Newsletter Volume 6

As of Friday, 16th December 2022

Bull & Bear

Article 1 — The Market This Week

The crypto market again continued to trade horizontally this week, albeit with a positive bias. The broader crypto market had multiple things to cheer after months of gloom and doom. Sam Bankman-Fried, the former Founder & CEO of the defunct FTX exchange, was arrested from his home in the Bahamas. He has been charged with multiple serious allegations, including the commingling of funds and wire fraud. In more positive developments, the US CPI reading for November came below expectation at 7.1%. Meanwhile, the FOMC met on 13th December and decided to shift its policy stance to a more moderate approach, raising rates only by 50 bps which was a move away from the 75 bps hike the markets have come to expect.

However, the U.S. stocks still sunk on Thursday after the Federal Reserve said on Wednesday that its benchmark rate would likely top out above 5%, which is higher than expected just a few months ago, and indicated it wasn’t inclined to pause or pivot to rate cuts anytime soon. That is pressuring stocks as investors had hoped for the turn sometime in 2023. Bitcoin moved towards $18,000, and Ethereum rose above the $1,300 mark immediately after the policy announcement. The rally was, however, shortlived, with Bitcoin now trading at $17,423 and Ethereum at $1,271.

Less than 24 hours after the Federal Reserve slowed its pace of interest rate increases, central banks in Europe did too, but they each stressed they were in a continuous battle against stubbornly high inflation. On Thursday, the European Central Bank, Bank of England and Swiss National Bank all raised interest rates by half a percentage point after three-quarter point increases at previous meetings. But the message to investors, businesses and households was all the same: Despite this slowdown in rate increases, it is too soon to declare victory over inflation, and they should brace for higher rates.

Although the European Central Bank had previously emphasized that it had already raised interest rates by a historical amount, these concerns were pushed aside this month as the bank’s forecasts showed inflation still exceeding the target in 2025. The European Central Bank expects the eurozone economy. might contract this quarter and the next one because of higher energy costs, economic uncertainty and the impact of tighter financial conditions. The bank’s staff lowered its forecasts for the eurozone economy next year, predicting it would grow 0.5%, down from a previous forecast of 0.9%.

The IC15 index dipped marginally to 25,659 from 25,840 a week ago. What’s holding a somewhat bullish bias are the recent signs that inflation may be at or near its peak in many economies. The annual inflation rate in the eurozone slowed last month to 10%, the first decelerating in more than a year. In Britain, consumer prices rose 10.7% in November from a year earlier, down slightly from 11.1% in October, the highest annual rate since 1981.

Key Indicators

○ Crypto Market Cap: $885 Billion

○ Bitcoin Market Cap: $335 Billion

○ Ethereum Market Cap: $153 Billion

○ Ethereum Gas Price: 13 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. Here is a review of the top constituents of the IC15 index.

Monday’s arrest of Sam Bankman-Fried capped off a historical period in the world of memes, money and mayhem that is the cryptocurrency industry. The arrest of the FTX exchange founder drew mainstream headlines that greatly overshadowed the other big crypto story of the day: questions around the solvency of Binance, the largest cryptocurrency exchange by trading volume. For over a month, Binance CEO Chanpeng Zhao, like other exchange leaders, has been trying to convince users that his product is wholly different from FTX. But like FTX, Binance is largely unregulated, and not everyone has bought CZ’s repeated assurances of propriety. Over the past week, a shoddy audit of the exchange’s reserves — followed by news of criminal investigations into Binance executives — alarmed users enough to catalyze record withdrawals from the platform and the BNB coin collapsing over 9% compared to last week.

