Newsletter Volume 3

As of Thursday, 25th November 2022

Bull & Bear

Article 1 — The Market This Week

As global economic outlooks for 2023 continue to call for higher interest rates and slowdowns in economic growth, equities and crypto are heading toward the end of the year deep in the red. Bitcoin, which recovered from its recent sub-$16,000 level, is still down more than 60% year to date. Ethereum, similarly, is approaching a 70% decline since January 2022. Equities are also likely to end the year solidly lower, with the S&P 500 and Nasdaq Composite indexes currently 17% and 30% lower year to date, respectively. Two-year Treasuries now yield around 0.65% more than ten-year Treasuries. A negative spread has historically been a leading indicator of a recession.

Bitcoin miners are also facing a tough few weeks ahead as low prices threaten to render the network service unfeasible for anyone but the largest operators. Even diamond-handed Marathon warned shareholders earlier this year that it might start selling its mighty bitcoin stash, having historically projected intentions to hold indefinitely. But taking a contrarian approach to all the gloom and doom, Cathie Wood’s ARK Invest has bought over 1.3 million shares of Coin base this month alone, worth about $53 million. Wood’s ARK Invest also ramped up purchases of Grayscale Bitcoin Trust and Silver gate Capital, a crypto bank.

Meanwhile, the 2022 FIFA World Cup is causing the value of national soccer team fan tokens to fluctuate wildly, as events on the field have effects on it. Immediately following Argentina’s 1–2 loss to Saudi Arabia on Tuesday, the ARG fan token’s price fell from $7.21 at the start of the game to $4.96 at the end of it — a 31% decline. Only four teams participating in the World Cup this year — Argentina, Portugal, Spain and Brazil — offer fan tokens through partnerships with the Socios platform. The Chiliz token, which powers the Socios fan token ecosystem, has also collapsed by about 30% since the World Cup started.

Further, in a rather unexpected turn of events, an unidentified trader believed to be Mango Markets exploiter Avraham Eisenberg, accumulated a roughly 92 million token loan of CRV, the native token of Curve Finance, over a period of six days. But rather than pay back the loan, the trader allowed a total of about $63.6 million in USDC collateral to be liquidated. The liquidation threshold for USDC was 88%, which meant that once the value of the borrowed CRV rose above 88% of the USDC collateral supplied to Aave, liquidators stepped in to sell the USDC, buy back CRV and close the debt position. But there wasn’t enough CRV liquidity to allow that to happen expeditiously. Instead, the position was closed over the course of 50 minutes through 385 individual mini-liquidation transactions. This left Aave with 2.64 million CRV, roughly $1.7 million, in bad debt — borrowed CRV that will never be repaid. Aave’s native token AAVE dipped to roughly $50 as the protocol began to accrue bad debt but has since fully recovered, trading at almost $57.

To sum up, the markets traded in a narrow range, with the IC15 index trading within a narrow range. The IC15 index dipped to 24,644 from 25,083 a week ago. Meanwhile, business confidence in Germany increased in November, beating expectations, as companies foresee a less severe recession than previously expected. The market is expecting the Federal Reserve to raise rates again in December, but markets are betting on a smaller 50 bps increase. The FOMC minutes also suggest a smaller rate hike is likely. Officials are now less unified on just how high rates will go. Some want to stop at around 5%, while others suggest they might need to go higher.

Key Indicators

○ Crypto Market Cap: $867 Billion

○ Bitcoin Market Cap: $318 Billion

○ Ethereum Market Cap: $144 Billion

○ Ethereum Gas Price: 11 Gwei

○ DeFi TVL: $60 Billion

Article 2 — Weekly Review of IC15

The IC15 Index, also known as the Index of Cryptos, is a rule-based broad market index by market capitalisation that tracks the performance of widely traded liquid cryptocurrencies worldwide.

Binance is now emerging as a decisive winner and leader of the crypto markets post the FTX/Alameda collapse. Binance recently unveiled an industry recovery fund, which aims to prop up struggling players in the wake of FTX’s calamitous bankruptcy. In a blog post, Binance said it will devote $1 billion in initial commitments to the recovery fund. It may increase that amount to $2 billion at a point in time in the future if the need arises, the company added. All this turn of events was reflected in the Binance Coin, which gained over 9% compared to last week. Meanwhile, Ripple gained over 5% after Ripple CEO Brad Garlinghouse was reported to be interested in buying certain parts of collapsed crypto exchange FTX. Solana also gained as the ecosystem finally starts to put behind the overhang from FTX/Alameda collapse.

