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Crypto markets took a beating this week. Federal Reserve (Fed) Chair Jerome Powell gave a hawkish testimony to Congress on Tuesday. He indicated that the March SEP terminal federal funds rate (FFR) was likely to increase and that if ‘the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes’.
Then Silvergate happened. Making matters worse for crypto, in a press release on Wednesday, Silvergate Capital, a crypto-friendly bank, announced that it intends to ‘wind down operations and voluntarily liquidate Silvergate Bank’.
The press release revealed that Silvergate believes that an ‘orderly wind down of Bank operations and a voluntary liquidation of the Bank is the best path forward’ in response to ‘recent industry and regulatory developments’. They also noted that ‘the Bank’s wind down and liquidation plan includes full repayment of all deposits’.
It all went down on Thursday afternoon. Until then, bitcoin traded in a gradual downtrend in response to the hawkish presser from Jerome Powell, exchanging hands at around $21,800. However, the price snapped lower on news of the Silvergate liquidation, closing the day below $20,000. Additionally, Silicon Valley Bank (SVB), another crypto-friendly bank, also came under pressure after it completed the sale of its $21bn bond portfolio, which led to a $1.8bn loss and added to risk-off sentiment.
Liquidations followed. There have been over $340mn of liquidations in the past 24 hours, and options markets are showing a bias for downside protection with the 25-delta skew (the difference in implied volatility between a 25-delta put and a 25-delta call) favouring puts out to 3 months. Put options give the holder the option to sell the underlying (e.g., Bitcoin).
What comes next? 50bp hikes could return at the March FOMC meeting if data continues to paint a picture of accelerated growth and no disinflation. Employment data came out today with something for the hawks (311,00 headline against 205,000 expected) and the doves (higher participation and slower wage growth). On balance, it was a win for the hawks, supporting a 50bp hike more than a 25bp hike in March. CPI core MoM above 40bp next week would increase the chance of 50bp.
The bigger picture is worrying. More generally, we believe markets continue to underprice the Fed, economic data calls for more Fed tightening, and the Fed’s strategy of reacting to inflation prints is a recipe for remaining behind the curve. The macro backdrop remains bearish for crypto.
Performance of Our Indices
All of our crypto indices have taken a beating this week, led by our Privacy index (-21% WoW), while our Smart Contract, Metaverse and DeFi indices are down between 18% and 19% each. Our Bitcoin index is down the least (-13% WoW, Charts 1 and 2). Rebasing each index to the start of this year reveals that our Metaverse index is up the most (+60% YTD) and our Privacy index is up the least (+15% YTD). Additionally, rebasing the index the start of this year also reveals that each index has been falling since peaking (Metaverse: +127% YTD, Smart Contract: +81% YTD, DeFi: +58% YTD, Privacy: +58% YTD, Bitcoin: +50% YTD) on February 21.
Our Smart Contract (+88%) and Metaverse (+85%) indices are most correlated to Bitcoin, while our Privacy (+83%) and DeFi (+80%) are least correlated to Bitcoin (Chart 3).
On macro markets, Bitcoin’s correlation to the S&P 500 has shifted from neutral to -21% compared to last month (Chart 4). Correlations with the NASDAQ (-10%) and Oil (-32%) has shifted from positive to negative. Lastly, Bitcoin is currently uncorrelated to gold (last month: +29%).
- Smart Contract Platform Index: VeChain (VET) is down the most (-25% WoW) while Cardano (ADA) is down the least (-11% WoW). Ethereum (ETH) is down -13% WoW.
- DeFi Index: Yearn.finance (YFI) is down the most (-29% WoW) while Maker (MKR) is down the least (-8% WoW).
- Metaverse Index: RedFOX Labs (RFOX) is down the most (-31% WoW) while Aavegotchi (GHST) is down the least (-4% WoW).
- Privacy Index: Keep Network (KEEP) down the most (-29% WoW) while Monero (XMR) is down the least (-6% WoW).
- Bitcoin: is down -13% this week.
What Are in the Four Indices?
Here are the indices in more detail:
- Bitcoin: the OG of crypto markets deserves its own category and is in many ways the true benchmark for any other crypto market.
- Smart contract platforms: after bitcoin, the big innovation was to have blockchains that were more programmable. These could host smart contracts or decentralised applications and have allowed the emergence of the metaverse and defi. Ethereum (ETH) is the most popular version of a smart contract platform. As well as ethereum, we also include some key competitors. The constituents of this index are: Ethereum (ETH), Cardano (ADA), Avalanche (AVAX), Solana (SOL), Fantom (FTM), VeChain (VET), Terra (LUNA), EOS (EOS), and Chainlink (LINK). We also include Polkadot (DOT) which allows interoperability between blockchains and the use of smart contracts via parachains.
- Metaverse: coins associated with the creation of a virtual space/digital world on the internet using a combination of augmented reality, virtual reality, and social networks. The constituents of this index are Axie Infinity (AXS), The Sandbox (SAND), Decentraland (MANA), Enjin Coin (ENJ), Aavegotchi (GHST), Terra Virtua Kolect (TVK), Ultra (UOS), Phantasma (SOUL), RedFOX Labs (RFOX), and Gala (GALA).
- Decentralised Finance (DeFi): financial services built on top of blockchain networks with no central intermediaries. This can be a broad category, so we narrow this down to platforms that focus on lending/borrowing, yield farming, automated market making and decentralised exchange tokens. The constituents of this index are: Aave (AAVE), Compound (COMP), Uniswap (UNI), Yearn.finance (YFI), Loopring (LRC), PancakeSwap (CAKE), Maker (MKR), 1inch (1INCH), Thorchain (RUNE), and Terra (LUNA).
- Privacy Coins: coins that obscure transactions on the blockchain to maintain the anonymity of its users and their activity. The constituents of this index are Monero (XMR), Zcash (ZEC), Dash (DASH), Verge (XVG), Horizen (ZEN), Beam (BEAM), Secret (SCRT), Decred (DCR), Keep Network (KEEP), and Dusk Network (DUSK).