The week ahead will deliver Coinbase’s Q2 earnings report and July’s inflation reading in the U.S. In today’s piece we examine how both events could impact price.
Last week Coinbase announced a landmark partnership with Blackrock, one of the world’s largest asset managers. In light of the company’s recent announcement, and the stock’s relative performance compared to the Nasdaq, its stock price could rally further if it posts strong results and positive guidance.
If this positive scenario plays out, it could act as a broader tailwind for digital asset prices, including bitcoin.
Even if the company’s performance for Q2 misses the mark, investors could see it as a buying opportunity, preventing the stock price from dropping by a large margin.
For context, Blackrock manages over $10 Trillion in assets. That’s close to the entire market capitalization of gold and more than 20 times the market capitalization of bitcoin.
Disclosure: Coinbase is an investor in Ledn.
Elsewhere in the space, anticipation continues to build around the upcoming Ethereum merge. Last week we reported how open interest in Ethereum options had surpassed open interest for bitcoin options for the first time in history.
This week, we will examine Ethereum futures and potential implications to Ethereum derivatives emanating from The Merge.
As we’ve covered in previous issues, the Futures market and the derivatives markets are instruments that allow investors to access significant leverage.
Not surprisingly, we are seeing an increase in the futures interest around Ethereum contracts. By dividing the spot volumes by the aggregate futures volumes, we can get a proxy for leverage activity in each asset. Below are the spot-to-futures comparisons for both Bitcoin and Ethereum.
As you can see from the graph, the spot-to-futures ratio on Bitcoin is currently north of 0.2 and rising - whereas the same ratio for Ethereum is at 0.14 and dropping. The lower the ratio, the higher the leverage - therefore we can infer that there has been more relative leveraged activity on Ethereum futures than on Bitcoin futures recently. This is consistent with rising speculative activity around the merge.
The Merge will also have implications for the shape of the Ethereum futures curve.
As Mike McGlone from Bloomberg intelligence pointed out recently, the 1-year implied yield on gold is almost identical to the 1-year U.S. treasury bond yield. Meaning that, since gold cannot generate interest natively, and has relatively low storage costs, the cost to carry and deliver a contract in the future is the current price of the asset plus the time to maturity multiplied by the risk-free interest rate.
While the risk-free rate is low, it still means that the price for gold or bitcoin in the future should be higher than the spot price - making the futures curves slope upward and to the right.
Ethereum will be different because it can be staked to generate interest. Therefore, the price of Ethereum for future delivery will have a different calculation. The cost to carry and deliver Ethereum into the future will have to be calculated as the current spot price, plus the time to maturity multiplied by the difference between the staking yield minus the risk-free rate. This means that if the staking yield is higher than the risk free rate (very likely the case), then the price for future Ethereum contracts will be lower than the spot price. This means that the Ethereum futures curve will look very different, as it will slope downwards and to the right - getting more negative as it is farther into the future.
Checking in on Argentina and Nigeria:
The Argentinian and Nigerian economies continue their descent down the inflationary spiral.
Headlines last week were once again, par for the course.
Bloomberg reported that Argentina is running out of reserves to stave off a material devaluation in their “official” exchange rate.
Adding to the challenge is the fact that many central banks are not transparent about their reserves - especially in Latin America.
The latest estimates from economists suggest that Argentina has about $38 Billion left in their reserves, with very little of it being in the form of liquid assets that could be used to defend the exchange rate.
Further evidence of the collapse is the fact that Argentina’s “official” inflation data, surpassed that of Venezuela for the month of July.
There has been no mainstream news regarding bitcoin or stablecoin volumes locally in Argentina this week. We’ll continue to monitor and share.
The updates from Nigeria show a similar picture.
As reported by a local newspaper, Nigerians are starting to replace items in their shopping list with lower-cost alternatives. Generally, people resort to substitution before having to cut back on consumption - but that is the natural next step.
Another article by Cointelegraph last week reported that “nearly 17.36 million, or 52% of Nigerian crypto investors, have allocated over half of their assets to cryptocurrencies. Nigerians started using crypto as a viable alternative to store and transfer assets.”
This week we also get an inflation reading from the U.S. which could impact bitcoin markets. Details in our What’s Ahead section.
The S&P 500 has now rallied over 13% from the local low on June 13th, 2022 and has reverted back to the mean of the ascending trendline it has been displaying since 2009.
While there is still considerable uncertainty with regards to the Fed’s future plans, investors have been debating whether the recent rally is signalling a pivot in Fed posture, or is it just a “bear market rally” like the one we saw in 2008?
As you can see from the chart above, the recent price-action on the S&P 500 looks almost identical to the bear market rally that it experienced in 2008. Back in 2008, the S&P saw a similar rally which ran out of steam and prices headed significantly lower.
However, even if an investor believes there is a large probability of repeating the 2008 fractal, data suggests that if the bottom for the market is not in, it is not far away either.
