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Weekly: Debt Serious

This was an eventful week for both traditional and crypto markets -- steepening in the US yield curve, BoJ intervention and an exploit on Curve Finance

August 4, 2023

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Key takeaways

  • Current macro conditions suggest we may see a temporary pause in the recent strong USD trend, which should be supportive for the digital asset market
  • But we’re concerned that crypto performance may recouple with US equities in the short term, as the latter is more concerned about a possible liquidity drain amid stretched valuations

Written by

  • David Duong, CFA, Head of Institutional Research

Market View

This was an eventful week for both tradFi and crypto markets but for very different reasons. Carry trades in traditional currency markets were upset by the Bank of Japan’s decision (on July 28) to raise the hard cap on its 10-year bond yield (signaling a transition from its yield curve control policy). While some media characterized it as a tweak, we think the broader policy implications are much larger. Despite the change in its rates regime, the BoJ has simultaneously been curbing sharp rises in the yield by offering to buy long-end Japanese government bonds (JGBs). Due to low rates in Japan, the JPY has historically been the base currency in many carry trade pairs, so intervention has created instability across different pockets of the FX market.

At the same time, we’re starting to see the higher interest rates in some price currencies come down, as evidenced by the surprise decision by Brazil’s central bank this week to cut its benchmark SELIC rate by 50bps (compared to expectations of 25bps).

Separately, in the US, the yield curve steepened significantly this week following the rally in Treasury bonds only two weeks ago, as the US Treasury Department announced an increase in the size of its debt issuance plans. (Note that ratings agency Fitch also cut the US debt rating from AAA to AA+ due to their concerns on the fiscal outlook, but we think the impact of this on bond yields was actually fairly limited.) Nevertheless, yields tend to track rate expectations more so than supply pressures, so a ~25bp move in the US 10y yield is meaningful. US stock markets reacted poorly due to concerns of liquidity drain, though the upcoming week’s higher-than-expected US$103B of issuance (an increase from $96B) is mostly just rolling over the government’s maturing debt.

What’s important for crypto is that the US dollar is more sensitive to front end rates, and the 2y yield seems to be well anchored. That is, current macro conditions suggest we may see a temporary pause in the recent strong USD trend, which should be supportive for the digital asset market. But we’re concerned that crypto performance may recouple with US equities in the short term, which may cap the upside on digital assets as we think it’s more likely stocks could retrace due to stretched valuations. For the moment, the correlation coefficient between these factors signal almost no relationship – see chart 1.

Screenshot 2023-08-03 at 5.20.07 PM

Meanwhile, the exploit of four liquidity pools on Curve (July 30) didn’t help risk appetite in the crypto space but neither did it sustainably accelerate the downtrend that’s been ongoing since mid-July. In a recent report, we discussed the potential implications of the event on the decentralized finance (DeFi) landscape. Our main takeaway is that the actual systemic risk associated with the exploit is limited by mitigating factors that offset some vulnerabilities of the attack. While the situation is still fluid, we believe that this is not evidence of DeFi’s weakness but rather highlights the system’s antifragile properties. That is, DeFi’s inherent visibility helps to recognize and confront problems, which may ultimately improve its resilience.

Crypto & Traditional Overview

(as of 4pm EDT, Aug 3)



Mkt Cap

24 hour change

7 day change

BTC correlation



















Gold (Spot)






S&P 500

















Coinbase Exchange & CES Insights

Traders are taking a wait-and-see approach to the crypto markets. The 30 day realized volatility for both BTC and ETH are near the lows of the year at 21.6% and 25.6% respectively, as of August 3. Possible upcoming catalysts include (1) the court decision in the Grayscale case (to convert its trust to an ETF), (2) distributions from the Mt Gox Rehabilitation Trust to creditors and (3) any movement on the various bitcoin spot ETF applications in the US. However, all of those events are difficult to position for, so the market will have to wait for more information before pricing them in.

Optimism’s OP token has been a focus on the desk this week as additional tokens were unlocked on Monday, July 31. The token traded better than might have been expected, up 15% over the last 7 days. Price action has largely been attributed to the news around Base, Coinbase's L2 on Ethereum. That chain, built on the OP stack, is set to broadly open on August 9.  

Overall, flows on the desk have been balanced in the majors while altcoins have been net for sale.

Screenshot 2023-08-03 at 5.27.48 PM

Financing Rates







5.00% - 10.75%


USD - 1m


5.25% - 11.00%

USD - 6m


5.50% - 11.50%


2.00% - 6.00%


3.00% - 7.50%


Notable Crypto News


  • Ethereum futures become latest ETF craze as applications tumble in (The Block)
  • Crossover and Cboe Digital collaborate on crypto clearing solution (The Block)


  • Democrat senators want Treasury, IRS to pick up the pace on new crypto tax rules (Blockworks)
  • FTX 2.0 would be a bad idea, says Kraken co-founder Jesse Powell (The Block)


  • Hong Kong Officially Opens Crypto Trading to Retail Investors, Grants First Licenses to HashKey, OSL (Coindesk)
  • Curve Finance’s $62M exploit exposes larger issues for DeFi ecosystem (TechCrunch)
  • Worldcoin faces setback in Kenya as operations halted (Blockworks)
  • Tether Reports $850M Profit In Second Quarter (Defiant)


Views From Around the World


The UK's Electronic Trade Documents Act 2023 aims to digitize trade documents using blockchain technology, marking a potential shift in centuries-old merchant laws. Under the initiative, electronic trade documents could be deemed legally equivalent to paper documents, if they meet specific criteria. This move could streamline trade processes and bring traditional practices into the digital age, boosting efficiency and reducing reliance on physical paperwork. (Coindesk)


India has released its official recommendations for the next iteration of a synthesis paper jointly produced by the International Monetary Fund (IMF) and Financial Stability Board (FSB) - which is expected at the end of August. The official recommendation includes action points such as “promoting the effective implementation of the FSB's recommendations and all other standard-setting bodies,” consideration of “macro-financial implications and risks specific to Emerging Markets and Developing Economies,” as well as an “outreach to all jurisdictions to generate awareness of risks.” (Coindesk)

The Week Ahead

Aug 7

Aug 8

Aug 9

Aug 10

Aug 11

Notable Macro

Initial Jobless Claims


U. of Mich. Sentiment



Notable Earnings

Marathon Digital

Bitfarms Ltd

Cleanspark Inc


Ethereum Dencun Interop Testing Call

Base Launch


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