In Markets
After a lacklustre few weeks, Bitcoin suddenly shot up 10% on the weekend due to a reported short squeeze. MicroStrategy announced its doubling down again, major buying from whales, and positive signs on traditional markets. Bitcoin is trading just over A$32,200 (US$22.2K) to be up 7% for the week (though it’s still lower than mid-August). The impending Ethereum merge (Google has thoughtfully created a countdown clock) has the token trading flat for the week to sit around A$2,500 (US$1,720). Positive sentiment could come to a screaming halt with the imminent release of the US inflation figures this week and a possible “sell the news” reaction following the Merge. XRP was flat, Cardano (-5%), Solana (+7%) and Polkadot (-4%). The Crypto Fear and Greed Index is at 25, or Extreme Fear.
From the IR OTC Desk
US inflation is the most important data point this week and will likely drive risk market sentiment and positioning into the September 21st Federal Open Market Committee meeting (FOMC). Scheduled for release on Tuesday the 13th of September at 10:30pm (AEST), US inflation YoY (Aug) is expected to print 8.1% relative to 8.5% in July. On the Core YoY (Aug) measure, inflation is forecast to remain unchanged at 5.9%. In a sign that the headline inflation rate might be reducing faster than forecast, Consumer Inflation Expectations (Aug) have lowered to 5.7% versus a 6.1% expectation. US retail sales (Thursday) and Industrial Production for August (Thursday) will also prove important data events for the FOMC. It remains near a 90% probability that the FOMC will look to increase the fed funds rate by 75 bps at their next meeting. Expect the CPI release to become one of the most significant determining factors for short term interest rate pricing into the event.
Last week, Reserve Bank of Australia (RBA) Governor Philip Lowe spoke at the Anika Foundation in a speech titled, ‘Inflation and the Monetary Policy Framework’. While the Governor is “committed to doing what is necessary”, the overall interpretation was that perhaps the RBA will begin to slow the pace of cash rate increases. “We are conscious that there are lags in the operation of monetary policy and that interest rates have increased quickly”.
Australian economic data on the week saw the GDP Growth Rate for Q2 increase by 0.9% on the quarter and 3.6% on the year – both above expectations. This week labour market data, scheduled for Thursday the 15th of September at 11:30am, will headline the calendar. Current expectation is that the labour market remains incredibly robust, and for the August release to highlight an unchanged unemployment rate of 3.4% – the tightest labour market in circa 50 years.
The USD currency basket (as expressed by the DXY) continues to exhibit volatility – as do US equity markets and cryptocurrencies. Last week we highlighted the impact of the DXY strength on the EUR, GBP and JPY. This week the DXY has weakened in line with an increasingly buoyant risk sentiment, pre-US CPI. The DXY currently trades at 108.19 versus 109.50 this time last week. Correspondingly the S&P 500 has rallied circa 5%, while BTC and ETH remain high beta risk assets, rallying 12.3% and 3.8% respectively. Expect US CPI to be critical to risk asset direction.
On the OTC desk, buy orders have been a theme on the week, particularly in ETH and USDT. ETH/BTC has retraced sharply from 0.08464 to 0.0765. While we would usually suggest that a reduction in ETH/BTC would naturally correlate to a price reduction in DeFi and Layer 1 assets, this move has been driven by BTC outperformance.
With all eyes on the Ethereum ‘merge’, the September 30 expiry and December 30 expiry futures are currently trading in line, suggesting that there is very little market expectation for the merge to be delayed. The ETH underlying price remains at a premium to the forward curve, with the backwardation highlighting a willingness for investors to buy and stake ETH for yield. While this is quite technical, it will remain an important market dynamic for the months ahead.
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In Headlines
Ethereum Merge network update
The Ethereum network’s Merge to proof of stake is happening on Thursday morning, and Independent Reserve will disable deposits and withdrawals of ETH and all ERC-20 tokens (USDT, USDC, MATIC, LINK, DAI, PMGT, AAVE, OMG, COMP, GRT, UNI, SAND, MANA, MKR, SNX, BAT, YFI, and ZRX) for about three hours prior, until the network stabilises. Independent Reserve will be supporting the new proof of stake chain, so if you want to receive any potential proof of work fork coins, please withdraw your ETH to your own wallet before withdrawals are suspended.
All set, but the yield looks low
Despite a few hiccups with the Bellatrix fork last week, everything looks good for the Merge. The previous shadow fork went smoothly, and 85% of Ethereum clients are now “Merge ready”. However, the returns you’ll get from staking Ethereum after the Merge aren’t looking crash hot. Earlier projections of 12% a year have now been revised to around 4% based on the current number of validators, which is estimated to fall to around 3.2% next year.
Bitcoin mining ban mooted
U.S. Office of Science and Technology Policy released a report this week urging politicians to take action against proof of work Bitcoin mining, which it said was a major contributor to climate change (0.3% of annual global emissions). It called for the development of standards for noise pollution, water usage, and the use of green energy for mining – however, it held out the nuclear option too. “Congress might consider legislation to limit or eliminate the use of high energy intensity consensus mechanisms for crypto-asset mining,” it said. If successful, Ethereum’s merge to proof of stake will ramp up the pressure on PoW mining as The Conversation reports: “Many believe that this will overcome the biggest institutional objection and see much more money flowing into the space… This will likely accelerate the global regulatory framework that would minimise undesirable activities.”
MicroStrategy buying $500M more BTC
MicroStrategy founder Michael Saylor isn’t concerned about Bitcoin mining bans, and the company has announced plans to sell US$500M (A$725M) worth of stock so it can add to its 130K Bitcoin stack. The move will lower its average purchase price and make it easier to get back in the black if/when Bitcoin’s price recovers.
APRA framework
The Australian Prudential Regulation Authority has released an information paper on its multi-year project to modernise financial service standards and guidance, focusing on emerging risks. “These include the advent of crypto-assets and digital ledger technology, the financial risks associated with climate change, and the increasingly prevalent risks associated with cyber security.” APRA seeks feedback on its new framework by November 30.
Bits and pieces
The SEC’s case against Ripple for selling unregistered securities looks like being wound up by the end of the year. According to CoinCarp, the top ten holders of XRP control about 73% of the supply. XRP founder Jed McCaleb made so much money from his allocation he’s now building private space stations with artificial gravity. Decentrader’s respected analyst Filbfilb, who called the 2018 bottom, believes that Bitcoin could dive another 50% if Europe’s energy crisis worsens during winter. But he also thinks we’ll exit the bear market in the first quarter of 2023 as Bitcoin historically becomes bullish again after 1,000 days since the last block reward halving. Bitcoin futures volume has dipped to near two-year lows, while Ethereum’s volume pulled ahead in August for the first time in history, with US$1.07 trillion (A$1.55T) across the month. Sanctions on Tornado Cash haven’t deterred hackers from using it, with 500,000 DAI tokens stolen in the DAOMaker exploit in August transferred to the coin mixer on September 8. In related news, users backed by Coinbase have launched legal action to overturn the sanctions.
Until next week, happy trading!
