With the market growing more accustomed to the Ukraine war, and inflation and interest rate rises, the Crypto Fear and Greed Index has recovered slightly to 30, or simply ‘Fear’. Bitcoin has spent most of the week in the mid AU$50Ks, and it’s currently 1% up on seven days ago to trade around AU$55,500 (US$41K). With signs the years-in-the-making Merge is finally coming closer to reality Ethereum jumped 8% to trade at AU$3,900 (US$2.8K). Separately, XRP increased 5% and Cardano and LINK are up 10%.
From the IR OTC Desk
The US Federal Open Market Committee (FOMC) delivered its first interest rate increase in more than three years, raising the federal funds rate to 0.25%-0.50%. In addition to the interest rate increase, the Federal Funds rate year-end projection (an anonymous FOMC committee survey), moved a full percentage point higher than the forecast of the December 2021 meeting, to a consensus funds rate of 1.9%. This would represent an additional six 25bp hikes expected by the committee before the end of the calendar year – or one per scheduled meeting in 2022.
Last week we mentioned two interesting topics. 1) Diverging underlying views from the FOMC voting members and 2) Whether the committee will address balance sheet reduction (quantitative tightening).
Diverging views within the FOMC voting committee have become quite telling, with St. Louis Fed President James Bullard dissenting, in favour of a 50bp rate increase; and while the 25bp increase was a view shared by Chair Jerome Powell, and Vice Chair Lael Brainard at the time, Chair Powell’s overnight comments that the Fed must move ‘expeditiously’ and possibly ‘more aggressively’ have the bond market questioning the smooth 25bp hiking profile, communicated at the March meeting.
Regarding the balance sheet, Chair Powell confirmed that the FOMC are ‘working on the details’ of balance sheet reduction and will soon deliver an outline of asset reduction to the market. Watch this space.
In Australia, the Unemployment Rate (Feb) printed at 4%, to be at the lowest rate since 2008. The Australian Federal Budget is due for release on Tuesday 19th March – and it is expected that shortly after this release, the Federal Government will announce the date for the Federal election. An enormous amount for the Reserve Bank of Australia to consider in their next few meetings.
On the OTC desk, Russian/Ukraine geopolitical headlines are having a reduced impact on market pricing, which has remained relatively sedate over the course of the week. ETH/BTC has outperformed over the week, as the anticipation of the ETH ‘merge’ begins to alter price action and the underlying demand for ETH. We continue to see a high volume of customer enquiries into staking coins via the OTC desk. This week UST (Terra), ADA (Cardano), USDT, USDC and LTC have all seen strong interest. As global monetary policy continues to gyrate risk assets, particularly US equities and core commodities, it will remain important to monitor underlying cryptocurrency correlations.
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The Merge incoming
With Ethereum co-founder Vitalik Buterin on the cover of TIME magazine, all signs are pointing to the Ethereum Merge finally happening in the coming months. The Kiln testnet successfully trialled the move from Proof of Work to Proof of Stake, with just the odd hiccup. The Ethereum supply squeeze is on in earnest with more than 2 million ETH burned since the fee burning mechanism was introduced in August last year. More than 10 million ETH is now staked on the Beacon chain and around US$1.61 billion (AU$2.16B) worth of Ethereum has left crypto exchanges so far in 2022, with the balance remaining falling to its lowest level since September 2018. It’s not all good news though, with Ethereum dev Peter Szilagyi expressing misgivings about the ever increasing complexity of the platform. “We are already past the point of anyone having a full picture of the system. This is bad,” he wrote.
Blockchain Week kicked off at the Australian Securities Exchange in Sydney yesterday with appearances by many notable names in the space. Senator Andrew Bragg said he wants the recommendations from last year’s Senate inquiry consolidated into a Digital Services Act, while Financial Services Minister Jane Hume said that digital assets could add around 2.6% to Australia’s GDP and create around 200,000 new jobs by 2030. “If you want to be a pioneer on the virtual frontier of innovation, Australia is open for business,” she said. Today the conference looks at DeFi, DEXs and DAOs, the event moves to Melbourne on Wednesday for NFTs, Perth on Thursday for regulations and Brisbane on Friday for startups. Throughout the duration of the week, Independent Reserve will be sponsoring as well as appearing in multiple panel discussions.You can join in online if you missed out on a massively oversubscribed in-person ticket.
