Week 24, 2023 - Weekly Market Outlook

TLDR

• Fed maintains steady interest rates, signals potential hikes later this year.
• BlackRock files for a Bitcoin ETF, the iShares Bitcoin Trust.
• Tether (USDT) deviates slightly from its USD peg due to imbalance in Curve's 3pool.
• Bitcoin experiences a volatile week, with the price dropping to as low as $24,800.
• Ethereum trends lower with potential buying opportunities at $1450 or $900.
• Growth in Liquid Staking Derivatives (LSDfi) market highlighted.
• Analysis of Bitcoin and Ethereum
• DeFi sector overview
• Review of the week's top gainers and losers in crypto.

Introduction

In the volatile world of crypto, this week has been particularly filled with significant events and developments. From the Federal Reserve's rate pause to BlackRock's filing for a Bitcoin ETF, and Tether's depeg scare in the crypto realm, all facets of financial markets have experienced their share of volatility. Adding to this, we've also seen an increase in interest in Ethereum staking and the rise ofLSDfi. This article delves into these major events, providing an analysis of the current state of markets and providing perspectives on what lies ahead. We also go through the performance of the crypto market, highlighting the market data and shedding light on the DeFi sector. Lastly, we provide a brief review of the best and worst performers of the week and a look at the week ahead.

Macro: FOMC rate pause

The Federal Reserve has just decided to keep interest rates steady, putting a halt to a series of rate increases that we've been seeing since March 2022. Additionally, the central bank hinted that they might need to raise rates later this year, with many committee members expecting a possible half-point increase. Federal Reserve Chair Jerome Powell pointed out a particular problem - the fact that rental costs are not falling as expected. Powell said, "You're just not seeing a lot of progress, not the kind we want to see," emphasizing how serious this issue is. The futures markets are also reflecting heightened anticipation among traders regarding the Federal Reserve’s actions.

According to the CME FedWatch Tool, there is approximately a 70% probability of a rate hike during the Fed's meeting scheduled for July 25-26. It is germane to note that Chairman Powell clarified that the decision to retain rates was specific to the current meeting, and that no decisions regarding future meetings have been taken at this juncture. Historically, apart from a chaotic period in the 1970s when inflation was out of control, the Fed rarely starts raising rates again after such a pause. This means we could see an end to rate hikes for the foreseeable future, unless something major, like a new Great Depression, occurs.

So, where do we stand? The Fed is carefully watching the economy, especially inflation and rental costs. Market players are eagerly waiting to see what the Fed does next, and all eyes will be on how effective the central bank's strategies are in the coming months. Whether the era of rate hikes is truly over will become clearer with time.

BlackRock Bitcoin ETF

BlackRock, the world's largest asset manager, has taken a significant step in the cryptocurrency domain. On Thursday, it filed for a Bitcoin exchange-traded fund (ETF). The move comes as crypto faces increasing regulatory scrutiny.BlackRock's new product, dubbed the iShares Bitcoin Trust, will be backed by Coinbase Custody, as revealed in the filing to the U.S. Securities and Exchange Commission (SEC). Yet, it is important to note that the SEC has not yet given the green light to any applications for spot Bitcoin ETFs.

However, the iShares Bitcoin Trust isn't a traditional spot ETF. In essence, it is a grantor trust, and the differences between the two types of financial instruments are significant. Shares of the iShares Bitcoin Trust denote fractional undivided interests in the Bitcoin held by the Trust. Conversely, a spot Bitcoin ETF would directly own Bitcoin, and its shares would represent ownership in the ETF itself.

The iShares Bitcoin Trust isn't governed or registered as an investment company under the Investment Company Act of 1940, unlike a spot Bitcoin ETF which would be required to register under this Act and adhere to its regulations. The aim of the iShares Bitcoin Trust is to reflect Bitcoin's price performance before expenses, whereas a spot Bitcoin ETF seeks to track Bitcoin's spot price. For tax purposes, the iShares Bitcoin Trust operates as a grantor trust, meaning any gains or losses from Bitcoin sales are passed on to shareholders. In contrast, a spot Bitcoin ETF, functioning as a regulated investment company (RIC), typically wouldn't be taxed at the fund level.

Finally, while the iShares Bitcoin Trust shares will be traded on NASDAQ, a spot Bitcoin ETF would likely be listed on a U.S. stock exchange. To sum up, the iShares Bitcoin Trust serves as a conduit that issues shares symbolizing fractional interests in Bitcoin, whereas a spot Bitcoin ETF would be a regulated fund that directly holds and handles Bitcoin and issues shares signifying an ownership stake in the fund.

Tether De-peg

The Tether stablecoin (USDT) experienced a slight deviation from this peg due to an imbalance in Curve's 3pool. The price of USDT dropped by 0.3% to about 0.997. This change occurred as its weightage in the Curve 3pool rose to over 70%, up from the regular 33.1%.

