Weekly: Suspended Animation
As the Federal Reserve continues to be cautious about interest rate cuts in the face of inflation risks, the crypto market, like stocks and other risk assets, has shown a downward trend.
In this market environment, gold has been the biggest winner, reaching new highs due to increased central bank purchases, escalating geopolitical risks, and concerns about reflation.
The launch of Endgame and recent governance changes aimed at increasing revenue have attracted widespread attention to Maker in the market, although these seemingly rapid changes are viewed as high-risk by other protocols such as Aave.
Market Outlook
Federal Reserve Chairman Jerome Powell’s cautious stance on interest rate cuts during the meetings on March 29 and April 3 led to a significant decline in the cryptocurrency market. The uncertainty of market direction is not only reflected in the crypto market; stocks and other risk assets have also performed poorly in the past week. Coupled with concerns about reflation, the implied magnitude of rate cuts by the end of the year (based on federal funds futures) is even more hawkish than the Federal Reserve itself, with an expected year-end rate of 4.631, far higher than the 3.825 predicted in early January (also higher than the Federal Reserve’s median target of 4.625).
In this environment, gold has been the biggest winner, reaching new highs due to increased central bank purchases, escalating geopolitical risks, and concerns about reflation. It is worth noting that the appreciation of gold is usually associated with Fed rate cuts and rising inflation rates. Given the market’s recent hawkish view on rate cuts, we believe that the performance of gold sends a signal that the fluctuation of gold prices is overly influenced by inflation rates relative to changes in Fed rates. It also reflects a general market expectation that the rise in inflation with certainty may be more problematic than expected.
In our view, the increasing acceptance of Bitcoin as “digital gold” may generate demand from a new subset of investors in this market regime. Therefore, we believe that there will be more positive buying during the downtrend compared to previous cycles, even with continued volatility during the price discovery period. We believe that the launch of US Bitcoin ETFs has provided Bitcoin with broader funding channels and may help to curb volatility (compared to previous cycles).
The impact of these ETFs and the inflow of greater institutional demand can be seen from the open interest in Bitcoin futures, which can be used as hedging tools. CME Bitcoin futures’ open interest is $9.9 billion, surpassing any single centralized exchange (CEX) and accounting for more than a third of the total Bitcoin futures market (including perpetual contracts and fixed-term futures). In our view, the capital released by ETFs may represent the most fundamental shift in market structure from the 2020-2021 cycle to date. The release of this capital, combined with the upcoming Bitcoin halving (expected on April 20-21, depending on changes in network hash rate) and other positive catalysts, leads us to believe that the market performance in the second quarter as a whole remains constructive.
On-chain: Endgame Feast
Maker has been performing well in recent weeks, thanks to its Endgame announcement on March 13. The announcement details a series of changes in four major stages. Phase 1 focuses on rebranding DAI and MKR tokens (including repricing MKR at a ratio of 1:24,000 as the new governance token), updating governance protocol incentives, establishing new asset bridges, and launching the Spark subDAO. Phase 2 involves expanding the subDAO, asset bridges, and governance responsibilities. Phase 3 outlines the plan to move Maker to an independent chain in the coming years. Phase 4 involves making all foundational governance contracts immutable.
As more details emerge, particularly regarding future subDAO governance tokens, speculation about airdrops for MKR holders and DAI stakers has increased. Given the industry’s widespread attention to airdrops, we believe that part of the increase in token valuation is driven by the future value of airdropped tokens (in addition to other governance proposals that have recently increased its protocol revenue). In our view, Maker’s changes are a continuation of its DeFi protocol movement, aiming to implement plans that have been mentioned for years more specifically (such as Uniswap’s fee switch). We believe that these long-running DeFi protocols may currently be perceived as somewhat stagnant but can leverage their brand and market share more effectively due to the network effects of their protocol liquidity.
