Weekly Research Report: All Eyes On Merge

Crypto assets traded higher following the easing of macro concerns, with Bitcoin trying to break the 100dma at $24.7k and Ethereum gyrating around $1900. Crypto total market cap stabilized at $1.2T. The intense focus in the crypto space continued to be the upcoming Ethereum Merge in September. Ether miners were unhappy with the Merge upgrade as they will be squeezed out in the proof-of-stake (PoS) ecosystem. Therefore, they tried to create the forked version and stay in the proof-of-work (PoW) generation. However, the forked version would be different to survive since the largest stablecoins’ firms, Tether and Circle, which are the core of the Defi and crypto space, announced that they would only support the PoS version.

Stablecoin dominance decreased as digital assets rallied (USDT 5.9%, USDC 4.8%).

General perpetual funding rates recovered (annualized 7d funding: BTC +0.7%; ETH +2.4%).

Alts’ funding rates also increased with strong price actions, with Cardano and Solana rates flipping positive (ADA+4.1%, SOL +1.0%).

For liquidation, high volatility in the market caused liquidations from both sides. The short side has been statistically more significant.

According to a research from CoinDesk, despite the crypto downturn over the last few months, institutional investors and miners are increasingly using options to speculate or hedge their positions. The option open interest has been drastically increased (“BTC option OI/BTC market cap” = 2%, “ETH option OI/ETH market cap” = 4%).

Chart 1: 7dma of BTC, ETH Perpetual Futures Funding Rate (Source: FTX)
Chart 2: 4hr BTC liquidation chart (Source: Coinglass)
Major Crypto KPI (Aug 15, 2022)

Ethereum Merge was scheduled on 15–16 Sep, forked versions will arise thereby. It is also expected to have an Ethereum outflow from centralized exchanges as holders would like to increase the on-chain Ethereum positions for receiving the free money from the forked versions. Some may also go short the Ethereum perpetual to hedge the over-leveraged Ethereum spot positions, plunging the funding rates. For a more aggressive play, some may borrow extra Ethereum using other assets such as Bitcoin to maximize their return during the Merge.

Memecoin outperformed this week, with $DOGE and $SHIB rallied up to $0.846 (+10.0%) and $0.0000179 (+30.1%) respectively.

Tornado Cash, a crypto transaction mixer, was banned by the US Treasury last week. A suspected developer of the protocol was arrested. Several protocols sanctioned a ddresses that associated with Tornado Cash, including Aave, Uniswap, Balancer, OpenSea and DYDX. Tron’s founder, Justin Sun, got suddenly blocked by Aave as he received an anonymous transaction of 0.1ETH from Tornado Cash.

Acala, Polkadot’s defi hub, suffered a $1.2B aUSD (Acala Dollar) exploit in its newly launched liquidity pool. $aUSD immediately de-pegged by 99%.

BlueBenx, a Brazilian crypto lending platform, got hacked for $32m. The platform halted customers’ withdrawals and laid off employees.

Pension funds remained bullish on investments in crypto assets and expected to take the high volatility.

The United Nations advised banning banks that hold crypto assets and asked developing countries to limit crypto adoption in terms of tax, monetary and financial stability perspectives.

The Philippines’ Central Bank stopped applications of new crypto firms.

Uzbekistan restricted access to crypto exchanges due to accusations of unlicensed activity.

Iran imported $10m worth of goods using cryptocurrency. The politician assured that digital assets and smart contracts will be widely applied in their foreign trades in the future.

Paradigm and FTX partnered to launch one-click future spread trading, and hence increasing the efficiency for the famous cash-and-carry trades and rolling expiring futures.

Messari, a well-known crypto database and research platform, managed to raise another $35m at $300m valuation.

Injective, a decentralized exchange, raised $40m led by Jump Crypto. The fresh fund will be used to increase the utility for its native $INJ token.

The macro concerns, especially the hyper-inflation issue, have been eased as July CPI number was lower than expected. The expectation for next rate hike changed from 75bps to 50bps. Before the September FOMC meeting (20–21 Sep), the only macro uncertainty will be the Nonfarm Payroll on 2 Sep and August CPI number on 13 Sep. Equities were up as macro situation turned positive (DJIA +3.6%, S&P500 +3.1%, NQ +2.2%). Commodities also traded higher (Gold +0.1%, Oil +3.0%, Wheat +1.0%).

The downturn in crypto space created room for the development of crypto regulations. Different countries expressed different views on their levels of crypto adoptions. Despite the recent exploits in defi protocols and high volatility in the market, institutions and pension funds continued to be highly interested in joining the industry. Market has recently rallied up with improved macro economy and optimism from the upcoming merge. Under current market sentiment, it is expected to see another squeeze for the digital assets very soon. SR continued to accumulate solid crypto assets.

DYOR, Good Luck!

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