Funding the Infra Bill
9 August 2021
Instead of being ‘buy the rumour, sell the fact’ event, London upgrade proved a catalyst for move higher in crypto, as market participants clamoured to gain exposure with an important riskevent past and safe; amount of ether being burned probably helped too. Given ether has rallied >80% and bitcoin >50% from 7/20 local bottom with very little pullback, some retracement has been expected; however, funding remains relatively neutral (Chart 1) and open interest remains at reasonable levels (Chart 2), so we think further short squeeze is possible.
On the OTC side, we are hearing relatively big players (both TradFi smart money and cryptofocused funds) actively covering their shorts and levering up to gain exposure — this further reinforces our bullish bias. On the ETHBTC side, we saw good breakout of ETHBTC to the upside as pointed out last week, and with various Layer-2 solutions being released/ utilized, we think another ethereum/DeFi season might be due.
On the industry front, crypto and non-crypto continue to merge; traditional insti money continues to flow into crypto, as evidenced by Point72 making first crypto venture investment in Messari’s $21mio Series A funding round (at $100mio), and market making giant Virtu officially making markets on cryptocurrency exchanges like Coinbase and Gemini. On the regulatory front, Binance ($BNB) continues to be under fire as Brian Brooks, former head of OCC, resigned from Binance.US CEO, and shut derivatives trading for Hong Kong users. As alerted last week, these developments reinforce our preference for higher FTT/BNB. Also, with leveraged trading getting increasingly regulated on centralised exchanges, trading activities and flow of funds could ebb into decentralised exchanges, such as Perpetual Protocol ($PERP) and dYdX ($DYDX), especially as Layer-2 solutions make transacting cheaper. Last but not least, debate on Infrastructure Bill has been closed in the Senate and final passage of Infrastructure bill is expected tonight/tomorrow — more details below.
On the macro side, risk initially suffered with concerns about “peaking” economic growth and profits, together with rising COVID-19 case counts due to delta variant and regulatory clampdown in China. Positive earnings surprises and economic data, especially the latest jobs report (943k jobs in June vs. Est. 870k), buoyed stocks to new record highs. More details abt the jobs report — not only was it the best number since Aug’19, details such as average hourly earnings (4.0% vs. Est. 3.8%), unemployment rate (5.4% vs. Est. 5.7%; new pandemic low), April/May revision higher, also reflected the broadly favourable fundamental backdrop. The beat in NFP and hawkish Fed contributed to sharp rise in mid- and long-term UST yields. This week, inflation watchers are in for a feast with CPI and PPI reports both due in; infrastrure bill is also making progress towards a Senate vote.
What is Happening?
Infrastructure Bill on cruise to passage as soon as late Monday in a 68–29 vote, with no change from last Friday’s amendment on the definition of brokers. The amendment only excluded Proof-of-Work (PoW) miners and wallet projects, leaving all the rest, including but not limited to software developers, Proof-ofStake (PoS) validators, Lightning node operators, and DeFi projects, under purview of the law. This seemed rather odd given the recent hoo-ha with Bitcoin and the ESG focus. However, we think that this could be to control non-custodial actors and DeFi in general.
Newly filed legislation in Uruguay aims to legalise digital assets, allow businesses to accept crypto for payments, and provide regulatory framework for incorporating crypto into its financial system. However, unlike El Salvador’s bill in June, the bill does not seek to make crypto as legal tender.
Price actions in bitcoin and ethereum are encouraging and give us better conviction that activities, whether it be in the form of increased trading volume, new ‘quality’ projects/deployment, would be coming back. We encourage our readers to identify upcoming themes in the market, and to pre-position themselves to reap the favourable risk/reward when the market inevitably comes back.