11 October 2021

Market Recap

Orange October continued last week as bitcoin outperformed alts; bitcoin dominance (45.3%) is 300bp higher from 42.3% a week ago. Other PoW tokens, such as $LTC (+6%), $BCH (+7%), $XMR (+6%), $BSV (+22%), also printed positive weekly gains — a stark contrast to smart contract platform tokens, such as $AVAX (-17%), $LUNA (-6%), $ATOM (-15%), $ALGO (-9%), which were previously the beneficiaries of “L1 szn” ignited by liquidity incentives. Notable exception was $FTM, which saw total value locked surge, with the launch of Geist Finance (TVL: $11.8bn) on Wednesday. Rotation into $BTC is strong as market participants flock to the underallocated token in anticipation for ETF approval, and to preserve their ‘bitcoin under management’. ETH has been performing poorly with ETHBTC in downtrend since early September, and is now testing 200dma. We think the rally in bitcoin is spot and institution-led (as explained in Friday’s letter), with funding (Chart 1) and leverage (Chart 2) under control, and are thus bullish on the breakout. Taproot, which will enable complex smart contracts on Bitcoin, will also be activated next month — hopefully the bitcoin community can strike while the iron is hot, and ride the bitcoin hype to deploy smart contracts.

Chart 1: YTD 7-Days Moving Average of Hourly Funding Rate for BTC and ETH on FTX
Chart 2: YTD BTC Price (Upper Panel) vs. Aggregated Open Interest (Lower Panel), from Source: Coinalyze

On the institutional side, the flow of capital seems to be unidirectional as non-crypto native companies venture into digital assets either by purchasing tokens (Soros family office confirms owning bitcoin) or by investing in crypto-related funds and companies (KKR makes first digital asset investment into ParaFi Capital, a blockchain- and DeFi-focused alternative investment firm). Aside from flow of capital, we also saw an example of a TradFi institution integrating and building on top of existing DeFi protocol. Soc Gen submitted a proposal on MakerDAO governance forum, to get their collateral (on-chain covered bond tokens) approved for loans (up to $20mio in DAI, with maturity of 6–9 months). MakerDAO has already closed 5 deals for loans collateralised with real world assets, starting with real estate and is working on 7 deals involving traditional assets in the works, including farmland, a film, and a solar array. DeFi could really be the future of finance.

On the macro side, most of US major equity benchmarks rebounded following 1st 5% pullback in about a year last week; energy stocks led the gains as natural gas price reached 13-year high and crude oil 7-year high on Monday following OPEC decision not to increase production. Elevated energy prices and Friday’s disappointing NFP (194k vs. 500k, but unemployment fell more than expected, and prior 2 months were revised higher) for September, as well as worries of slowing China macro, supply chain disruptions, and energy shortages, continued the macro narrative of stagflation. On the inflation discussion, this Wednesday’s CPI prints will offer latest gauge, and we also have plenty of Fedspeak to compliment the backdrop this week.

(Oct 11, 2021, Top 5 Crypto KPI)

What is Happening?

FDIC is said to be studying deposit insurance for stablecoins. The agency is said to be analysing what pass-through insurance would look like for reserves that stablecoin issuers hold at banks, and what regular, direct deposit insurance might look like for banks that want to issue stablecoins. However, the discussion is said to be preliminary, with uncertain timetable as to any policy decisions. Stablecoins are increasingly used by both retail and institutions as a gateway to gain crypto exposure, as well as yield available in crypto and DeFi ecosystem. One major concern of regulators is stablecoin issuers having insufficient underlying assets to keep the peg, and US regulators, in specific, are trying to subject stablecoin issuers to bank-life regulations. Most recently, Circle (issuer of USDC), also disclosed that they received an investigative subpoena from the SEC in July.

Conclusion

Nothing much has fundamentally changed from last week, although price action makes us more comfortable with increasing our market exposure. We continue to like our ‘barbell strategy’ of being overweight on bitcoin, while farming DeFi yields. For now, market seems to be in a flux with no coherent market theme (except Orange October), so we are keeping a close eye on revolution of market narrative as well.

Good Luck!