In Markets
Interest around the Ethereum merge saw a massive increase in market volume, with the seven day moving average spiking from A$26.7B (US$18.1B) on September 6 to A$42.8B (US$28.8B) on September 16. Unfortunately, everything tanked after the merge on macroeconomic news with inflation running at 8.3% in the US and markets bracing for a 0.75% to 1% rate rise. Bitcoin dipped as low as A$27.6K (US$18.5K) and finishes the week down 15% to trade around A$29,000 (US$19,450). Ethereum is back to mid-July prices, sliding 22% to A$2,030 (US$1,365). XRP was up 3% on hopes of a court victory against the SEC, Cardano fell 13%, Solana (-15%) and Dogecoin (-11%). The Crypto Fear and Greed Index is at 21, or Extreme Fear.
From the IR OTC Desk
Last week’s US inflation data surprised – unfortunately to the upside. The ‘headline’ Inflation Rate YoY (Aug) printed at 8.3% relative to an 8.1% expectation: the Core Inflation Rate YoY (Aug) moved higher to 6.3% versus 5.9% in July. Unofficial forecasters and market traders were quietly hoping the headline inflation rate may move substantially lower on the back of retracing petroleum and commodity prices. This unfortunately was not delivered, with shelter, medical, education and food prices being materially positive inputs for the CPI basket.
The surprise inflation upside has seen a substantial repricing of interest rate expectations for the Federal Open Market Committee (FOMC) meeting. Scheduled for Thursday the 22nd of September at 4:00am AEST, short term interest rate futures are suggesting a near 20% chance of a 100bp increase to the Fed Funds rate. The most likely scenario remains a 75bps increase at circa 80% probability. This would take the target band for the Fed Funds rate to 3.00-3.25% and materially above the current cash rate target for the Reserve Bank of Australia (RBA) at 2.35%.
Additional to the FOMC meeting will be the release of the September ‘dot plot’ data as well as the accompanying press conference from FOMC Chair Jerome Powell. Importantly for the dot plot will be whether there is an increase in the median dot for any of the years ending 2022 or 2023. The dot plot represents an anonymous survey of expectations from each individual FOMC member. Watch this space.
In Australia the Unemployment Rate (Aug) moved up by 0.1% to 3.5%. The underlying release details however, remained incredibly positive, with net 33.5k jobs being created (split +58.8k full time and -25.3k part time). The move higher in the unemployment rate being explained by an increase in the labour market Participation Rate (Aug) of 66.6% versus 66.4% (Jul). While the most recent message from RBA Governor Philip Lowe has been a willingness to slow the speed of interest rate increases, this will continue to be dependent on domestic inflationary pressures as well as the monetary policy approach of offshore central banks.
In markets, the USD currency basket (as expressed by the DXY) has ended the week unchanged, at 109.50. US 2yr Treasury Note yields have moved higher, from 3.70% to circa 3.95%. The NASDAQ 100 is off circa 3.5% at 11,953.27. Cryptocurrencies remain correlated to the price action of US Treasury Notes, as well as tech stocks, to trade as a high beta risk asset.
On the OTC desk, volumes have been reduced this week due to the merge. Importantly for ETH pricing, we remain focused on where the ETH proof of stake (PoS) yield will settle, particularly under a backdrop of rising US interest rates. This may take a few weeks/months to better profile however ETH validator nodes appear to be returning circa 4.25%.
Last week we highlighted that the ETH futures curve was in backwardation, due to the synthetic ETHW ‘airdrop’ being priced into the underlying price of ETH. This has now been removed, with Dec 30, 2022 expiry futures trading at a discount of circa US$3 versus US$20+ prior. ETH/BTC has also reflected this change, moving from circa 0.0750 down to 0.0700 at the time of writing.
Now we wait patiently for the FOMC decision on Thursday morning.
