The Insider #1 - 09 Oct 2023
Uptober seasonality continues to live up to its name (for now)
The uptrend has continued into October, with the total crypto market capitalization up +0.9% month-to-date. Leading gainers include Monero (+6.1%), Avalanche (+5.3%), and Solana (+3.3%), while Bitcoin is up +3.15% over the past week, reclaiming the $27.5k level. However, Ethereum has started the month negative -2.8% to $1,630, alongside underperformers Maker (-9.3%), Arbitrum (-8.23%) and Lido (-6.9%).
Total crypto market cap stands at $1.09 trillion after a +0.9% weekly gain. Trading volumes around $30 billion
An ETH Futures ETF kicked off to modest interest, but is seen as a step towards a spot BTC and ETH ETF. Approval could unlock huge inflows.
The historical seasonality suggests a strong month for crypto overall.
However, some headwinds persist. The high-profile FTX trial commenced amid the collapse fallout. According to on-chain tracking, the FTX hacker moved 75,636 Ether worth $124 million to Bitcoin's network via Thorswap, whose token RUNE dropped -8.6% during maintenance.
This extra Ethereum sell pressure has weighed on the ETH/BTC ratio, now at 0.05829, possibly contributing to Ethereum's poor October start. Meanwhile, Bitcoin dominance trends higher, currently at 50.9%. But Solana has shone as concerns about FTX selling its stake led to a short squeeze, with TVL hitting a 2023 high of $338 million.
α) Global Macro Overview
The relentless rise in global bond yields has become the primary focus for markets. Both short and long-dated maturities are facing intense selling pressure, with some longer duration government bonds issued in 2020 losing nearly 50% of their value.
This sharp decline in bonds can be attributed to concerns over decelerating growth and an imbalance between bond availability and its demand. In September, the total federal debt surpassed $33 trillion, with an added $500 billion in the subsequent period. This equates to an average addition of $1.4 billion every hour for the past 15 days. For nearly a decade, the US national debt's growth outpaced its GDP, and now, the margin between the two is the largest ever recorded.
There's a growing worry that with debt-to-GDP ratios hovering around 120%, servicing the debt might become challenging if rates continue to climb. This concern, combined with fears of inflation and the dollar's debasement, might steer investors towards assets like Bitcoin for security.
On the bright side, recent economic data from the US remains robust. The Nonfarm Payrolls (NFP) data for September reported an addition of 336,000 jobs against a forecast of 170,000, while unemployment rates remained stable at 3.8%. However, with the ongoing adjustments in yields, the probability of an interest rate hike before year's end has risen to 44%. Moreover, the Federal Reserve's anticipated break from rate adjustments is now expected to stretch from June to July 2024.
Higher debt-to-GDP ratios expose nations to the perils of surging rates. Countries with substantial debt loads, such as the US and Japan, are witnessing the most aggressive yield hikes. Meanwhile, as long-term rates ascend, the gap between 2-year and 30-year yields is narrowing.
The credit default swap (CDS) spreads for major US banks are on an upward trajectory, drawing comparisons to SVB and Silvergate levels. Amidst these changes, questions about the next potential bank downfall loom large. Deutsche Bank analysts opine that escalating yields might intensify banks' Unrealized losses by $140 billion, reaching an unprecedented $700 billion. They caution that the recent spike in rates undeniably exacerbates unrealized losses in US bank bond portfolios, which already prompted several bank failures earlier this year.
While the broader system's solvency remains relatively secure, dwindling securities valuations could negatively impact banks’ capital ratios. This could deter banks from lending, thereby throttling the economy's credit flow.
During last year's financial stress in February, digital assets saw a uptick. Given the government's current stance on bolstering bank liquidity, a lax monetary policy might benefit cryptocurrencies and other high-risk assets. Yet, the exact correlation remains ambiguous, with factors like prolonged yield suppression possibly playing a larger role.
Despite the bond market's tumult, equities have remained resilient. The prevailing oversold status hints at a potential market turnaround.
Geopolitical tensions flared over the weekend with rising unrest in the Israel - Palestine conflict. This poses risks of higher oil prices and a stronger dollar - headwinds for risky assets like crypto.
With the US as a net exporter, oil often trades in positive correlation to the dollar. So geopolitical instability that disrupts Middle East supply could drive up crude prices, strengthening the greenback. Meanwhile, flight to safety typically weighs on equities and crypto during conflicts.
OPEC and allies have also reaffirmed commitment to production cuts over 1.5 million barrels per day, tightening supply amid fraught geopolitics.
The combined likelihood of rising oil, a surging dollar, and equity/crypto declines paints a challenging backdrop for digital assets as risks heighten. Already facing inflation and recession concerns, further macro turmoil chips away at fragile risk appetite.
However, as we enter the typically bullish fourth quarter period, countervailing forces like earnings strength or cooling inflation (US CPI on Thursday) could spark a rally. Still, the winds appear to blow against risk assets currently, with dovish pivots still a distant hope.
