A murky macro environment

We discuss the macro challenges facing investors including significant uncertainty over U.S. monetary policy while the lockdowns in China and the Russian invasion of Ukraine have been major headwinds for global growth and earnings season kicking off with negative revisions.

April 15, 2022

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At a glance

Despite concerns over rising energy costs and snarled supply chains, U.S. inflation in March more or less met median survey expectations at 8.5% YoY (headline) and 6.5% for core. The latter figure seems particularly important as it suggests we may be getting closer to “peak inflation”.

Key takeaways

  • In China, COVID-related lockdowns are reinforcing worries about growth, even though hints of easing restrictions have helped Chinese stocks recover in recent days.
  • We saw an initial 4% drawdown in ETH versus BTC intraday following a tweet from Tim Beiko confirming that the merge will miss its June soft target.
  • In the options market, we have seen front end implied vols coming down sharply in the last week with BTC vol falling 8pp to 52% and ETH vol falling 10pp to 54%.

Written by

  • David Duong, CFA, Head of Institutional Research

Summary

In this weekly, we discuss the macro challenges facing investors as there doesn’t appear to be one dominant theme driving risk assets at the moment. Despite a benign U.S. inflation print (relative to economists’ expectations), there is still significant uncertainty over U.S. monetary policy while the lockdowns in China and the Russian invasion of Ukraine have been major headwinds for global growth. Earnings season has also kicked off with negative revisions capturing more attention than fundamentals.

Meanwhile, we just published a quick guide to our expectations for Ethereum’s merge timeline and the remaining steps until the Paris upgrade. As of April 13, the Ethereum Foundation’s website anticipates an estimated shipping date for the merge (moving the network from PoW to PoS) of ~3Q22/4Q22, a change from the ~2Q22 target it listed on its previous April 2 update. This would decouple the merge from a difficulty bomb that could start to be felt in late June/July. For more, see our full report here.

Weekly Market Call

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Market view

Macro outlook

Despite concerns over rising energy costs and snarled supply chains, U.S. inflation in March more or less met median survey expectations at 8.5% YoY (headline) and 6.5% for core. The latter figure seems particularly important as it suggests we may be getting closer to “peak inflation”. Housing and used car prices appear to be moderating. The challenge is that meeting expectations doesn’t give market participants much clarity on the current economic scenario, with fears of an economic recession in the ascendant. Pressures on the pipeline haven’t been fully abated yet either as PPI for March came in way above forecasts.

There are a lot of divergent views regarding whether too many hikes are now priced into the U.S. rates curve (another 190bps for the remainder of 2022 with 50bps priced in for each of the next three FOMC meetings) or if the U.S. Federal Reserve is so behind the curve that an aggressive stance is necessary to get inflation under control. Meanwhile, in China, COVID-related lockdowns are reinforcing worries about growth, even though hints of easing restrictions have helped Chinese stocks recover in recent days. Russia’s invasion of Ukraine continues to pose a headwind for markets everywhere, but specifically, activity expectations in Europe are being revised lower. Corporate earnings are now rolling in, with the threat of negative revisions overwhelming fundamentals.

In short, the macro environment seems murkier than ever. No one theme seems particularly dominant for markets, which we think makes it tough for institutional investors to deploy capital with any meaningful confidence in the short term.

Ethereum’s merge: the shadow (fork) knows

Meanwhile, we saw an initial 4% drawdown in ETH versus BTC intraday following a tweet from Tim Beiko (a key facilitator for the Ethreum network’s protocol developer calls) confirming that the merge will miss its June soft target. However, the ETH/BTC cross has since stabilized and is trading in a narrow range between 0.075 and 0.0763 despite the confirmation from the Ethereum Foundation that the final Paris upgrade could take place around 3Q22/4Q22 instead of ~2Q22 as had initially been expected.

In our view, the main concern that many investors have is whether the merge gets delayed beyond this year, which for the moment still seems unlikely. Apparently, the most recent delay has been caused by the discovery of edge case issues found in the recent mainnet shadow fork on April 11, like the default gas limit setting among others. For now, we do not believe this changes the fundamental narrative that we had previously discussed in our Market Intelligence reports regarding the reduction in ETH’s issuance rate and higher staking yields. This may be containing the price action at the moment.