The outflows were large enough to temporarily force Binance to pause withdrawals of USDC. Binance said it needed to pause USDC withdrawals to facilitate a token swap of USDC stablecoins for its own BUSD stablecoins — a practical measure necessary to loosen up liquidity for further withdrawals. Despite the uproar, Binance’s explanation for why it paused USDC withdrawals is plausible on its face. Moreover, Nansen’s accounting of Binance-linked blockchain wallets shows that the exchange has at least $60 billion in on-chain reserves — more than enough liquidity to handle customer withdrawal demands and vastly more than FTX had (as a percentage of overall user assets) when it collapsed. But without a full accounting of Binance’s assets and liabilities, the exchange’s health is impossible to judge definitively.

Outside of IC15 constituents, the Trust Wallet, a self-custody service backed by Binance, saw the spillover effects. Trust Wallet Token is down more than 20% compared to last week. In positive news, Toncoin, a decentralized layer-1 blockchain developed in 2018 by the encrypted messaging platform Telegram, saw its native token Toncoin gain over 28% after Telegram unveiled the ability to buy blockchain-based identities by paying Toncoin. These decentralised identities will enable users to signup for Telegram without needing a SIM card.

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 again, with bulls having a slight upper hand over the bears.

Despite the bear market, the speed of development and innovation in DeFi continues unabated. Archblock, a core developer of unsecured lending protocol TrueFi, is working with Adapt3r, a subsidiary of alternative asset manager MJL Capital, to bring U.S.-regulated community banks to decentralized finance. Marcus Leanos, founder and chief investment officer of MJL Capital, said that they have a number of banks in their pipeline that ranges in size from $500 million to $5 billion in assets and have a history of conservatively originating loans.

Meanwhile, Crypto.com obtained a Payment Institution License from the Central Bank of Brazil. The crypto exchange said on Thursday. The license allows the company to continue offering regulated fiat wallet services in the country, where the Crypto.com Visa card has been available since 2021.

Broadly, one interpretation of Federal Reserve Chair Jerome Powell’s comments this week is that, while he acknowledged the recent progress in bringing down inflation, material increases in unemployment might still be necessary medicine to stabilize consumer prices that were rising earlier this year at their fastest pace in four decades. The reality may have started to set in on Thursday as prices for BTC and ETH moderated following Wednesday’s gains. Despite the increase in rates coming in slower, as expected, markets were seemingly caught off guard by Powell’s hawkish commentary about the need to keep pressing forward well into 2023.

Sentiment for digital assets can be gauged in part by viewing BTC and ETH’s respective funding rates. Bitcoin’s funding rate recently dipped into negative territory, reflecting a shift to bearish sentiment. A look over the last month shows that funding rates have oscillated back and forth, unsurprising given the uncertainty around BTC prices.

Market Sentiments

Article 4— Weekly Spotlight

This week more than just any particular the entire Binance ecosystem was under the spotlight. Binance is not experiencing the same volume of outflows that FTX had in the days before its collapse. While withdrawals have increased, they are small compared with the exchange’s overall reserves. In a tweet, Binance CEO Changpeng said he “welcomes the stress test.” For Binance, CryptoQuant says 88.95% of its reserves are clean. That compares with 56% for Huobi, 66.5% for Bitfinex, 81.64% for Kucoin, 97% for Crypto.com and 100% for OKX. Data from Nansen pegs Binance’s total reserves at $57.4 billion versus $3.04 billion for Huobi, $2.47 billion for Kucoin, $3.36 billion for Crypto.com, and $6.67 billion for OKX. Nansen doesn’t have data for Bitfinex.

But, what on-chain data can’t account for is corporate control. FTX was known for lavish spending on employee perks, such as luxury apartments for staff, a generous DoorDash allowance for food delivery, and a chartered aircraft to fly Amazon deliveries to the Bahamas from the U.S. Binance Chief Strategy Officer Patrick Hillmann recently tweeted corporate travel at the company is more austere than at FTX.

For now, Binance has met the enhanced volatility and spike in withdrawals almost without breaking a sweat. Binance draws so much spotlight as it is one of the largest ecosystems in the crypto by far. So, the scrutiny it goes under is warranted.

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 $885 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.