24 May 2021
Digital assets market sees more than $1 trillion wiped off market cap, as Wednesday marked the worst day since March 2020, and Sunday saw further sell-off in thin weekend liquidity. Bitcoin is down 20% on weekly basis, but still 20% higher YTD; Ethereum and DeFi (DeFi Pulse Index) are down 37% and 46% respectively, but still up ~300% and ~260% YTD. Analysts looking for explanations for the blood on the street point to China regulatory concerns (3 self-regulatory organizations issued a note telling their member financial and payment institutions not to engage in/provide services to crypto-related businesses; Huobi scaling down on some of its services and products) and Elon Musk turning on bitcoin. With negative price action, any remotely bad news caused further fear, uncertainty, and doubt, and no coins survived the wrath of the markets. The sell-off also marked the local bottom in bitcoin dominance as bitcoin dominance jumped from 39% to current 46% (Chart 1).
On the TraFi front, it is undeniable that blockchain and digital assets (in one form or the other) are being widely adopted. Fed joined 60+ other central banks in exploring CBDC, and plans to publish discussion paper with focus on possibility of issuing a CBDC. DBS became Asia’s first bank-based crypto asset trust services, and would be providing private banking clients the ability to invest, custodise, and manage selected digital assets. DBS has been on the forefront of providing blockchain-related services, starting with the launch of digital exchange last year, to teaming up with JP Morgan and Temasek to create blockchain payments platform last month. Finally, MicroStrategy (Ticker: MSTR) added another $10 million in bitcoin to its holdings, bringing the total to 92,079 bitcoins at average price of $24,451 (vs. current bitcoin price of $35,000). MSTR shares have been trading at a premium (Chart 2), but this could spectacularly collapse if bitcoin price continues to be under pressure. There will also be Coindesk Conference this week; the Conference would feature Fed’s Brainard, Cathie Wood, Michael Saylor and Ray Dalio amongst many others.
On the macro side, stock market closed mixed for the week (green for NQ, and red for ES and Dow), bounced by the volatile trading in bitcoin, strong PMI data, and potential Fed taper talk. April FOMC meeting minutes offered additional insight into policymakers’ thinking on the economy and inflationary pressures; investors focused on a statement that Fed members “begin discussing a plan” for tapering its US$ 120bn/month asset purchase programme.
What is Happening?
Bitcoin hash rate dropped by nearly 20% as Sichuan miners face short-term power cap. Sichuan enjoys cheap hydroelectricity, but with hotter-than-usual weather driving demand for energy higher, and light volume of rain driving supply lower in April and May, the region has been suffering from power demand and supply imbalance, leading to local authorities requiring energy-intensive enterprises to limit their power consumption. With much of the mining operations in Xinjiang and Inner Mongolia thought to be conducted via coal and other fossil fuels, and with the Chinese government trying to clamp down on fossil fuels, mining activities in China in near-term could be adversely affected.
Bank of America joins Paxos’ blockchain-based settlement network for equities. Paxos’ solution is a private, permissioned blockchain network that allows 2 parties to settle securities trades with each other on the same day instead of usual T+2 settlement for Depository Trust & Clearing Corporation (DTCC); this would help to free up collateral, and improve return on assets. The network was launched in in February 2020 after receiving a no-action relief from the U.S. Securities and Exchange Commission (SEC) in October 2019. Paxos also has plans to apply for a clearing agency registration with the SEC.
Underperformance last week exarcerbated this week, destroying the structural picture of digital assets, and turning FOMO (Fear of Missing Out) into FUD (Fear, Uncertainty, Doubt). After all, digital assets are new technologies and it is crucial that scale of investment and adoption towards technology has to be sufficient enough to sustain prices before hype wanes. This week’s selling has ended the bullish run in digital assets. For now, we prefer to err on the conservatively side, keeping some dry powder to re-engage aggressively when the trend is clearer.