SUMMARY

It was a rough ride this week due to the Omicron variant and the Fed finally acknowledging that inflation is not transitory. This caused stagflation to start to get priced in but one off spikes in the VIX generally lead to future rallies. Digital assets capitulated on Friday as hedge fund degrossing poorly performing expensive tech names into year end spilled over into the space. Stubbornly high open interest in BTC and ETH led to a flushing out of over $4 bn in leverage over 24 hours. The news that Square is rebranding as Block and Jack Dorsey is stepping down from Twitter did nothing to push bitcoin higher but is a long term positive as he now turns his attention fully to blockchain. In DeFi, Algorand and 1inch received new funding, while the metaverse is also seeing additional waves of investment, with the US overtaking Asia in blockchain deals.

MACRO

VIX spikes are generally a time to buy

Markets seemed to be in recovery mode as we started the week, only to dip again Friday, with the S&P 500% down close to 4% from its highs. The Nasdaq had a worse drawdown as expensive tech names felt the brunt of the sell off. This led to net deleveraging by hedge funds back to April 2020 levels. These funds had aped a third of their holdings into expensive tech, according to Goldman Sachs’ prime brokerage.

The VIX (Chicago Board of Exchange volatility index), a guide to market sentiment, saw some big moves, spiking by 55% on last Friday's return from Thanksgiving. This was the fourth-largest single day jump in history (a level over 30 indicates pronounced uncertainty although we’ve seen levels in the 80’s and 90’s in 2008/2020). 95% of S&P stocks were down on December 1, which is also rare and digital assets were not spared. The good news is the market generally goes on to have positive returns over a one month and six month period.

Every time the VIX has spiked in 2021, U.S. markets have rallied again, notably last January

The market falls for Powell’s tightening talk, at least in the short term

Monday’s recovery was stopped in its tracks by Fed chairman Jerome Powell’s backpedalling on the “transitory” element of inflation. He reiterated the central bank’s commitment to tapering, causing investors to panic about tightening into a scenario of lower growth caused by lockdowns and higher inflation. Hence the lower long term yields as the market incorporated weaker growth ahead, while the 2-year rose to 60 bps on potential short-term rate hikes, yield curve flattening. The market is buying the hikes in the short term but not further out.

Lawmakers reached a deal to avert a funding crunch with a looming deadline this weekend to tide them over into the new year. Watch for the next Fed meeting on December 14 and 15.

Cathie Wood’s ARKK Innovation Fund has taken a beating, indicating pain under the hood of headline indices as more expensive tech stocks have wobbled

Source: Yahoo Finance

Commodities look to be rolling over, providing some relief from inflationary pressures, as noted in the CRB Commodities Index, made up of 39% energy, Agriculture (41%), Precious Metals (7%) and Base

Metals (13%). OPEC+ announced a release of an additional 400k bpd in January, not enough to make a substantial difference.

Are commodities rolling over? 

US manufacturing activity rose in November at an even faster pace than October to 61.1, well in expansionary territory, with purchasing managers battling with supply shortages and hiring but generally optimistic. This is a six month high. The Institute for Supply Management (ISM) subcategories of new orders, production and employment all great at a faster pace. That’s 18 consecutive months of growth.

CRYPTO

Forced selling

Digital assets got pushed around by the broader risk off conditions related to Omnicron and expectations of a rate hike as early as May but didn’t sell off until Friday, on contagion from equities. BTC had been stuck in a narrow range since late November with stubbornly high open interest ($22bn) for both perps and options so a big move was incoming either way. This was one for the bears as over $4bn of leverage was wiped out, with aggregate funding rates now in negative territory. 

Bitcoin short term holders' cost basis was sitting at 53k, and once we broke through that level there was another big leg down. Ethereum open interest at $12 bn had exceeded May’s highs but is now at $9bn, with funding rate also negative. Of note, CME share of the futures market has exploded upwards, from 10% to 19% since September, signalling more institutional money and more correlation with traditional risk assets.

Open Interest for BTC (and Ethereum) had jumped since September but has since fallen back on a wave of liquidations

Source: D. Declair

Among the larger cap names, Terra’s Luna algorithmic coin was the standout performer (+24%), as 88 mn LUNA were burned ($4.5 bn USD) out of 475 mn total circulating supply. Matic also remained in the green (+12%). Stacks, the token of Stacks Network designed to unlock BTC as a programmable base layer, raced ahead on speculation that Square’s (Block) CEO will focus on Bitcoin.

Stacks stacks on hopes Jack Dorsey will unlock BTC’s full potential as a programmable base layer

Source: Messari

ETH supply on exchanges made new lows, partly related to coins moving to DeFi

Dorsey Tweets Goodbye 

Jack Dorsey, the founder and twice CEO of social media giant Twitter, resigned… again. After first resigning in 2008, he then founded the digital payments app Square, which has also grown into a multi-billion dollar company. CTO Parag Agrawal is now taking over. Dorsey has since revealed that Square, which he still heads, is rebranding as Block to allow for future growth of CashApp, music streaming service Tidal, and bitcoin developer platform TBD, as well as a hardware wallet. The company is also considering creating a bitcoin mining service.

That’s the second social media company in as many months to rebrand and shift focus towards developing new technologies and ecosystems. Probably nothing.

ETP, ETF FTW! 

Invesco, the trillion dollar investment firm, has launched a European spot Bitcoin ETP as it waits for a physical Bitcoin ETF in the US. The firm has partnered with crypto indices provider CoinShares and its ETP is backed by physical bitcoin. For traditional investors, these instruments make it easier to gain exposure to crypto without having to hold the asset itself. 

These products are gaining significant traction in Europe, particularly in Germany and Switzerland. Asset manager WisdomTree has listed three crypto basket exchange-traded products (ETPs) on Swiss stock exchange SIX and Frankfurt-based Börse Xetra. The ETPs, which track proprietary indices developed by WisdomTree, are the WisdomTree Crypto Market (BLOC), WisdomTree Crypto Altcoins (WALT) and WisdomTree Crypto Mega Cap Equal Weight (MEGA).

In Canada, Fidelity Investments is launching a crypto exchange traded fund called Fidelity Advantage Bitcoin ETF. The scheduled launch of FBTC on the Toronto stock exchange, comes more than eight months after it filed with the SEC to launch a similar spot bitcoin ETF in its home market. This indefinite hold from the SEC is making the Canadian crypto ETF more crowded, with seven managers offering 23 funds already. Maybe this will put more pressure on the SEC to start moving but from what the regulator’s head said recently, he wants the industry to register with the agency before that happens.

Saylor buys the dip, now holding 0.64% of circulating supply

MicroStrategy added 7k bitcoin to its holdings at an average price of $59,187 per BTC, the company, as per an SEC filing. Michael Saylor’s firm now holds around 121k BTC acquired at an aggregate purchase price of $3.57 billion, averaging approximately $29,534 per coin. They sold class A common stock to finance the purchase. The company financed the acquisition by selling class A common stock. 

Bullish on Bullish? 

Bullish, an institutional exchange backed by Block,one, Peter Thiel, Galaxy Digital and Nomuras and based in Gibraltar launched this week. Block.one is providing capital including 164,000 bitcoins and $100 million in cash. The differentiating factor is the internal automated market makers (AMM) that are a characteristic of decentralised exchanges, but under a regulatory umbrella. Block.one has a patchy record with its EOS coin, which was fined by regulators and turned out to be an unsuccessful “Ethereum killer”.

REGULATION

A broker is a broker

One of the most positive developments this week was that US Treasury Secretary Janet Yellen noted the definition of a “broker” does not include hardware wallet manufacturers, software developers, miners or providers of un-hosted wallets that do not take custody of funds.

This is important as the $1 trillion infrastructure bill that contained vague wording around crypto was signed into law and will go into effect in January 2024. Many in the crypto industry were concerned the term “broker” would be widely applied meaning not just exchanges would be required to submit names and addresses of their customers, something which not all of the actors in the space have access to. This is in line with FATF (Financial Action Task Force) guidelines.

“Bitcoin is a competitor to the U.S. banking system.” Gary Gensler, SEC chairman

Gary Gensler, chairman of the SEC said in a talk this week that bitcoin was created as a reaction to the US monetary system and that crypto is an off the grid alternative to traditional finance and once again invited the industry to register with the SEC in order for a spot ETF to be approved. He also reiterated his stance that most coins are security-like, excluding bitcoin.

