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 Chair Jerome Powell: says that the “transitory” label for current high inflation rates should now be retired, Omicron variant raises supply side price uncertainty – Treasury Secretary Yellen agrees.
- IMF urges Fed Reserve to accelerate tapering due to growing inflation fears, market prices in more rate hikes in 2022.
- Amid foreign listing crackdown tensions, Chinese rideshare tech giant Didi set to leave NYSE for HKEX.
- Several CEOs of crypto firms are set to testify before the US House Committee on Financial Services this Wednesday to discuss the future of digital assets; House announcement.
- FTX releases crypto regulatory proposal before Wednesday’s hearing.
- Meta ends ban on crypto advertisements, enforced since January 2018.
- First NFT-focused ETF launches on NYSE Arca.
- Jack Dorsey steps down as Twitter CEO, with more time to allegedly work on Bitcoin.
- Australia’s GDP fell only 2% in the September quarter, positively surprising economists amid lock down in several major states.
- Upon listing rejection, Grayscale argues “no basis” to US SEC for approving bitcoin futures ETFs but not spot.
- Microstrategy purchases another 7,002 BTC, growing its crypto holdings to 121,044 BTC or around $6.9B at the time of writing.
- Latin America’s e-commerce giant MercadoLibre soon began to accept several cryptos as payment for any product, starting with Brazil.
Winners & Losers
- Bitcoin began the week in consolidation after an early $4,000 surge into the previous weekly close. Ethereum outpaced Bitcoin as did a number of assets in the crypto sector with many reaching all-time highs against BTC. With such aggressive dip buying, spot volumes remained elevated as did open interest in the futures market. After news surrounding inflation and tapering in the US late in the week, risk-off bled into the crypto market with significant selling pressure across the board. Almost a quarter of open interest (-$5.4B) in Bitcoin’s futures market was wiped in the drop as price moved more than 27% in as little as 24 hours. Overall, BTC returned 13.72% and ETH returned -2.40% WoW.
- Global Stocks started the week on a positive note. However, after FED chair Jay Powell’s speech to congress, volatility soon took hold, confirming his change of thinking on “transitory” inflation. Growth stocks took the biggest beating as funding costs on the front end jumped. S&P 500 was down by nearly 4%, with the Nasdaq down by almost 5.5% from peak to trough. In one session, Tesla shares dropped by 6%, while Facebook shares have been down by 20% since their recent peak. Apple stocks fell after a news report that the iPhones of at least 9 US state dept employees were hacked. News of Chinese tech giant Didi’s US delisting also weighed on geopolitical concerns as Chinese companies are now afraid to raise funds from the states. Alibaba’s HK listed stock dropped to record low amid global growth slowdown fears. Shares in China Evergrande dropped to 11 year low.
- Volatility in all asset markets jumped for the week, following US FED’s “flipping” from transitory inflation to a more permanent concern and faster tapering talk; USD strengthened substantially, with USDJPY hitting 115.50 last week before risk aversion took hold. By week’s end, AUDUSD had broken below 70 cents, a massive move since the 79.50 level achieved in February. USDJPY also reversed course following stocks, credit, front-end bonds and cryptocurrency sell-off, hitting a low of 112.50. Stocks took some hits going into mid-week, with the VIX index climbing from 26 to 34, a level not seen since January this year.
- OPEC+ bowed to consumer pressure by proceeding with their scheduled oil production hike but said they could revisit the decision at any moment due to the tremendous uncertainty in the market. Aluminium prices fell as much as 2.6% after inventories in warehouses tracked by the LME jumped 18% due to a rise in Malaysian stockpiles. Physical premium in the Chinese copper mkt eased to a normal level from a record high in mid-Nov as domestic inventories rebounded from the lowest in more than a decade. Gold prices failed to benefit from FED “flip” as prices retraced on a stronger USD against risky assets.
- Scheduled macroeconomic data took a backseat to events driving volatility this week, with weaker employment data out of the US (210k increment vs 546k expected, with UR lower at 4.2%). Germany’s November CPI came in at the highest level since 1992. Concerns over the Omicron variant forced Japan and Australia to close their international borders to foreign visa holders also weighed on recovery hopes.
- Geopolitical concerns weighed on sentiment as US president Biden was due to meet with Russia’s President Putin to de-escalate a build-up of Russian troop presence bordering Ukraine. In addition, Chinese tech giant Didi’s delisting from the NYSE to migrate to Hong Kong further highlights political barriers between Beijing, Wall Street and the Whitehouse.
- The bond market saw escalated volatility during the week with initial concerns over the US debt ceiling as congress has yet to approve the extension of further borrowing by the government. The US government could default on its coupon payment as early as the 21st of the month. Following the “flip” by FED chair Jay Powell on inflationary expectations, the front end of the curve sold off aggressively, with two-year UST yield jumping 20bp for the week, or a move of 45%! In addition, the longer end rallied on the back of economic growth concern amid both Omicron strains spreading across the globe. The ten-year UST yield dropped from 1.51% to 1.34%, while the 30-year benchmark dropped from 1.84% down to 1.67%, flattening the curve substantially.
Macro, Technicals & Order Flow
- FED discussions involving the acceleration of bond tapering provided enough momentum for risk aversion to push BTC below the 53,000 mark, coinciding with the break of the trendline from July, where it cascaded into the low 40’s. This was definitely a case of sell now, ask questions later across the financial markets.
