The ETH/BTC cross continued to trend lower last week despite a reduction in ETH supply for the first time since the Merge. A higher than expected inflation print was a major headwind for general crypto performance, alongside all risk assets more broadly. Meanwhile, MakerDAO is seeking to diversify its balance sheet by allocating stablecoin reserves into short term US treasuries and corporate bonds.
Separately, please take a look at our recently published Market Intelligence report, “The palpability of private market funding,” which examines the ascendance of crypto as a meaningful segment of the broader venture capital market and how recent dealmaking trends suggest underlying strength for crypto.
Finally, the institutional research team is hosting their next ask-me-anything webinar on October 20 at 11am ET. Please register here to listen to “Ask Coinbase Research” and submit your questions.
Weekly Market Call
View replays of our weekly crypto market analyses from our Americas, APAC and EMEA Coinbase Institutional teams, available here.
Another step towards peak hawkishness
September’s inflation print surprised median consensus economists’ forecasts to the upside, although annualized figures for both headline and core came inline with the Cleveland Fed’s nowcast of 8.2% YoY and 6.6% respectively. That pushed US Treasury yields higher across the curve (above 4.5% in the 2y) and reinforced USD strength, thereby pressuring crypto prices weaker. The ETH/BTC cross continued its post-Merge trend lower (down 21%) suggesting market players are reining in risk exposure. This was despite the fact that we saw some supportive fundamental factors for ETH last week. That includes the launch of Fidelity's Ethereum Index Fund and sufficient activity on the network to achieve ETH supply reduction for the first time since Ethereum's transition to proof-of-stake. Around 4950 ETH were burned between October 8 and 12, although this was mainly due to transactions (mostly free mints) associated with the XEN Crypto protocol.
Chart: ETH/BTC vs US Treasury volatility (MOVE index)
Looking ahead, the Cleveland Fed is projecting a CPI nowcast of 8.04% YoY for October (0.72% MoM) which reflects base effects from the previous year. That would put inflation on track to end 2022 somewhere around 7.5% YoY at a minimum and only assuming a return to pre-pandemic norms. Meanwhile, the US economic calendar looks less crowded next week, although we’re paying close attention to the data on housing starts and building permits for September. These figures have been pointing weaker for some time and have important implications for the economic cycle. We think declining residential investment will likely remain a major headwind to growth.
Ultimately, despite the fact that we have likely seen the peak in inflation, we believe the Fed will deliver a 75bps hike at the November 2 meeting, while the odds of another 75bps hike in December are rising. The rates curve is currently pricing in a terminal rate close to 5.00% by the end of 1Q23. In our view, the sooner maximum hawkishness from the Fed is fully priced, the sooner crypto prices can start to stabilize. (Notably, the Chicago Fed index suggests financial conditions are finally starting to tip over from expansionary to neutral.) With stablecoin dominance (as % of the total crypto market cap) still relatively high at 13%, we expect a better setup for crypto performance in November post-FOMC.
MakerDAO’s move into US Treasuries
MakerDAO, the issuer of the stablecoin DAI, is moving forward with a strategic initiative to allocate US$500M of its stablecoin reserves into short-term US treasuries and investment-grade corporate bonds. The plan, initially proposed in late June, was put in motion last week following a community vote. MakerDAO has partnered with the asset advisory firm Monetalis to facilitate the multi-phase transaction which will ultimately deploy:
- 32% ($160M) to 0-1 year US Treasury iShares ETFs (from BlackRock),
- 48% ($240M) to 1-3 year US Treasury iShares ETFs (from BlackRock),
- 20% ($100M) to 0-5 year investment-grade corporate bonds (from both the US Treasury Index and the investment management firm Baillie Gifford)
The core aim of the initiative for MakerDAO is to diversify its balance sheet with low-risk, highly-liquid traditional assets that can generate incremental yield relative to DAI and USDC. It’s also indicative of the protocol’s broader efforts to integrate real-world-assets into its collateral ecosystem in the face of waning demand for crypto-based leverage. Indeed, ostensibly risk-free US Treasuries are now paying more than higher-risk DeFi lending on stablecoins, acting as a drag on DeFi activity more broadly. While the diversification is warranted, in our view, the increasing vectors of centralization may pose a concern for the greater community in the future.
Coinbase Exchange and CES Insights
Volumes on the exchange have continued to trend lower while crypto volatility remains subdued, suggesting interest in the space is cooling. BTC represented a surprisingly large share of the exchange volume over the past week. We think investors were likely drawn to its relative safety. Meanwhile, ETH’s share of the volume has dropped off as on-chain transaction volume remains underwhelming.
Separately, Coinbase Exchange recently announced a partnership with Signature Bank to provide real time settlement via Signet.
Coinbase Execution Services
The CES desk saw balanced flows from clients. Crypto focused VC’s and hedge funds continued to add to positions while private wealth was a net seller. Traditional hedge funds traded both sides of the market. Identity continues to be a favorite sector along with the Smart Contract Platform and Derivative sectors.
BTC retested support (US$18.2k) on October 13 post CPI and has managed to form a hammer candlestick (bullish) on the daily with a StochRsi cross. While still overall bearish, BTC is showing signs of life and is likely to retest the trendline level (US$19.6k). If BTC can successfully retest and close above the trendline, a retest of the EMA50 (US$20.5k) is likely. Given the weekly timeframe is still very bearish, we expect BTC to reject the US$20.5k level if breached. If BTC fails to close above the trendline, we will retest June lows at US$17.5k.
View From Around the World
The Reserve Bank of India announced last Friday that pilot tests for its upcoming digital rupee will be launched soon, with the digital rupee available for specific use cases during the pilot. This pilot programme aims to create awareness around the planned features of the digital rupee. A concept note for the digital rupee was also released, which discusses the technology and design, potential use cases of the digital rupee, issuance mechanisms, and more. (Bloomberg)