Crypto execs head to the Hill 

Next week, execs from eight crypto firms will be called to testify before a US congressional committee on the 8th. Included will be Coinbase's Alesia Haas, Circle's Jeremy Allaire and Bitfury's Brian Brooks, himself a former regulator, as US politicians across the floor aim to scrutinise the space. Politician’s from both sides have been critical of the space but there is pressure from institutional and retail investors to push forward and provide clarity for players in the space. 

FCA turns to Bitcoin experts

The UK’s regulator, the Financial Conduct Authority, has published a tender offer for a firm that specialises in the analysis of cryptocurrency asset blockchain data to crack down on crypto-funded terrorism. 

Crypto taxation delayed in Korea by a year 

Crypto traders in South Korea get a reprieve. The country’s National Assembly passed a bill pushing back the planned 20% taxation of capital gains of over $2.5 million from cryptocurrency trading by one year.

Huobi goes to Singapore

In another sign of Singapore’s openness to crypto, Huobi Group, the company behind crypto exchange Huobi Global, has picked Singapore for its regional HQ. Most of its staff is already based there while the exchange is expelling all Chinese users by year end, as per Chinese regulations.

Crypto players playing ball 

The Premier League, the largest sports league in the world, has announced it will investigate the growing links between crypto companies and football clubs. Fan groups have posed a concern that supporters will be encouraged to buy products that they don’t fully understand. Meanwhile, and in completely unrelated news, the Premier League is considering a partnership with a cryptocurrency platform that provides “digital collectibles.” Bit of an own goal? 

DeFi / NFTs / Metaverse

Uniswap continuesto dominate volumes in DeFi Dapps over the course of November, though the user base is lower, attesting to the institutional nature of the platform. PancakeSwap, the Binance chain platform, conversely has millions of users and approximately half the volume. Raydium, the Solana dapp has significant volume and also looks to be more institutional, judging by the transactional volume per user.

Uniswap V3 dominates the leader board in volumes, Pancake Swap in user base

The sun (SOL) also rises

In addition to sending a scathing letter to the SEC for not allowing a spot bitcoin ETF (the product continues to trade at a wide discount to spot), Grayscale is diversifying further by launching a new trust that invests in Solana, the alternative Layer 1’s to Ethereum.

Solana has grown its usage exponentially this year and Grayscale seeks to capture ex BTC and ETH, with SLX, which has a 2.5% annual fee. Solana’s TVL went from $600 mn six months ago to $14 bn, according to DeFi Llama. Transaction speeds are at over 50k per second and the chain can scale without Layer 2’s or sharding. Part of that growth is due to the success of NFTs , but is also attributable to DeFi Dapp Raydium, a liquidity provider for order books, with 14% dominance.

TVL of Layer 2 scaling solutions continues to gain traction on lower costs

Source: L2 Beat

NFTs

To the MoonPay! 

DJs and rappers including Diplo, DJ Khaled, Martin Garrix and Future have bought Bored Ape Yacht Club NFTs through MoonPay’s ‘concierge service,’ helping the rich purchase NFTs. The service has also helped other celebrities including Lil Baby, Post Malone and Jimmy Fallon buy NFTs. These celebrities have gained further notoriety for MoonPay after its recent $555m Series A round. 

First the Adiverse now a Bored Ape

Adidas ventured into NFTs with the purchase of a Bored Ape as brands that appeal to younger demographics seek to gain relevance in the digital world.

INVESTMENT TRACKER

US leads global blockchain investment deals 

The US was the global leader in blockchain-related investment deals in Q3 21. For the first time, Asia fell behind the US by the number of crypto startups that raised capital, according to CB Insights. This large amount of capital raised in the US over the past quarter represents an increase of more than 11x from the same quarter last year, when just $263m was raised. Last quarter’s high number came after strong growth in both the first and second quarter of 2021.

Source: CB Insights

Algorand funding for Dapps

Borderless Capital is launching a $500 million fund to develop Dapp projects on the Algorand blockchain, including NFTs and DeFi. They are one of the top investors in the ecosystem with a $400 mn stake, but Algorand has not yet achieved a high TVL ($100mn currently).

South Korea is a very relevant market for crypto investment

With the CEO of Korea’s stock exchange saying recently that traditional finance needs to embrace crypto and that volumes might catch up to equities, it is clear that market is at the forefront. Just this week, we saw two important investments.

