationary concerns prompted a push higher. However, a price cap on Russian oil, imposed by the G7 soured sentiment caused Bitcoin to retrace 3.07% in the following hours. 
  • Historically, in the presence of risk-off sentiment participants move into stablecoins as well as Bitcoin, as seen in June’s risk events. Notably, despite persisting macro headwinds, since June 2022 Bitcoin’s market dominance has fallen sharply and currently resides at levels seen in 2018. Correspondingly, Ethereum’s market capture has elevated significantly, depicting the impact of Ethereum’s approaching merge.
Data source: Tradingview
  • While Bitcoin’s market capture remains diminished, participants continue to accumulate at current levels. URPD shows that substantial volumes continue to be transacted between the 19,500 and 24,300 levels, reaffirming this range as support. 
Data source: Glassnode
  • Last week, we touched on Bitcoin’s 25 delta option skews persisting higher toward the latter part of August. Entering September and facing continued inflationary and macroeconomic headwinds, this behaviour remains.
Data source: Glassnode
  • Further clarity is provided when looking at this week’s popular options strategies. This week there was notable volume in puts, expiring at the end of September, at the 16,000 and 17,000 strikes. Correspondingly, December calls at the 18,000 and 30,000 strikes were popular. Participants are considering downside protection in the short-term whilst also forming potential bullish opportunities at longer-dated expiries.
Data source: Laevitas
  • This week, Bitcoin recovered some of the losses it endured off the back of the Jackson Hole event. However, while Ethereum’s market dominance grows in line with its approaching merge, Bitcoin’s continues to diminish. Notably, Bitcoin has experienced drawdowns in the month of September for 5 consecutive years and it seems that some participants are trading in line with this seasonal pattern via options. Short-term action will possibly be influenced by next week’s CPI printout of the US and any newsflow related to geopolitical risk out of Taiwan.

Ethereum

Data source: Tradingview 
  • Following last week’s break downward into support at 1,420, Ethereum retraced much of its losses early this week. A move back above Ethereum’s 100-day moving average (MA) was followed by consolidation. Notably, bids higher found ongoing resistance in line with Ethereum’s 50-day MA. Consequently, Ethereum persisted sideways for much of the week, closing at 1,580 for a 10.71% gain WoW.
  • This week, despite some retracements off the back of the G7’s price cap on Russian oil, ETH displayed relative strength and outperformed a host of global markets. Ethereum’s gains could possibly be attributed to continued bid volumes by speculators that continue to position themselves in anticipation of a successful merge to PoS. With the Labour Day long weekend in the US and the Bellatrix upgrade slated for Tuesday night AEST, volatility could possibly be expected as the week progresses.

ETHBTC Daily Chart

Data source: Tradingview 
  • ETH/BTC staged an impressive rally over the course of the week. While brief, the pair reclaimed the 0.080 level, despite facing ongoing macro headwinds. Notably, crypto assets have persistently tracked equities. However, this week, markets witnessed a clear breakdown in this relationship. The ETH’s merge narrative has bucked the trend facing global markets. While a new local high above 0.082 is yet to be seen, ETH’s outperformance may remain as the merge draws closer.
  • Notably, this week as the price found support and subsequently consolidated, Ethereum’s active addresses sharply increased. It is hoped that Ethereum’s transition to PoS will result in a more consistent network environment. Moreover, positive changes at the network level such as this have historically been bullish for tokens at the protocol level, all else being equal. Should the entire ecosystem benefit from a successful merge, and if macro headwinds subside, it is our opinion that there will be outperformance.
Data source: Glassnode
  • Despite uncertainty around a possible fork of the proof of work (PoW) Ethereum blockchain, many popular protocols, tokens and marketplaces are expressing they will only support the proof of stake (PoS) chain. DeFi platforms like Aave have specified that their teams will not monitor or maintain websites for a PoW fork of Ethereum. Similarly, Tether and Circle, respectively the companies behind USDT and USDC have clarified that their stablecoins will only be redeemable for USD and hence have value on Ethereum PoS. Moreover, this week, OpenSea and LooksRare have both stated their marketplaces will only support Ethereum PoS after the Ethereum merge. Therefore, it is our opinion that any fork of Ethereum PoW may struggle to replicate the traction on the PoS blockchain without its thriving ecosystem of protocols.
  • To further support the accumulation narrative, last week saw a hefty uptick in ETH withdrawals from exchanges – historically indicative of heavy bidding on the asset. Such levels of exchange withdrawals have not been seen since early May, pre-capitulation.
Data source: Glassnode
  • In newsflow, an Ethereum proposal to create abstract storage bonds has passed, creating the ERC-3475 token standard. This token allows for a new layered structure that facilitates the issuing of service debt and assets without fracturing liquidity. With this, more features can be written into smart contracts, ensuring that individuals immutably commit to repaying bonds before a certain date. This remedies the severe complexity and illiquidity of DeFi bonds, whereby issuers no longer need to issue individual ERC-20 tokens that constantly service the bond. In this sense, the ERC-3475 tokens are a major step forward for programmable money on the blockchain.
  • In light of risk-off sentiment apparent within global markets, Ethereum pushed higher this week. As the merge continues to bolster action, Ethereum may continue to break its relationship with broader markets. This narrative is affirmed by increasing network participants in addition to supply being pulled from exchanges. Nonetheless, we are expecting that short-term action will continue to be somewhat impacted by forthcoming prints out of the US and further newsflow related to the merge.