The above chart shared by Dan Tapiero shows the historical returns for the S&P after a 15%+ drop over a quarter. As you can see, the only time where the following quarter also had negative returns was 2008 - the fractal we were just comparing it to. But looking ahead, returns for the year after were 23.45%! In other words, historical data suggests that if things turn for the worse, they might be short-lived.
Gold saw its third consecutive week of gains, even as the U.S. dollar rallied last week. The rising geopolitical tensions between the U.S. and China last week on the back of Nancy Pelosi’s trip to Taiwan could have provided a tailwind for gold as a safe-haven.
Outside of geopolitical drivers, the macroeconomic picture does not look too great for gold from now until the end of the year, as the Fed has signalled that it will continue rising rates in an effort to bring down inflation. RIsing rates and lower inflation increase the real return of the U.S. dollar, which is inversely correlated with gold.
Looking ahead, markets are estimating that the Fed will have to shift gears and start cutting interest rates early in 2023. When this “pivot” occurs, gold should benefit and move higher.
A very hectic week in the DeFi space with ETH continuing to show strong momentum against BTC (closing the week +1.24%) with the Merge narrative expected to occur in mid-September getting louder as broadly covered here.
The DeFi Index slightly outperformed ETH despites several headlines along the week and some concerning incidents.
Another DeFi bridge was exploited leading to heavy user's losses as reported recently:
Nearly $191M has been removed from the bridge leaving the bridge's wallet practically empty after some users indicated that a potential configuration error in a smart contract used to process messages could be the main cause.
The bridge is a protocol that allows users to move digital assets between different blockchains, including Avalanche (AVAX), Ethereum (ETH) and others. As of today, Nomad team reported that "$36.2m has been returned to the Nomad recovery wallet from 41 wallet addresses" while the efforts with white hackers continue aiming to recover the user's funds.
Another intriguing news took crypto twitter's attention on Monday morning, with the U.S. Treasury Department adding more than 40 crypto addresses allegedly connected to the DeFi application Tornado Cash to the Specially Designated Nationals list of the Office of Foreign Asset Control, or OFAC.
According to the publication, individuals and groups had used the mixer to launder more than $7 billion worth of crypto since 2019, including the $455 million stolen by the North Korea-affiliated Lazarus Group, the list of addresses and further information can be consulted here.
The implications of this crackdown against Tornado Cash and its users triggered concerns on the crypto community:
We will keep a close eye on this act's developments and as usual keep you posted.
TL;DR for today's mining section: Bitcoin miners have $3-4 billion in outstanding ASIC-backed debt on their balance sheets.
After 2021's bull run and the great mining migration, miners experienced a remarkable profitable period. As shown in the chart below, provided by Luxor Technologies, a single S19 Antminer generated close to $40/day during its revenue peak; right before the China mining-ban. Since then, mining equipment costs and profitability have dropped by almost 70%.
However, revenue reduction is only one of the variables that led to the most-recent miner capitulation event. Miner-selling pressure was also caused due to over leveraged balance sheets. A product of poor risk management practices and miners financing the acquisition of new ASIC equipment through BTC & ASIC-backed loans. The end result is a group of miners with stressed balance sheets being forced to sell more than 100% of the Bitcoin they produce to service the cost of debt and cover some of their operations.
This has led to fluctuations in mining stock valuations. As per Luxor's Enterprise Value / ASIC Value Ratio chart below, certain mining stocks seem to be overvalued when comparing their EVs to the market value of their ASIC machines.
The main events that could impact bitcoin markets in the week ahead will be Coinbase’s earnings report and July’s Consumer Price Index reading for the U.S.
Before we get into the details, we wanted to offer a clarification from our Chile commentary last week. As our readers Marcelo and J. Luis pointed out, the drafting of Chile’s new constitution began in 2019 and was not commandeered by the recently elected president. That’s an important difference and we wanted to highlight it to our readers.
Chileans have been presented with the new constitution draft and it will be voted on in September. We will continue to report on the progress.
While the new constitution still has to be voted on, the new president’s plans continue to make some Chileans nervous.
As per the recent article from Coindesk, local crypto exchanges have seen a 50% increase in stablecoin transactions and users in Chile, Argentina, Peru and Colombia.
This is consistent with what we have been covering over the last months - and it is a supertrend that is very likely to continue as emerging market currencies continue to come under pressure.
Now, here are the earnings and announcements that could move the markets in the week ahead:
8.30 AM EST - Consumer Price Index for July (expectation is for 8.7% in July from 9.1% in June)
7.00 PM EST - Fed Speech - Mary Daly
It's a big week coming up, and as always, we'll keep you posted on any relevant news throughout the week right here and from our Twitter account.
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About the author
Mauricio Di Bartolomeo
Mauricio is the co-founder and Chief Strategy Officer of Ledn.io. He grew up in Venezuela where he and his family learned about Bitcoin. Now based in Canada, Mauricio holds HBA and MBA degrees from the Richard Ivey School of Business in London, Ontario in Canada.