We’re preparing for a busy week in markets with some notable earnings reports, a rates decision from the Fed and the text of a bipartisan legislative proposal on stablecoins. Meanwhile, we hosted our first “Ask Coinbase Research” webinar on Thursday where we answered some top-of-mind questions posed by our institutional clients. Watch the replay available here.
Also, this week we published a blog post discussing how Coinbase implements secure and comprehensive risk management practices that enable institutions to successfully navigate the cryptoeconomy. While some firms have struggled to remain solvent due to insufficient risk controls, Coinbase has prioritized building its financing business with prudence and deliberate focus on the client. Please read more from our Head of Coinbase Institutional.
Finally, our new Coinbase Institute Speaker Series will discuss the topic of using crypto to increase the efficiency of countries' remittances process on July 26. If interested, you can register here.
Weekly Market Call
View replays of our weekly crypto market analyses from our Americas, APAC and EMEA Coinbase Institutional teams, available here.
Market View
Next week is going to be a busy one for markets with the US Federal Reserve’s FOMC meeting, many large cap companies reporting earnings, a new stablecoin proposal from the US Congress and major options expiries (July 29) for BTC and ETH. Meanwhile, in Europe, the ECB took the more aggressive approach of a 50bps (vs 25bps) hike this week though they provided less clarity than we think markets would have liked on its anti-fragmentation tool, the Transmission Protection Instrument (TPI).
In our view, that could put pressure on the EUR in the short term alongside the political uncertainty observed in Italy. This has been reflected in how digital assets like bitcoin and ether have outperformed many G10 currencies since early July. Bitcoin has had a ~0.65 standard deviation move lower (relative to the average of the last three months) compared to an average ~1.4 standard deviation move lower in the euro, sterling and yen (note that the EUR had actually had a 3 sigma move weaker at the end of the prior week).
Chart 1: BTC and ETH outperforming EUR, GBP and JPY
Meanwhile, the ECB’s decision may put more onus on what the Fed will do on July 27, although it still seems like a 75bps hike is the more likely outcome at this point. Before the blackout period started, some hawkish board members (e.g. Christopher Waller and James Bullard) publicly came out in favor of a 75bps over 100bps rate hike in response to the higher-than-expected June inflation print. After this July meeting, the next meeting won’t be until September 21, which may limit some of the market volatility.
Derivatives
Options positioning going into July month end make max pain points around $23,000 for BTC and $1,350 for ETH some key levels to watch, particularly with a combined US$2.9B in notional options expiry outstanding according to skew.com (the max pain point is the spot price at which the intrinsic values for most option contracts become zero, or to put it more plainly, it’s the level that would cause the greatest financial losses in the system). Low liquidity due to the summer and the uncertain macro environment could be factors relevant to a possible convergence here.
Bitcoin has been trading precariously close to that $23,000 level in recent days, oscillating around the ascending 50 day moving average of $22,900 (the price dipped following news that Tesla sold 75% of its BTC holdings in 2Q22 but has since retraced). However, we’re already very close to the top band (overbought) of the relative strength index (RSI). After a drop in open interest over the course of June, options activity (for both BTC and ETH) has bounced back sharply in the last ten days. This coincides with a large uptick higher in implied volatility across the shorter dated 1wk and 1m tenors (by around 5-10 vols) over that period while 1m realized volatility has declined by ~29 vols.
Coinbase Exchange and CES Insights
Exchange
With more clarity around the potential date of the Ethereum merge, we’ve seen increased volumes on the exchange. This positive news, along with relative stability in overall risk markets, has helped to drive both prices and volumes higher across the complex. Understandably, ETH has been the most traded asset on exchange over the past seven days as investors prepare for a possible September Merge. Additionally, some positive Polygon headlines have increased interest in MATIC. The protocol was selected by Disney to join its Accelerator program and it rolled out an ethereum-compatible zero-knowledge scaling solution that aims to increase transaction throughput.
Coinbase Execution Services
The desk has seen strong buy interest in ETH as well as a number of other projects. Where a week or two ago our buyers were being very passive, setting limits below the current market price, we are now seeing traders get more aggressive. Short term moving averages have ticked positive across most of the crypto complex and so we are seeing momentum and trend following traders come back and try to capture that upside.
Bitcoin Technicals
The BTC technical chart continues to be bearish despite recent performance. BTC is going eight straight days of closing above the EMA9 (in addition to an EMA9 / EMA20 cross on July 17), but is currently on its third day of rejecting the EMA50 which is signaling a local short term top. On the weekly chart, BTC is rejecting the EMA9 and the EMA50 is crossing the EMA70 which is very bearish. Given that the StochRSI on the daily chart is overbought and the EMA rejections on multiple timeframes, it is likely that we can see an EMA9 / EMA20 recross downward with a StochRSI cross at the same time which takes BTC to the US$17.5K support level. BTC needed to reclaim the EMA70 level of US$25K to turn short term bullish but as it stands, we may see lower levels in BTC.
View From Around the World
Asia
The Shanghai city government has released a policy paper that outlines its strategy to cultivate a metaverse industry worth US$52B by the end of 2025. They are looking at strengthening technological breakthroughs by focusing on VR headsets, chips, cloud computing and 5G technology. Last December, Shanghai had also drafted a metaverse development plan, with a five-year goal to increase research of the use of blockchain. (Coindesk)
India’s Finance Minister Nirmala Sitharaman expressed concerns about the ‘destabilizing effect of cryptocurrencies on the monetary and fiscal stability of a country,’ and is of the view that cryptocurrencies should be prohibited. This change in tone is in contrast to India’s earlier move to tax transactions and profits related to crypto trading earlier this year. (The Economic Times)
According to a Financial Times report, Japan's ‘self-regulation experiment’ for its digital asset sector is unraveling, as disagreements between financial regulators and the industry advocacy body deepen. The Japan Virtual Currency Exchange Association (JVCEA), which was set up as an advocacy group in 2018 to promote self-regulation in the crypto industry, has received an ‘extremely stern warning’ from Japan’s Financial Services Agency over delays in anti-money-laundering regulation and a lack of communication between JVCEA leadership and members. (Coindesk)
Europe
This week we saw Coinbase (Coinbase Blog) and Crypto.com exchanges approved with operating licenses in Italy. In contrast Binance, who was recently approved for operating licenses in France and Spain, was fined US$3.4M by the Dutch central bank for operating illegally in the country (FT). With MiCa (markets in crypto assets) regulation making progress it is likely those with larger resources will continue to work to win approvals across the region, where others may wait for MiCa to come into effect.
