Historic 1st Quarter (Alts outperform)
05 Apr 2021
Market Recap
Digital asset market ended the quarter on a high note, as the space saw concomitant tailwinds of good price gains and favourable industry developments. This week, Ethereum finally broke above the key 1,900–2,000 price level on the back of news that Visa would be using Ethereum to settle USDC transactions, a huge step towards traditional finance using open finance for its rails. Competing Layer 1 tokens such as Polkadot (+36%), Tron (+111%), Solana (+29%) and EOS (55%) did even better.
In fact, it won’t be an overstatement to say that this quarter was an ‘altseason’ as alternate smart contract layer 1 platform tokens delivered supernormal gains over Bitcoin and Ethereum (Chart 1), especially $SOL and $BNB which have managed to build working products in the ecosystem.
Binance Smart Chain (BSC), while arguably not decentralized, had a breakout quarter with its total value locked (‘TVL’) jumping more than 34x to $8bn by the quarter’s close and daily trading volume rising from <$300k prior to 2021 to over $1bn (Chart 2, 3).
For now, Ethereum’s on-chain network activity is magnitudes greater than any competing blockchain network despite relative underperformance of its price, but we will continue to watch developments in this space very closely.
Digital asset’s rails continues to merge with traditional finance’s. Aside from Visa, Paypal will now allow crypto spending at its online merchants, by converting cryptocurrency (BTC, BCH, LTC, ETH) at the point of sale so the merchant receives their local fiat currency. Goldman Sachs announced plans to offer multiple crypto investment vehicles to its private clients by Q2’21, and BlackRock bought 37 CME bitcoin futures contracts in January — the allocation only represents 0.03% of BlackRock’s Global Allocation Fund. It is also worth noting that CME would be launching Micro Bitcoin futures (equivalent to 1/10th of Bitcoin), targeting retail clients, and also allowing clients to size their trades with more precision.
On the macro side, major benchmarks closed higher for the holiday-shortened week, with S&P 500 index crossing the 4,000 milestone. Initial concern over Archegos Capital’s liquidation was quickly dissipated as investors turned to unveiling of Biden’s infrastructure plan on Wednesday. Although the bill came at $2.25tn which is on the lower end of expectations, Biden mentioned a second package would be revealed in April, which would focus on healthcare, education, and child-care, as opposed to this round’s focus on internet and transportation infrastructure. Biden’s plan did not include tax increases on upper income individuals, as some had speculated, but it did include raising the top corporate tax rate back to 28% to cover the cost of the bill.
What is Happening?
Tether releases assurance report, claiming its USDT are fully backed. Tether, the largest stablecoin issuer, published a report with assurance opinion by accountacy firm Moore Caymen. The assurance states that Tether’s assets (valued at $35.3bn) exceeded its liabilities (valued at $35.2bn), suggesting that the stablecoin is fully backed, although the report did not explain where Tether’s reserves are held.
Soros Fund Management moves into digital assets, declares crypto market is at “an inflection point”. The Fund’s CIO, Dawn Fitzpatrick acknowledged that infrastructure around cryptocurrency is a “top theme” for their current investment strategy. Fitzpatrick said she does not think about Bitcoin as a currency, but a commodity that is easily storable, transferable and finite, and further went to back Bitcoin’s digital gold narrative. Over the last month, Soros Fund Management have invested in Bitcoin financial services company NYDIG (the company that brokered MassMutual’s Bitcoin investment), as well crypto data provider Lukka.
Conclusion
As we enter Q2’21, we remain constructive of the whole crypto ecosystem. Price action and on-chain indicators continue to suggest a robust outcome. The next set of catalyst could come from anywhere and our money is on sovereign wealth funds foraying into this asset class, starting with Bitcoin. We expect the virtuous cycle of increased involvement and higher prices to continue.
Good Luck!