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In Headlines
Markets go south
Crypto markets are moving in tandem with traditional markets, and billionaire investor Ray Dalio thinks stocks will slide about 30% all up if interest rates top out at 4.5%. Santiment reported that more than 1.69 million BTC was moved to exchanges last week and crypto trader Justin Bennett released a chart suggesting the worst case scenario for Bitcoin was US$5K ($7.43K). Rekt Capital pointed out that previous cycle bottoms happened 517-547 days before the next halving, which would put the low in Q4 this year and he said it could be around US$11,500 (A$17K).
Member for Crypto
The Liberal Party’s Member for Crypto Senator Andrew Bragg has released a draft bill to implement the recommendations of last year’s Senate inquiry into crypto regulation. He’s also added in some reporting requirements targeting China’s new CBDC. Bragg says he’s been rethinking the whole CBDC idea given the potential for misuse. “I was wrong to recommend a retail CBDC without deeply considering the privacy/big state implications,” he said.
Global adoption
Australia is ranked 40th on the latest Global Crypto Adoption Index from Chainalysis. However only two developed western countries made the top twenty (US and UK). The top ten were Vietnam, Philippines, Ukraine, India, US, Pakistan, Brazil, Thailand, Russia and China.
Merge a success, price deflating
The Ethereum merge went off without a hitch on Thursday afternoon, having been planned since the original white paper. It was somewhat anticlimactic however, with everyday users noticing zero change. The electricity consumption of the network has been slashed by 99.9% and there’s been a big reduction in the rate of new ETH being created. Since the merge 3,130 ETH have been added, which is much better than the 57,000 additional ETH that would have been created (and sold) under POW. Former BitMEX CEO Arthur Hayes says this will create a new bull market. Out of work miners, however, have dumped about 30,000 ETH in the past few days so selling pressure remains at present. From here the roadmap aims to get danksharding and ZK rollups working in tandem to scale the network to the point where it could theoretically encompass the world’s entire financial system.
Centralisation fears
The merge aimed to make the network the most decentralised in the world, with anyone able to become a validator with low spec equipment. Most people don’t have the 32 ETH required however, so they join pools. Straight after the merge it was reported that 420 out of 1,000 blocks were being proposed by just two entities, Coinbase and Lido, raising centralisation fears (though Lido is a DAO and spreads staking across multiple node operators). Ethereum fan Evan Van Ness argued Bitcoin was no better saying that “Out of the last 1,000 BTC blocks, 430 have been built by just Antpool and Foundry.”
No security
SEC boss Gary Gensler said straight after the merge that Proof of Stake blockchains have investment contract-like attributes that could bring them under the SEC’s purview. Jake Chrevinsky from the Blockchain Association said people who understand securities laws think the “merge not only *doesn’t* make ETH appear more like a security, but in fact was a significant derisking event.” CoinCenter released its opinion stating the same.
Proof of berk
The Ethereum proof of work fork ETHW has been a comedy of errors with the blockchain inaccessible two days after launch due to glitches, miner Chandler Guo predicting 90% of miners on the network could go bankrupt and the price plunging from A$74 down to A$9. The network’s Ethereum OmniBridge smart contract suffered a replay attack, where it was fooled that the same transaction had happened on both networks and lost 200 ETHW.
Vasil hard fork is on
Cardano founder Charles Hoskinson says the Vasil Hard Fork is good to go on September 22. The fork was originally scheduled for June but was delayed numerous times. “We don’t anticipate there will be any issues, but there’s no going back now,” he said. “No amount of testing or anything can save us because [the] rocket’s in the air. It either explodes in air or reaches orbit and obviously, it’s going to reach orbit.”
CFTC meets Ripple
Commodity Futures Trading Commission’s Caroline Pham met with Ripple CEO Brad Garlinghouse yesterday. It was interesting timing considering the CFTC is vying with the SEC to become crypto’s regulator and the SEC vs Ripple case for selling unregistered securities is coming to a close. Both the SEC and Ripple have filed for a summary judgement with lawyer and XRP fan Jeremy Hogan characterising the SEC’s case as narrower and focused on XRP only, meaning it would have fewer implications for similar cryptocurrencies if the SEC wins. By contrast he said Ripple’s argument is so broad that a win could stymie the SEC’s attempts to bring similar cases in future.
Until next week, happy trading!
