Introduction
This week we investigate the reasons behind the EUR trading at parity to the USD, with the erosion of the ECB’s credibility in handling inflation being a leading factor in our opinion. In addition, we cover the committee overseeing the Mt. Gox rehabilitation plan notifying creditors that they could receive their 141,686 bitcoin (~US$3B at today’s prices) as soon as August. Finally, we discuss Celsius paying off more than $800M of debt ahead of its bankruptcy filing on July 13.
Meanwhile, we recently hosted a webinar with Coinbase client Anheuser Busch discussing how they used Coinbase Commerce to successfully launch their NFT marketplace, view the recording here. We also published our July Monthly Outlook earlier this week, covering (over)leverage in the crypto ecosystem and evidence of improper risk management being leading factors on market volatility.
Weekly Market Call
View replays of our weekly crypto market analyses from our Americas, APAC and EMEA Coinbase Institutional teams, available here.
Market View
Macro moment
There are many reasons why the EUR is trading at parity to the USD at the moment, though the one that’s been catching our attention has been the slow erosion of the ECB’s credibility in the handling of its inflation woes. Europe is dealing with a challenging macro outlook predicated on massive external energy dependence and proximity to a major geopolitical conflict. Moreover, the prospect of tightening in a rapidly slowing economy amid the fragmentation of fiscal policies regionally is juxtaposed against a US Federal Reserve who seems committed to fighting inflation. Indeed, with the latest headline US CPI print coming in at 9.1% YoY, it seems like a 100bps Fed hike on July 27 isn’t out of the question, even if it could be considered somewhat aggressive in light of the seemingly stable core CPI at ~6% YoY. Either way, this could affect investor sentiment in all risk assets in the weeks leading up to the next FOMC meeting, and crypto is not an exception.
Mt Gox BTC flows?
Over eleven years since its initial security vulnerability (and over eight years since filing for bankruptcy), the since defunct and much maligned bitcoin exchange Mt. Gox is back in the news this week, as the committee in charge of the rehabilitation plan notified creditors on July 6 that payments could be dispersed as soon as August. We had previously discussed in our Year in Review 2021 report that the Rehabilitation Trustee approved a plan in 4Q21 to distribute 141,686 bitcoin (~US$3B at today’s prices) to the creditors whose BTC was lost by the exchange. Market participants have begun to speculate about the potential price impact of this large swath of bitcoin supply hitting the market next month. However, we believe the situation is more complex than that.
First, some hedge funds and private equity firms began acquiring claims from creditors at discounted prices starting in mid 2019. For example, the Block reported in March 2021 that Fortress was spending $100M to buy BTC from creditors at up to 80% of what they’re owed. Thus, many of the most motivated sellers may have already disposed of their claims to these funds. Those firms who purchased such claims may be more likely to hold these eventual repayments and/or hedge their exposure, as opposed to immediately selling their interest, given their historically positive and constructive view of the industry. Fortress, in particular, was one of the first TradFi entities to enter the space when they purchased US$20M of BTC in 2013 and later partnered with Pantera Capital to launch the Pantera Bitcoin Partners Fund in 2014.
Second, creditors who opted not to take an earlier payout and instead await resolution from the rehabilitation plan were relatively early to bitcoin (pre-2014). Those that continued to accumulate bitcoin across other venues between 2014 and today would likely have other methods of managing their investment exposure outside of immediately selling their rehabilitation payment.
Third, the notification from Mt. Gox last week stipulated that although the repayment period is expected to begin in August, any movement of creditors’ funds will be restricted “from approximately the end of August this year until all or part of the repayments made as initial repayments is completed.” That statement suggests that not all the repayments will be distributed at once. Without more concrete details from the rehabilitation committee, it’s difficult to say whether the potential supply of bitcoin hitting the market would be sold in pieces over the course of several months or all at once after all repayments are completed (perhaps towards year-end).
Celsius settles DeFi loans, files for bankruptcy
After suspending withdrawals from its platform on June 12, the troubled centralized (CeFi) crypto lender, Celsius, has managed to keep much of its financial obligations private, with the notable exception of their on-chain activities. But recently, Celsius paid off more than $800M of debt on Aave, MakerDAO and Compound, and as of this writing has no outstanding debts owed to any other decentralized lending protocols. Crucially, Celsius withdrew 400k stETH (Lido’s liquid staked ether derivative) that at one point helped make up a sizable part of the ~20% of stETH based collateral on Aave. That said, we expect that these debt repayments are likely to be scrutinized throughout the forthcoming legal proceedings given that they were made ahead of payments due to the firm’s non-DeFi creditors. Celsius filed for bankruptcy on July 13.
Coinbase Exchange and CES Insights
Exchange
With summer upon us we are seeing lower volumes across the board. This seasonality, coupled with the fact that a good deal of leverage has left the system has really slowed things down. Additionally, we are entering a very important earnings season which will help decide the direction risk assets take. With the added uncertainty we are seeing traders pause and wait for more information before making their next move.
The makeup of assets being traded on exchange are rather typical. This is as expected given there wasn’t any standout news story for any particular token. We will want to see sustained buy interest away from BTC and ETH before we call a bottom. So the asset mix will be an important data point to keep an eye on as we go forward.
Coinbase Execution Services
Macro funds have mostly gone quiet at these levels and are unlikely to reemerge until we have a clear change in trend. We do have a number of clients picking spots on the buy side but managing risk very tightly and quickly dumping positions if the price moves against them. The technical picture, along the macro drop, is still rather bearish so many are taking a wait and see approach to initiating new positions.
Bitcoin Technicals
BTC has traded in a very tight range the last week ($18.9k to $22.3k) and continues to have a very bearish setup. On the daily chart, BTC is likely to have its 4th consecutive close below the EMA9 after 7 consecutive closes above it. The monthly chart is by far the most bearish it has ever been and is likely the catalyst to take BTC lower. The EMA9 crossed the EMA20 on July 7th for the first time since January 31, 2019. The MACD on the monthly chart isn't close to bottoming out either and BTC is currently having a nasty rejection of the EMA70 on the monthly. With the lack of volume, uncertainty over earnings season and the monthly chart, BTC could see the $16k level tested followed by $13k over the coming weeks.
View From Around the World
Asia
The People's Bank of China announced that the country would be expanding the number of digital yuan (e-CNY) test sites in the country from 11 to 23 to enhance its technological capabilities after the success of its recent rollout in 1H22. Chinese consumers have spent a cumulative 264 million transactions amounting to 83 billion CNY ($12.35 billion) as of May 31, and more than 4,567,000 merchants across the country have begun accepting the CBDC. (CoinTelegraph)
Europe
The European Central Bank this week urged member countries to act quickly in passing and implementing the Markets in Crypto-Assets (MiCA) law which was revealed in late June. A new stablecoin report outlined the functions, risks and policy of stablecoins and referenced the crash of UST/LUNA as an example of a stablecoin being ‘anything but stable’ and the need for regulation. (ECB, Blockworks)
