Week 22, 2023 - Weekly Market Outlook

TLDR

• The U.S. debt ceiling crisis sparks political debates within the Republican party.
• Cryptocurrency entity Circle protects its reserves amidst the debt ceiling situation.
• LSDfi implements emergency protections due to potential unsheth vault security risks.
• Growth in Liquid Staking Derivatives (LSDfi) market highlighted.
• Analysis of Bitcoin and Ethereum amid the debt ceiling talks.
• DeFi sector overview, with Polygon outperforming.
• Review of the week's top gainers and losers in crypto.

Introduction

In this article we shed light on various developments in the crypto sector. This article aims to provide a comprehensive analysis of the current political and financial landscapes, focusing on the potential impact of the U.S. debt ceiling crisis and the recent developments within the Republican party. We will also take a closer look at the intriguing world of cryptocurrencies, discussing the role of stablecoins in this potential financial turbulence and exploring recent developments in the Liquid Staking Derivatives (LSDfi) space. Alongside this, we delve into the ongoing issues with LSDfi's unsheth vault and how the team's prompt response could serve as an example to the crypto industry. We round off our discussion with a detailed examination of the crypto market data, the DeFi sector, and the best and worst performers of the week.

Macro: The Debt Ceiling

In the past few weeks, the Republicans in the House of Representatives have been relatively coordinated. In April, they proposed a bill to increase the debt limit, featuring substantial spending cuts. This weekend, a compromise with President Biden was reached, seeming to satisfy both parties to some extent. Despite criticisms from hardline Republicans and Democrats, the bill looked set to pass.

However, internal disputes among Republicans have now cast a shadow over the agreement. Influential hardline Republican, Chip Roy of Texas, publicly urged his party not to support the bill. Another conservative Republican, Dan Bishop of North Carolina, criticized the compromise and his party's leader, Speaker Kevin McCarthy, accusing him of dishonesty and lack of courage. External conservative groups like the Club for Growth and the Heritage Foundation, also condemned the agreement.

Whether these objections are merely posturing or pose a genuine threat to the bill's success is uncertain. Despite the turmoil, McCarthy remained hopeful about the bill passing and the House Rules Committee granted a procedural win by allowing the bill to be debated in the House. If the bill does pass, this debate will be seen as a minor hiccup in achieving a somewhat scruffy victory. Nevertheless, it highlights the ongoing disorder within Republican Party politics. Compared to this, the Democrats in Congress have shown more unity over the past 15 years, leading to the passage of more comprehensive legislation on healthcare, climate change, and other issues.

Details of the debt limit deal include suspending the nation's debt limit until January 2025, imposing caps on some spending, and retracting $10 billion in IRS funding. Additionally, it introduces new work requirements for older Americans on food stamps while extending food stamp access for veterans and the homeless. It also marks the end of President Biden's freeze on student loan repayments and fast-tracks the construction of a contentious pipeline. If this debt-ceiling bill doesn't pass, and the government defaults, the nation could face severe turbulence. Risk-assets would cascade lower, they could potentially fall as much as 50%.

Circle protecting their reserves.

Circle Internet Financial, the issuer of the USD Coin (USDC) stablecoin, has recently taken steps to safeguard its reserves against potential fallout from the U.S. debt ceiling crisis. This has involved the complete removal of U.S. Treasury bonds from its USDC reserve fund. This reserve fund, managed by global investment powerhouse BlackRock, currently holds all its $24 billion assets in overnight repurchase or "repo" agreements as of May 30, as shown on the fund's website. This is a significant shift from the end of April when the fund held over $30 billion in U.S. Treasury bonds, according to Circle's monthly report.

The fund's last remaining Treasury bond, worth $4 billion, matured on Tuesday. This change marks Circle's strategy to shield the $29 billion USDC stablecoin from possible instability in the bond market amid ongoing negotiations in the U.S. government to prevent a default. Circle's CEO, Jeremy Allaire, stated in early May that the company would avoid holding Treasury bonds in the USDC reserves that were due to mature beyond the end of the month. Alongside this, throughout the month, Circle's reserve fund has been systematically replacing maturing bonds with overnight repurchase agreements.

Unsh Hack

There's a buzz in the world of cryptocurrency due to potential security risks involving LSDfi's unsheth vault. Some on-chain data suggests there might be issues with withdrawals, which is causing worry among users and market watchers. But the Unsh team has acted quickly to implement emergency protections. When diving deep into the on-chain data, it appears that the unsheth vault could be stuck in a withdrawal stalemate. These findings are unsettling, but they need further investigation to confirm. The ambiguity surrounding this situation adds to the intrigue about this significant cryptocurrency entity.

