Rising Tide Lifts All Boats
8 November 2021
Rising tide lifts all boats; bitcoin pushed through $65k and ether made new ATHs overnight, and L1s continued to be the biggest beneficiaries (as a sector) of the pump (SOL +20% ahead of Solana Conference, DOT +23% ahead of parachain auction on 11/11, AVAX +35% on $220mio Blizzard Fund). We’ve been favouring ETH higher (and ETHBTC as a result) given the healthy price action (slow and steady growth in a channel since start of October) and until proven otherwise, we will continue to do so. We are not too defensive about overall markets, given relatively calm funding rates (Chart 1), although rising open interests (in both USD and token terms) are slightly concerning.
Just like SOL, DOT, AVAX which were buoyed by idiosyncratic factors, biggest gainers in Top 100 were beneficiaries of token-specific developments, including CRO (+67%; Coinbase listing on 11/4), KDA (+172%), SAND (+64%; Metaverse + Softbank investment), and LRC (+145%; rumours of integration by Gamestop NFT marketplace). As an extension of our overweight position on ether + sideways bitcoin price action + optimistic overall macro/crypto sentiment/newsflows, we’ve been favouring alts over bitcoin. Given market focus on L1s and infrastructures (“fat protocol thesis”), we prefer protocol layer/infrasturcture tokens over application-specific tokens, despite lack of immediate value-accrual.
On the institutional side, several banks furthered their optimistic coverage on crypto; Jefferies called for 10% allocation into bitcoin (out of gold), while Goldman Sachs called for $8,000 end-of-year- ether price target and pointed out correlation (Chart 2) between inflation swaps (2y2y forwards) and ETH.
On the regulatory side, the President’s Working Group released much-anticipated Report on Stablecoins; the report focused on potential stablecoin runs and called for greater regulations on stablecoin issuers (to be insured depository institutions). We think concrete actions and regulations are still far away, given they would need to pass through the Congress, but that these would eventually pave way for algostables, such as DAI and UST, to play a greater role.
On the macro side, stocks posted impressive weekly gains (ES +2.0%, NQ +3.1%, DJIA +1.4%, all ATH) as relatively dovish Fed policy meeting + healthy economic data + strong tail-end to earnings season all boosted sentiment towards equities. On the highly anticipated Fed front, the central bank left rates unchanged and stated that it will start tapering (as expected), starting with $15 billion reduction in November and December, but did not specify the speed of the taper beyond December, giving flexibility to make adjustments as economic conditions evolve. Inflation remains top of mind amidst increased central bank uncertainty, and going into the week, US CPI as well as inflation prints in China and EU are being watched.
What is Happening?
Following Facebook’s pivot into metaverse, the metaverse space has seen a huge influx of investments in the recent weeks. On one hand, there were the likes of Sfermion, which closed $100mio for a new fund focused on metaverse-related infrastructure (backed by Alan Howard, Winklevoss, DCG, Animoca, etc). And on the other hand, there were the likes of Enjin and FTX/Solana, dangling sweet incentives to builders to integrate their native solutions; Enjin launched $100mio Efinity Metaverse Fund to support its ecosystem partners, and FTX, Solana Ventures, Lightspeed Venture Partners followed with their $100mio in Web 3 gaming development to support gaming studios and technology integrating Solana blockchain. Fundraising models in digital assets (tokens) unlock previously- inaccessible capital, and with abundance of capital in the system, attracting projects, developers, and users are the limiting factor.
At the risk of sounding like a broken record, we continue to favour alts over bitcoin. Event-driven L1s that we called for last week (SOL, DOT) have both seen 23% move higher. Now that both have played out (or are playing out), we are shifting our attention to other tokens with yield-bearing opportunities and trading events.