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Week in Review
- Federal Reserve raises rates by 50 basis points – the largest single move in 20 years.
- Balance sheet reduction will be of $47.5 billion per month from June to August, with a limit of $95 billion monthly by September.
- Fed Chair Powell states 0.75 bps hikes are not being actively considered at the moment as data points “inflation may have peaked.”
- S&P 500 falls for five straight weeks, Nasdaq records worst daily-percentage loss this year.
- US Senators propose new crypto bill limiting capital gains tax.
- California governor signs blockchain executive order to protect consumers, promote Web3 jobs and research.
- Great resignation continues – Record 4.5 million Americans quit their jobs in March.
- Reserve Bank of Australia warns core inflation could hit 4.6% by December, signals more rate hikes throughout the year as the country records lowest unemployment since 1974.
- US SEC nearly doubles the size of the Crypto Assets unit; adds NFTs to the protection list.
- EU finance commissioner calls for “global agreement on crypto” to protect investors and environment – Commission report on DeFi rethinks policies and addresses positive uses.
- Record 90% of surveyed Central Banks are officially exploring CBDCs; BIS report.
- Binance commits $500 million to coinvest in Twitter with Elon Musk.
- FIFA announces partnership with crypto project Algorand.
Winners & Losers
- Central bank activity was the main topic of the week. We began with a surprise rate hike from the Indian central bank, RBI, which has not altered its monetary policy since the beginning of the COVID-19 pandemic. The RBA surprised the market by adjusting rates higher by 25bp to 0.35%. Economists were split over the ability of the central bank to move ahead with a rate hike, given that a federal election is just around the corner. But with the latest inflation headline at 5.1% p.a, there is a lot for the central bank to catch up on. Next came the FOMC, and the FED did what the market had expected with a 50bp hike. The curve is now pricing in a 50bp consecutive move for the next two meetings.
- More specifically on the domestic front, the RBA has been behind the curve for way too long, and now it has become an impossible task to catch up. We had two decades of continuous growth without a single recession, but we entered the COVID-19 pandemic at historically low rates. If they were genuinely independent of the politics of Canberra, then I’ll say they fell asleep behind the wheel. The housing issue has been driven by political stupidity as the Coalition went into the last election, giving first home buyers the ability to borrow 95% of the house valuation at historically low variable rates. Both variables (rates and equity) are now at risk for default. Both sides of the big party are now suggesting the same equation, a jump further down the rabbit hole. Only this time, it appears the “can” is getting a bit too heavy to kick down the road.
- The relief rally following the FOMC only lasted one day as the solid Non-farm payroll data confirmed the US economy still requires plenty of “foot on the brakes” to tame the inflationary spiral. Stocks are now at their worst level since this time last year. The market is currently pricing in a substantial turn of the interest rate cycle that’s from the liquidity injection that the Fed implemented to support asset prices following the GFC. With the Fed’s balance sheet at multiple of what it was before 2008 and starting at interest rate levels, that’s never been seen in the history of the developed world; we have some way to go before the Macroeconomic environment equalises again.
- China’s foreign exchange reserves fell more than expected in April; official data showed on Saturday. The country’s foreign exchange reserves – the world’s largest – fell $68 billion to $3.12 trillion last month, compared with $3.133 trillion according to a Reuters poll of analysts and $3.188 trillion in March. Furthermore, the Russian-Ukraine war is disrupting the regular supply chain feeding into China’s manufacturing hub, and the additional sanctions placed on Russia by western nations are seriously weighing on China’s growth engine. That means the level of revenue generated via exports in FX will diminish. On top of this, the fallout from the US and its allies freezing Russia’s FX reserve is worrying emerging market sovereign wealth managers and potentially reducing the attractiveness of hard currency accumulation.
Technicals & Order Flow
- This week, action remained compressed within the 39,250 and 37,500 zones until bullish momentum sparked a push to weekly highs above 40,000. However, elevated sentiment was short-lived and liquidations caused prices to cascade. On the back of thin liquidity over the weekend, support at 36,000 gave way and Bitcoin closed the week slightly above 34,000, which acts as key support going forward.
- Early on, Bitcoin displayed dampened price volatility as investors awaited Wednesday’s FOMC. The announced 50bp rate hike aligned with investors’ expectations and bulls took advantage of the Fed’s supposed control, initiating the push to weekly highs.
- However, equities showed no interest in an extended relief rally and the market’s mood toward the Fed and the current monetary context was quick to turn sour. Bitcoin followed the mid-week selloff in equities and fell over 8% on May 5th.
- Price is looking very heavy right now – we’ve broken the key ascending trendline from July 2021, and the prior lows from Feb 2022. Next key support is at 31,000 – and a break here could see us down at 28,000 in swift succession. Tough to time the market at these levels, and we are expecting volatility on either side, but not before further down moves into this week. There is a clear case for protection strategies and accumulation yield notes on the back of these moves at lower levels.
- Bitcoin’s correlation with the Nasdaq is now the highest it has been since 2022’s year open. Any sell-offs in equities will almost certainly roll into the digital asset space.
- Looking at derivatives data, investors are favouring puts over calls. This is indicative of the current bearish underlying market sentiment and suggestive of short term directionality.
- The on-chain metric URPD depicts a significant void of support below current levels. Risk this week may result in an exaggerated move into the high 20s if the technical lows at 31,000 break.
- URPD shows notable accumulation between 37,000 and 41,000. Moreover, short term holders who accumulated at these levels are feeling the pain from recent price action. The amount of short-term holder supply in loss is now the highest it has been since July of 2021.
