Valour

Market Update 19/02/23

February 19, 2023

The purpose of this piece is to provide a market update regarding Valour’s current underlying exposures.

Bitcoin pushed past $25,000 to boast gains of upwards of 11% (24h) following what can only be described as an anxious week. Following Kraken’s announced settlement with the SEC over their US crypto staking operations, BTC fell below its key $22k support, mounting investor concerns as regulatory scrutiny shifted focus towards BUSD stablecoin issuer, Paxos. With February being a historically notable month for poor performance, BTC’s intraday gains marked the highest such increase in over 6 months, given that BTC last traded at the $25k level in August ‘22. Despite U.S inflationary data coming out slightly higher than expected, crypto markets netted an $84bn increase in value as CPI rose 0.5% for the month. Alongside the positive growth in retail sales and manufacturing production, talks surrounding the effectiveness of the Fed’s current inflationary measures renewed. Despite this, crypto markets gained momentum leading to $65m in liquidations across BTC short positions. Recent data by Lookonchain noted over $1.6bn in institutional USDC withdrawals entering crypto markets, significantly contributing towards the price movement. Meanwhile in ecosystem news, the number of Ordinals and BTC inscriptions surpassed 122,000, amassing a total of $904k in fees, whilst El Salvador continues to make waves in pushing ahead with its Bitcoin-centric strategy, aiming to open a ‘Bitcoin Embassy’ in the U.S later this year.

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Ethereum mimicked Bitcoin’s price movement breaking past the $1,700 mark to reach its highest price since mid September last year. Following its transition to a PoS consensus earlier that same month, issuance of new ETH has primarily waned with current issuance standing at its most deflationary level to date - more than 24,500 ETH below pre-Merge circulating supply. According to data by Santiment, this has translated into a 37% decrease in the liquid supply of ETH on exchanges. With 16m ETH (14% of current supply) locked up (staked) in the Beacon Chain until the Shanghai upgrade, and recent ecosystem events having placed a greater emphasis on self-custody, the reduced volume of liquid ETH on exchanges has benefited overall price and facilitated the growth of Ethereum’s layer-2 environment. This past week, ETH-based scaling solution Arbitrum saw greater total transaction volumes and fee revenues than that of Ethereum’s main network. With layer 2 scaling solutions primed to increase Ethereum’s throughput and transaction finality without compromising on decentralisation and security, competition is well underway. Matter Labs’ zkSync Era announced the availability of dApp deployment for testing this coming week, whilst Polygon has set Mach 27th as its official mainnet beta launch for its widely anticipated zkEVM.

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Cardano released its ‘Valentine’ (SECP) upgrade to improve cross-chain dApp development on its smart contracts platform, Plutus, as well as enhancing the cryptographic features and cross-chain functionality for its ecosystem of dApps. Meanwhile, L2 interoperability technology provider Milkomeda announced that it is working on a wrapped smart contract feature that will enable developers to call Solidity smart contracts directly from a Cardano wallet. On the organisational side, the Cardano Foundation announced the appointment of two new executives. Filling the role of COO, Andreas Pletscher joins from PwC, whilst Nicolas Jacquemart (CLO) joins from Swiss Financial Market Supervisory Authority (FINMA) to further enhance the advancement of the Cardano blockchain.

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Polkadot metrics were published courtesy of Messari research. Looking at the state of DOT during Q4 of 2022, daily active accounts increased by 64%, whilst new accounts rose by 49%. In terms of parachain communication, prior to implementing V3 of its cross-consensus messaging infrastructure (XCM) earlier this year, a total of 166,000 transfers across 70 channels were transmitted, whilst 35 leased parachain slots resulted in over 133m DOT being bonded. Meanwhile, treasury holdings increased by 85% (YoY), totalling 43m DOT, as the platform ranked amongst the most actively developed with developer count increasing from 200 in 2018 to over 2,000. With several significant developments scheduled for 2023, Polkadot remains at the forefront of Web3 interoperability.

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Avalanche experienced a 1,500% growth in transaction volume over 2022, rising to a cumulative 450m transactions. Data by Nansen shed light on the impressive metric which surged from a count of 27m back in 2021. Despite the blockchain’s TVL falling from $15bn to $900m as a result of the various contagion events last year, the substantial growth reflects the healthy state of the network, with both recent price increases and the deployment of other protocols to the Avalanche ecosystem seeing its TVL increase to $1bn.