Curve's 3pool is a significant pool of stablecoins in decentralized finance, containing large quantities of the top three stablecoins: USDT, USD Coin (USDC), and Dai (DAI). When one stablecoin's weightage in the pool rises significantly, it usually points to extensive selling of that asset. A notable increase in the selling of USDT for DAI or USDC was observed as USDT's weightage reached around 73.8%. A similar surge occurred in November 2022 when USDT's concentration in Curve's 3pool exceeded 50% during the FTX collapse.

The imbalance was primarily caused by a large transaction from a 'whale' address known as CZSamSun. This address borrowed 31.5 million USDT, swapping it for USDC, which led to a slight deviation in USDT's U.S. dollar peg value. With 17,000 Ether (ETH) and 14,000 staked Ether (stETH) as collateral, CZSamSun exchanged the borrowed sum into USDC using the 1inch Network. CZSamSun then deposited a total of $31 million into Aave v2 and v3. The address also took out a USDT loan of 12 million from v3 and deposited it into v2.

Around 20 minutes after this transaction, another address mortgaged 52,200 staked Ether (stETH) through Aave v2 and borrowed 50 million USDC, leveraging the USDT/USDC price difference. This minor deviation in USDT's price caused the USDC/USDT trading pair on Binance to hit a new yearly high of $1.0034. The distribution in Curve's 3pool was approximately 73.79% USDT, 13.05% DAI, and 13.16% USDC.

Tether's chief technology officer, Paolo Ardoino, addressed the situation on Twitter, assuring the crypto community that there was no cause for alarm. Ardoino also debunked market rumors about Tether's depegging. The recent depeg scare follows a similar situation that occurred with USDC a few months ago, causing significant disruption for many investors. USDC depegged below $0.90 in March due to Circle confirming it had over $3 billion trapped with Silicon Valley Bank. Despite Circle gathering enough capital to re-peg USDC within two days, the resulting panic led to many traders selling their USDC at a loss.

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 the potential of the market, read more here.

Crypto Market data

This week has been a week filled with volatility. Bitcoin traded as low as $24,800. After 12 weeks, Bitcoin traded at Hight-Time-Frame (HTF) support. I have bought small amounts of spot Bitcoin. I have been waiting for this for the last 12 weeks, the HTF retest of a 9-month range. If it doesn't hold, Bitcoin trades back at the yearly open. I am not expecting a 50% rally with this buy. I am expecting a dead cat bounce. The plan is to keep buying the dip till about $23,500 and sell at about $27,500. If $27,500 is cleared, I don't see why I can't make new highs. Bitcoin's reclaiming $27,000 will indicate some strength in the market. If $23,500 is not held on the daily or weekly, the probability for Bitcoin to trade at $20,000 is high.

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 $1750 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 Pulsechain.

Pulsechain is the Proof of Stake chain. PLS is the native token of the chain, the token was created by Richard Heart. I think Pulse is a huge scam. One of the red flags surrounding Pulsechain is the fact that its native token, PLS, is untracked on platforms like CoinMarketCap. The absence of reliable market data raises concerns about transparency and liquidity. Before his involvement in Pulsechain, Heart was associated with projects that generated controversy and skepticism within the cryptocurrency community. Heart gained initial attention through the launch of Hex, a cryptocurrency that was widely criticized for its alleged pyramid schemes and questionable marketing practices. If you want to use a scam of a chain, be my guest, I won't be touching the chain or token with a 10-foot pole.

Best and worst performers

Amid all the narratives and FUD, we still had a project go up over 30% this week. Kaspa is a proof-of-work layer-one, which implements the GHOSTDAG protocol. There isnt any narrative present in the top gainers.

There isn't any narrative when it comes to the losers. Polygon being here is no surprise. Polygon was sold by Robinhood because Robinhood doesn't support crypto securities anymore.

The week ahead

After 12 weeks, Bitcoin traded at Hight-Time-Frame (HTF) support. I have bought small amounts of spot Bitcoin. I have been waiting for this for the last 12 weeks, the HTF retest of a 9-month range. Bitcoin probably trades back at the yearly open if it doesn't hold. I am not expecting a 50% rally with this buy. I am expecting a dead cat bounce. The plan is to keep buying the dip till about $23,500 and sell at about $27,000. If $27,500 is cleared, I don't see why I can't make new yearly highs. Bitcoin's reclaiming $27,000 will indicate some strength in the market. If $23,500 is not held on a daily or weekly timeframe, the probability for Bitcoin to trade at $20,000 is high.

If you haven't bought the dip because of fear or uncertainty, waiting from the sidelines is best. It's also great to start researching new narratives and projects. You can read those here.