AB Newsletter #1
Banks Down….Crypto Up?
The following content is for informational purposes only, you should not construe any such information or other material as investment, financial, or other advice.
Banks Down….Crypto Up?
What is going on?!
This past week has been the most eventful in traditional markets since the COVID-19 collapse. We have witnessed a banking crisis with three banks shutting down, including Silicon Valley Bank, which marks the second-largest bank failure in US history. In contrast, Bitcoin and other crypto assets have rallied, reminding us that Bitcoin was initially created as an alternative to the traditional financial and banking system.
What caused this crisis?
Banks maintain collateral on their balance sheets to generate yield and collateralize their deposits. US Treasuries are considered the best form of collateral since the US is unlikely to default on its debt, as it can always print more money to cover its obligations. However, banks held these bonds while the Federal Reserve increased interest rates at an unprecedented pace over the past 12 months. As interest rates rose, bond values decreased, causing hundreds of billions of dollars in losses on banks' bond positions. Some banks managed to hedge this exposure, while others went bankrupt due to the losses.
How did authorities respond?
The Federal Reserve and the FDIC intervened to stabilize the situation. The FDIC fully protected all Silicon Valley Bank depositors, and the Fed opened a facility to compensate for the bond losses held by banks. Investors in the bank's stock and debt, however, were not bailed out.
What's next for the markets?
The Federal Reserve generally raises interest rates until a recession occurs or the financial system "breaks." It appears that the Fed is on the verge of facing both outcomes. Several banks are still under pressure, and more are likely to go bankrupt in the coming weeks, leading to more bailouts. This "break" in the financial system will likely signal the end of the Fed's tightening cycle. Futures markets anticipate a pause in rate hikes either in the upcoming meeting or the following one, with several rate cuts expected soon after. The end of this tightening cycle is generally bullish for risk assets, as looser financial conditions will stimulate the economy. However, if a recession occurs simultaneously, asset prices will likely remain suppressed. A recession appears increasingly probable, as the unfolding banking crisis tightens lending activities and the impact of the Federal Reserve's interest rate hikes over the past 12 months continues to permeate the economy.
Crypto has outperformed stocks during this banking crisis, highlighting the growing recognition that digital assets provide an alternative to traditional finance. Digital assets offer an alternative to the banking system because users can custody their own assets without any counter-party risk, and they are disinflationary or deflationary assets by nature. A popular meme in the crypto community, "Bitcoin Fixes This," seems more relevant today than ever before.
Crypto vs Traditional Finance Markets
The last 12 months have been an exceptionally tumultuous stretch for both traditional and crypto markets. In recent years there has been a clear positive correlation between the S&P 500 and crypto assets, but as investors attempt to navigate an increasingly uncertain macroeconomic landscape, an emphasis on risk management continues to be front of mind. Amongst the many factors, inflation concerns and subsequent interest rate hikes have been the talk of the town in the financial world recently. While both crypto and traditional financial markets have exposure to these risk factors, they have been responding in different ways.
Regarding traditional financial markets, there has been a slight surge in risk asset prices to start 2023, however, that has quickly fizzled as investors are becoming increasingly weary of the Federal Reserve’s staunch hawkish stance on interest rates for the remainder of the year. Consequently, the bond market has been seeing increased demand as investors flock to safe-haven assets. The yield on US treasury bonds has been rising, indicating that investors are willing to accept lower returns in exchange for the security that bonds offer.
Although cryptocurrencies and related assets are undoubtedly riskier investments in terms of volatility, the crypto markets offer a unique diversification opportunity during times of high inflation and increasing interest rates. Unlike traditional currencies, which are subject to inflationary pressures due to government policies like printing more money, cryptocurrencies like Ethereum and Bitcoin have a fixed supply limit and are deflationary in nature. In recent months asset prices in crypto markets have generally moved sideways as the global cryptocurrency market cap hovers around 1 trillion, however, the underlying technology that powers these assets has never been more broadly accepted. In recent days, an interesting and rare phenomenon has appeared on the correlation chart between Bitcoin and the S&P 500 and for the first time since the FTX collapse, the daily correlation has become negative. A negative correlation could suggest that investors are adopting cryptocurrencies as the inflation hedge they were intended to be.
Blockchain Ecosystem / Crypto Market Update
2023 is off to a positive start in the blockchain ecosystem with the macro market trending up since January 1, despite stablecoin depegs and banking failures. As we know, the crypto market tends to operate in cycles, repeating bullish and bearish patterns that can be seen in fractals of price history.
Marked on the ETH/USD chart above where each candlestick represents 1 week of ETH price history, “WE ARE HERE” is where we estimate we currently are relative to the 2016-2020 market cycle (Cycle Two). Considering fundamentals, alongside comparing technical analysis of the past cycle to current, we believe we still have another 3-9 months of relatively sideways price movement in store. We predict this 3-9 month timeframe will carry us through the transition between Cycle Three and Cycle Four, into the true start of Cycle Four, which would signal an incoming 2 year uptrend.
Ultimately this means we don’t expect to see ETH/BTC network value (prices) reach all time highs until late 2023 - early 2024. This is why we are continuously buying ETH, with our current average buy price at $1,337 this cycle, which is significantly down from our average sell price of $3,500 in 2021. This trade has allowed us to gain tremendous alpha on our ETH position.
Price aside, developer and user activity on-chain continue to grow exponentially. This is extremely positive, and signals that the best blockchain networks are significantly undervalued. For tracking blockchain developer activity, here’s extremely impressive and valuable report from our friends at Electric Capital (PDF download available).
ETH Denver 2023
For the first week of March the AB team met out in Denver, Colorado to experience our first ever ETHDenver. With a record number of attendees, somewhere in the 12,000-30,000 range, the event was very vibrant and incorporated many of the important narratives/developments in both the Ethereum network and Web3 ecosystem as a whole.
As early as registration, everyone was encouraged to use blockchain tools like providing proof-of-ticket with an NFT or paying for food using a real time Layer 2 blockchain. Swag (merchandise) was in abundance, people flew in from all over the globe, and so many thought provoking panels/speakers discussing MEV, DeFi, NFTs, DAOs, SoFi, and GameFi.
The Layer 2 vibe was definitely strong with Arbitrum, Optimism, Base, Matter Labs, and Polygon all in attendance. ZkSync partnered with MEW wallet to provide free meal points for those attending the event to show how the Layer 2 Blockchain Era works in production. Another narrative that stuck out was the attention to GameFi. Within seconds of walking into the venue, everyone saw numerous booths from companies working toward bringing traditional gamers into Web3. Last but not least the demand for account abstraction is very real, so many projects are developing with better UI/UX in mind after Vitalik’s last post. With the launch of ERC4337 as a smart contract on Ethereum, we seem to be closer to that reality.
Cant get enough? Even more links below …
For more resources visit AdvantageBlockchain.com
Vitalik Demands Better Web3
Can you blame him?
CNBC on Banks x Crypto
Sell! Sell! Sell! No…Buy! Buy! Buy!
Coinbase x Bankless Podcast
How is the largest US crypto exchange handling recent events?
Developer Report
Follow the money developers. (click to download pdf on right side page)
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