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BNB endured the effects of the recent regulatory push back against the issuer of its BUSD stablecoin. With both the SEC and New York Department of Financial Service clamping down on Paxos’ partnership with Binance for the creation of what it deems an ‘unregistered security’, the exchange was subject to outflows of more than $700m. Overall, the number of addresses holding between 1,000 and 10m BUSD has rapidly declined, with users selling off more than $200m of the stablecoin, and Paxos burning more than $700m BUSD in the immediate wake of the clampdown. Whilst BNB’s market cap took a hit in light of the news, the Build N Build Chain has outlined some of its upcoming improvements that will undoubtedly enhance the blockchain’s overall performance, scalability, security and decentralised properties. Focusing on EVM compatibility and the mainnet launch of its L2 zkBNB infrastructure, BNB aims to expand its current validator set to 100 throughout the course of 2023, whilst adding optimistic rollup solutions to its already expanding ecosystem in the hopes of increasing its overall throughput to 5,000 TPS.

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For Solana, Uniswap, Cosmos and Enjin, no noteworthy news updates this week.

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Macro & Markets 🏦💱

The Week Behind: 🗓️⬅️

15/02: U.S manufacturing output rose by 1% as (MoM) retail sales increased to near 2-year highs (3%)
15/02: UK posts better than expected inflation results, with figure falling to 10.1% for Jan
15/02: FTSE pushes past 8,000 points for first time amidst easing recession fears
15/02: EUR GDP rose by 0.1% in Q4 of ‘22, with employment climbing 1.5% (YoY)

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The Week Ahead: 🗓️➡️

21/02: Germany Manufacturing PMI (Feb)
21/02: U.S Existing Home Sales (Jan)
22/02: Germany CPI (YoY) (Feb)
23/02: EUR CPI (YoY) (Jan)
23/02: U.S GDP (QoQ) (Q4)
24/02: Germany GDP (QoQ) (Q4)
24/02: U.S New Home Sales (Jan)

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Fear & Greed Index 😨🤑

The multifactorial index looks at investor sentiment across Bitcoin and other large cap crypto markets, covering volatility, volume, momentum, dominance, and social trends. A score closer to 0 represents ‘Extreme Fear’ whilst a score closer to 100 is linked to ‘Extreme Greed’.
Following one of the most volatile weeks for the leading crypto asset in recent months, the multifactorial index closes the week in ‘Greed’ territory, standing at 61. With Bitcoin having peaked at over $25,000 on Thursday, investors have cited the currently profitable DCA indicator as a signal for an anticipated bull run. Used to measure the relative profitability of a hypothetical DCA strategy involving daily $1 purchases over a 365 day period, the metric has only flashed green on 3 previous occasions, each leading up to significant market runs.

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CBOE VIX Index 📉🦘

The CBOE VIX Index measures the implied volatility of S&P 500 Index options, traditionally following an inverse relationship. Currently at 20.84 (pre-market), the volatility gauge rose sharply following the release of crucial macro data this week. The SPX closed in the red on Thursday on the heels of strong inflation data and declining jobless claims, whilst growing retail sales seemingly suggested that inflation has not yet been tamed. Fearing more aggressive future Fed rate hikes, the VIX rose sharply, up 4.5% over the last 24h.

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BTC/DXY Correlation 💵📈

The DXY provides an indication of the value of USD relative to a basket of U.S trade partner currencies. Although the 6-month correlation (-0.9) confirms the typically inverse relationship between the two symbols, both BTC and the USD hit 6-month and 6-week highs (respectively) on Thursday, with BTC markets undergoing a slight corrective pullback to $24,000. The DXY has moved back above its 50-day SMA, forming support at 104, with 2-year treasury yields climbing back above 4.6%.

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Market Dominance 📊👑

Bitcoin dominance: 42.2% (+0.8%)
Ethereum dominance: 18.7% (+0.1%)
BTC EU Crypto ETP dominance: 50.9% (+0.8%)
ETH EU Crypto ETP dominance: 27.4% (-0.5%)

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Risers & Fallers 📈🚀

⬆️ Astar ($ASTRA) increased by 50% this past week, trading upwards of $0.11. The scalable decentralised blockchain provides the infrastructure for the development of EVM and WASM smart contract dApps, offering extensive interoperability via its cross-consensus messaging (XCM) and cross-virtual machine (XVM) interfaces. Having recently partnered with automotive giant Toyota to experiment several DLT use cases, Astar has been approached by Sony for their Web3 incubation program, exploring the use of blockchain systems within Sony Network Communications’ industry.

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⬇️ Neo ($NEO) is down 2.5% over the last 7D, falling to $9.11. The open-source community driven blockchain platform enables the digitisation and automation of assets via smart contracts, whilst being home to a wide array of infrastructures, including, decentralised storage, oracles, and domain name services. Founded in 2014, Neo underwent a design change in 2021, with Neo N3 boasting advanced functionality, a highly modular architecture, and a newly enhanced governance framework.