Unpacking the Signal
Stablecoin TVL
The $5 billion increase in stablecoin total value locked (TVL) during the last week of September (27 Sep to 2 Oct) lends some credibility to the current crypto rally. However, this metric warrants close tracking, as continued sharp TVL rises would signal stronger fresh capital inflows. In contrast, a flat or declining TVL could indicate existing funds rotating rather than new money entering. For the rally to prove sustainable, real-money flows must persist. While uncertainty remains, stablecoin TVL serves as a key barometer for gauging the health and staying power of the uptrend. Its close correlation to total crypto market capitalization underscores why monitoring stablecoin TVL developments is critical for reading market sentiment and money flows accurately.
The Explosion of Real World Asset Tokenization
Real world asset (RWA) tokenization is emerging as a promising new frontier for DeFi, enabling assets like invoices, securities, commodities, and currencies to be represented on-chain.
Protocols such as MakerDAO are leading the charge. Maker now hold over $3.2B in RWAs collateral according to MakerBurn data as of 5th October. Maker further increased its RWA holdings by $101M last week through Monetails Clydesdale, BlockTower Andromeda and New Silver.
Activity expanded from TradFi last week with UBS tokenizing a money market fund on Ethereum. Last month, ANZ Bank announced partnering with Chainlink’s Cross Chain Interoperability Protocol (CCIP), London Stock Exchange Group (LSEG) announced a blockchain-based platform offering for traditional finance assets . Meanwhile Circle's new Perimeter open source protocol aims to serve as a foundation for tokenized credit markets has been launched.
The market is still early days compared to its potential - The Federal Reserve estimates just $700M of the $2.15B RWA market capitalization is currently on DeFi as of May 2023. But a 2022 report from last year, by BCG, estimates tokenization to be a $16 trillion in real world assets opportunity by 2030.
If executed properly, RWA tokenization could significantly expand the TVL and utility of DeFi with yield to be passed on to stablecoin holders while credibly leading to all time high TVL. New on-chain credit markets, transparent lending, fractionalized ownership and embedded interest rates are all possible with programmable tokenization.
ETH futures ETFs Debuts, Spot ETFs Could Unlock Billions
The launch of the Ethereum futures ETF's last week has garnered tepid trading volumes around $15.6M on Wednesday, VanEck in an early lead over ProShares. This is typical for new ETFs but low compared to the $200 million seen in the first 15 minutes for BITO. While the ETF itself has seen moderate interest, approval indicates a potential sign that SEC do not view ETH as a security - a promising sign for the prospect of a spot ETF in the future.
All eyes remain fixed on anticipated SEC approval for spot Bitcoin ETFs. Former BlackRock executive Martin Bednall and Steven Schoenfield predicted during CCData Digital Asset Summit in London last week, that the SEC greenlighting all spot bitcoin ETFs simultaneously within 3-6 months. Schoenfield estimates this could attract $150-200 billion into bitcoin investment products over three years.
While that projection seems bullish, even a more conservative $25 billion short-term estimate could significantly impact markets. A back-of-the-envelope calculation shows just how much:
While the volumes are still building, the ETF developments continue to be watched closely as a stepping stone for the anticipated SEC decision on spot Bitcoin and Ethereum funds. This potential greenlight could unlock significant inflows, making it a horizon to keep firmly in view
Across the Ecosystem
Ethereum Developers Appear Successful in Second Attempt at Holesky Test Network Launch
Optimism announced the alpha release of its first fault-proof system on the OP Goerli testnet.
Bitcoin Is Coming to Cosmos With New Nomic Bridge
Chainlink unveiled low latency Data Streams for DeFi oracles
Radix Babylon mainnet upgrade went live
StarkWare delayed first STRK token unlock to April 2024
Stride Zone proposed merging with Cosmos Hub
Compostable Finance launched Ethereum IBC testnet
Catalyst - AMM purpose-built to connect all chain testnet is live
Rome Protocol introduced for Solana sequencers on Ethereum
HTX was drained of 5,000 ETH in late September and moved swiftly to get the funds back from the hacker.
Parting Thoughts
As October's crypto rally persists, the currents beneath the surface offer insight into its sustainability and strength.
Rising stablecoin TVL suggests fresh capital inflows, not just recycling existing funds. RWA tokenization continues expanding DeFi into bold frontiers of TradFi asset adoption. And the promise of spot ETFs on the horizon could unlock a wave of new institutional investors.
Surging bond yields have sparked deep repricing and intensified recession fears amid fraught geopolitics. With higher rates threatening overextended government and corporate borrowers alike, the fallout could spread rapidly. And unrelenting inflation continues to destabilize economies and central bank policies. The resulting volatility leaves investor sentiment on shaky ground across assets.
Yet amid the macroeconomic tumult, crypto carries onward. As with past crises, short-term tempests can give way to long arc progress
However uncertainty lingers on several fronts. Future regulation, security vulnerabilities, and fickle market sentiment all pose risks. But for now, uptober's swell seems to be carrying crypto forward on a trajectory of maturity.
Of course the tides can turn quickly in this volatile asset class. But green shoots of progress both technical and regulatory appear to be sprouting. And innovation seems to advance even in crypto's darkest winters.