In Markets
Crypto markets turned around this week, thanks to a bullish narrative that the Ethereum Merge will actually happen in September, and perhaps guarded optimism from some in traditional markets that inflation may have peaked in the US at 9.1% due to falling commodity prices and supply chains clearing up (plenty of others think that idea is totally wrong, however.) The overall crypto market cap has returned above the US$1 trillion mark (A$1.47T), leading to loose talk about a new bull market. It’s worth noting that the market is still down US$2T (A$2.93T) from November’s peak, and Glassnode points out that the average time Bitcoin normally trades below the realised price during a bear market is 197 days. The current bear has just 35 days on the clock. Still green is good, and Bitcoin finishes the week up 9% at A$32,070 (US$21.7K), while Ethereum has shot up 40% to A$2,200 (US$1,500). Ripple (XRP) was up 13%, Solana jumped 28%, and Dogecoin increased 6.6%. The Crypto Fear and Greed Index is at 20 – that’s still Extreme Fear but a lot higher than one month ago when it was 6.
From the IR OTC Desk
The July Reserve Bank of New Zealand (RBNZ) meeting delivered another 50bp rate increase, to take the underlying cash rate to 2.50%. Last week, we highlighted that the Meeting Statement would be of particular importance – to better understand how the Central Bank would consider the growth versus inflation trade-off. Interestingly the RBNZ gave very little weight to the soft Q2 GDP report, instead maintaining that they will ‘continue to lift the OCR to a level where it is confident consumer price inflation will settle within the target range’ (of 1.00% – 3.00%). This week, we received the Inflation Rate YoY Q2, which surprised to the upside at 7.3%. The RBNZ are scheduled to meet on the 18th of August, where an additional 50bp increase to the cash rate is currently forecast.
In the US, the Inflation Rate YoY (June) printed at 9.1%, relative to 8.6% in May – this is now the fastest pace of consumer price index growth in more than 40 years. Short term interest rate futures are questioning whether a 100bp fed funds rate increase may be appropriate at the upcoming 27th of July Federal Open Market Committee (FOMC) meeting. Of note, Goldman Sachs Chief Economist Jan Hatzius suggests that the “softening of inflation expectations’” and “declining gas prices” will be critical to the FOMC decision – forecasting that the FOMC will deliver a 75bps increase not 100bps.
Australia has also received substantially stronger economic data this past week – with the Unemployment Rate (June) printing at 3.5% relative to 3.9% in May. This represents the lowest level of unemployment since 1974. Next week Australia is due to receive the Q2 inflation report, where prices are forecast to increase by 6.2% (YoY) versus a previous reading of 5.1%.
On the OTC desk, the most recent rally in cryptocurrencies has resulted in a dramatic drop in BTC versus Nasdaq correlation (to print close to the lowest point this year). This week, ETH has notably outperformed – with the upcoming ETH merge date being released. To quantify the relative move, the ETH/BTC cross was trading at circa 0.0540 just 7 days ago: to now trade above 0.06880 at the time of writing. We have always highlighted the importance of ETH/BTC as a proxy for underlying DeFi risk sentiment, with market pricing against confirming this relationship. Of note SUSHI, AAVE, SOL, SNX and LINK have received strong enquiry. In stables, USDT is back trading around USD 1:1, and while most of our flow remains to the sell side, pricing would suggest a significantly more balanced market. Time will tell whether cryptocurrencies and US equities can continue to plot their own pricing directions. Expect the upcoming FOMC meeting to prove critical to all risk markets.
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In Headlines
The merging of the bulls
Ethereum jumped by more than one-third this week on the news the devs have finally set a date for the Merge, when the network adopts Proof of Stake after working towards it for seven long years. The final trial run on the Goerli testnet will happen from August 8 to 11, and the Merge proper is expected in the week of September 19. Ben Edgington from Consensys noted that the September 19 date is still at a burrata, or ‘soft cheese’ level of firmness, while the Goerli merge was more ‘mature cheddar’ level.
He also said that while one third of nodes had gone offline just after the recent Sepolia testnet merge, that was due to a testnet-only situation and wouldn’t happen during the real thing. The Merge makes ETH 99.9% more energy efficient and reduces the supply. However, it doesn’t scale the blockchain or make transactions faster and cheaper.
Bitcoin’s energy use
Senator Elizabeth Warren and two other Democrats fired a letter to the EPA and the Department of Energy pushing for more transparent data on the “disturbing” energy use by Bitcoin miners. The letter claimed that: “The total annual global electricity consumption associated with just the two largest cryptocurrencies by market capitalization, Bitcoin and Ethereum, has been estimated to be as high as 300 TWh in May 2022,” or as much as the entire UK. While Ethereum’s move to PoS will slash its electricity use to almost nothing, Bitcoin is increasingly facing efforts from regulators worldwide to curb its power consumption.
Celsius bankruptcy
After paying down many debts, Celsius finally announced it was entering Chapter 11 bankruptcy. This is a form of bankruptcy that has been successfully used by the likes of Marvel and General Motors to trade themselves back into business and Celsius vows to do so – however, it’s a big ask. Filings show the company has a US$1.2B (A$1.76B) hole in its books – US$4.3B (A$6.31B) in assets and US$5.5B (A$8.1B) in liabilities – and some of its assets are vastly overstated, given it claims it has US$600M (A$881M) in CEL tokens which is impossible given CEL’s current market cap is one-third of that figure. Koinly’s Danny Talwar warned users could wait for years to get their money back in a repeat of the drawn-out Mt Gox process, which has been ongoing since 2014.
Other contagion news
The fallout from the collapse of Three Arrows Capital, which borrowed money from every major lender, continues. Voyager also filed for bankruptcy, saying it has around US$1.3B (A$1.9B) in user’s funds in addition to a “claim against Three Arrows Capital” of US$650M (A$954M) worth of BTC and USDC. Genesis has filed a lawsuit against 3AC to recover US$1.2B (A$1.76B). In total, filings show that 3AC owes 27 crypto companies US$3.5 billion (A$5.14B). Incredibly enough, the founders of 3AC have filed their own claims that 3AC owes them money, with Su Zhu claiming $5M (A$7.34M) and founder Kyle Davis’s wife Kelly Kali Chen claiming $65.7M (A$96.5M).
Stablecoins
The Reserve Bank of Australia’s Governor Philip Lowe told a side event at the G20 he believes the private sector is more likely to develop a successful stablecoin than the government is to develop a retail CBDC (though the RBA is still working on a wholesale CBDC). “The private sector in the end is going to be more innovative than the central bank, it’s going to be better at innovating and designing features for these tokens,” Dr Lowe said. “There are also likely to be very significant costs in the central bank.”
Dr. Lowe (Photo by Lisa Maree Williams/Getty Images)
Good news for Ripple
Ripple scored a victory this week with a judge denying the SEC’s motion to keep internal documents secret regarding the Hinman speech (in which a former director stated ETH was not a security). The judge blasted Ripple for “hypocrisy” for arguing the speech was both made in a personal capacity and should be ignored as it was unofficial, but should also be protected because Hinman received legal advice from the SEC about the speech. Meanwhile, Ripple cofounder Jed McCaleb has reached the end of his eight-year-long dump of 9 billion XRP. On July 17, he made his final 1.1M XRP sale and deleted his account from the XRP ledger shortly afterwards. There were news reports of him supposedly keeping $5 million back “in case it moons” but that was based on a satirical news article in the Crypto Town Crier that a hapless crypto journo reported as fact.
Until next week, happy trading!