While attention has been focused on Maker’s Endgame launch, recent governance changes in Maker have caused some controversy within the DeFi community. Maker has quickly passed several reform proposals, including integration with Morpho and USDe, and is considering significantly expanding these businesses by increasing collateral limits. While these changes will greatly increase Maker’s revenue, some believe that the speed of change has significantly increased the risk level. In light of this, the Aave community has been discussing the ability to remove DAI as collateral seriously. These discussions have been supported by key figures in the Aave community, including its founder Stani Kulechov, who “fully agrees to remove DAI from all Aave markets.”
We believe that this conflict may herald a transformation in the decentralized stablecoin market. Compared to DAI, Ethena’s USDe has gained rapid market share due to its higher yield and airdrop incentives. Both assets have inherent limitations on their issuance capabilities (compared to centralized stablecoins). DAI supply requires over-collateralization, thus being constrained by the collateral of borrowers. Meanwhile, the US dollar is constrained by the open interest market of futures. If the short interest rate is too high, the interest rate becomes unsustainable.
Creating and expanding new decentralized stablecoins remains challenging due to the network effects of liquidity. DefiLlama tracks over 160 stablecoins, most of which have very little usage outside their original protocols. Although the number and market value of decentralized stablecoins are increasing, their growth rate is not as fast as that of centralized stablecoins. The market share of stablecoins like USDC and USDT has grown to 90%. With the advantages of issuing native cross-chain stablecoins and user experience improvements provided by asset bridges supported by technologies such as Circle’s cross-chain transfer protocol, we believe that the adoption of decentralized stablecoins may still face challenges compared to centralized stablecoins.
Crypto and Traditional Finance
(as of 4 pm Eastern Time on April 4th)
Data Source: Bloomberg
Coinbase
– Exchange and CES Insights
In the past week, the market has calmed down. BTC has fluctuated within a narrow range of $2,000, and the inflow of funds into the US Bitcoin ETF has slowed down, although it remains positive. Overall, as the market tries to find the next narrative that can drive its rise, cryptocurrency trading volume continues to slow down. Bullish traders have gained some confidence, and the risk of their long positions has calmed down significantly. The funding rates for BTC, ETH, and various altcoins are currently close to their lowest levels this year. The BTC halving, expected to occur on April 20 or 21, is expected to be a catalyst for price increase, but it will have to deal with the weakness that the crypto market and other risk assets have always faced.
Coinbase Platform Trading Volume (USD)
Coinbase Platform Trading Volume (Asset Ratio)
Funding Rates
Notable Crypto News
Institutions
Monthly trading volume of US Bitcoin ETF nearly doubled in March, reaching $111 billion (The Block)
Regulation
TRON Foundation and Justin Sun ask US court to dismiss SEC lawsuit (Coindesk)
General
Ethena’s token is listed on exchanges today and opens for airdrop claims (The Block)
Vitalik Buterin and Arthur Hayes comment on the meme coin frenzy (The Defiant)
Coinbase
Coinbase blog: The Future of AI-Driven Content: Expanding Perspectives and Enhancing User Experience (Coinbase Blog)
Global Outlook
Europe
Russia discusses testing digital ruble for budget payments (bitcoin.com)
21Shares launches Toncoin staking ETP on Swiss Stock Exchange (The Block)
US and UK investigate $20 billion cryptocurrency trade for potential violation of Russian sanctions law (Bloomberg)
Asia
VSFG, a Hong Kong-based financial firm, plans to launch a spot Bitcoin ETF as early as May (The Block)
HSBC introduces tokenized gold to retail investors in Hong Kong (CryptoNews)
Singapore expands crypto regulations, introduces enhanced user protection requirements (The Block)
Indonesia implements sandbox for crypto companies before OJK supervision (Finance Magnates)
Taiwan’s crypto industry gets government approval to establish an industry association (The Block)
Tags
Aave
Coinbase
DAI
DeFi
LEND
MKR
Tron
USDC
USDT
Ethereum
Bitcoin
Bitcoin Halving
Source: https://mp.weixin.qq.com/s/6pzEclsR1qGA5ay0nggwvQ