ETH/BTC cross reflects stability despite merge delay

ETH/BTC cross reflects stability despite merge delay

Derivatives

In the options market, we have seen front end implied vols coming down sharply in the last week with BTC vol falling 8pp to 52% and ETH vol falling 10pp to 54%, back where these ended the previous week. Open interest for BTC is above US$7.6B across major exchanges and for ETH it’s $5.2B, though the put/call ratios for both have been rising MTD. Back end vols (3m and 6m) have been drifting lower for ETH – perhaps to capitalize on the merge narrative above – while remaining relatively unchanged for BTC.

Meanwhile, in the futures market, we have seen little movement in the basis over the last week for either BTC or ETH on the CME exchange - tracking close to 1% on both. Perpetual swap funding rates are close to zero on both, suggesting there is little leverage in these markets at the moment.

Crypto & Traditional Overview

Crypto & Traditional Overview chart apr 15

Coinbase Exchange and CES Insights

Exchange

coinbase exchange data apr 15

Looking at the bigger picture since the beginning of February volumes on the exchange have remained in a stable sideways trend which hasn’t changed over the last week. The fact that volumes have not spiked significantly in the second half of March, when the broader crypto market was seeing a strong rally, is especially interesting and might suggest some reservations about the rally despite the crypto fear and greed index temporarily moving to 60.

Another potential explanation could be that retail has remained on the sidelines for the most part as social media metrics suggested limited engagement and volumes in meme coins were mostly on the lower side.

chart showing crypto buying percentages apr 15

The volume breakdown is starting to look similar to what we had in the beginning of 4Q21 when BTC, ETH and SOL were dominating trading activity. 

In terms of other major L1s, AVAX and ADA remain popular although relative to the market capitalization ADA’s volumes traded have been shrinking. Another interesting observation is the share of USDT picking up slightly which suggests more crypto to crypto trading instead of fiat.

The buy ratios across the board have been looking relatively healthy with the exception of some shorter term corrections in SHIB and ETH.

buy ratios for different coins apr 15

Coinbase Execution Services

On the desk we have seen some profit taking across the board in many long positions that were put on over the course of March. This comes in the wake of the general market sentiment deteriorating somewhat over the last week on the back of high inflation, a hawkish Fed, high geopolitical risks and the COVID wave in China which could result in some turbulence in global markets in the near future.

This profit taking as well as risk reduction trades could be observed in most major coins such as BTC, ETH, AVAX and SOL while longer term investors have continued to allocate capital with their averaging strategies although this has been outweighed by selling over the last week.

DeFi

We have seen a lot of market attention being given to alternative layer-1 blockchain Near (asset: NEAR) recently, triggered in part by large venture capital inflows. Indeed, the total value locked on the network has more than tripled from $120M to $405M in the last three months alone (according to DeFiLlama), not including another $850M locked on Aurora, an Ethereum Virtual Machine (EVM) running on the blockchain as a smart contract - which is unique among L1s. Together this represents only 0.6% of the TVL across the crypto universe, but transaction volumes on the broader Near network have more than doubled in 1Q22 alone. A high growth rate reflects significant incentives being offered to developers to build.

Near distinguishes itself from other alt L1s due not only to Aurora but also its Nightshade scaling (sharding) solution which targets blocks rather than the main chain. That said, we think NEAR’s price has mainly benefited recently from investor speculation over the potential launch of a new algorithmic stablecoin known as USN, possibly as early as April 20. This stablecoin may offer a 20% annualized rate of return comparable to the Anchor lending/borrowing protocol on the Terra network.

Indeed, we think the comparisons with the Terra platform have benefited the NEAR token as Terra has been a pioneer in building out an ecosystem around its native token LUNA, used in the minting process of algorithmic stablecoins like UST. This may be a precursor to how investors conceptualize and refine the vision of a multichain future.

