Looking at the traditional cycle which is currently closely intertwined with the crypto market cycle, we are approaching later stages in terms of what has been priced in historically.
FED will most likely stop at 3+ % fed funds rate and adjust its policy framework or become very data dependent vs. being too specific on forward guidance.
Risks remain outside globally from monetary policy error standpoint. In particular, asymmetric risks remain with regards to monetary policy of BOJ and ECB.
Inflation most likely reached a peak and commodities are signalling weakening of global growth which should also lower inflation on forward basis. We are not going to historical 2% target but more likely set for structurally higher inflation of 4-5 % for 2023.
Supply side inflation is easing judging by supply pressure index
Long term inflation expectations are well anchored while short term expectations remain elevated.
We are in technical recession in US while growth in Europe is also pointing out to recessionary environment.
Most economic indicators point to global recession.
Here are our key takeaways:
Crypto Macro and Web3 Fundamentals
This has been one of the fastest drawdowns in the history of crypto, measured by the time to fall 70%. It reflects the speed of financial conditions tightening, but also could suggest we could be closer to the end of the drawdown.
Over the past two months, crypto beta (ETH/BTC) has decoupled from traditional risk assets. This is a departure from the trend over the past year and reflects the tremendous deleveraging that occured across the crypto markets.
Ultimately, the industry experienced a full-fledged financial crisis, led by CeFi (Centralized Finance) lenders and over-leveraged crypto funds. It’s no surprise that we’re now seeing bankruptcy proceedings and a new regulatory focus on investor protections. We have seen this playout throughout the history of traditional markets. The opacity of exposure and liquidations created additional market uncertaining, increasing volatility and reducting liquidity. Meanwhile on-chain, liquidation levels are transparent and comfortably distant from spot. In contrast, during this crisis,DeFi (decentralized finance) is fulfilled its promise – forced asset transfers that followed smart contract code, predictable, orderly, and visible to all.
Stablecoins are a key part of the ecosystem. They played an important role over this crisis. The different dynamics of each stablecoin, their mechanism, collateral, and transparency led to winners and losers.
We are seeing signs that the market has re-shifted focus on the Ethereum merge. This has been reflected in pricing in the derivatives market (i.e. options). In addition, the ETH to BTC ratio has reflected a major shift in sentiment.
There are also signs that retail and institutional sentiment is shifting.
Total value locked in Decentralized Finance on Ethereum fell over 71%. However, in recent weeks it has increase approximately $13 billion from the lows.
Similarly, the imbalances in the stETH/ETH curve pool are gradually starting to normalize. While there are still issues, it has been improving.
Yields on DeFi protocols suggest little appetite for risk (leverage). Yields have slightly increased from the lows, but risk sentiment is still low.
Web3 address activity is something we monitor very closely. It’s difficult to track the address data, especially across chains. However, our estimates show growth in total addresses but a decline in active addresses. In July, we saw a slight growth in the active addresses on the Ethereum network.
We monitor several factors, including the number of transactions, that can have implications on the price of ETH. Transactions have been steadily declining along with its price since November of last year. However, there has been an uptick recently in the number of transactions as the price of ETH stabilized in July. We see this as a potential sign that tides are turning and the price of ETH may have reached its lower bound.
When looking at how NFT’s have performed during the sell-off, marketcaps for the top 100 NFT projects held up fairly well. The NFT marketcap priced in ETH increased by 24% since May while the price of ETH declined by 27%. A healthy sign for the NFT sector showing resilience in this market.
Large DeFi protocols are beginning to launch their own native stablecoin. This creates an additional layer of capital efficiency on the respective protocol as users can mint stablecoins to deploy to other opportunities while their collateral remains locked on the platform. Perhaps more importantly, this provides the protocol with a secondary revenue generating mechanism, given that all interest accrued flows back into the treasury.
ZK technology is advancing much faster than originally anticipated. Polygon, Matter Labs, and Scroll have all made recent announcements that they are close to launching their respective ZK product, which in some cases could be deployed as early as September 2022. This is important because ZK rollups are generally thought of as much more efficient than their optimistic counterparts, which gives Ethereum a better scaling solution and also puts pressure on existing optimistic rollups.