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Insights on the Crypto Down Cycle: Edition #11

Monday, August 1st, 2022

 

 

*Ethereum is the community-run technology powering the cryptocurrency ether (ETH) and thousands of decentralized applications.

#1. Market Overview (FOMC, FED, Inflation, etc)

The markets were attentive to the FOMC 27th July meeting. The hike came at 75bps, in line with expectations. The press conference after the announcement was perceived as dovish by the markets, which fuelled a very strong Equities rally.

During the conference, Fed chair Jerome Powell communicated that the Fed will be moving to a data-dependent methodology instead of full forward guidance. He has also said that the Fed has achieved a “neutral rate” and it wouldn’t want to move to restrictive areas without relying on data.

We think that the Fed has managed the event very well, however, the markets might have been too simplistic in interpreting the Fed intentions. If the inflation numbers come out hot again and/or financial conditions are proved to be loose, we think the Fed will reassess the hiking pace. Fighting inflation is still the number one task of the Fed and it will want to get it under control before pivoting comfortably.

This being said, the current hiking consensus seems to be fully priced in by the markets. The reader can refer to this website for viewing probabilities at each hike. View at: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html.

Currently, it sits at around 75% for 75bps in September, likely the last 75bps of this year.

 

#2. About Crypto Market (ETH, and more)

In crypto, ETH had a huge rally from under $1000 to nearly $1800 in the last two weeks of July. It seems the next interesting debate from an investment perspective is whether the merge would see the Ethereum network forked into two separate coins, namely: ETH-1 which continues the current PoW mining, and ETH-2 which upgrades to PoS. The market will be keenly pricing the value of ETH-1, which would act like an airdrop for the holders of Ether near some snapshot date close to the merge. Note that there could be more than one fork (e.g ETH1a, ETH1b, etc) because it is possible that there would be many teams/communities wanting to take advantage of the situation to control a mature smart-contract chain such as Ethereum PoW.

We think we could use the $OMG airdrop of $BOBA in November 2021 as a template scenario. The chart below shows how the futures market (ticker OMGUSDTPERP) priced the airdrop in advance (snapshot date is 11th November 2021), and then converged back to the spot price after the event.

The broader crypto market has seen more risk being put back. While we think August will be a good month for crypto, the agenda is still full of risky events, such as:

  • 10th Aug: CPI number release.
  • 25th Aug: Jackson Hole meeting and conference.
  • 13th September: CPI number release.
  • 21st September: FOMC
  • Sometime in August: Mt.Gox coin news.
  • And while we are drafting this post, Congresswoman Nancy Pelosi is visiting Taiwan.

 

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Published on Aug 1st, 2022

***Disclaimer: views given in this channel are for informational purposes only and are not financial advice.
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