Risk Asset It Is (for now)
20 December 2021
It’s been a quiet week, as market further chopped indecisively in a storm of macro headlines. Bitcoin mostly stayed within $46–49k, unable to break out of either range, while ether stayed within $3,700–4,100. However, risk sentiment within crypto recovered, with alts resuming their outperformance (BTC dominance -100bp to 40.3%); ETHBTC bounced back from 0.078 to 0.0838, and other outperformers included smart contract platforms, including LUNA (+27%), AVAX (+18%), HBAR (+21%), ONE (+10%), and CELO (+11%), as well as idiosyncratic names, such as OKB (+22%), AR (+31%), SPELL (+19%), YFI (+53%). In terms of the market structure, open interest (Chart 1) and funding (Chart 2) are largely unchanged, reflecting lack of convictions by market participants — this makes sense given shaky macro backdrop, and increased macro-crypto correlation.
On the fundraising side, it’s worth noting the increased trend of companies that just raised funding not too long ago, opportunistically raising fresh funds. Given 1. elevated private market valuation (vs. public market sell-off) due to abundance of dry powder, and 2. Projects looking to extend their runways with higher expectation of bear market, we think the trend would continue. For example, 2 crypto analytics funds raised last week — Nansen ($75mio @ $750mio valuation), <6 months from their previous $12mio Series A round, and Dune Analytics (@ $1bn valuation), just 4 months after they raised $8mio in a Series A round. Fresh capital continues to pour in, with new crypto-focused funds launching every week (literally), given crypto offers alternative, new sources of growth and yields. TraFi names, for example, are investing into infra projects that they are most familiar with, such as NYDIG (raised $1bn @ $7bn valuation from Morgan Stanley, MassMutual, etc.; largest private equity deal in industry so far) and Anchorage (raised $350mio at >$3bn Series D; led by KKR as its first direct equity investment in crypto firm, and participated by Goldman Sachs, BlackRock, GIC, Apollo, etc.). Despite high valuation, as a firm, we continue to participate in private rounds given growth upside is too attractive to ignore, but are cautious given potential liquidity vacuum.
On the macro side, considerable volatility was observed with major central bank meetings, continued Omicron concerns, and triple witching on Friday. Fed’s minutes and press conference on Wednesday dominated the sentiment for much of the week; Fed announced faster tapering of its monthly asset purchases (to $30bn/month; tapering expected to stop by end of March), and FOMC’s dot plots signalled 3 rate hikes in 2022, followed by 3 more in 2023. Market had a quick relief rally following press conference, during which Powell reassured confidence in the economy. BOE (bank rate +15bp to 0.25%) and Norges Bank (+25bp to 0.5%) raised rates as well, becoming the first major central banks to do so during the pandemic. The relief rally was quickly followed by worsening Omicron headlines on Friday. The risk-off moves pushed treasury yields lower, and 10s is currently testing a rather critical level of 1.38%; equities gave up all the post-FOMC gains, to finish the week lower (NQ -2.9%, ES -1.9%, DJIA -1.7%). Worth noting that NQ is underperforming ES and DJIA by a wide margin with shift in outlook for long-term rates weighing in. Going into the holiday-shortened Christmas week, we expect market to be largely quiet, but we do have some important economic data data, including 3Q GDP, housing stats, and consumer data.
What is Happening?
Crypto scams are increasing with burgeoning digital ecosystem; Chainalysis’s report showed that crypto scam revenue was up 81% in 2021, with >$7.7bn worth of crypto taken from victims worldwide (Chart 3). Rug pulls (developers of crypto project abandoning the project, and taking users’ funds with them) accounted for 37% of all crypto scams. Just last week, there were 2 high-profile scams (Ascendex $80mio hack + Vulcan Forged $140mio exploit).
In Reminiscences of a Stock Operator, there is a quote on how it was never Jesse Livermore’s thinking that made the big money, but his sitting. We are listening to the adage for now (maybe we will not make big money from this, but perhaps it will save us from losing money?). And while we wait for more opportune time to add our positions, we’re happily harvesting yield on DeFi protocols, and thinking hard and long about new market themes and best ways to express them.