- This spilled into the weekend, and as cryptocurrency is a 24/7 market, we saw significant unwinds of open long futures contracts which saw the asset drop approximately 17%, with weekly lows to around $42,000. Amazingly over $5 billion of open interest in derivatives were wiped out. The more widely adopted cryptocurrency becomes, the more we will see risk moves (both ways) on weekends as the market looks to front run event risk.
- As inflation persists and Omicron shows signs of increased transmissibility, further lockdowns and stimulus may not be viable options. As investors look to offload risk, further changes in the monetary policy narrative and safe haven dynamics are determinants to look for moving forward.
- Indicators for BTC are offering conflicting signals. On-chain data indicates a continued supply squeeze on exchanges, although this is tempering with the recent move. Conversely, for the first time since September, extended negative perpetual funding rates have shifted funding flows from shorts to longs, illustrating significant short-term bearish pressure.
Bitcoin Net Position Change
BTC Perpetual Swaps Funding
- Perpetual funding liquidations were huge, seeing leverage reset across major exchanges.
BTC Perpetual Liquidations 1W
- Out to December 31, option strikes are heavily weighted to calls at 80,000, 100,000 and 120,000 levels. Out to Mar 25, 2022, we are still seeing interest weighted to 100,000 as the key level.
OI Interest by Strike – Dec 31, 2021
OI Interest by Strike – Mar 25, 2022
- Some wild action on the futures basis curve.. Predictably most exchanges went negative on the move, but the CME went wildly positive – although this could be errant data spikes given the volatility. We are looking into this for insights this week..
BTC Futures Annualised Rolling 1 Mth Basis
BTC CME Futures Annualised Rolling 3 Mth Basis
- The low levels of short-term holder supply persist. However, since the start of November, this figure is starting to show signs of growth. Conversely, long-term holder supply is at all-time highs albeit showing signs of rotation.
BTC Total Supply Held by Short-Term Holders
Bitcoin: Long-Term Holder Net Position Change
Bitcoin: Total Supply Held by Long-Term Holders
- In summary, we’ve been talking about inflation risks for a long time now. The market cycle is now clearly shifting to tightening. The real test of the next phase will be the medium and long-term assets that the market deems inflation hedges. We believe that BTC will be one of the primary benefactors.
- Despite Bitcoin’s major deleveraging event, Ethereum held its ground. The roll-on effect of BTC’s downturn was rejected by ETH bulls, bouncing off the 3500 level and closing the week at the 4200 level.
- Risk aversion in the Altcoin market saw 8 of the top 10 coins lower by 20-30%.
- Despite this, DeFi total locked value hit an all-time high above $250B last week at one point and ETH is clearly losing total value locked market share.
DeFi TVL in Competitor Chains (Delphi)
- Layer 2 roll ups such as Arbitrum and Loopring continue to grow in popularity on the back of Ethereum’s scaling issues.
- Despite TVL shifts, we are still seeing strong derivatives interest in higher ETH prices.
ETH Open Interest by Strike: Dec 31, 2021
- ETHBTC is breaching above levels that haven’t been seen in over 3.5 years, indicating a strengthening ETH against market uncertainty in broader cryptoassets, and a further decoupling of the two largest assets by market cap. Interestingly on the back of the risk move, we would’ve expected greater downside from ETH. Perhaps JP Morgan’s take on Ethereum as an inflation greater inflation hedge is coming true.
ETHBTC Daily Chart
- Like BTC, on-chain data suggests a continued supply squeeze on exchanges, although this is moderating on the back of the risk moves.
Ethereum Exchange Net Position Change
- There are notable spikes in both directions on perpetual funding rates, with divergence across exchanges. Short-term players are looking to capture potential momentum, and there are some strong arbitrage opportunities.
ETH Perpetual Funding Rates
- The futures basis has equally gone negative temporarily at some exchanges, and wildly positive on the CME (assuming the data spike is partly correct).
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 8,514,293. This represents 7.17% of the total supply estimated to remain locked for ~ one year, continuing to slowly constrict supply.
- In summary, ETH’s V-shaped bid is demonstrating bullish sentiment amongst investors, and a potential decoupling between ETH & BTC as the ETH/BTC pair reaches multi-year highs. However the looming inflation, FED’s monetary policy, equity markets and the Omicron variant will be key determinants for calling the next move.
DeFi & Innovation
- Total value locked in DeFi reaches a new all-time high at $276B.
- Seoul, Korea set to become the first city to join the metaverse.
- Jack Dorsey’s Square changes its name to “Block” to focus on blockchain projects.
- China’s Central Bank proposes further crypto crackdown by monitoring Metaverse and NFT projects.
- Four metaverse projects sold over $106 million worth of virtual land just last week.
- Astar Network wins Polkadot’s third parachain auction, gathering over 10.3 million DOT and over 27,000 contributors as the auction ends, joining Moonbeam and Acala in the ecosystem.
- LUNA continued to rally and break all-time highs despite other assets declining, joining the ranks of SOL, DOT and ADA in the top 10 Cryptocurrencies by market capitalization.
What to Watch
- The US House Committee testimony of crypto CEOs on Wednesday.
- US’ November JOLTS report on Wednesday.
- US’ November CPI report on Friday.
- Further remarks from the Fed on inflation and potential rebuttals on IMF’s taper tightening proposal.
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 29 Nov. 2021 0:00 UTC to 5 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|