20 September 2021
Market spent the week rallying, only to give back some of the gains during the weekend — nothing much has changed in terms of funding rate (Chart 1) and levels of leverage (Chart 2) for both BTC and ETH.
We do have the quarterly expiry this Friday, with $4bn in USD-equivalents expiring (~60k BTC contracts, ~400k ETH contracts) — max pain for BTC is at $44k. Smart contract platforms continued to be ‘tradeable’ high beta plays as sharp retracement was seen, led by previous leaders, $SOL (-17%) and $LUNA (-20%). The biggest news last week was definitely Solana, a $40bn+ blockchain, experiencing an outage for nearly a day. This was in stark comparison to Arbitrum, a Layer-2 solution, which also saw an ‘outage’, but one in which users were still able to process transactions as they could bypass the Arbitrum Sequencer to directly use L1 network (Ethereum). As we mentioned in last week’s report, Ethereum killers’ competition is not Ethereum but L2 solutions. Despite the price action, Satori remains constructive especially on the majors (BTC, ETH) going into year-end, with underallocation in petrock BTC and potential ETF approval.
On the institutional front, fiat money and capital continue to be cheap; MicroStrategy bought additional 5,050 bitcoin (bringing total to 114,042 btc), and TradFi continues to pour into crypto, mostly via equity tranches given regulatory uncertainties regarding token exposures. Brevan Howard formed new unit, ‘BH Digital’, to manage cryptocurrencies and digital assets; Jump Trading announced formation of Jump Crypto to grow and develop blockchain ecosystems, and Jump Capital also announced $350mio early-stage investment fund to invest in crypto sectors like DeFi, Web 3.0, blockchain and financial applications; Steve Cohen also personally invested in Radkl, a quantitative trading firm, and Recur, an NFT marketplace; Franklin Templeton filed for blockchain venture fund, and also participated in Amberdata’s $15mio fundraise, led by Citi. On the digital asset investment funds flows, activities continue to be rather muted (Chart 3), with ~$133mio MTD inflow as of 9/10/2021.
On the macro side, the week began on a down note with moderating stimulus hopes. Muted CPI (0.1% vs. 0.3%; smallest gain since Feb) on Tuesday and optimistic retail sales (1.8% vs. -0.1%) on Thursday did little to lift equities as market weighed in that benign inflation report was unlikely to impact the following week’s Fed decision. Bond yields, which retraced following softer-than-expected inflation data, drifted higher as the week progressed with solid manufacturing and retail sales data. With quadruple witching past us, market looks towards FOMC meeting and press conference this Wednesday, with focus on timing of tapering; most are expecting first change in asset purchase to take place in December. Aside from that, the House is expected to vote on debt ceiling and bipartisan infrastructure bill.
What is Happening?
Treasury officials are getting ready to release policy framework for stablecoins to addres potential risks to the market, according to Bloomberg. Officials are also said to be discussing launching a formal review by the Financial Stability Oversight Council into whether stablecoins pose an economic threat, a process that could trigger even more severe oversight. In 2021 alone, total stablecoin supply increased by more than 4x from $29bn to $124bn (Chart 4), and the view that stablecoins, either in the form of CBDC or privately-issued tokens, will become an integral part of financial landscape is getting more widely accepted. With the impending regulatory risks, ‘decentralised stablecoins’ and algostables, such as $UST, $DAI, $FRAX, might gain more traction.
Institutional interest in crypto continues to be strong, and with continuously increasing vested interest and money invested in crypto, we remain constructive on crypto prices going into year-end. Our decision to not chase extended rallies on $SOL and other assets has paid off, and levels now look decent to scale in. We continue to like thematic opportunities (L2, liquidity incentives by L1 Foundations) and yield opportunities in various DeFi protocols to benefit from liquidity incentives.