Uneasy resilience

The resilience of crypto markets this month has been impressive if not surprising, as our view was that this bear market rally had been driven mostly by short covering. However, some upcoming US economic data has the potential to disappoint expectations of further upside, in our view, including the US Fed’s policy meeting from January 31 to February 1.

Meanwhile, there has been a noticeable uptick in NFT trading activity in recent months, supported by the popularity of a new marketplace known as Blur. We discuss how the platform has outcompeted OpenSea in terms of total volumes month-to-date, which may have to do with a token launch expected in mid-February.

Finally, we recently published a new report on “Bitcoin hashrate trends” that looks at the persistent growth of bitcoin network hashrate despite a tumultuous 2022 for many mining operators. We discuss the implications for the protocol.

Weekly Market Call

View replays of our weekly crypto market analyses from our Americas, APAC and EMEA Coinbase Institutional teams, available here.

Market View

The resilience of cryptocurrencies (among other risk assets) has been surprising in light of the short covering that we believe had been driving this move higher in recent weeks. We thought the poor economic data (discussed in our previous weekly commentary) would have diminished investors’ soft landing thesis somewhat. Moreover, there are some important events to watch out for in the coming week like the US 4Q22 employment cost index, PMI data and JOLTS job opening numbers. Not to mention the main event, which is the Fed’s FOMC meeting from January 31 to February 1. Expectations of a 25bps hike are priced in, but the Chicago Fed’s national financial conditions index suggests conditions have continued easing since the last meeting, which may lead policymakers to reinforce a hawkish tone.

Chart 1: US financial conditions have been easing

On the upside, rates appear to be anchored for the moment, as the US Treasury can’t issue any new debt until a new limit is set. After the $31.4T debt ceiling was breached last week, extraordinary measures are being taken to meet the country’s fiscal obligations, and a more realistic deadline appears to be early June. Meanwhile, we think the debt supply on secondary markets will likely be capped relative to presumably flat demand, which should theoretically support risk assets in the very short term, assuming no major negative surprises on the economic data.

Something unusual about the recent rally is that bitcoin outperformed ether, whereas the reverse tends to be true during most risk-on periods for crypto. One explanation for this is the better liquidity in BTC vs ETH. For example, we believe that it may have been easier for market players to accumulate a short BTC position at the end of 2022 (to express a negative view on the asset class) because BTC is the easiest cryptoasset to short as well as the most liquid. As market players became more bullish on a US soft landing scenario in January, the subsequent technical short covering may have been an important catalyst to see a larger retracement in BTC prices over ETH.

Indeed, open interest on BTC perpetual swaps ended 2022 at a very high 556k BTC (US$9.2B) across both centralized and decentralized exchanges before falling to 468k BTC as of January 26.  Notably, retail investors were responsible for much of that decline, as we saw the share of institutional participation via CME bitcoin futures increase from 80k BTC to 89k BTC (19% of total open interest). Comparatively, open interest on ETH perps ended 2022 at 4.4M ETH ($5.2B) and declined to 3.6M ETH over the same period, with CME’s share of the total futures open interest falling (from 7.3% to 6.7%).

Meanwhile, open interest on BTC options has increased significantly in January to 343k BTC (US$7.5B) near the highs of 2022, after falling at the end of last year to 205k BTC. Open interest on ETH options, on the other hand, also increased from 2.4M ETH ($2.8B) at the end of 2022 to 3.3M ETH although in ether terms, this is still far below the 5M ETH reached in September 2022 post-Merge. The 25D 1m put-call skew (reflecting the implied vols of puts vs calls) for both BTC and ETH have been in negative territory for almost two weeks. While these figures appear to be normalizing, this is the first time we have seen the skew in sustained negative territory in over a year.

NFTs

Beginning in early December 2022, there has been a noticeable uptick in NFT trading activity. Daily secondary sales volume since the second week of December through January 25 has averaged ~US$30M, after ranging between ~$5-15M for most of the summer and fall. A meaningful contributor to this increased activity is the new NFT marketplace called Blur, which launched to the public on October 19, 2022 and has quickly risen in popularity. Month-to-date through January 25, aggregate sales volume on Blur accounted for 43.7% of total volume across all marketplaces, compared to 36.8% on OpenSea (with the remainder split across various smaller venues). Over the same period, average daily sales volume on Blur was ~$13.8M versus ~$11.7M on OpenSea. 