Altcoins

  • In a recent Helium governance proposal, HIP-70, the core developers of the decentralised wireless network have suggested that the project could increase its scalability by migrating to Solana. The improvement proposal cited Solana’s efficient and cost-effective transactions for its decision to move away from its own chain. Currently, Helium consists of nearly 1 million IoT devices, hotspots, and utilises its blockchain as an incentive layer to grow this number. If the proposal is accepted, the network’s hotspot devices will remain the same, yet rewards will be issued using Solana contracts.

DeFi

  • Upon the Compound DAO passing a governance proposal to upgrade its Chainlink price feeds for the new version of the protocol, Compound III, an error was discovered which led to ETH lending freezing for 1 week. The code error was that the new smart contract for cETH (Compound ETH) did not have a function to obtain the underlying price of ETH. Accordingly, borrowing and lending cETH has been paused to mitigate the likelihood of exploits. Fortunately, users can still repay debt and add collateral to avoid having their positions liquidated.
  • Subsequent to the numerous DeFi attacks in 2022, resulting in investors losing billions of dollars, the FBI has requested that DeFi platforms increase their security measures. Likewise, the bureau warned investors against the potential for vulnerabilities in these platforms. The FBI specified that individuals should first conduct thorough due diligence when using DeFi platforms. Investors were also warned to utilise protocols that have been audited by reputable firms and in existence for a long time.

Innovation

  • Popular video game development company, Limit Break, has raised $200 million USD to build Web3 massively multiplayer online (MMO) games. Investors in this round include FTX, Coinbase Ventures, Paradigm Ventures and more. The founders of the development company, Gabriel Leydon and Halbert Nakagawa created the ‘free-to-play’ model of games with Game of War, Mobile Strive and Final Fantasy. Limit Break has goals to create video games with this model in a decentralised way and low barriers to entry. Following the announcement of the fundraiser, Limit Break’s NFT collection DigiDaigaku pumped in floor price, going from about 5 ETH to 15 ETH, given they will be used in upcoming games.
  • Dominant Layer 2 platform, Arbitrum, has upgraded its current chain, Arbitrum One to Arbitrum Nitro. Subsequent to the Nitro upgrade, Arbitrum have stated that they will offer reduced fees, more efficient transactions, increased transaction throughput, additional interoperability and more. With these protocol-level improvements, Arbitrum will be resuming its Odyssey Campaign to incentivise new users to join the network. Specifically, through various data compression techniques and increasing its compatibility with the Ethereum virtual machine, Arbitrum will lower its fees by an additional 27% on top of its 90-95% reduction of Ethereum gas fees. Notably, Arbitrum Nitro benefits come at the cost of centralisation as validators are whitelisted by the developer team as opposed to using a decentralised sequencer to compress transactions.

NFTs & Metaverse

  • Meta has integrated Ethereum, Polygon and Flow NFT cross-posting for Facebook and Instagram as part of its push for interoperability. To link up one’s NFTs to their social media platform, a single wallet connection is required as a one-time event. Notably, once a connection has been established once, evidence of the wallet is stored, meaning NFTs can be displayed without an active connection. The necessary handshake can be performed via MetaMask, Rainbow and a plethora of other web3 wallets.
  • Event organisers using Ticketmaster will now be able to issue tickets as NFTs on the Flow blockchain. Although Ticketmaster originally partnered with Polygon to create NFT tickets for NFL games, the team reelected Flow for this purpose early this year. Beyond issuing NFT tickets, organisers will be able to include unique features including special experiences, celebrity meetups and memorabilia. Furthermore, Ticketmaster is seeking to increase liquidity for tickets through an NFT ticket marketplace enabling these digital assets to be traded in a peer-to-peer manner.
  • VC firm, Andreessen Horowitz, has released its ‘Can’t Be Evil’ licences for NFTs to prevent copyright and IP confusion. These licences are crucial for the evolution of NFTs as they remove the need for holders to trust that creators will abide by the licence agreement. Instead, the licences are built into the base level of the NFT, ensuring that collection creators ‘Can’t Be Evil’. In the blog post announcing these licences, a16z described 6 different options and put each under the CC0 (creative commons) category – meaning the firm holds no ownership over the IP. Moreover, the code for all 6 licences are publicly available on Github.

What to Watch 

  • Australia’s quarterly GDP report, on Tuesday.
  • UK’s monetary policy hearings, on Wednesday. 
  • ECB Press Conference and Fed Chair Jerome Powell’s speech, on Thursday – We expect the ECB to address record eurozone inflation while Powell may provide a more positive outlook on the US economy following better-than-expected results.
  • Developments with Binance.US’s federal request to provide consumer protection data.
  • User feedback from Meta’s long-awaited NFT integration with Facebook and Instagram.

Announcements & Insights

  • Our new structured product, the ETH Merge Note, is now live. Providing simple, dual outcomes and enables investors to capture yield from market sentiment in Ethereum.
  • HopgoodGanim Lawyers, a leading crypto law firm in Australia, has just announced the consolidation of its digital assets practice with the appointment of Tim Edwards as the Head of the practice – with Zerocap as one of its initial flagship clients.
  • We are proud to announce that Zerocap has won the 2022 FinTech Award for the category of Best Innovation in Crypto/Digital Assets.
  • Zerocap Chief Investment Officer Jonathan de Wet joins Ausbiz to share his insights following the recent Federal Reserve speech, the Ethereum Merge and more.

Learn more about ANZ’s vision for a better carbon market using blockchain technology, and how Zerocap has been part of the process by mediating the bank’s first purchase of tokenised carbon credit units in this Financial Review piece.

Disclaimer

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* Index used:

  Bitcoin    EthereumGoldEquities        High Yield Corporate Bonds      CommoditiesTreasuryYields
BTCETHPAXG        S&P 500, ASX 200, VT      HYG  SPGSCIU.S. 10Y

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