Bitcoin Technicals

bitcoin technicals apr 15

After bitcoin successfully closed above the EMA200 and reached a high of $48,224.45 on March 28, BTC rejected the 38.20% Fibonacci (FIB) line for six consecutive days before finally closing below the EMA200 on April 6, creating a bearish supertrend reading on April 8. Since then, BTC rejected the EMA100 twice (April 7 & April 8) and the EMA70 (April 9 & April 10). BTC is now rejecting the EMA9 (as of April 14) and with a close below, it is likely BTC will retest previous support around $37k. If $37k fails to hold, the next levels of support are around $35k and $32k respectively. The EMA20 should cross the EMA70 on April 15 with the EMA doing the same on the 23.60% FIB line which is extremely bearish short term. If BTC fails to retest $42k and close there (the EMA9), the bearish technical structure will remain / continue to get worse implying more weakness ahead.

Financing Rates

financing rates apr 15

Notable Crypto News

Institutional

  • Avalanche developer raising $350 million at $5.25 billion valuation (The Block)
  • BlackRock’s Newest Investment Paves The Way For Digital Assets On Wall Street (Forbes)
  • Pantera Capital Set to Close $1.3B Blockchain Fund (CoinDesk)
  • Tesla, Block and Blockstream team up to mine bitcoin off solar power in Texas (CNBC)
  • BlackRock, Fidelity Back Stablecoin Firm Circle in $400 Million Funding Round (Bloomberg)

Regulation

  • Ripple Lawsuit Victory Looms After Big Win Versus SEC (Yahoo Finance)
  • Will Biden’s Executive Order Smash Barriers to Crypto? (CoinDesk)
  • New Virginia law allows state-chartered banks to custody crypto (The Block)

General

  • Meta Will Enable VR Creators to Sell Virtual Items in Horizon Worlds (Decrypt)
  • NFL Teams Test the Waters of Crypto Fan Tokens (CoinDesk)
  • Ethereum largely passes first major test for proof of stake (The Block)
  • Luna Foundation Guard Adds $100M in BTC to UST Reserves (CoinDesk)

Coinbase

View From Around the World

Asia 

Three major Chinese banking groups involved in the clamping down on NFTs – the Internet Financial Association, the China Banking Association and the China Securities Association – have announced a joint initiative to prevent NFT-related financial risks through NFT securitization. Despite acknowledging the potential of NFTs to promote ‘the digitalization of industries and digital industrialization,’ they warned against financial risks related to hyping the assets, money laundering and other illegal financial activities. The government will also mandate accurate and full disclosure of NFT products and plans to take more measures against associating NFTs with conventional cryptocurrencies, without specifying the details. (CoinDesk)

HSBC has started a Metaverse Fund for high net worth and ultra-high net worth professional investors and accredited investor clients in Hong Kong and Singapore. It ‘aims to capture growth opportunities arising globally from the development of the metaverse ecosystem over the next decade’. The portfolio will be actively managed, with a focus on five key areas: infrastructure, computing, virtualization, experience and discovery, and human interface. (CoinDesk

Japan’s largest social media app, Line has officially launched its own NFT marketplace called LINE NFT. Users can store their NFTs in the LINE BitMa wallet, a product offered in conjunction with BitMax. This is the latest crypto feature from LINE after it launched the option of allowing users to pay for items with its native LINK token (LN) at any of LINE Pay’s online merchants, earlier this year. (Coin Telegraph)

Europe 

The crypto sector is still reeling from a string of votes in the European Parliament that some warned could prove regulatory overkill, attendees at the Paris Blockchain Week Summit discovered Wednesday. Recent EU plans to curb the energy footprint of proof-of-work technology – which some feared could amount to a bitcoin ban – failed to get through the European Parliament when voted on in March. But a second, also controversial, anti-money laundering measure did pass and could now become law if governments also sign up. (CoinDesk) The Paris Blockchain Week Summit (PBWS) - a flagship European blockchain conference hosted at Palais Brongniart in Paris - took place this week with an all-star cast. There was a myriad of high profile speakers with Brett Tejpaul (Coinbase Head of Institutional and Cloud) among others who shared his perspective during the “Empowering the Crypto Economy at Scale” session. (Cointelegraph)

The Week Ahead

upcoming crypto news apr 15

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