Steve Vallas, CEO of Blockchain Australia | Day 1 Live Stream
There was a flurry of activity around crypto inquiries, papers and reviews this week. Treasurer Josh Frydenberg announced the release of a paper “seeking industry’s feedback by the end of May on proposed new crypto asset licensing and custody requirements.” It’ll also cover the first stage of a “broader token mapping exercise” and be complete by the end of the year. The terms of reference were also released for a review by the Board of Taxation into crypto taxes, particularly capital gains, with the promising rider that “it will not increase the overall tax burden.” The terms of reference seeking advice from the Council of Financial Regulators (CFR) on the issue of debanking crypto users were also released, to be completed mid-year.
NFTs go Meta, ACCC goes Facebook
Meta CEO Mark Zuckerberg confirmed at South by Southwest Festival that NFTs are coming to Instagram. Closer to home the ACCC is taking Facebook to court for allowing a plague of scam crypto ads featuring celebs. It noted the platform had profited from ads that had seen users ripped off for hundreds of thousands each.
First OTC transaction by major US bank
Galaxy Digital said it has facilitated the first OTC crypto transaction (of a Bitcoin non deliverable option) by a major bank in concert with Goldman Sachs. “This is an important development in our digital assets capabilities and for the broader evolution of the asset class,” said Max Minton, head of digital assets for Goldman’s Asia-Pacific division.
SEC stifling crypto innovation
While US Senator Elizabeth Warren and Congressman Brad Sherman are introducing legislation to crack down on crypto, other legislators are fighting on its behalf. A bipartisan letter signed by eight members of congress expressed concern that SEC boss Gary Gensler’s pursuit of crypto firms was “overburdensome” and suffocating the industry. “My office has received numerous tips from crypto and blockchain firms that SEC Chair @GaryGensler’s information reporting ‘requests’ to the crypto community are overburdensome, don’t feel particularly… voluntary… and are stifling innovation,” tweeted Republican Minnesota Congressman Tom Emmer as he released the letter.
Terra founder adding US$10B in BTC to stablecoin reserves
Terraform Labs (TFL) founder Do Kwon has outlined plans to accumulate a sizable US$10 billion worth of Bitcoin to add to the project’s stablecoin reserves. The Terra blockchain platform specialises in stablecoin minting via its algorithmically pegged USD stablecoin Terra USD (UST – not to be confused with Tether’s USDT). It has now been made clear that the native underlying asset (LUNA) would not be sold to build its reserves but will be backed by over US$10 billion in BTC reserves, opening “a new monetary era of the Bitcoin standard.”
When asked if this was a mere idea or the accumulation plans were already in motion, Kwon responded, “I don’t understand the distinction, we’re already buying bitcoin”. Furthermore, when asked what the BTC reserves will be used for, Kwon responded that the funds will be used to backstop short-term UST redemptions and for a decentralised forex reserve.
Bits and pieces
In between issuing stirring appeals to world leaders and dodging Russian attacks, Ukrainian President Volodymyr Zelenskyy somehow found the time to sign the Virtual Assets bill into law, launching a legal market for cryptocurrencies in Ukraine. A new survey carried out by El Salvador’s chamber of commerce found that only 14% of businesses had made a Bitcoin transaction since the Bitcoin Law went into effect in September. A negative story in the Financial Times revealed offhandedly that El Salvador has seen US$1.5B (A$2.03B) in demand for its $1B (A$1.35B) Bitcoin (“volcano”) bonds. The Lightning Network is growing at an annualised rate of 30% per year. Pantera Capital CEO Dan Morehead told Bloomberg TV that every two years “ten times more people use cryptocurrency than they did in the past … and every two years the price of crypto’s gone up 10x”. He went to predict a US$400K (AU$541K) price by 2025. BitMEX founder Arthur Hayes went one further and predicted a US$1M (AU$1.35M) price.
BTC Lightning Network Capacity | Source: Glassnode
Until next week, Happy Trading!