Bitcoin and Ethereum have been under steady pressure throughout the week as the FTX hacker has been dumping Ethereum, while Genesis’s illiquidity crisis makes market participants wonder whether Grayscale, the parent of Genesis, might be forced to liquidate its Bitcoin holdings. In positive news, multiple exchanges have now posted their proof of reserves on Nansen’s dashboard, allaying some fear. The latest to join was CoinDCX, an Indian exchange which also published its proof of reserve.

As we always say, zooming out, Bitcoin and Ethereum are up more than 1000 times since they entered the scene despite the recent drawdown. So, it’s all about staying in the game for longer without getting knocked out.

Article 3 — Battle of Bull and Bear

This week was almost evenly battled out by the bulls and bears, with bears having a slight upper hand. The market has been more wait-and-watch as participants wait to see how the Ethereum dumping by the FTX hacker proceeds. They are also on the lookout for how the Genesis illiquidity crisis plays out. If Genesis fails to secure liquidity quickly, Bitcoin liquidations by Grayscale could take Bitcoin and even the broader markets much lower.

But despite the slowdown, the builders continue to build in crypto. Multiple projects have recently raised millions of dollars to build crypto. Curve DAO recently unveiled the whitepaper of its stablecoin, which market participants have gauged to be a move in the right direction. Meanwhile, FRAX has been steadily adding new capabilities to its ecosystem. FRAX now boasts a lending platform, a DEX, a bridge, liquid staking and a stablecoin. Meanwhile, Binance’s $1 billion industry recovery fund will also cushion some of the contagions that may still be left to unravel.

Outside of the IC15 constituents, there was a steady uptick, with Litecoin, Huobi Coin and Curve DAO Token gaining 24%, 22% and 19%, respectively, over the previous week. GMX, the native protocol token of the GMX protocol, has been moving upwards as the protocol gains traction. GMX is a decentralized spot and perpetual exchange that supports low swap fees and zero-price impact trades. Amongst the top losers was Chiliz Token. Chiliz is the leading digital currency for sports and entertainment by the eponymous Malta-based FinTech provider. It operates the blockchain-based sports entertainment platform Socios, which enables users to participate in the governance of their favourite sports brands.

Market Sentiments

Article 1 — Weekly Spotlight

Generally, investor sentiment plays a huge role in how traders approach high-volatility risk assets. The current uncertainty about which major market makers and crypto firms are solvent has resulted in a lack of demand for cryptocurrencies, and the current price action reflects this fact.

The factors impacting falling prices within the crypto market is driven by reckless lending, and insufficient capital controls coupled with investors’ fears from previous insolvencies. The DCG saga with Genesis Trading and Grayscale will also weigh heavily on investors fearing liquidations and capitulation. In the meantime, investors’ appetite for risk is likely to remain muted. Potential crypto traders might consider waiting for signs that U.S. inflation has peaked and for the regulatory environment to become clearer. Meanwhile, United States-based ApeCoin holders could miss out on staking rewards after the U.S. was added to a list of regions geo-blocked from using an upcoming APE staking service. But despite the recent setbacks, there seems to be light at the end of the tunnel. Many CEXs are now looking to be more transparent so that no one can pull an SBF-like heist in future.

So, that’s how the crypto industry has progressed so far. Boom and bust cycles keep happening, but the builders continue building relentlessly, leading to bigger booms in the future. For investors looking to buy and hold for a few years, the prices right now are low compared to where the market was just a few months ago. So as we always say, if you believe a specific project will do good in the long run, wait and watch how the current situation plays out and maybe then it might be a good time to start building your positions for the years to come.

When you zoom out and see the bigger picture, you’d understand that the current bearish year is normal. From a market cap of $250 Billion in 2020 to a current market cap of $867 billion, the crypto market is definitely in good shape over the long term. The question remains, when will the crypto market go back to its uptrend? Well, the short answer, as we say often, is not likely next week.