- A quick plug for our Smart Beta fund – this is what we built it for in many ways. Various asset classes have faced significant drawdowns this year. Notably, during the same period, Zerocap’s Smart Beta Bitcoin Fund has experienced lower drawdowns compared to the S&P500, the Nasdaq, Bitcoin and bonds.
- Not only does the Fund limit downside exposure, but by implementing risk management strategies, investors are provided with optimised upside exposure over the long term.
- This week, fear in equity markets has clearly flowed into the digital asset space and resulted in significant sell-offs. Derivatives data shows that some market participants are bearish on short term price prospects and on-chain indicates that short term holders are feeling the pain of recent price action. A void of support below current levels, paired with a significant correlation between Bitcoin and equities makes digital assets exposed to short-term future risk moves that affect equities.
- We recognise that there are mechanisms that not only protect investors but optimise their prospects over the long term. Zerocap’s Smart Beta Bitcoin Fund is one example of this. More recently, Zerocap launched its Principal Protected Note (PPN). The PPN is also designed to maintain optimised exposure to the upside while limiting investors’ downside exposure.
- Entering the week, all eyes, including Ethereum’s, focused on Wednesday’s all-important FOMC meeting. Markets saw a short-term reprieve rising 4% higher post-event and prospects were reaffirmed by Powell suggesting that future 75bps hikes were off the cards. However, the gains were short-lived. Ethereum struggled to break above 3,000 and akin to broader risk assets were aggressively sold off during Thursday’s session. Overall, Ethereum posted a fifth consecutive WoW loss, falling 10% to close the week at 2,500.
- The dynamic of inflationary pressures amidst tightening monetary conditions is continuing to wreak havoc on risk assets. This thematic is a pivotal factor in the now well-documented correlation between the Nasdaq and digital assets. Ethereum’s 30d correlation to the Nasdaq sits at all-time highs, and we expect this relationship to persist unless idiosyncratic news flows attempt to decouple crypto from equities.
ETHBTC Daily Chart
- Despite the risk-off sentiment, Ethereum rose relative to BTC this week, contrasting the conventional behaviour between the pair. The upcoming merge is likely a factor at play here. As I write, this is breaking down though – with a sea of red across the board, and ETHBTC heading lower.
- Looking at options data, Ethereum’s volatility premium over BTC has hit a 12 month low, flipping negative in the weekly expiries. Previously, IV spreads below 5% have been preceded by a move higher in the ETH/BTC ratio. The fundamentals are aligning for strength in Ethereum over Bitcoin, if risk moderates against the macro headwinds.
- Ethereum’s 25 delta skew shows an incremental price (IV) increase in puts relative to calls. Buying short-dated puts to protect downside risk is becoming relatively more expensive when compared to 25 delta calls. Participants hedging against further price depreciation is behaviour consistent with the market’s current underlying bearish sentiment.
- The MVRV Z-Score metric can be used to assess Ethereum’s relative value and provide an indication of market cycles. Historically, market tops (red) are present when the market value is significantly higher than realised value, with the opposite applicable for market bottoms. More recently, the MVRV Z-score has approached a ratio that has been historically correlated with market bottoms.
- With the FOMC meeting behind us, traders shift their attention to Wednesday’s CPI reading as the next impactful event. Markets are expecting Core YoY inflation to reduce by 50bps relative to March figures. A stronger report would further propel the US Dollar and heighten risk aversion for digital assets.
- This week, Solana’s mainnet was inoperative for 7 hours, marking it the blockchain’s 7th outage for 2022. The blockchain went dark due to a rush of bots attempting to mint Solana native NFTs on Candy Machine, a NFT minting program.
- TRON (TRX) launches its algorithmic stablecoin USDD. Tron proposes that individuals can earn 30% APY on USDD. Like other popular stablecoins, USDD’s price will be pegged to the US dollar and will be maintained through an arbitrage-driven mechanism similar to Terra’s stablecoin, UST.
- Google Cloud launches its Web3 division. The newly formed division aims to improve the Google Cloud Platform so that it becomes the first choice for blockchain developers. In order to capture the distributed nature of Web3.0 the team endeavours to implement decentralised solutions for numerous external parties.
- Furthering their adoption of Web3, select Gucci stores in the US will accept BTC, ETH and other popular cryptocurrencies. This announcement comes after Gucci’s popularity in the Web3 community. Gucci possesses a popular NFT collection and actively participates in the Metaverse.
NFTs & Metaverse
- VanEck steps into the metaverse by launching their own NFT collection. The collection intends to provide online and real-world utility. VanEck’s NFTs will be high-quality, 3D avatars which develop in real time and act as a digital pass for online events as well as various opportunities.
- PROOF’s NFT collection, Moonbirds, announces its “nesting” mechanism which acts to incentivise investors to hold their NFTs. By nesting Moonbirds, holders will receive unique rewards.
- Internet Computer’s Dfinity Foundation sues Meta over similar logos. The Dfinity Foundation has filed their suit in the U.S. District Court, contending that Meta threatens their brand given both entities target similar users.
- Kraken, one of the largest exchanges in the US, has opened a waitlist for its Beta NFT Marketplace. This continues the trend of popular centralised exchanges creating NFT marketplaces. However, Kraken’s selling point is the promise that their exchange will be free from gas fees.
What to Watch
- OPEC meeting and US CPI, on Wednesday.
Here is our Q1 Market Report for 2022, where we provide data insights on crypto performance tied with broader financial markets and an overview of how Zerocap products have performed over the past quarter.
A brief breakdown on the main results of April, followed by what can be expected this month and results from Zerocap’s Yield Entry Notes.
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 2 May. 2022 0:00 UTC to 8 May. 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|