Conference takeaways on macro and crypto

Introduction

This week, we attended the Milken Institute Global Conference from May 1 to 4 and present some of our key takeaways below.

Meanwhile, the market received more details about Ethereum’s plans for the merge, though there are no details yet about when the transition to proof-of-stake will occur. According to the proposed timeline, it seems like we may be a few months away from knowing the terminal total difficulty at which merge could happen. These developments have taken on added significance following the congestion caused by NFT virtual land sales for Otherside that took place on April 30, which we discuss below.

Finally, we published our latest Monthly Outlook, where we discuss some of the major new crypto narratives that we are anticipating in 2H22. In the last few months, we have seen the carry over of many important crypto-specific themes from last year but very little in the way of new “top down” narratives, which are crucial to the “hype cycles” in this space. For more, see our report published 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

We attended the 25th Annual Milken Institute Global Conference this week (May 1 to 4) to hear from leaders across various financial and business sectors. With numerous panels at the conference, it’s difficult to distill the plethora of divergent and intersecting views into one formal set of notes. However, below are our key impressions from the event:

Macro takeaways

• The majority of macro panels took place before the conclusion of the U.S. FOMC meeting on May 4, where the Fed took a less hawkish stance than expected (ruling out a 75bp hike at the June 15 meeting) and delivered a rather positive message on economic growth.
• Nevertheless, the general consensus was that despite the turmoil we have already seen in financial markets, there is still a good chance for further downside correction across risk assets.
• The current U.S. economic scenario is different from the one we witnessed during the global financial crisis, insofar as the labor market is fairly strong, corporate balance sheets are relatively healthy, the housing market is in good shape and banks are not a major concern. But the markets are just as volatile now as they were then, albeit perhaps not as painful.
• It’s important to note too that historically, we haven’t seen the U.S. central bank reduce inflation by more than 2pp in the past without inducing recession, which is why we have seen market players speculating on the Fed’s ability to generate a soft landing.
• Meanwhile, there has been a divergence of growth trajectories for different countries and regions. For example, the threat of recession or possibly stagflation weighs much more heavily on Europe due to the dependence on Russia for energy needs and the lockdowns in China pressuring supply chains.
• This could mean that it’s more important to consider countries and currencies from an investment perspective than it is to focus on market sectors, as investors have done over the last decade.

Blockchains and digital assets were an important part of the conversation at the conference, even among panels that were not strictly crypto-dedicated. In our view, this reflects the pressure we have seen on more institutional investors to explore the asset class in a serious way:

• Digital property rights and web 3.0 development were among the major themes being discussed at the conference. Blockchain technology is a way of creating user-owned property rights for the data that we produce, thus giving agency to individuals.
• In a web 3.0 world, those property rights should be portable - a person can move assets to different blockchains instead of being locked into a single platform (like under the web 2.0 model.) This enables crypto’s role as a conduit of financial inclusion and a facilitator of wealth creation.
• The secular curve for crypto adoption is still relatively steep as we are in the early stages for the asset class, even if the cyclical trends are currently a headwind for markets. However, we have been in a negative optionality environment for some time that has led to overreactions on the way up for many risk assets and now overreactions on the way down. There is no consensus on the entry point for new flows into this space.
• Meanwhile, some institutional investors still tend to think of crypto as part of their tech stack (i.e. as a growth investment in a venture capital sense) rather than a portfolio diversifier for equity risk.
• But many recognize that it has been difficult to ascertain the correlative aspects of crypto under such stressful market conditions, and many panelists at the conference extolled the virtues of blockchain technology as part of their customer engagement strategy.

Crypto & Traditional Overview

Coinbase Exchange and CES Insights

Exchange volumes have remained firm over the past week ranging between US$2B-$3B a day, which in itself is an interesting data point considering the volatility in risk assets this past week. Historically we are accustomed to a pick-up in volume when the markets are under stress, however, the lack of elevated volumes lends itself to the narrative that positioning is generally flat.

We witnessed stronger than average weekend volumes of ~$2B each day, which is almost double previous weekends. This was driven by elevated volume in APE as the Otherside metaverse project by Yuga Labs sold out within 3 hours of its public sale, the sale of which was conducted in APE tokens. (For more, see the NFTs/Gaming section below). Bullishness around the project had led to APE rallying from $13 to $22.50 in the week leading up to the sale, however, the price sharply retraced towards $15 over the weekend (April 30-May 1.) As APE is an ERC-20 token we also witnessed ETH gas prices spike on May 1 to an average of over 650 gwei as investors looked to participate in the sale.

Overall for the week, BTC accounted for 29% of volumes on the exchange, ETH at 23% and APE took the third spot at 12%.

Some interesting findings on buy-sell ratios among retail clients to highlight.

