Market Commentary
The recent collapse of FTX has led to a plethora of “crypto is dead” headlines on mainstream media. To someone that is new to crypto and suffered losses due to the FTX fallout, these headlines might seem appropriate. However, if you’ve been around the industry for more than 5 years, these headlines and claims by mainstream media should come as no surprise.
Mainstream journalists are always waiting on the slightest opportunity to dunk on bitcoin and the crypto industry. So much so, that bitcoiners created a website to track how many times journalists have published obituaries for Bitcoin and Crypto.
Dating back to 2011, the site recounts 466 articles where journalists deemed Bitcoin/Crypto to be “dead/a ponzi scheme/never coming back” over the years.
Bitcoin is not dead. In fact, it is more alive than it ever has been. The number of network addresses showing balances above 0.01 is at its highest point ever, north of 11 Million.
The chart above speaks for itself, and the trend is clear. The number of addresses holding balances over 0.01 BTC has continued growing, even during the largest market shock the industry has ever sustained.
The trend is very similar when looking at stablecoins.
The number of addresses holding over $1 USDC on-chain has continued to rise, even during recent weeks.
The FTX fallout resembles previous fraud cases. Fraud cases have been brought to justice in many industries. As an example, Elizabeth Holmes from Theranos was just sentenced to 11 years in prison. At its peak, her company was valued at $9 Billion.
Does this mean healthcare is a scam? No.
Another recent example is Mr. Bernie Maddoff, who once chaired the NASDAQ exchange. Mr. Madoff duped New York elites, including wall street bankers and politicians, while running the biggest ponzi scheme in history.
Does this mean financial services are a scam? No.
Fraud happens even within publicly traded companies, which are supposed to have the highest level of oversight. Examples include Enron in the U.S. and more recently Wirecard in Germany.
Does this mean all publicly traded companies are scammers? No.
The point we’re trying to make is that fraud can occur anywhere: from healthcare, to financial services, energy companies and even government. This, however, does not mean that the industry or sector itself is fraudulent. It means that there’s a bad actor in an otherwise good industry. The FTX story will be no different, and Sam should eventually be brought to justice for the pain and damage that he caused.
Having said all of this, the crypto industry will take some time to recover. Many enthusiasts just suffered significant losses, and their excitement (and portfolios) have been shattered. It will be up to the remaining players to rebuild trust with their clients. To do so, even more transparency will be required. Clients will rightfully demand more risk disclosures from all service providers, and lenders in particular will tighten their covenants to minimize any risks going forward.
A few examples of how the FTX collapse continues to impact our industry today are contagion (what is happening with Genesis Capital), and perception (what is happening to Coinbase stock and bond prices).
In the case of Genesis Capital, the once mighty lender is currently facing potential bankruptcy as it allegedly struggles to raise capital to make up its recent loss with FTX/Alameda.
Whether or not Genesis, or its parent company Digital Currency Group, will be able to raise enough capital to return all assets to its clients is still uncertain. This is impacting clients and entities that in some cases had no affiliation with FTX.
For further clarity, Ledn does not have any exposure to Genesis Capital, as we closed our last remaining loan with them earlier this year.
In the case of Coinbase, their stock is currently trading at a 52-week low, and their bonds are trading at 50 cents on the dollar.
For further clarity, Coinbase Ventures is an investor in Ledn.
As the saying goes, time heals all wounds. And this time should be no different.
We are certain that the industry will learn from this and come back stronger. We certainly have learned a lot from this experience and will work towards the goal of greater transparency and even better risk management.
S&P 500
The S&P 500 is still riding the high of last month’s soft inflation reading. It continues to trade north of the historical trendline dating back to 2009.
It is currently trading north of 3,900 points, which is substantially higher than the year-end estimates from most bank analysts. As a reminder, analysts from JP Morgan, Bank of America, Morgan Stanley and others pin their end-of-year estimate for the S&P 500 at 3,600 points - that represents about a 9% drop from current levels.
The target from bank analysts is consistent with the current investor sentiment.
A recent survey from Bank of America showed that fund managers have an almost consensus view that the global economy will enter into stagflation over the next 12 months. Stagnation means high inflation and low-to-none real growth in the economy - the net effect of which is a loss of purchasing power.
In terms of upcoming catalysts, there is only one Fed meeting left for the calendar year, and that is scheduled for December 14th. This week the minutes from the November meeting will be released. Many expect to see evidence of discussing the pace of rate hikes within members of the Fed. Some of them have already been outspoken about it to the media.
While this may seem like good news, it still represents even higher rates - at a point where the economy is already showing cracks.
This has prompted several Fed officials to even mention the “r” word.
In addition to raising rates aggressively, which raises the overnight interest rate (the “short” end of the yield curve), the Fed and other central banks have also been unloading its balance sheet, in other words, selling its longer-dated treasury bonds (the “longer” end of the curve).
This is what has many economists calling for stagflation, and bank analysts predicting markets going lower than current levels.