Chart 1. Daily sales volume per NFT marketplace

Backed by Paradigm and a handful of notable NFT collectors (e.g. Punk6529, Cozomo Medici and Zeneca), Blur has positioned itself as both an NFT marketplace and aggregator, tailored to more advanced traders. The platform offers “floor sweeping” functionality, simultaneous listings, real-time data feeds from other marketplaces, portfolio analytics, and faster trading speeds relative to its competitors. Further, the platform currently charges zero marketplace fees and artist royalties are optional. Blur’s purposeful orientation towards advanced traders has led to a greater number of trades per user (4.2 daily average on Blur, versus 2.4 on OpenSea) and larger transaction sizes per user (2.2 ETH daily average on Blur, versus 0.45 ETH on OpenSea), since its public launch. 

Arguably, however, interest in the platform is largely a function of users’ anticipation of the forthcoming launch of Blur’s token (expected in mid February). Leading up to the public launch of the token, Blur has been distributing token allocations to early users in the form of airdrops that are linked to their historical engagement on the platform. In addition to being rewarded for activities like listing, selling and buying NFTs on the platform, users are rewarded for opting to pay artist royalties. This represents a relatively unique incentive model with respect to royalties compared to its competition. Notably, the tokenomics of the forthcoming governance token are yet to be released and it remains unclear whether the platform will eventually have to increase its marketplace fees above zero.

Crypto & Traditional Overview

(as of 4pm EST, January 26)

Coinbase Exchange and CES Insights

On exchange volumes continue to be above average and trending up. Aptos had a standout week up over 125%. Their NFT collection has been gaining momentum lately. Additionally, Binance announced new liquidity pools to support the token. The positive headlines sparked renewed buy interest as traders chased the momentum higher. Additionally there were reports of cross-exchange arbitrage opportunities for APT.

On the CES desk flows have become more balanced this week though still skewed to the buy side. Crypto focused funds remain net buyers along with traditional asset managers and institutional private wealth. Traditional hedge funds have turned net sellers while miners continue to sell at their typical pace. A number of clients are adding to the larger cap tokens while using the rally to de-risk the less liquid parts of their portfolio.

Bitcoin Technicals

After a strong rally on Friday, January 20, BTC has spent the rest of the last week consolidating between the $22,500-$23,000 level and has started to show some softness with risk assets trading poorly. Having said that, it still performed surprisingly well, relatively speaking, although going by classic textbook analysis we are still in overbought territory looking at (1) RSI levels or (2) BTC trading above the upper Bollinger band on the daily chart (see below). One further thing to watch is the potential bearish divergence on the daily chart that started appearing as the price rallied from $21,000 to $23,000 which coincided with the daily RSI coming off from ~89 to ~79 as of Wednesday this week. From a technicals perspective, given the weakness in US equities and large rallies in crypto more generally over the last few weeks, we think it’s possible that BTC could be vulnerable to a correction in the very near term.

Financing Rates

Notable Crypto News

• Celsius Hints at New Token Launch as Part of Restructuring Plan (Decrypt)
• Unredacted document shows $1.2B in BlockFi assets linked to SBF (Protos)

• Stablecoin Issuer Circle Blames SEC for Derailing $9B Plans to Go Public (Decrypt)
• France Gives Crypto Firms More Time to Comply (Decrypt)

• Lido presents design for staked ether withdrawals after Shanghai upgrade (The Block)
• Pantera, Jump Crypto Back $150M Injective Ecosystem Fund (Coindesk)
• Aave Ethereum v3 proposal overview (Aave)

• Coinbase’s blockchain-enabled approach to funds management and storage (Coinbase Blog)
• SOON (Spark cOntinuOus iNgestion) for near real-time data at Coinbase - Part 1 (Coinbase Blog)
• How Coinbase identifies bad actors and keeps the ecosystem safe (Coinbase Blog)
• National Security in the Age of Digital Innovation: The Critical Role of Crypto (Coinbase Blog)

View From Around the World

The United Arab Emirates (UAE) minister of state for foreign trade said in an interview with Bloomberg that crypto “will play a major role for UAE trade going forward”. Their priority is to ensure global governance when it comes to cryptocurrencies and crypto companies, suggesting that the focus will be on making the Gulf country a hub with crypto-friendly policies that also have sufficient protections in place. (CoinTelegraph)

“European lawmakers have approved a bundle of changes that will impose steep new requirements on banks that have business dealings in crypto. The European Parliament’s Economics and Monetary Affairs Committee today passed cross-party compromises which will require banks to hold more capital to protect against potential crypto losses. A spokesperson for the Committee confirmed to Decrypt that the measures adopted include a requirement for banks to disclose if they are exposed to cryptocurrencies.” (Decrypt)

The Week Ahead