This week, cryptocurrencies retraced higher to levels last seen in August 2022 due to a combination of positioning, kinder regulatory headlines, and general risk-on sentiment. ETH appears to have lagged BTC in the run-up, but both have outperformed US stocks on a risk-adjusted basis after falling behind the previous week. Note that while futures volumes have picked up significantly year-to-date, we are not seeing a comparable increase in futures open interest in native token terms, suggesting the role of leverage may be somewhat limited here.
Meanwhile, we recently published a report that looks at whether we may see increased ETH selling pressure around the Shanghai Fork in light of recent events. There are a number of mitigating factors that should limit that risk, although overall, we think ETH performance around the Shanghai Fork will be less strictly dependent on technicals and more contingent on what risk does at the time withdrawals are enabled. For more details, please see our full report, “New Math for Staked ETH Withdrawals?”
Weekly Market Call
View replays of our weekly crypto market analyses from our Americas, APAC and EMEA Coinbase Institutional teams, available here.
Digital assets recovered last week’s underperformance to US stocks with an over 2.0-standard deviation move in bitcoin relative to the 65-day rolling average, compared to only a 1.3 sigma move in the S&P 500. Part of that had to do with light positioning early in the week on the back of crypto regulatory headlines and ahead of some key US economic data (CPI, retail sales, housing). On the regulatory side, Coinbase has commented publicly about Coinbase’s staking services here, our thoughts on stablecoins here, and the SEC’s new proposal on custody here. On the macro data, January headline inflation came in at 6.4% YoY (5.6% core), above median survey forecasts. But we believe investors were braced for a negative surprise while a moderating trend on core services prices helped relieve market concerns about a hawkish Fed tilt, thus opening the door to better risk sentiment.
Chart 1: Bitcoin and ether have outperformed G10 FX to start the year
Note that we had previously discussed in our last Monthly Outlook that lower token supply circulating in the market coupled with the lack of marginal sellers has been offering technical support for cryptocurrencies this year. We also think a high stablecoin dominance ratio of 18.0% (vs the total crypto market cap) to start 2023 has likely enabled excess cash on the sidelines to be put to work. Indeed, the total stablecoin market cap has fallen by a net US$3.3B over the last six weeks. We’re cautious, however, as the back half of Q1 tends to be a seasonally weaker period for risk assets, even if liquidity conditions remain supportive for the time being due to the drawdown of the US Treasury General Account (TGA) balance coupled with the lack of new government borrowing due to the breached debt-ceiling limit.
Meanwhile, we’ve been seeing higher aggregate daily futures volumes on BTC and ETH over the last six weeks, with funding rates on perpetual swaps back in positive territory (after sitting idle for some time). Yet, what’s noteworthy is that open interest on BTC futures has actually fallen by 78k BTC since the end of December (i.e. in BTC terms) and been flat at 478k BTC ($11.8B) since the end of January. Open interest on ETH futures actually declined over the last two weeks from 3.59M ETH to 3.42M ETH ($5.9B). Consequently, we do not think the data suggests that there is more leverage in the system which one would otherwise believe should compound the volatile market moves that we’ve seen year-to-date.
Chart 2: Futures aggregated daily volumes for BTC
Finally, we saw MATIC outperform its peers among the top ten non-stablecoin cryptoassets (by market cap) this week, following the announcement by Polygon that their zkEVM mainnet will launch on March 27. (We’ve previously discussed layer 2 scaling solutions for Ethereum and zkEVMs in this report from August 8, 2022.) Polygon’s biggest competitors thus far in the zkEVM race have been zkSync and Scroll. The former (run by Matter Labs) launched its mainnet yesterday (February 16) with the platform rebranded as zkSync Era (albeit it's not a full launch as the chain is still closed to end users). The latter has a mainnet target sometime in 2Q23. As we’ve previously discussed, the big prize is achieving true EVM equivalence, and we believe the developments across these projects should be closely watched as an important theme for this year.
That said, we’ve seen MATIC prices also bolstered by Polygon’s progress on the business development side. It has recently made strides in the realm of institutional (or “permissioned”) DeFi for example, as Siemens, the industrial manufacturing conglomerate, recently announced the issuance of a one-year US$65M bond on the Polygon blockchain. Leveraging functionality introduced by the Electronic Securities Act – enacted in mid-2021 in Germany – the Hauck Aufhäuser Lampe Privatbank coordinated the issuance of the tokenized bond which promises to reduce the operational overhead traditionally associated with bond issuance and trading. Separately, the DeFi protocol Clearpool recently decided to use the Polygon blockchain to launch its institutional credit platform called Clearpool Prime. We think these efforts signal the growing interest from institutional pools of capital looking to experiment with the capabilities of decentralized protocols.
Crypto & Traditional Overview
(as of 4pm EST, February 16)
24 hour change
7 day change
Coinbase Exchange & CES Insights
Volumes on exchange have remained steady through February, though lower than we saw last month. BTC and ETH have fallen to just over 51% of exchange volumes as traders have searched for higher returns among the altcoins.
Crypto markets overall continued to trade higher with BTC and ETH up 14% and 11% on the week, respectively. A combination of positioning, kinder regulatory headlines, and a general risk-on attitude have fueled the rally. Positioning was light going into the week. The seemingly tougher macro data points we received along with regulatory headwinds caused a good number of market participants to book profits after January’s run up. Investors had turned cautious and didn’t believe there was much more near term upside.
Some of those regulatory concerns have subsided. We learned more about the SEC’s approach to Qualified Custodians in crypto. Binance has announced it is in settlement talks with regulators. And both Citadel Securities and Susquehanna have disclosed large positions in Silvergate, which has provided a boost to sentiment in the space. All the while, a “no-recession” narrative has emerged that has supported general risk assets. As crypto continued to trade well those cautious investors came back into the market and added length. Crypto and traditional hedge funds have been recent buyers. Private Wealth and VC’s have remained on the sell side.
Despite SEC-related news in the past few days which negatively affected sentiment, BTC is still looking quite constructive and has in fact, shown remarkable resilience. The daily chart for BTC is now showing a bullish divergence – with higher highs, and higher lows since the golden cross signal flashed last week (50D MA crossing over 200D MA). With the MACD indicator looking set for another bullish crossover (as of time of writing) – if we do break through the strongly tested resistance level of $25,000, there is a chance we may see a break through to $30,000 as there is not much resistance historically between the two levels.
View From Around the World
“Interactive Brokers has begun offering Bitcoin and Ether trading to professional investors in Hong Kong in partnership with crypto exchange OSL Digital Securities. This is only offered to investors with more than HKD 1 million in investable assets and institutions with over HKD 40 million.” (Coindesk)
“DBS Group Holdings saw an 80% surge in Bitcoin traded on its digital exchange in 2022 compared to the previous year. According to the bank, it likely benefited from a ‘focus towards trust and stability, especially in the wake of multiple scandals that have rocked the industry’ – referring to the collapse of Three Arrows Capital hedge fund and FTX exchange.” (Straits Times)
“The European Parliament has released a report on a draft bill that proposed banks that hold cryptocurrencies to set aside a large amount of capital in an effort to address potential risk. European Union lawmakers also proposed that banks apply a 1,250% risk weight on their exposure to digital assets, suggesting that any framework applied to crypto assets should ‘adequately mitigate the risks of these instruments for the institutions’ financial stability’. According to CoinTelegraph, the proposed law suggested that such requirements go into effect until Dec. 30, 2024.” (CoinTelegraph)