Feb 21
Another Bull Bites the Dust
2022–02–21
Market Recap
Last week was a great representation of fragile investor sentiments. Inflation concerns, flagged in previous week’s CPI data, coupled with heightened geopolitical uncertainty dragged down on risk sentiments; BTC failed to hold $44k, and consequently crucial 50dma of $41.6k. Ether continued its relatively weaker price action, drifting further away from its 50dma ($3,000). ETHBTC has been in clear downtrend since Dec’21, and with precarious geopolitical backdrop, we remain bearish ETHBTC. On derivatives front, BTC and ETH funding rates remain tricky to trade, as funding chops around zero (Chart 1). In the last 7 days, funding for BTC was barely positive, whereas for alts, it was rooted in negative territories (SOL -9%, AVAX -3.4%, DOT -13%, etc.). Liquidations (Chart 2) also picked up with bearish price action, resulting in declining open interest. Overall, market seems to find little reason to be bullish with bearish technicals and fragile macro backdro are fragile — we can do as much research as possible, but macro currently dominates price action, and we prefer to play RVs.
On the institutional/regulatory front, following the highly anticipated Crypto Bowl on Monday that featured multiple ads from leading crypto companies, including Coinbase and FTX, there was a deluge of news of crypto-companies getting regulated / self-regulating. 1. BlockFi was fined by the SEC for $100mio; the Firm also announced plans to file an S1 to offer BlockFi Yield to US investors as security (part of settlement with the SEC) as opposed to savings accounts. 2. Nexo, another lender, announced it would stop paying interest on new deposits from US customers, and 3. Coalition of US crypto firms led by Coinbase (and including Anchorage, Circle, BlockFi, Fidelity Digital Assets, etc.) created centralized solution to the information sharing requirements of the travel rule — the solution (“TRUST”) would allow crypto firms to securely collect and transmit customer data. Furthermore, with Biden administration expected to issue executive order next week regarding cryptocurrencies, regulation season is in full swing.
On the private funding side, valuation remains elevated with influx of capital, and despite weaker secondary market. Sequoia Capital announced the launch of its $500–600mio crypto fund (and also its first-ever sectorspecific fund since founding in 1972) to invest in liquid tokens. For raises, Circle fetched $9bn in revamped SPAC deal terms, and Helium raised $200mio Series D at $1.2bn valuation.
On the macro side, narratives of heightened geopolitical tensions and inflation concerns continued to weigh on sentiments. Conflicting signals on whether Russian troops were preparing to cross the Ukrainian border appeared to whipsaw the markets. Contradictory signals from the Fed also seemed to foster volatility; Bullard’s statements that Fed’s “credibility was on the line”, and that he expected a full 100bp of Fed funds rate increase by July contradicted with rather dovish Fed’s meeting minutes on Wednesday. Nonetheless, futures markets are pricing in ~80% of 25bp in the upcoming March meeting. On the data-fronts, it was rather conflicting as rising weekly jobless claims (first time in a month) conflicted with retail sales data which surprised to the upside. The unclear signals from Russia, Fed, and economic data kept the market chopping over the week, but overall uncertainty weighed down on the markets; equity indices dropped for the second week (NQ -1.7%, ES -1.6%), yields consolidated, gold rallied. Going into the holiday-shortened week, geopolitics is likely to cast a shadow over financial markets, and economic data will closely be monitored.
Conclusion
When the first Fed rate cut came in Jan’01 after a full tightening cycle, the US economy enjoyed healthy inflation (core CPI of 2.6% vs. current 6%), robust GDP growth (4.2% in Q4’20 vs. current 6.9%), and labour market (unemployment of 3.8% in Dec’20 vs. 4.0% now). At the same time, the S&P 500 has corrected 19% off its highs (or 3,903 from our cycle high) and Nasdaq 57% off its highs. Our view is that given the inflation backdrop, it’s hard to see Fed put coming into place, and that sharp falls in equity market could temper the pace of rate hikes & balance sheet contraction at best. It’s thus difficult for crypto, which we view as very liquidity-sensitive asset, to outperform the broader markets unless narrative of crypto (bitcoin or ether or whatever) as inflation-hedge catch on again. Nonetheless, bear markets is also the best time to build, and we are excited to see projects innovate to make blockchain more accessible, composable, and usable.
Stay alert and good luck!
