April 3, 2022

Insights, news and analysis for the professional investor

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Bitcoin (BTC) - $46,488.13

Ether (ETH) - $3,500.05

Prices as of 4/3/22 @ 1:40 p.m. UTC

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Welcome to Crypto Long & Short – featuring a new look.

I probably owe subscribers an update on crypto markets given I've basically avoided the subject since I took this newsletter over. There are two reasons I have ignored them 1) nothing has really happened and 2) it's absolutely petrifying to write about crypto markets because they move so fast. (Also, I'm totally in it for the tech, right?)

Alas, last week the market finally broke out a bit just as the first quarter was coming to an end (then it started going down again, ugh), so here it goes. NgU Technology (that is, "Number Go Up") is back! This newsletter will serve as a lookback to Q1 2022, so pretend it's March 31 when you get to reading this.

That (and maybe more) below...

– George Kaloudis, research analyst

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The Briefing

Calendar year quarters provide an artificial breakpoint to reflect on what happened. The first quarter of 2022 didn't really provide much by way of crypto market movement until it was basically over. Since February until this past weekend the price of bitcoin had been range-bound between $37,500 and $42,500. Given the macro landscape, this was surprising. Russia invaded Ukraine, the Fed announced at least six rate hikes and there were lots of things happening in U.S. and EU regulation.

It was even more surprising if we compared bitcoin's price in that period to, well, everything else. Between Feb. 1 and March 14 the S&P 500 shed 8% and long-term (20-year) Treasurys dipped 7%; meanwhile, bond markets were ravaged, and we saw the price of commodities, like oil and nickel, spike aggressively. (Side note: The story about the London Metal Exchange and the nickel short squeeze is a must read.)

Meanwhile, bitcoin didn't really do anything.

That was true until last week. We rolled into that weekend, March 25, with bitcoin at $44,000 and by that Monday, March 28, it had brushed up against $48,000. This gain was partially catalyzed by the Luna Foundation Guard planning to buy up to $10 billion of BTC to back its terraUSD (UST) stablecoin. The persistent bitcoin purchases by LFG has proved to be a near-term tailwind for bitcoin price. Crypto investors, who are salivating at the prospect of earning up to 19.62% interest on UST holdings using the Anchor protocol, seem to agree as Terra (LUNA), the token that powers UST, gained ~15% in the last week of the first quarter.

With the price of bitcoin finally trending up, the bitcoin options market saw open interest (OI), the U.S. dollar amount allocated to bitcoin options contracts, hit a year-high ~$9.8 billion on March 24, a day where more than $3 billion in options expired. Since then, we've seen more than $1.3 billion in options enter the market, marking a relatively quick recovery.

However, bitcoin wasn't the only asset that the market has liked recently. In fact, the market liked ether (Ethereum's native asset) more, with ETH gaining 23% since Feb. 1 (compared to BTC's 18%). ETH's price catalyst came on March 14 when Ethereum successfully "merged" on the Kiln testnet ahead of the blockchain's eventual move to proof-of-stake. Ethereum changing its consensus mechanism to proof-of-stake has been closely watched by investors, and the successful test signaled to the market that Ethereum might actually make the transition that has been in the works since 2015.

On the topic of ether, its price compared to bitcoin's (ETHBTC) has started to reverse. ETHBTC was on a steady climb from 0.024 to as high as 0.087 in 2021 (the unit is bitcoin per ether), but ETH's market cap has mostly lost ground to BTC this year, dropping from 0.083 to 0.065 between Jan. 4 and March 14. Since then, ETHBTC has steadily walked up to 0.073.

From here, it is natural to look at bitcoin dominance, the measure of BTC market capitalization compared to the market capitalization of all crypto assets. In times of uncertainty, bitcoin dominance tends to gain ground, and that has come to bear so far in 2022. It has been a weird, tough year in general for the crypto market, even with the recent run-up (bitcoin lost 2% in the first quarter).

Something off-the-wall as we look toward Q2

As we take a look towards the second quarter, I want to share a detailed (and esoteric) on-chain bitcoin chart Glassnode published in its most recent newsletter. The chart is titled "Bitcoin: Realized Cap HODL Waves (Coins > 1yr)."

HODL Waves are groupings of bitcoins differentiated by the amount of time those bitcoins have been held (e.g., bitcoins held for two years would be in the 2-3 y HODL Wave). If we then weigh those HODL Waves by "Realized Price," the price at which those bitcoins last moved, we can use the result to analyze the U.S. dollar wealth held in those bitcoins. If we filter out coins less than a year old, we get an interesting visual.

If we consider that bear markets come in two phases, the first where a low proportion of wealth is held by older investors and the second where the wealth disparity recovers strongly as more coins age into the one-year band at a higher cost basis. That cost basis should stand in as a higher floor value than the previous cycle. We might be at a turning point in this bear market.

Lastly, while the past is not indicative of the future, understanding the past can help us anticipate what might happen. Looking back, we know that it sometimes snows in April on the bitcoin market. But usually bitcoin performs well in April, with an average gain of about 17% over the month. So, who knows, maybe we'll close the book on the bear market in the next 27 days. But maybe not.

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Takeaways

Axie Infinity's Ronin Network suffered a $625 million exploit.

TAKEAWAY: On March 29, the gaming-focused Ronin network announced a loss of over $625 million in USDC and ether (ETH). According to a blog post published by the Ronin network's official Substack, the exploit affected Ronin validator nodes for Sky Mavis, the publishers of the popular Axie Infinity game, and the Axie DAO. The Ronin Bridge and the Katana automated market maker (AMM) have both been paused while investigations are ongoing.

BNY Mellon to custody assets backing Circle's USDC stablecoin.

TAKEAWAY: BNY Mellon, one of the oldest U.S. banks and one of the first to lean into custodying digital assets, will serve as the "primary custodian" for the reserve assets behind the USDC stablecoin, its issuer Circle Internet Financial said on March 31. That Circle is trumpeting legacy banking partner BNY Mellon speaks to the issuer's vested interest in building trust in its stablecoin brand. Competing stablecoin issuers have come under fire in the past for their less than transparent business practices.

Kraken hits a key milestone in its quest to gain a Fed account.

TAKEAWAY: Wyoming-based digital asset bank Kraken Bank, the Wyoming subsidiary of the Kraken crypto exchange, moved a step closer toward being granted a Federal Reserve Master Account and gaining the same access to the global payments system as traditional banks. Crypto companies have traditionally had difficulty accessing banking services. Kraken, should it be granted this access, would be well positioned to serve this market by effectively being treated as a traditional bank.

Senator Elizabeth Warren of Massachusetts called for the U.S. to create a central bank digital currency (CBDC).

TAKEAWAY: In an NBC interview on March 31, Warren indicated that she thought it was time for the U.S. to create its own central bank digital currency (CBDC). Warren said that there is "a lot that banks do wrong; if you think, 'We could improve that in a digital world,' the answer is, 'Sure you could.' But in that case, let's do a central bank digital currency … I think it's time for us to move in that direction."

Binance is sponsoring the Grammys this year.

TAKEAWAY: The company said in a press release Thursday that it is "the first-ever official cryptocurrency exchange partner" of the Recording Academy, the organizer of the annual Grammy Awards. Binance also said that Web 3 initiatives with the Recording Academy are also in the works. It's not the Grammys' first Web 3 foray. Last November, the awards show tapped the Tezos-based OneOf non-fungible token (NFT) platform for a three-year partnership.

Introducing Market Wrap, our daily newsletter that explains what happened today in the crypto markets — and why. Sign up to get the first edition in your inbox tomorrow, April 4.