Weekly Market Outlook

Introduction

This past week has been full of surprises in the SEC. Coinbase and many other American projects have been served a Wells Notice. The FOMC meeting had everybody on their toes about what was next. There have also been legal problems for Justin Sun, who is being sued by the SEC. People are excited about the ARB airdrop, and finally, Do Kwon was arrested while trying to flee to Dubai. In this article, we recap and look towards the coming week.

Coinbase vs The SEC

Coinbase received a Wells Notice from the SEC, claiming that their staking products are unregistered securities, along with concerns about their exchange and wallet. Coinbase is confident in defending its position in court and is frustrated by the SEC's sudden action. Coinbase has discussed regulations with the SEC for months and requested clarity on which digital assets are considered securities.

Coinbase was surprised when its competitor, Kraken, reached a $30 million settlement with the SEC over its staking business. They submitted a letter to the SEC asking for clear rules on staking. The SEC then informed Coinbase that they would pursue enforcement action against them.

In a blog post, Coinbase's chief legal officer, Paul Grewal, mentioned the need for more information in the Wells Notice. Coinbase CEO, Brian Armstrong, expressed his confidence in the company's legal position and welcomed the chance for the crypto community to go to court.

The SEC got busy

The SEC has filed civil charges against Justin Sun and eight celebrities, including Lindsay Lohan, Jake Paul, and Soulja Boy. The complaint alleges Sun engaged in market manipulation and the unregistered offer and sale of securities related to his crypto assets TRX and BTT. The charged celebrities are accused of promoting the coins without disclosing their payment and the amount received, which misled the public into believing they had an equitable interest in the cryptocurrencies.

On top of the SEC suing Justin Sun. Do Kwon has been charged in the US with fraud after his arrest in Montenegro. Prosecutors accuse Kwon of defrauding crypto customers by deceiving them about aspects of the Terra blockchain, including its technology and user adoption. He faces eight criminal counts, including securities, commodities, and wire fraud. Montenegro's interior minister revealed Kwon's arrest at Podgorica Airport with falsified documents. The US attorney's office for the Southern District of New York plans to extradite Kwon. The UST collapse last year caused a massive crash in crypto markets, and Kwon has previously been charged with fraud and breaches of capital markets law in South Korea.

In the last week, the SEC has decided to crack down on the crypto space with Wells Notices to American projects and charging crypto entrepreneurs. It remains to be seen how this will play out. At Flagship, we have already started covering this thesis, which you can read about here.

The FOMC meeting

At the recent FOMC meeting, the Fed announced its plans. It increased interest rates by 0.25%, raising the highest rate to 5.0%, continuing its previous policy (QT) while helping banks with money. Some say this is like pressing the gas pedal and the brake simultaneously (QT and rate hikes with "QE").

However, Fed Chair Powell said this kind of help for banks is not the same as "QE" and doesn't have the same effect. A more straightforward way to understand it is like braking while protecting a baby in the car, to keep the analogy of pressing the brake.

Powell explained that the recent increase in the balance sheet size due to liquidity provision has different intentions and effects than purchasing long-term securities (QE). While QE aims to influence monetary policy by raising security prices and lowering long-term rates, the current balance sheet expansion is temporary lending to banks to address special liquidity demands.

Powell believes the approach works as it boosts confidence in the banking system and prevents a sudden, significant tightening in financial conditions. He also thinks the passive and predictable reduction of the Fed's balance sheet is functioning as intended.

Some wonder if the Fed has limited its options by suggesting that rate hikes will stop after one more increase. Powell responded with a firm "no." He said that if raising rates higher is needed, the Fed will do so. He also mentioned that, eventually, they would reach a policy tight enough to lower inflation to 2%.

After having one of our best weeks since 2017 last week, Bitcoin has been neutral as we ranged a little this week. This comes after one of the most anticipated FOMC meetings, where Jerome Powell mentioned how they would fight inflation until it reached 2%. However, with the banking crisis, they are fearless in starting the money printer again. This shows that we are in the uncharted territory of monetary policy. In times like this, it's best to protect capital and play it safe.

When looking at the daily change for Arbitrum native projects, it doesn't reflect a billion-dollar injection. The reason is that most of the gains were last week in anticipation of the airdrop. Before giving my opinion, I will preface it by saying that I completely sold my airdrop and all arbitrum coins, which could be my coping. But the ecosystem has currently topped, or is in the process of topping. Arbitrum's best marketing strategy for the last two years was the anticipation of an airdrop, and now with that it has passed, what else is there to do for now? Money will likely rotate to a different ecosystem. Overall I would start looking at a new ecosystem to rotate capital to or even go airdrop farming till our next big play.

In the last 24 hours, over $100 million of stablecoins has come into the ecosystem. I have a personal rule for when an ecosystem tops. That's when the blockchain starts getting extremely congested with new wallets and daily active users, and it's in the process of topping. This worked for me throughout the previous bull market. Maybe I'm coping with selling my airdrop too early, but I couldn't say no to free profits.

Best and worst performers

The top gainers have a vague narrative. It's all over the place, with the FUBT token being the top gainer. Fubt is a new Asian exchange. This significant gain is potentially due to the recent hype with the Conflux (CFX) crypto network. After that, you have JOE. JOE was one of the best exchanges on Avalanche and recently ported over to Arbitrum. They are one of the biggest winners from the Arbitrum airdrop. We also see Mask Network and Celer Network as our top gainers. These higher beta layer 1's being in the top gainers make me worry that a pullback might be coming.

Nothing is interesting about the losers of this week. Helium is again this week's biggest loser because Binance.US announced they would delist the token from their platform before transitioning to Solana. What is interesting is Canto and Liquity in here. Before the recent uptrend, these two were performing exceptionally well, and this indicates they are not interesting in the public eye, and everyone is trying to find the next 10x.

The week ahead

I was expecting this week to be quite bullish after the close. In the end, it was an alright week. It would be best if you played defensive here with capital, and all leverage positions and low caps should be closed here. If you hold spot BTC, you are fine. But a pullback could come. Altcoins seem very weak, so a significant BTC pullback will slaughter the altcoins.

The only alt that I would play is Litecoin. It has some strength, and its halving is coming up next month. It is currently trading at $90. Before the halving, we could get another leg up. This all depends on how Bitcoin and the US equity market behave. If these start getting slaughtered, no altcoin can protect you.