WEEKLY - Oct 1, 2022

Welcome to the first Crypto is Macro Now free weekly email. I’m Noelle – I’ve been writing crypto-focused newsletters for over six years now, first for CoinDesk and more recently for Genesis Global Trading. Now that I’m focusing on independent research, it feels natural to continue. I publish a premium daily market and news commentary (which officially launches on Monday, but you can see rather clunky draft posts here), and in this free weekly version I’ll talk about key developments from the previous week, the most intriguing deals, and anything else I’m looking at. Thanks for being here. If you find these useful, do please share. 

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A “Pivotal” Week

After a week of what would previously have been unthinkable moves, Friday ended on a relative note of calm but with simmering tension as investors steeled themselves for what comes next.

• The yield on the 10-year UK government bond started the week by zooming above 4.5% and then settling back down to 4.1% as the Bank of England intervened to calm the markets.

• The US 10-year yield briefly popped above 4.0%, only to drop along with UK gilts, ending the week at just over 3.8%.

• The DXY dollar index also enjoyed the wild ride, reaching its highest point since 2003 earlier in the week but later correcting to the still-high level of 112.

• BTC’s volatility as measured by Deribit’s DVOL index climbed sharply, only to unwind all of its weekly gains on Friday as the price continues to hover below $20k. ETH continues to languish at just over $1,300.

Adding even more spice to the astonishing UK market moves, there’s concern at just how temporary the relief intervention will be, the vulnerabilities the turmoil unearthed, and the possibility that other key central banks (looking at you, US) may end up being forced to go down the same route of reigniting QE just to avoid a total system break. While that would be good for asset prices, it would be bad news overall in terms of economic pain inflicted.

It would also be a heavy hint that the trusted system of the past few decades, with independent central banks laser-focused on price stability to encourage resilient economic growth, is now seriously weakened. And however much us crypto folks might cheer the breakdown of economic orthodoxy and the resulting surge in awareness of the value of a hedge against precisely that, we all know that such radical uncertainty will hurt many. No-one wants that.

A key fault line that triggered the BoE’s action yesterday is the state of public and private pension funds. Not only are they large holders of UK government bonds, whose value has taken a hammering over the past week. It turns out that they are also leveraged, and margin calls led to more selling which led to more margin calls. In crypto, we are very familiar with this downward spiral – we just didn’t expect to see it in the “safe” market of developed economy government bonds.

I’ve written in the past about how pension funds are likely to become holders of decentralized, hard-cap crypto assets. I still believe that, and the current situation could end up encouraging a re-think of the rules. But meanwhile, pension funds going under because of market volatility is not politically acceptable. Many have speculated on what it would take for the US Fed to waver from its inflation focus – danger to pensions is one potential catalyst.

A breakdown in international markets is another. Yesterday we saw the near collapse in the government debt market of one of the US’s major trading partners (at one stage “there were no buyers”, according to a report in the FT). Zooming out, the persistent strength of the dollar combined with rising rates continues to push up financing costs for all holders of US debt, including countries battling supply chain issues, climate catastrophies, social unrest and more. Bailouts from the IMF have reached record levels as at least five countries have been pushed into default. And let’s not forget that the week saw market interventions from not only the UK but also Japan and China.

The Fed’s mandate is price stability – but the underlying motive for that is sustainable economic growth and reliable, liquid markets. Even the US government debt market – supposedly the “safest” market in the world – is suffering liquidity strains. The MOVE index, which tracks implied volatility in 1-month options for a basket of US government debt, reached its highest level since 2009 earlier this week, much higher than even during the pandemic panic.

A rising dollar is not good for crypto markets, for both the denominator and the “safe haven” effect – BTC is generally inversely correlated to the DXY. Yet BTC spot volumes started to show a revival of activity while ETH spot volumes remained flat. Could this be a sign of investors positioning for a potential coordination to stem USD strength?

The most beneficial takeaway from this week is likely to be the inevitable philosophical questions about market structure and economic orthodoxy. Central bank independence will be in there; so will pension fund rules and the inevitable nature of risk (where it can emerge, it will emerge). This is unnerving as well as intriguing: after all, times of change is when new ideas take hold.

Yet not all new ideas are welcome, and often for good reason. Tax cuts are usually greeted with market jubilation. That most certainly did not happen in the UK this time, which shows that investors are not universally driven by the incentive of more income, and that markets – on the whole – can see through reckless feel-good plans. Common sense caused a lot of market pain this week. I find that reassuring.

Another Reason Why All This Matters

Other international news that highlights the vulnerabilities of legacy structures is the unrest in Iran. After two weeks of widespread and sometimes violent protests over the death of Mahsa Amini while in custody, Iranian authorities are curtailing access to the internet, especially social media channels, to prevent the broadcast of images or video of what’s going on at street level.

This is yet another stark reminder of how current networks can be used to censor and control, and that the original promise of the internet to “free” people everywhere from the heavy yoke of centralization has yet to be realized.

Many in crypto are working on precisely this. Most projects are still early – some are operational yet none enjoy mainstream awareness. Tragically, developments like that in Iran add fuel to the narrative and to the urgency, not just on the technology side but also from the philosophical and regulatory angles. Censorship is a tricky topic, bad when it suppresses free speech, good when it protects us – the conflict always lies in who gets to decide which is which.

Still Building

Bear markets are generally bleak times for those whose business or personal income depend on asset prices. They are also emotionally difficult – the dismay when you see red on the screen, the elation when there are blocks of green, the frustration when there’s hardly any movement at all. I hope you’re all taking care of yourselves.

But they are not bleak for builders. The scramble for talent is less fierce, the dash to market feels less frantic, and equity investors have more time to get to know teams and their vision. There is less financing to go around, true, but deals are still happening. Some of the larger ones from this week:

• Bitcoin-based payments platform Strike raised $80 million in Series B funding led by Ten31. Two other participants were Washington University in St. Louis and the University of Wyoming – curious to see traditionally conservative university endowments step up their involvement in the crypto ecosystem.

• MPCH Labs, which is developing crypto custody products based on multi-party computation (MPC) technology, raised $40 million in a Series A round led by venture capital firm Liberty City Ventures, with QCP Capital, Mantis VC, LedgerPrime, Polygon Studios, Quantstamp, Animoca and others also participating. This serves as a reminder that crypto custody – often taken as a “commoditized” and boring-yet-essential service – is far from done innovating.

• Decentralized data platform Space and Time, a decentralized data platform focused on enterprise warehousing, secured $20 million in strategic funding led by Microsoft’s venture capital arm M12, with Framework Ventures, HashKey, Polygon and several others also participating.

• Coral, the developers of the Solana-based Anchor development framework, raised $20 million from FTX Ventures, Jump Crypto, Multicoin Capital and others.

Weekend reflections

We haven’t talked about DAOs yet, but: