Weekly Market Outlook

Introduction

The past week in the financial markets has been an eventful one, to say the least. The world of cryptocurrency was shocked by the closure of Silvergate. Shortly after, Silicon Valley Bank (SVB), a bank that makes loans to startups collapsed.

One of the companies banking with SVB was Circle, the company behind the stablecoin USDC. On Friday the 10th of February, this information started circulating and rapidly caused widespread panic. USDC derives its trust and stability from the fact that the crypto-dollar can always be redeemed on a 1:1 basis for traditional dollars. Once this was in question, investors started selling USDC everywhere they could. This caused USDC to de-peg as there were lots of sellers but very few buyers.

This caused a panic in the space, and Circle came out with a blog post that they were banking with SVB and had $3.3 billion (about 8% of their total $41.2b reserves) deposited in the bank. They stated that they were positive that they would still get their $3.3b back through the FDIC and reassured that they were also in a position to cover the hole themselves in the worst-case scenario.

On top of that, regulators responded quickly to the bank run and on Sunday evening, March 12, 2023, Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg issued a statement informing Silicon Valley Bank and Signature Bank depositors and other customers that they would "have access to all of their money”. These measures caused the USDC price to crawl back towards its 1:1 peg.

(Read more about this story in our dedicated article here)

Arbitrum

In other news, Arbitrum, the most significant player in Ethereum's layer two scaling landscape, is finally getting a token. The Arbitrum Foundation announced on Thursday that ARB, Arbritrum's new token, will be airdropped to community members on Thursday, March 23. According to the Arbitrum Foundation, ARB will mark Arbitrum's official transition into a decentralized autonomous organization (DAO), meaning ARB holders can vote on key decisions governing Arbitrum One and Arbitrum Nova.

ARB’s total circulation will number 10 billion. The Arbitrum community will control 56% of those tokens – the airdrop will grant 11.5% of the total supply to eligible Arbitrum users and 1.1% to DAOs that operate in the Arbitrum ecosystem. The remaining community tokens will go to a treasury controlled by the new Arbitrum DAO, allowing ARB holders to vote on how to disburse the funds.

The other 44% of ARB’s circulation will go to the investors and employees of Offchain Labs – the development firm that built Arbitrum. CEO Goldfeder says these tokens will be subject to lock-up periods and vesting schedules. However, the proportion of ARB reserved for insiders is somewhat higher than in similar projects (Optimism). We must see how the market reacts when the token goes live on the 23rd.

Market data

After a dreadful week where the total market capitalization dropped by 10 percent, we rebounded with an even more significant move to the upside this week. The crypto market generally had one of its better weeks while the rest of the world was burning. The biggest reason for this has been that the Federal Reserve injected more money into the US economy. Most of the tightening done in the last 15 months was undone by SVB mismanaging their risk.

This week, the Federal Reserve experienced a substantial increase in borrowing activities. Net discount window borrowing reached a staggering $148.3 billion, while the newly launched Bank Term Funding Program brought in an additional $11.9 billion.

These figures combined for a subtotal of $160.2 billion in new borrowing. Furthermore, banks seized by the FDIC also contributed to the borrowing spike, accounting for another $142.8 billion. In total, the Fed saw a remarkable $303 billion in new borrowings during this period, highlighting the growing demand for liquidity. As this balance sheet grows, the crypto market will move higher. The game of musical chairs has started, and you want to take advantage of this opportunity.

While the market is recovering because of the liquidity injection, we should be looking to play our ecosystem game. With the recent announcement of the Arbitrum airdrop, capital will be looking to rotate into that ecosystem because of liquidity incentives and new projects launching.

Looking at the Arbitrum ecosystem in the last 24 hours, the liquidity in most projects has risen by 10%. This trend will continue as long as the Federal Reserve's balance sheet grows.

When it comes to the other big ecosystems, there is not much change. Most ecosystems seem to be very stagnant apart from Arbitrum. While most stablecoins seem to be moving away from other chains, liquidity seems to be moving towards Arbitrum. All eyes are on Arbitrum for the coming weeks with their own capital injection into the market.

Best and worst performers

When looking at the best-performing ecosystem in the past seven days, it seems to be Layer-1’s. This strengthens our idea that we should focus on playing different ecosystems.

In reality, this market will continue to climb higher as long as the price of Bitcoin and the Federal Reserve balance sheet continues to grow. The game of musical chairs has started once again. When the music does eventually stop, you don't want to be left playing alone.

The top gainers have a vague narrative. It's all over the place. Ignore Huobi BTC. The reason it's the top gainer of the week is because it de-pegged last week and just recently re-pegged. With Conflux Network, we could be eyeing the China narrative that was looming last week. With Liquity, we could be looking at the decentralized stablecoin narrative brewing due to the USDC de-peg.

Lastly, Stacks' narrative has been there for months and is growing because of the recent Bitcoin pump. There doesn't need to be a specific narrative in the space. A lot is happening; your job is to make money from the pumps and protect capital if it starts going lower.

Nothing is interesting about the losers of this week. Helium is this week's biggest loser because Binance.US announced they would delist the token from their platform before transitioning to Solana. Not having a significant narrative in the loser category is bullish for the market, and all narratives are ready for a higher continuation.

The week ahead

The week ahead is likely to be quite bullish. With the liquidity injection from the Federal Reserve, we will see risk markets rally over the coming days and weeks. With this information, you need a plan of action.

The Federal Reserve started with a $300 billion liquidity injection, but that doesn't change the fact that they are still doing Quantitative Tightening and hiking rates. This rally will only be sustainable as long as the balance sheet continues to grow.

How big the Balance sheet grows is unknown. All that is known right now is that there is a liquidity injection, but when this liquidity injection stops, the rally could also stop.

With Arbitrum dropping their token next week on the 23rd of March, all eyes will be on that ecosystem. Be on the lookout for new projects launching there, as liquidity will be rotating between projects in that ecosystem.