Hashed, a firm that invests in crypto, has raised $200mn for a fund dedicated to Web3, after it raised $12mn last December, without revealing who the investors were. But they have been active investors in names such as Axie Infinity and The Sandbox as well as Terra. The amount is double what FTX announced last month.

Softbank invests in metaverse K-pop  

Mosayoshi Son, founder of Softbank Group, has invested $170m in Naver Corp’s metaverse platform, pitting against players such as Roblox, Meta and Google. Naver Z Corp is the operator of South Korea's metaverse platform Zepeto, which has attracted 240m users. The app has become a popular platform for teens, making up 80% of its users. K-pop groups create their content on the app to communicate with fans globally, with non-Koreans making up about 90% of its users. 

SK Square, an investment company spun off from South Korean telecoms provider SK Telecom, has acquired a 35% stake in crypto exchange Korbit worth 90 billion won ($75 million), becoming its second largest investor. The exchange also launched the first NFT platform in the country.

1inch closes $175m Series B  

The company behind the DEX aggregator 1inch app has announced it has closed a $175m Series B funding round. Amber Group led 1inch's Series B and it was a token funding round. It sold its tokens at a discounted $1,50, which are now trading at around $3.60. With fresh capital at hand, 1inch Network is looking to serve institutional customers, including banks and hedge funds, with an aim to be licensed in Europe and in the US. 

Brazil’s Mercado Bitcoin plans to take over Latin America  

Mercado Bitcoin, Brazil’s largest crypto exchange, raised an additional $50.3 million in a second closing of its Series B funding round.They had raised $200 mn in June, in a round led by Softbank, that had put its valuation at $2.1bn. Use of proceeds will be to expand operations in Latin America, with Argentina, Chile, Colombia and Mexico as priorities.They now have 3.2 million users, 400k added since June, and 80% of the local market and traded $7bn YTD.

Bitcoin miners seize the day  

Griid Infrastructure, a bitcoin miner, is to list on the NYSE via a SPAC, joining other publicly listed miners. The value of the vehicle is $3.3 bn and will trade as GRDI. They aim to have 734 megawatts in capacity by 2023.

Two other miners, including Marathon and Greenidge, announced bond issuance. Given their profitability, those should be oversubscribed.

November has been a good month to be a bitcoin miner

Attack-proofing the blockchain

Blockchain cybersecurity firm CertiK raised $80 mn in a series B2 round led by Sequoia Capital CHina and takes its valuation to close to $1bn, and marks three rounds in four months for a total of $140 mn as security is critical for companies investing in crypto. The firm seeks to protect blockchains from cyberattacks, conducting audits for thousands of clients.

Security remains at the forefront of investor concerns as we just saw a $115mn hack from BadgerDAO, with one single user losing 900 BTC although this one appears to be the web interface rather than the protocol, according to Peckshield, an analytics company.

Derivatives on Solana: not just for NFTs

Hxro, a derivatives primitive that allows access to aggregated liquidity and built on Solana closed a $34 million strategic round led by Jump Crypto, Blockchain Capital and SIG DT Investments. It is composable with Serum, the spot liquidity hub on Solana and will be a permissioned market, something which institutions require.

New crypto funds launch  

Hivemind Capital Partners, founded by former Citi banker Matt Zhang, announced a $1.5 billion venture fund to invest in blockchain and digital asset ecosystems, with Layer 1 Algorand providing the technology and network ecosystem infrastructure.

NYDIG, a leading crypto player, has unveiled its seventh digital asset fund, with a single investor contributing the whole amount. This now seems small compared to other recent launches.

India’s crypto exchange unicorn is stuck in regulatory limbo

CoinDCX, India’s first crypto unicorn, plans to go for a public listing, once regulations permit it, co-founder Neeraj Khandelwal said in an interview with Bloomberg. The exchange is a private company with over $1 billion valuation, after a $90 million funding round in August this year, with funding from Facebook co-founder Eduardo Saverin’s B Capital Group, Coinbase, Polychain Capital, Block.one and Jump Capital.

Until next week! We welcome comments and suggestions. Martha @reyeshmartha

Disclaimer: The views expressed in this newsletter are my own and not intended as financial advice or a recommendation, but only for informational purposes. You should carry out your own independent research or consult a financial adviser if you are unsure. Please also be advised that I hold investments in some of the assets mentioned in this report, including digital assets, equities and ETFs.