Vas Crypto

2nd December

Last week I posited that the crypto market was well positioned to recover following the sustained bearishness that characterised the largest part of November. Although we find overall market cap at largely the same level today, the preceeding days have been volatile. This is as a result of the new Omicron variant of COVID-19 and statements from the Federal Reserve indicating a potential acceleration in the tapering of monetary stimulus. This macro context will continue to loom large until the market has a clearer understanding of one or both topics, and this is true for both crypto as well as trad-fi.

As we wade through the alphabet soup of COVID mutations, we would do well to remember that markets were similarly shaken by the Delta variant a few short months ago. On the 19^th July 2021 we hit max pain on Delta variant fears and on the day a Bitcoin could be had for the paltry sum of $29,302.  The Crypto fear and greed index* was hovering just above its low for the year and crypto bros everywhere were updating their LinkedIn profiles in preparation for needing to find a real job.

The 7-day rolling average of new COVID cases globally was 520,000 (vs 570,000 today) and US M2 money supply was roughly half a trillion dollars lower than today.

What happened after 19^th July 2021? We discovered Delta was not dissimilar to Alpha, Beta, and Gamma, and we continued rolling out vaccines.

And crypto gained 130%.

While my lack of medical training precludes me from commenting on the relative pathogenicity of Omicron, as opposed to any other strain, one could consider two potential scenarios:

1. Efficacy of the vaccines is substantially reduced, and we have another COVID-induced economic contraction. On a short-term basis, markets will take a beating particularly since leverage is high (see BTC estimated leverage) and we haven’t had a true flush out of leverage since September. On the medium-term this will preclude monetary tightening and the Fed will return to the “it’s transitory” narrative on inflation. As crypto fundamentals won’t be any weaker than they are today, many (both institutional and retail) will use this as a second chance to get in on projects they missed. This is likely to be jet fuel for prices.
2. Efficacy of the vaccines is not significantly reduced against Omicron. We breathe a sigh of relief and go back to analysing on-chain data, whitepapers, charts, and the Tweets of Elon Musk. Crypto fundamentals are strong, and the bull thesis will hold at least until monetary policy changes start becoming a reality (or we are somehow surprised by the emergence of the Rho/Theta/Epsilon-squared variants).

While any assignment of probability of occurrence to either scenario requires a Virology qualification, it’s not difficult to see that market participants may be overreacting. In the 3 hours after the announcement from the CDC that the first US case of Omicron had been identified, both the S&P and the BTC/USD pairs shed just over 3 %. Did we really get taken by surprise and think that somehow the USA would be immune?

Risk-on or Risk-off?

Last week I advised caution on gaming and metaverse projects and reiterated my bullish stance on Ethereum in the face of rising anti-ETH sentiment. ETH subsequently flirted with ATH but has retreated to largely flat, while the gaming/metaverse sector is down 7.5 % with tokens red across the board. This is most likely to be a healthy consolidation period rather than a major narrative change however.

From a sector perspective smart contract platforms have held their own (0.22% up in the last 7 days) and outperformed BTC by some 4.86 % in the last week. Alts remaining green while BTC and traditional markets retreat is an unusually risk-on signal given the context discussed previously. This leads me to remain in risk-on posture however we can expect volatility to continue until scientific consensus is reached on the severity of Omicron.

25th November 2021

After adding a cool $ 1 Trillion in total market cap between late September and the all-time high reached on 10^th November, the last week has been characterised by uncertainty. With the market down some 13 % from the high, and only the metaverse and gaming sectors continuing their upward trajectory, one must ask if we are poised for a trend reversal or if this is simply much needed consolidation following over-exuberance?

On-Chain Data

Supply and Demand

The supply of BTC on exchanges continues to decline in a the trend has continued largely unbroken since July. While this is a low-sensitivity indicator due to the relative size of the BTC market, there is significant divergence building between the constrained supply and downward price action.

A similar trend can be observed for Ethereum exchange balances, although the early part of the week saw an uptick in movements to exchanges. This follows a rise in anti-ETH sentiment which has not yet translated into any significant price declines.

Who is Selling and Who is Buying?

A brief look at spent output profit ratio data for short-term holders indicates these holders have been selling at a loss in the last 7 days. This is generally a “buy-the-dip” opportunity as indicated by the similar shaded areas from this cycle.

Another interesting visualisation to determine the behaviour of different market participants is the proportion of total supply held by wallets of a certain size. For ease of consumption, consider the chart below of balances in large wallets (10-10k BTC) vs small wallets (<1 BTC).

Both groups have been net accumulators since the middle of last week, so it is more instructive to examine periods when their behaviour diverges. Interim and cycle tops are characterised by whales gradually selling their bags to small participants, and trend reversals are often instigated by sharp changes in large holder balances.

Current on-chain data can be construed as bullish, and we are likely in for a green weekend.

Key Narratives for the Week

Ethereum is bad, Avalanche is the new Solana

As mentioned in the prior section, crypto twitter has been awash with anti-ETH sentiment. While I am an unapologetic Ethereum bull, many of the arguments have merit:

• High gas prices are a recurring issue during periods of increased activity. This in
  turn prices many participants out of using the network and hampers
  adoption.
• The success of L2s and rollups as a solution to Ethereum’s scalability issues
  is not guaranteed. This is a multifaceted topic worthy of it’s own
  article, but the crux of the argument is:
  • Rollups provide cheaper transactions, but they may still be too expensive (see L2 Fees)
  • Current L2s like Arbitrum and Optimism require a challenge period of 1 week
    before funds can be removed. I’m sure market makers will step up and
    resolve this issue in future, but it won’t be without added cost.
  • While the L2s are EVM (Ethereum Virtual Machine) compatible they use their own
    subtly different virtual machines. That means you can’t just copy your
    dApp or smart contract over without a high probability of redevelopment
    being required.

The problem with much of this discourse is Ethereum is a soft target. As the only L1 that has achieved real scale, we have data points to legitemise the bear case. It’s quite easy to argue how much better your “ETH killer” is when the internet hasn’t had 6 years to try and break it yet.

One might also consider how easily sentiment is influenced when the two teams are a decentralised group of ideological ETH intellegentsia versus a bunch of VCs (and their marketing departments) with one foot on Wall Street shilling their investments.

Gaming and Metaverse continue to go parabolic

This shows little sign of slowing down as projects like Sandbox grow to eyewatering valuations. I would advise caution here as although the future of this sector will no doubt be stellar, these kinds of projects will need to attract substantial user numbers to justify said valuations. Alarm bells start to ring when I see $ 6 Billion attached to blockchain Minecraft that isn’t out of Alpha yet.

Ask any gamer for a measure of their dissapointment after buying a much-hyped game on pre-order, and you will recieve the sweatiest confirmation that just because a game looks cool, doesn’t mean it’s any fun to play.