• ETH's buy ratio has continued to trade at a discount to BTC throughout the last 2 weeks by quite some margin. The ETH/BTC pair has been in a tight range the past 2 weeks between 0.0725 and 0.075.
• Despite another outage of the SOL blockchain, buy ratios have remained firm above 60% throughout for SOL
• Unsurprisingly the APE buy ratio turned negative on May 1 given the interest and price action as a result of the Otherside launch but has bounced back since.
• Cardano remains well bid amongst retail clients compared to majors and some of its peers.

On the desk this past week we have seen several accounts and segments add to their BTC and ETH positions ahead of the FOMC meeting on Wednesday. We have also seen some disciplined dollar-cost averaging on longer tail assets. On the sell-side there has been some continued selling of alternative L1’s tokens.

NFTs/Gaming

On April 30, Yuga Labs, the parent company of the Bored Ape Yacht Club (BAYC) and related NFT collections, completed a digital land sale for its newly created metaverse which will eventually serve as the virtual world for a massively multiplayer online role-playing game (MMORPG) titled “Otherside.” But the main narrative stemming from this event was not that Yuga Labs and its partners had raised US$320M from the sale of 55k plots of virtual land (Otherdeeds) within only a few hours. Rather, it was the fact that the mint caused gas prices on the Ethereum blockchain to spike to exorbitant levels (~8,000 gwei at its peak), with some transaction fees costing more than the plots themselves.

Many buyers ended up paying for costly failed transactions and never received an Otherdeed plot (although Yuga Labs has publicly committed to refunding users’ gas fees for failed transactions). In total, roughly US$170M was burned on gas fees alone. Furthermore, the mint saw so much demand that it crashed the blockchain explorer Etherscan.

While some pundits were quick to blame Ethereum, as this was not the first “gas war” observed in the NFT space and certainly not the only network that has been affected, others noted that Yuga’s minting contract and its noticeable lack of NFT-specific optimizations were the main problem. (Yuga Labs also abandoned a Dutch auction format that might have helped reduce congestion.) After the tumultuous minting experience, Yuga Labs suggested that they may need to migrate ApeCoin (which was required to make any public sale purchases, leading APE to trade up to US$26 in the days leading up to the mint) to its own proprietary layer one blockchain to avoid future issues with Ethereum. But less dramatic solutions already exist.  For example, NFT collections like Azuki have recently been vocal about the steps they have taken to optimize their minting contract to reduce gas fees for minters.

This situation thus draws more scrutiny to Yuga Labs’ development of the gaming environment which will accompany the Otherside metaverse. Since the mint, the BAYC floor has fallen from roughly 160 ETH to 116 ETH as of publication. In our view, Yuga Labs has put themselves in an unenviable position of needing to regain much of the NFT community’s trust.

Bitcoin Technicals

The BTC chart continues to get worse / more bearish by the day. In the last week BTC rejected the EMA9 four times and has rejected the EMA20 the last two days. The 23.60% FIB line last retest was on April 21 and has not rebounded since. As it stands, it is unlikely that BTC will reclaim the EMA100 ($42,500) to invalidate the bearish setup currently in play. The $35,000 level is the next level of support which is fairly weak. We will likely retest the lows reached mid January around the $33,000 level given that Thursday was the highest volume we have seen in 2022. Lastly the EMA200 is now about to cross the bearish super trend line. All signs point to continued downside.

Financing Rates

Notable Crypto News

• MicroStrategy says it may explore more 'yield generation opportunities' following bitcoin-backed loan deal (The Block)
• Argentina's Largest Private Bank to Offer Bitcoin, Ethereum Trading (Decrypt)
• Amberdata raises $30M to chase the “unlimited opportunity” of bringing traditional finance into web3 (TechCrunch)

• SEC Nearly Doubles Size of Enforcement’s Crypto Assets and Cyber Unit (SEC)
• Dubai’s crypto regulator to launch metaverse headquarters in The Sandbox (The Block)

• APE Surges, Sinks as Elon Musk Teases With Bored Ape Collage as Profile Picture (Coindesk)
• Virginia county looks to crypto yield farming for pension system investments (The Block)
• LGT, World’s Largest Family-Owned Private Bank, to Offer Crypto (Coindesk)

• Coinbase's NFT marketplace beta is now open to everyone (Twitter)
• Coinbase took out the first Bitcoin-backed loan from Goldman Sachs (Bloomberg)
• An update on our asset listing processes (Coinbase Blog)
• Coinbase Giving: Insights From The Blockchain Breakthroughs for a Better Future Challenge (Coinbase Blog)
• Improving Transaction Privacy on the Bitcoin Blockchain (Coinbase Blog)
• The Merge and the Ethics of Ethereum (Coinbase Blog)

The Week Ahead