Original title: Weekly: Suspended Animation
Original author: David Han (Institutional Research Analyst)
Release date: April 5, 2024
Key takeaways
Crypto markets, like stocks and other risk assets, have shown a lower trend as the Federal Reserve continues to be cautious about cutting interest rates amid reflation risks.
Gold has been the biggest winner in this market environment, with prices hitting new highs amid increased central bank buying, rising geopolitical risks and concerns about reflation.
The launch of Endgame and recent governance changes to increase revenue have brought widespread attention to Maker, although these seemingly rapid changes are also considered high risk by other protocols such as Aave.
market view
Cryptocurrency markets fell sharply lower after Federal Reserve Chairman Jerome Powell expressed caution about cutting interest rates during meetings on March 29 and April 3. Uncertainty about market direction is not just reflected in the cryptocurrency market, stocks and other risk assets have also performed mediocrely over the past week. Coupled with concerns about reflation, the implied magnitude of rate cuts by the end of the year (based on federal funds futures) has even become more hawkish than the Fed for the first time in 2024. As of April 4, the market expects year-end interest rates to be 4.631, well above the 3.825 forecast in early January (and above the Feds midpoint target of 4.625).
Gold has been the biggest winner in this environment, with prices hitting new highs amid increased central bank buying, rising geopolitical risks and concerns about reflation. It’s worth noting that gold’s appreciation is typically associated with interest rate cuts by the Federal Reserve and rising inflation. In view of the markets recent hawkish view on interest rate cuts, we believe that golds performance sends a signal that relative to changes in the Federal Reserves interest rates, gold price fluctuations are too highly affected by the inflation rate. A sudden rise in inflation could turn out to be more problematic than expected.
In our view, the growing acceptance of Bitcoin as a form of “digital gold” may create demand from a new subset of investors in this market system. We therefore believe there will be more aggressive buying on the downside compared to previous cycles, even as volatility persists during price discovery. We believe that Bitcoins access to broader funding channels due to the launch of the US Spot Bitcoin ETF may also help curb volatility (relative to previous cycles).
The impact of these ETFs and the inflow of greater institutional demand can be seen in the open interest of Bitcoin futures, which can be used as hedging instruments. CME Bitcoin futures open interest is $9.9 billion, which has exceeded any single centralized exchange (CEX) and accounts for more than one-third of the total Bitcoin futures market (including perpetual contracts and fixed futures). In our view, the capital unleashed by ETFs may represent the most fundamental shift in market structure from the 2020-2021 cycle to date. These capital releases, coupled with the upcoming Bitcoin halving (expected to occur on April 20-21, depending on changes in the network hash rate) and other positive catalysts, make us think the market will be better throughout the second quarter. Performance remains constructive.
On the Chain: The Final Feast
Maker has been performing well over the past few weeks, thanks to its Endgame announcement on March 13. The announcement details a series of changes in four main phases. Phase 1 revolves around the rebranding of DAI and MKR tokens (including re-denominated MKR into a new governance token at a ratio of 1:24,000), updating governance protocol incentives, establishing a new asset bridge, and launching Spark subDAO. Phase 2 involves expanding subDAO, asset bridges, and governance responsibilities. Phase 3 outlines plans to move Maker to an independent chain over the next few years. The fourth stage is to make all basic governance contracts immutable.
Airdrop speculation has increased around MKR holders and DAI stakers as more details emerge, particularly regarding the future subDAO governance token. Given the widespread focus on airdrops in the industry, we believe part of the increase in token valuations is driven by future airdrop token values (in addition to other recent governance proposals that have increased its protocol revenue). In our view, Makers changes are a continuation of its DeFi protocol movement to more concretely implement plans that have been mentioned for years (such as Uniswaps fee switch). We believe that these long-running DeFi protocols may be considered somewhat stagnant at the moment, but their brand and market share are in a stronger position to capitalize on innovation due to the network effects of their protocol liquidity.
While attention has been focused on Makers Endgame launch, recent governance changes in Maker have caused some controversy in the DeFi community. Maker has quickly adopted a number of proposed changes, including integrations with Morpho and USDe, and is considering significantly expanding these operations by increasing collateral limits. While these changes will significantly increase Makers revenue, some believe the speed of the changes has significantly increased the level of risk. In light of this, the Aave community has been seriously discussing removing the ability of DAI to be used as collateral. These discussions have received support from key Aave leaders, including its founder Stani Kulechov, who is fully in favor of removing DAI from all Aave markets.
We believe this conflict could signal a shift in the decentralized stablecoin market. Relative to DAI, Ethenas USDe has gained rapid market share due to its higher yield and airdrop incentives. Both assets have inherent limitations in their issuance capabilities (compared to centralized stablecoins). DAI supply requires over-collateralization and is therefore subject to lender collateral. At the same time, the dollar is constrained by the futures open interest market, and if its short interest becomes too large, interest rates will become unsustainable.
Creating and scaling new decentralized stablecoins remains challenging due to the network effects of liquidity. DefiLlama tracks more than 160 stablecoins, most of which have very little use outside of their original protocols. Although the number and market capitalization of decentralized stablecoins continues to increase, their growth rate is not as fast as that of centralized stablecoins. The market share of USDC and USDT stablecoins has grown to 90%. With the advantages of cross-chain native stablecoin issuance, and the user experience improvements of asset bridges supported by technologies such as Circle cross-chain transfer protocol, we believe that the adoption of decentralized stablecoins may continue to face challenges relative to centralized stablecoins. challenge.
Crypto and traditional finance
Source: Bloomberg
Coinbase Exchange and CES Insights
Markets have calmed down over the past week. BTC is trading within a tight $2,000 range, and inflows into the U.S. Spot Bitcoin ETF, while positive, have slowed. Overall, cryptocurrency trading volumes also continue to slow as the market attempts to find the next narrative that can propel its gains. Bullish traders received some confidence and the risk on their long positions calmed down a lot. Funding rates for BTC, ETH, and various altcoins are currently near their lowest levels this year. The BTC halving, expected to take place on April 20 or 21, could be a catalyst for higher prices, but it will have to contend with a period of weakness that has been common for both crypto markets and other risk assets.
Coinbase platform trading volume (USD)
Coinbase platform trading volume (asset ratio)
funding rate
Notable Crypto News
mechanism
Spot Bitcoin ETF monthly trading volume nearly tripled in March to $111 billion (The Block)
Supervision
TRON Foundation and Justin Sun ask the US court to dismiss the SEC’s lawsuit (Coindesk)
conventional
Ethena’s tokens will be listed on the exchange today and airdrop claims will begin (The Block)
Vitalik Buterin and Arthur Hayes weigh in on meme coin craze (The Defiant)
Coin Library
The future of AI-driven content at Coinbase: Expanding horizons and enhancing user experience (Coinbase Blog)
global vision
Europe
Russia discusses testing digital ruble for budget payments (bitcoin.com)
21 Shares Launches Toncoin Staking ETP (The Block) on the Swiss Stock Exchange
The United States and the United Kingdom are investigating whether a $20 billion cryptocurrency transaction violated Russian sanctions (Bloomberg)
Asia
Hong Kong financial company VSFG plans to launch a spot Bitcoin ETF (The Block) as early as May
HSBC launches tokenized gold to Hong Kong retail investors (CryptoNews)
Singapore expands cryptocurrency regulation, introduces enhanced user protection requirements (The Block)
Indonesia Implements Sandbox for Crypto Companies (Finance Magnates) Ahead of OJK Oversight
Taiwan’s encryption industry received government approval to establish an industry association (The Block)
Big events for the week ahead
