Fear, Uncertainty, Doubt
17 May 2021
The crypto market started the week on fire, with $ETH climbing to new ATH of nearly $4,380 (and market cap of over $500bn for the first time) and meme-coins ($DOGE, $SHIB) euphoria. As if to punish the degenerate exuberance, Vitalik Buterin donated $1bn worth of $SHIB to charity, delivering first blow to meme-tokens. Elon Musk, the Trump of digital assets, delivered second blow by saying Tesla would stop taking payments in bitcoin due to environmental concerns. Another tweet of Musk suggested Tesla might be selling its bitcoin stash, leading to another sell-off on Sunday — price action echoed last month’s mid-month sell-off. Most tokens are currently down >10% on weekly basis with the exception of $ADA (+19%), $MATIC (+67%), $KSM (+9%). Despite the weak market overall, alt-season is continuing in full-stride, with bitcoin dominance falling below 40% (Chart 1).
Another notable flow was a massive (5,000 BTC, ~$250mio) purchase of $BTC 1–2 week (5/21, 5/28) 45+46k puts on Friday near the US close, leading implied volatility (IV) and put skew to surge. With market negative gamma, prices could further experience downside pressure, especially if bitcoin ETF gets rejected.
FOMO continues on the institutional side with TraFi participants continuing to explore digital assets trading/investing opportunities — Steve Cohen’s Point72 is poised to make big crypto entrance in digital assets via both its VC arm (Point72 Ventures) and hedge fund side. MicroStrategy, a de-facto levered bitcoin ETF, further added $15mio of bitcoin to its reserves. The Diem Association, a Facebook-backed crypto project, also announced that it will be partnering with Silvergate Bank to issue USD-backed stablecoin. Stablecoin has been growing at a faster rate than overall crypto market (Chart 2) as stablecoin serves as a convenient entry point to purchase digital assets via cryptocurrency exchanges (Chart 3).
It is likely that real competition to crypto companies is not its TraFi counterparts, but FinTech companies that already have experience bringing mass adoption to new financial products and services, and friendly platforms.
On the macro side, inflation continues to be name of the game as inflation worries dragged stocks down from record highs, and kept markets focused on the future path for monetary policies. Core CPI jumped by 0.9% MoM (Est. 0.3%) in April, the most in nearly 4 decades, leading to worst day for S&P 500 since February 25. Fedspeak remained bent on seeing price pressures as transitory. We have retail sectors (Walmart, Target, Home Depot) announcing earnings this week; economic calendar remain relatively light with housing starts, PMI prints, and FOMC Minutes release.
What is Happening?
Coinbase reported its first quarterly results since being listed on the US stock market. Coinbase’s revenue more than tripled from Q4’20, leading to 300% uptick in company’s profit QoQ; its total number of monthly active users (MAU) more than doubled from 2.8 million to 6.1 million. This is in line with crypto prices (crypto market cap rose from $776bn to $1.9tn in Q1) and uptick in crypto tradindg volume.
Tether revealed a breakdown of its reserves for first time since 2014 launch. The breakdown shows that Tether held nearly 76% of its reserves in cash and cash equivalents and other short-term deposits and commercial paper. Commercial paper, formed the majority of its cash and cash equivalents category, with a 65% share.
As warned in last week’s letter, both signs of overheating (in the form of meme tokens) and pullbacks in traditional macro space (in the form of elevated inflation readings and concomitant pullback in risk) materialised, dragging down the crypto complex. However, as performances of $MATIC, $ADA show, there are always pockets in the vast and diverse digital assets space that would do well, and by identifying the emerging themes in the digital assets space and exercising prudent risk management, digital assets space can deliver very attractive returns.