Newsletter Volume 5

As of Friday, 9th December 2022

Bull & Bear

Article 1 — The Market This Week

The crypto market continued to trade horizontally this week, with Bitcoin now sitting comfortably above the $17K mark. The markets overall seem to be in a wait-and-watch mode as the FOMC is set to conclude its meeting on 14th December. The U.S. economy is heading into a short and shallow recession over the coming year, according to economists polled by Reuters, who unanimously expected the Federal Reserve to go for a smaller 50 basis point interest rate hike on December 14. The Fed has another half-point at least to go with rates early in the new year, with inflation still running well above the Fed’s 2% target even though economists put a steady 60% probability of a recession taking place in 2023.

The recent pain in the crypto industry has forced the SEC to step up. SEC warned public companies that they better tell investors if they have a stake in the crypto industry’s recent torments. Meanwhile, shares of the world’s largest bitcoin fund, Grayscale Bitcoin Trust, hit a record discount rate of nearly 50% relative to the price of BTC on Thursday. Bearish sentiment surrounding the trust deepened over the last few weeks as fears surfaced that crypto trading firm Genesis Global Trading, which is owned by Grayscale’s parent company, Digital Currency Group, could file for bankruptcy. GBTC shares haven’t traded at a premium to BTC since March 2021. Prior to that date, the trust benefited from strong institutional demand and traded at a double-digit premium to its net asset value.

But as usual with the crypto industry, the innovations and progress continued unabated despite all the gloom and doom. Chainlink, a provider of price feeds and other data for blockchains, had its first-ever staking pool draw in 24.27 million tokens worth some $170 million, with community allotment filling up in two days. The new staking effort is designed to help secure the project’s price feed quality for Ethereum. Under the system, participants and node operators commit their holdings of Chainlink’s LINK tokens as a form of guarantee in exchange for 4.75% annualized rewards. The overwhelming interest in the new staking effort shows that some cryptocurrency investors and users are still eager to sock money into digital-asset projects, even with the nascent markets mired in crypto winter and bellwether BTC down 64% year to date.

The IC15 index rose marginally to 25,840 from 25,481 a week ago. Meanwhile, China’s factory-gate prices showed an annual fall for a second month in November while consumer inflation slowed, indicating weak activity and soft demand in an economy that has been held back by tough pandemic controls. Similarly, there are already clear signs the economy is slowing in the U.S. as well, particularly in the housing market, which is often the first to react to tightening financial conditions. Existing home sales have fallen for nine months in a row. The signs of a slowdown have given some respite to market participants who now expect the FOMC to raise rates more moderately going forward than earlier stated.

Key Indicators

○ Crypto Market Cap: $895 Billion

○ Bitcoin Market Cap: $331 Billion

○ Ethereum Market Cap: $155 Billion

○ Ethereum Gas Price: 14 Gwei

○ DeFi TVL: $62 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. Here is a review of the top constituents of the IC15 index.

As can be seen from the table, none of the top constituents had a major move last week. Even though the spot markets were timid, the options market trading has been going on in full swing. Deribit, the world’s largest crypto options exchange by volume and open interest, has been busier than ever. The number of ETH options contracts traded rose 10% in November relative to October, reaching a record high of 8.9 million. Trading volume in BTC options rose 17% to 778,000 contracts, nearing the record rally registered in January 2021. The demand for options is closely tied to the degree of uncertainty in the market. The higher the uncertainty, the greater the demand and activity in options. That’s what happened last month as traders snapped up protective puts in BTC, ETH and SOL in the wake of the negative news flow related to FTX/Alameda.

Meanwhile, developments continued to enhance the utility of cryptocurrencies. In a bid to match growing demand, Strike launched a new feature for US users to send bitcoin to Nigeria, Ghana and Kenya instantly and with minimal fees. Countries such as Jamaica, the Bahamas and Nigeria are at the forefront and have launched CBDCs, while Brazil and Haiti have expressed interest in exploring their own. The trend can be attributed to these economies having more pressing, fundamental needs than those of more developed markets, according to Steve Aschettino, a Norton Rose Fulbright partner focused on fintech. Further, PayPal expanded its crypto service offerings into Luxembourg in the first European Union EU Foray. The move follows the initial rollout of the crypto service in the U.S. in 2020, followed by an expansion to the U.K. last year.

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 saw the markets moving more horizontally than vertically, with bulls and bears almost evenly battling out. However, the bulls had a slight upper hand as the Federal Reserve is expected to take on a more moderate policy approach as early signs of slowdown begin to appear.

Further, in more positive news, crypto venture funding has remained relatively strong this year — despite difficult macro conditions, the collapse of Terra, and FTX’s fallout, which decimated spot digital asset markets. Crypto startups gathered nearly $20 billion of capital across 616 deals through the first three quarters of 2022, 41% more than they attracted in the same period last year. Meanwhile, Goldman Sachs is reportedly looking to spend millions of dollars to buy or invest in distressed crypto companies. The bank is already conducting due diligence on its targets of interest. CEO of Goldman Sachs, David Solomon, wrote that he still sees promise in blockchain “if allowed to innovate under the right conditions.” BlackRock CEO Larry Fink also remains bullish on underlying blockchain technology — despite the industry taking a beating.

Outside of IC15, the Trust Wallet Token is en route to attaining a new all-time high. Trust Wallet Token is up over 19% compared to last week. Trust Wallet received a boost when the CEO of Binance endorsed the platform and encouraged investors to take control of their coins. Axie Infinity is another token which had an impressive run over the last week gaining over 18%. The price and trading volume increase for Axie Infinity coincided with the announcement of Axie Infinity’s Axie Contributor Initiative, which includes advancing its progressive decentralisation strategy with the Axie community, including establishing an ‘Urban Planning.

On the contrary, 1inch Token tumbled over 10% as reports emerged that investors of 1inch reportedly offloaded $8 million worth of tokens. Chainlink’s LINK Token was also down over 7% compared to last week as investors grew concerned that LINK might become hyper-inflationary without enough fees to back up the newly launched staking rewards.

Market Sentiments

Article 4 — Weekly Spotlight

Last week, more than any token, the entire Arbitrum ecosystem was in the spotlight. Arbitrum, which is a layer-2 solution for Ethereum, has recently shown how just one dApp can change the fortunes of an entire ecosystem. Arbitrum was largely forgotten after the initial hype, but the launch of GMX Protocol, a DEX on Arbitrum, has again piqued users’ interest in the Arbitrum ecosystem. GMX enables low swap fees and zero price impact trades. Trading on GMX is supported by a unique multi-asset pool that earns liquidity providers fees from market making, swap fees and leverage trading.

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 $895 billion, the crypto market is definitely in good shape over the long term. Further, this time the innovation continues to happen despite the bear market. 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.