Crypto Update - May 9, 2022 (Patreon)

Crypto had a rough time dropping double digits over the past two weeks and have clearly broken through the previous technical support levels for both BTC and ETH. What appeared to be a relief rally on Wednesday was short lived as other central banks such as Bank of England followed Fed’s tightening road map with their rate hikes.

• BTC dropped around 13% over the past two weeks and is now trading around 34.5k
• ETH dropped around 14% over the past two weeks is now trading around 2.5k
• Total Crypto market cap is also down around 13% with total market cap at around only $1.67

The bloodbath was precipitated by the 10year breaking through the psychologically important 3% barrier on Thursday leading to highly correlated sell down of global assets including equities, credit as well as crypto. 

Chart: US 10 year yield

Interestingly, despite liquidations reaching USD400mn on Thursday, total liquidations have declined in the following days despite the continued drop in crypto prices, indicating relatively better than expected leverage in the crypto complex

Two L1 tokens are worth high lightening. As indicated in the chart below, Tron (TRX) is actually up 35% over the past two weeks, which makes it one of the only tokens that is positive on an absolute basis throughout the market collapse. The other token worth noting is Terra (LUNA), which is down almost 30% over the same time period, underperforming most major tokens.

In terms of Tron (TRX) - we were watching out for the launch of TRON’s stable coin USDD. Justin Sun, the founder of Tron, announced that USDD would be backed by $10 billion dollars of Tron token to ensure that USDD would stay pegged to the USD as well as to finance 30% of interest free yield (Justin Sun said, not Ah ju) on USDD. The result of that was a exponential increase in the marketcap of USDD from zero to around USD228mn dollars currently, this has led to inflows of capital into Tron with hopes that Tron would be able to replicate the successes of Terra.

But speaking of Terra (LUNA), it had a poor showing over the past two weeks with the sell off accelerating over the past two days. Similar to Tron, the focus was on stable coins. However in Terra’s case, this was a liability as the market was concerned due to Terra’s stable coin UST’s peg vs the USD appears to have broken over the past 48 hours. UST price, supposed to be pegged to 1USD, dropped to as low as USD0.985 on Sunday.

The way that algorithmic stablecoins work, in a nutshell, is that when the stablecoin is below peg price, the backing currency (LUNA in this case) is minted to maintain the peg. As supply of LUNA increases and price of LUNA drops, there is always a chance that LUNA and UST could enter the dreaded “death spiral” creating a vicious minting/burning cycle leading to zero. Hence this is why market tends to sell down LUNA every time UST breaks peg. And this is not the first time UST have broken the peg, it’s done so a few times in the past and have always managed to climb back up to parity. Not to mention this time around LUNA have more firepower behind them in terms of the BTC war chest they accumulated as well as institutional capita like Jump.

The peg is already starting to recover from its Sunday lows. But crypto markets will not fully recover unless UST reclaims its peg first. UST is now the third largest stablecoin with a USD18bn dollar market cap and it’s the engine of Terra(LUNA) which itself has a USD22bn dollar market cap. The fate of both tokens are inevitably intertwined by design and is the number one thing to watch right now in crypto.

Things aren’t looking any better in NFT land. The major projects are all down by about average of 20 – 30%. But remember NFTs are priced in ETH, so they are really down 40 – 50% in USD terms

However, the blow is softened by the Otherdeeds land sale done last weekend by Yugalabs. All BAYC and MAYC NFT holders received 1 Otherdeed NFT for free. The floor price of the Otherdeed NFT is around 3.3ETH but some BAYC and MAYC received rare land NFTs that could fetch upwards of 100ETH in the market today. Aside from the 30K NFT that was airdropped to BAYC and MAYC holders, a further 70K was sold to the public making the full collection an ambitious 100K total NFTs, leading to a existing market cap of over USD600mn dollars based on current prices.

Let’s put that in perspective, a bunch of cartoon land in the form of JPEGS with no functionality was sold and created over USD600mn dollars in value. And the entire collection was completely sold out to the public within 3 hours of the sale, pushing gas prices on Ethereum to unprecedented levels. In total, more than USD150mn dollars was spent on gas alone by users rushing to mint the Otherdeed NFT.

Not to mean that these JPEGS are actually extremely liquid. On the day of Otherdeed mint, OpenSea recorded the highest one day volume of more than USD 476mn of trades fuelled by Otherdeed. And as of now (May 9th), Otherdeeds have traded 239K ETH on OpenSea alone for the past week. That is more than USD700mn of liquidity, much better than some mid-cap HK listed stocks.

And in terms of APECOIN, it has predictably dropped back down to earth post the Otherdeed sale. Since the Otherdeed mint was denominated in APECOIN, it has gone up almost 100% in the weeks prior to the event. But since the secondary sales of NFTs are still in ETH, there is not much need for APECOIN after the mint is done.

Other market impacting news

• Solana crashed again, this time due to overloading by bots rushing to mint a popular NFT. Designed as a high TPS layer 1, Solana can’t use high fees as a moat to keep out unwanted spam, leading to frequent system failures. This is extremely unfortunate because layer 1s are not supposed to be down. (very negative for Solana)
• Fidelity to allow retirement savers to put bitcoin in 401(k) accounts (positive)
• Bitcoin to become legal tender in Panama and Central African Republic (positive)
• As form of protest, Shanghai residents posted a video in the form of NFTs on OpenSea preventing government censorship (positive)
• Gucci to accept bitcoin and dogecoin (positive)
• SEC’s Crypto Asset and Cyber Unit is adding 20 people to its staff (negative)

Watching out for

• The number one thing to watch out for is the UST peg. If it breaks down further, it could led to systematic risk in the crypto complex given the amount of leverage based on UST across multiple chains and protocols
• Also waiting for Yugalabs to make an announcement explaining the cryptic traits of their land and plans for the Otherside metaverse