So far this current market has resembled the 2007-2009 fractal pretty closely. If history is any guide, we could be in for a few more months of red in equities before turning a corner.
Gold
Gold prices have been down slightly in the last 2 weeks, however, it has managed to hold on to most of its gains from 3 weeks ago and is still trading north of $1,700/oz. The moves in gold continue to mirror the inverse price action of the U.S. dollar index.
Gold prices are inversely correlated to the real return of U.S. Treasury bonds, and as we’ve covered in our previous dispatches, the real return of U.S. Treasury bonds has been rising as the Fed continues to hike interest rates and inflation starts turning a corner.
There is, however, a group of investors that have no interest in Central Bank debt notes and are preferring to stack gold: Central Banks.
Uzbekistan is purchasing quite a bit of gold recently, and so have other central banks.
Not surprisingly, the Central Banks that hold the most gold relative to their reserves, happen to be some that are not quite in the “good books” with the U.S. Take a look at the list below.
While these are relatively small central banks by comparison, it seems as though something changed after the Russia/Ukraine conflict. Certain central banks understand that debt from other countries can evaporate if there is ever a conflict or disagreement between the country that holds the debt and the country that issues the debt. This should bode well for commodities in general, gold in particular, and in the future, even bitcoin.
DeFi
On the DeFi front, Ethereum circulating supply has now dropped below pre-merge levels.
This is quite interesting to see, especially during a bear market. In other words, what this means is that the change to proof of stake has burned more ETH than it has minted since it occurred. This narrative is picking up steam within the investor community, however, in bitcoin terms, ETH is still stuck within its historical range - currently trading at 0.07 BTC.
Another interesting development was the fact that Circle, the company that operates the USDC stablecoin, announced last week that it has added an onramp API for developers to connect ApplePay to USDC settlement.
This development could get USDC in the hands of many people worldwide that use ApplePay daily, and accelerate the adoption of USDC in these markets. It’s important to keep in mind that most of the emerging world does not have access to ApplePay - meaning that this will mostly benefit users in developed markets. However, this signals that Circle and other stablecoin operators are working hard to make stablecoins easier to use in everyday life.
Mining
The difficulties continue for bitcoin miners of all sizes. The most recent sign of stress is the fact that bitcoin miners have sold almost 400% more bitcoin than their average.
The increased selling means that many are having to liquidate the bitcoin holdings that they had accumulated over time to cover their operating expenses.
At current difficulty levels and bitcoin price, many miners are under water - meaning that all of the bitcoin they mine does not generate enough revenues for them to cover their expenses. They are having to dip into their equity or sell more shares to stay afloat. If this dynamic continues, it would not be surprising to see even more miner capitulation in the coming weeks.
What's ahead for the week
It’s a short and light week in terms of data and events given the Thanksgiving holiday in the U.S. Here’s a summary of what could potentially move markets.
Tuesday
10:00 AM EST - First day hearing for the FTX bankruptcy proceedings
02:15 PM EST - Fed Speech - Kansas City Fed President Esther George
Wednesday
08:30 AM EST - U.S. Labour Market statistics - initial & continuing jobless claims
02:00 PM EST - FOMC Meeting Minutes
Thursday
U.S. Markets closed for Thanksgiving holiday
Friday
U.S. Markets close early for Thanksgiving Holiday
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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Notice for U.S. Residents: Effective April 4, 2022, U.S. clients will no longer be able to earn interest on any newly deposited funds in their BTC and/or USDC Savings Accounts, where available; however, they will continue to earn interest on their pre-existing balances in their BTC and/or USDC Legacy Savings Accounts.
This article is intended for general information, educational and discussion purposes only, it is not an offer, inducement or solicitation of any kind, and is not to be relied upon as constituting legal, financial, investment, tax or other professional advice. This article is not directed to, and the information contained herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to law or regulation or prohibited by any reason whatsoever or that would subject Ledn and/or its affiliates to any registration or licensing requirement. This article is expressly not for distribution or dissemination in, and no Ledn product or service is being marketed or offered to residents of, the European Union, the United Kingdom, the United States of America or any jurisdiction in Canada, and such product or service may only be marketed or offered in such jurisdictions pursuant to applicable laws or reliance on regulatory exemptions. A professional advisor should be consulted regarding your specific situation. Digital assets are highly volatile and risky, are not legal tender, and are not backed by the government. The information contained in this publication has been obtained from sources that we believe to be reliable, however we do not represent or warrant that such information is accurate or complete. Past performance and forecasts are not a reliable indicator of future performance. Any opinions or estimates expressed herein are subject to change without notice. This article may contain views or opinions of the author that do not necessarily reflect the opinions, standards or policies of Ledn. We expressly disclaim all liability and all warranties of accuracy, completeness, merchantability or fitness for a particular purpose with respect to this article/communication. Read our Disclaimers at https://ledn.io/legal/disclaimers
