Inflation Woes Worsen
17-Jan-2022
Market Recap
Crypto market partially recovered, and have been consolidating in their respective zones (BTC +2.6%, ETH +5.4%). It was again too early to fade “L1 szn”, as smart contract platforms outperformed, erasing the losses from last week’s corrections; LUNA (+13%), ADA (+25%), MATIC (+14) were outperformers, but the real action was in the FOAN complex as all constituents enjoyed elevated-, doubledigit gains (FTM +31%, ONE +15%, ATOM +20%, NEAR +43%). The positive sentiments spreaded over to DeFi and metaverse sector (DPI +3%; AXS +10%, SAND +3%, MANA +7%, ENJ +9%), but they still remain well off their highs. On the derivatives side, BTC and ETH perpetual funding rates retreated to finish the week with negative average funding rate (Chart 1). It’s also worth noting bitcoin price having been pinned ~$44k last Friday, max pain price for the option expiry date (Chart 2). Going forward, we have monthly options expiry next Friday (1/28), worth ~$2bn, and at max price of $48k.
On the institutional side, there were constructive-bitcoin headlines last week; Kingdom of Tonga is expected to adopt Bitcoin as legal tender, copying El Salvador’s playbook, with the adoption expected to happen as soon as November/December this year. Mayor of Rio de Janeiro, Eduardo Paes, also announced plans to launch “Crypto Rio”, where the city would invest 1% of the city’s treasury in cryptocurrencies, and offer discounts on taxes paid in bitcoin. This closely follows Miami, whose mayor is also considering putting some of the city’s treasury into BTC. Elon Musk further highlighted the potential of crypto as a means of payment by twitting that Tesla will accept Dogecoin to pay for Tesla merchandises, resulting in 10% rally in $DOGE following the announcement. On the funding side, money continues to be abundant; FTX launched $2bn ventures unit, dubbed “FTX Ventures”; there were also a few 9-fig raises, including NEAR Foundation’s $150mio funding round, SEBA’s (Swiss crypto bank) $120mio Series C funding, Lukka’s $119mio Series E (@ $1.3bn valuation, led by Marshall Wace), and Zero Hash’s $105mio Series D (just 3 months after the firm’s $35mio Series C). 2022 might be the year where we really see who are the ‘good’ VCs.
On the macro side, inflation signals and concerns about rising interest rates weighed in again. On the inflation side, CPI hit a 40-year high (7.0% YoY vs. Est. 7.0%) — a number in line with expectations. Friday’s downside surprise on retail sales (core retail sales -2.3% MoM vs. Est. 0.2%) did little to calm the nerves as the slowdown covered both offline and online sales, suggesting caution over the Omicron variant was probably not the reason behind the slowdown. On the rates side, both Powell and Brainard (Biden’s nominee for vice-chair of the Fed, and a noted dove) repeated that the central bank would not hesitate to contain inflation. With the aforementioned developments, short-term rates continued their ascent in anticipation of tighter monetary policy (2s +9bp), while 10s rallied to 1.7% before selling off to 1.79%, leading to flatter yield curve. On the equities side, indices recorded their 2nd consecutive weekly loss to start the year (ES -0.3 %, NQ -0.3%, DJIA -0.9%), reflecting broader risk-off sentiments. Earnings season has begun in earnest, starting with the usual bank names (JPM, C); analysts expect S&P 500 companies to report >20% increase in net income vs. prior year’s Q4.
What is Happening?
Walmart is preparing to enter the metaverse.The retailer is reported to have submitted 7, separate applications, including those for new trademarks indicating its intent to make and sell virtual goods, and offer users a virtual currency and NFTs. Ever since Facebook pivoted to “Meta”, shiftings its ambitions from just social media to metaverse, businesses have been rushing to figure out how they will fit into a virtual world. For example, Nike filed trademark applications that previewed its plans to sell virtual branded sneakers, bought RTFKT, a virtual sneaker company, and created Nikeland on Roblox; other apparel brands, such as Gap, UnderArmour, Adidas, etc. launched their own NFTs.
Conclusion
One of main themes we explored going into 2022 was bifurcation of crypto performances, and thematic rotations. So far, it has paid off to be overweight alts (especially L1s) vis-à-vis bitcoin. However, the trend of more institutions, cities, and governments adopting Bitcoin cannot be ignored, and bitcoin remains the first port of entry into broader crypto world (or has NFT replaced that?) as well as the inflation hedge in the crypto world. Good Luck!