Responding to these rising concerns, The unsh team promptly activated their backup plan. They released a statement on Discord, reassuring users that all associated Ethereum funds are safe. This communication helped to calm any rising fears among the user base. This potential hurdle highlights the intricate challenges of the cryptocurrency world, especially regarding the safety of digital assets. Yet, the quick reaction demonstrates their readiness to manage such situations, which could serve as an example for other groups in the industry.

Looking ahead, unsh’s future is still bright. Their swift and proactive approach in addressing potential security threats shows their commitment to protecting their users, which helps to reinforce trust. This solid crisis management suggests that unsh has a promising future ahead, continuing to innovate and grow in the ever-evolving crypto market.

The Narrative

With this increased interest staking in Ethereum. Liquid Staking Derivatives have also grown. A new sector growing in the space is the Liquid Staking Derivatives finance space.

LSDfi builds on LSDs to create new market opportunities related to staking yields, validator monopolies, slashing risks, and even validator censorship. These mechanisms provide unique opportunities for users, promoting healthy competition among validators and preventing one party from monopolizing the consensus layer.

At the core of LSDfi are LSDs, LSDs are tokens that users receive when they stake their assets. These tokens enhance network security and allow users to earn an additional yield on top of their staking rewards. An essential feature of LSDs is that they provide users with flexibility and liquidity. This means users can still reap the benefits of staking crypto without locked assets. LSDfi represents staked assets and can be traded, loaned, restated, or used for arbitrage trading on secondary markets. To learn more about upcoming projects in the space, read more here.

Crypto Market data

After Bitcoin broke its 8 Week range, it was rejected from previous support. Due to the Debt ceilings talk this week, it has reclaimed its previous support. Bitcoin's failure to Hold the 8-week support could cause concern. There are a couple of scenarios that could play out here. Cryptocurrency could trade higher based on the US equity market having a bullish trend and looking good. That does not blindly mean buying right now. 2 Possibilities of getting crypto exposure. 1. We hold support. Bitcoin holding support will be bullish for crypto; I target about $30,000 as the first take profit. 2. Buying $24,000- $25,000. I have spoken about the 9-month retest for the last two months. I still stand by this. Buy the 9-month retest; if it doesn't hold, you can buy Bitcoin below $20,000. Buying below $20,000 is one of the best cases. It is crucial to note that these scenarios are hypothetical and can be changed because of different information.

In my opinion Ethereum looks awful. It has been steadily trending lower. Until it can break the bearish market structure, it remains an asset I'm not buying. Until $2000 is reclaimed, I plan to buy Ethereum at $1450 or $900. Till then, Bitcoin looks like the better chart.

The DeFi Sector

With Ethereum being so weak, there wasn't a chain that did extremely well. The best-performing chain of this week has been Polygon.

While Polygon outperformed Ethereum this week, it outperformed so well because of Azuro. Azuro has ascended about 7094% in the last week. Azuro is a decentralized betting protocol that aims to build the foundation for decentralized betting markets by utilizing three of crypto's main primitives: Prediction Markets, NFTs, and DAO governance. Azuro's novel "Liquidity Tree" pool can be likened to a betting AMM, which addresses key pain points associated with classic betting and current on-chain betting solutions. Liquidity providers deposit funds into Azuro's pools, and bettors bet against the liquidity providers according to the odds set by the protocol. Bettors' losses are shared between Azuro DAO (revenue), LPs, frontend providers, and data providers (supply-side fees).

Best and worst performers

There isn't a narrative with the top gainers. An interesting project here is Artificial Liquid Intelligence (ALI). The US equity market has started to run with the AI narrative, and NVIDIA and C3.ai are two companies that have done well in the past week. ALI being an AI token has also done well. As long as NVIDIA keeps doing well and the US equity market keeps running with the AI narrative, other crypto AI tokens could also do well in the coming days.

There isn't any narrative about the losers, and Optimism is one of the biggest losers as there is a large token unlock. Over the weekend, about 1.27 million Optimism will be released, which could cause Optimism to fall further.

The week ahead

Bitcoin has reclaimed its 8-week range support. A failure to hold support would mean that this failed bullish retest. When an asset fails a bullish retest of its range, it usually takes a while to find balance again. We will be waiting for that balance to take place. That balance might take place at $24,000-$25,000. Till then, there is no point trying to catch a falling knife. The only person that cares about catching a falling knife is a degenerate gambler. Please wait for the knife to fall and then pick it up. The chances of you hurting yourself are smaller. The same goes for trading. Wait for the market to present an opportunity. Till the opportunity presents itself, it's best to wait from the sidelines. It's also great to start researching new narratives and projects. You can read those here.