16 August 2021
You know it’s bull market when bad news are discounted — passing of infrastrcture bill with no change to the definition of crypto ‘broker’ and biggest DeFi hack in history ($662mio) did little to stem crypto rally, and retail favourites/legacy tokens like Cardano (+52%), XRP (+68%), DOGE (+41%), and Polygon (+39%) outperformed BTC (+10%) and ETH (+13%). Funding rate also turned positive (‘Top 5 Crypto KPI’), but other indicators, such as Kimchi premium and GBTC premium — common gauges for exuberance — remained under control (Chart 1, 2).
It is also worth noting that TVL on certain blockchains, such as Solana (+50%) and Terra (+51%), are reaching new ATHs, and not just on USD-terms. As we mentioned in our previous letter, we think DeFi season is due, and being long these ecosystems favours risk-reward. On the ETHBTC side, the pair has been range-bound for the past 10 days, increasing the likelihood of breakout.
On the industry front, crypto continued to contribute money to real world in the form of taxation (infra bill), fines (BitMEX settles with CFTC for US$ 100mio; Poloniex gest US$10mio fine from the SEC) and sponsorships (BitMEX sponsors AC Milan). Another interesting development last week was the merger of Polygon ($MATIC) and Hermez Network ($HEZ; zkRollup Layer-2 solution), taking a page out of corporate finance playbook. The first-ever merger of blockchain networks, including the token, will be done at their prices on Aug 4, 11:00 CET (3.5 MATIC : 1 HEZ) — the ratio is currently at 3.15 MATIC: 1 HEZ (*wink* *arbitrage*). Aside from this, Polygon further committed $1bn from its treasury to ZK-based solutions. Also as we proceed further in August, we are looking forward to mainnet launch of Arbitrum, another Ethereum scaling solution; more than 400 projects, including the likes of Aave, Uniswap, and Sushiswap, are expected to deploy on Arbitrum. In particular, we are interested in Perpetual Protocol ($PERP) to make a comeback and compete with DYDX that has taken the #1 perpetual DEX spot with its successful launch of liquidity mining programme and deployment on zkSTARKS.
On the macro side, the week saw new records with Dow and S&P 500 inching to fresh highs with the Senate approving $1.2tn infrastructure bill and authorizing $3.5tn in additional spending. NASDAQ and small caps underperformed. Bulk of last week’s economic reports were close to estimates, barring University of Michigan Sentiment Survey, which showed downside surprise to the lowest level since late 2011 (70.2 vs. Est. 81.2) and uptick in PPI (1.0% vs. Est. 0.5%). Wednesday’s CPI number also showed deceleration of inflation, which appeared to align with the prevailing narrative that the increases in consumer prices should prove transitory as the economy works through pandemic-related bottlenecks. Nonetheless, with absolute number still at elevated levels, the inflation debate continues. This week is mostly quiet except for retail sales on Tuesday and FOMC meeting minutes on Thursday.
What is Happening?
Coinbase’s Q2’21 earnings showed strong growth and diversification across platform. On the retail side, monthly transacting users grew 44% QoQ to 8.8 million, and ~27% of the individuals engaged with at least one other non-investing product. On the institutional side, Coinbase stated that 10% of the top 100 largest hedge funds by AUM have onboarded with Coinbase, and that institutional trading volume (47% QoQ) saw faster growth than retail volume (21% QoQ). Another point worth noting is ether trading volume (26%) flipping bitcoin’s (24%) for the first time. In fact, institutions like NYDIG and Fidelity are reportedly pushing to expand services for ether to respond to demands of yield-hungry institutions.
Valkyrie files for Bitcoin Futures ETF application, following remarks by SEC Chairman Gary Gensler that he would favour ETFs based on CME Bitcoin Futures. In the same week, Kryptoin also filed for Ether ETF.
Metrics such as trading volume, TVL, and on-chain activities corroborate bullish sentiments. However, instead of chasing rallies, we prefer to pre-position ourselves by pampamental analysis (fundamental: identify upcoming themes in the market; study underlying data, such as transaction volume and activities; technical: identify cryptocurrencies on the verge of breakout/have been consolidating).