Charts of the month

Figure 1: Hourly minimum sale price for CryptoPunks over the summer. After two previous rallies towards the end of 2020 and end of Q1 2021 that brought the cheapest Punks from hundreds of dollars to the low thousands, and then to a few tens of thousands, the latest summer craze has pushed the entry price for these 24x24 pixel images to approximately $500k. Source: Dune Analytics

Commentary

August has not disappointed, with the heat of the Summer (if you are lucky enough not to live in the UK) unleashing a new wave of interest in the NFT market, where some items have reached unthinkable valuations. Among the noticeable mentions: CryptoPunks — one of the original NFTs, reached an estimated valuation of $5-$10 billion; Art Blocks — a curation website for generative art, single-handedly spawned an artistic current that has already seen hundreds of millions in sales, EtherRocks — low effort pictures of rocks from 2017 are selling for millions each, with only 100 in existence; Justin Aversano’s Twin Flames — suddenly became one of the most valuable collection of photographs in the world.

The busiest square where merchants from all over the world meet to exchange exotic JPEGs is OpenSea, an aggregator of projects that offers wide compatibility for NFTs minted through most platforms (as long as they are compliant with the ERC-1155 or ERC-721 standards). As a result of the current NFT-mania, OpenSea gross merchandise value (GMV) at the current run rate is 25% of eBay’s, revenues are likely to be around 10%/20%, while we estimate costs to be between 1% and 5% of the e-commerce giant. This would place OpenSea among the most valuable companies in the crypto industry and, if they were to issue a token, it would probably be one of the most valuable.

Figure 2: Price performance over the Summer for Bitcoin and few market indexes (ALT — large cap in turquoise, DEFI — DeFi tokens in green, MID — mid cap in light blue, SHIT — low cap in blue). After the crash on May 17th, the market found a double bottom on June 22nd and July 20th, since then the growth has been almost uninterrupted with gains ranging from 55% for Bitcoin, to >100% for ALT, SHIT and DEFI. Source: TradingView

With the noise coming from the NFT community, constantly encouraged by new entrants of the likes of Visa (purchasing a CryptoPunk) and Budweiser (purchasing beer.eth domain and “a rocket”), one could almost miss historic events like a $600m hack to a cross-chain protocol (Poly), which was subsequently returned in exchange for a “bug bounty” of $500k, or a $1 Trillion Infrastructure deal in the US being held-back due to disagreements on language related to crypto regulation (that somehow ended up in there as a way to collect more taxes). However, the market is indeed recovering. After the doldrums of the first two months of Summer, returns in August have been substantial, with valuations having been higher than current ones only during the month of May, and, for a few days, also in April.

We display in Figure 2 the price performance of Bitcoin and several market indices over the Summer months and, as it can be observed, August has seen an almost uninterrupted growth, with gains in excess of 50%, and closer to 100%, for most assets.

Figure 3: Yield curve steepness of BTC and ETH between the December 21 and September 21 maturities, superimposed on BTC spot price over the last 4 months. In normal circumstances, steepness is correlated with price movements, while the market rally in August has created a divergence and failed to create an increase in forward rates (as opposed to demand for leverage, which has registered an uptick), as indicated by the chart. Source: TradingView

Turning the attention to the Derivatives markets, we notice only a modest uptick in demand for leverage and, although the open interest has grown considerably, it remains well below the ATH recorded in April. Despite the double-digit price appreciation, most of the recovery for derivatives took place during the final week of July, displaying a more range-bound behaviour during August.

Funding rates for Bitcoin and Ethereum have remained mostly subdued although consistently positive (greater demand for long rather than short exposure), similarly the yield curve has not steepened throughout the month, as shown in Figure 3. More broadly, as displayed also in Figure 4, Futures have not followed the price action during the rally, and have instead followed a negative trend (partially due to the approaching of the maturity of the contract at the end of September). Unless more capital is deployed in the weeks to come, the speculative activity would not suggest a bullish positioning.

Figure 4: September futures across major derivative trading venues superimposed on the spot price of Bitcoin. Similar to Figure 3, we highlight the divergence between the Future basis and the price trend. Notice that figures are not annualised, and the negative trend in the basis is caused by the approaching of the maturity. Source: TradingView

Extending the analysis to the options markets, we find a similar environment, with the initial enthusiasm due to the breaking of the $45k resistance already dying out, as shown by the short-term implied volatility displayed in Figure 5. In addition, the chart shows a sign of increasing uncertainty, with a steep volatility structure where longer-term maturities have instead retained most of the value gained during the first two weeks of August. Looking at the balance between Put and Call prices, as shown in Figure 6, we also notice that call selling above the perceived resistance ($50k in this instance), as well as demand for downside protection, has picked up again, causing an inversion in the bullish trend observed during July and the beginning of August. In particular, one month skew has just recently turned negative, demonstrating greater demand for Puts with maturity of approximately 30 days.

Figure 5: At-the-Money Implied Volatility (IV) for specific maturities (30–60–90–180) over the month of August. It can be noticed how the market has cooled down for closer maturities after having peaked as Bitcoin crossed the $45k resistance. Longer maturity options have instead maintained a >90% IV, creating a relatively steep contango on the IV forward curve that indicates a potential for adjustment on the upside (call seller above $50k might be distorting IV). Source: GenesisVolatility

While derivative markets do not offer substantial evidence for renewed optimism, fundamentals remained unperturbed and, similarly to previous months, have strengthened. The demand for goods and services on the Blockchain can now be assessed and verified in a variety of applications as already discussed at length in these reports, while the overall macroeconomic backdrop remains favourable for the appreciation of scarce assets, as well as intangible ones with high growth potential.

Figure 6: At-the-Money Skew (Call — Put) for specific maturities (30–60–90–180) over the month of August. It can be noticed how short-term call selling, as well as an increase in demand for downside protection has brought the skew curve in negative territory again after having maintained a bullish profile during most of August. Source: GenesisVolatility

As displayed in Figure 7, the latest figures published by the Bureau of Economic Analysis, US Department of Commerce, show an overall inflation in the Personal Consumption Expenditures (PCE) index of more than 4% over the last 12 months, with Durable goods having appreciated more than 5% in the last 6 months.

Contrary to the increasing inflation resulting from the governments responses (and money printing in particular) to the Coronavirus emergency worldwide, Ethereum has recently implemented an Improvement Proposal (1559) that introduces a burning mechanism targeted at reducing the overall supply of ETH according to the usage on the network (via the base fee). As reported in Figure 8, as a result of the recent NFT craze, and unabated use of DeFi applications, the burning has matched and surpassed the issuance, effectively transforming ETH into a currency with a deflationary supply.

Figure 7: Personal consumption expenditures (PCE), Durable goods, Nondurable goods and Services price inflation since January 2020. The first six months of the year have seen already a considerable increase in price levels, with durable goods in particular appreciating at 10% APR. In the current environment a sudden tightening by major Central Banks could cause a price correction of considerable magnitude. Source: bea.gov, US Bureau of Economic Analysis
Figure 8: Net emission of ETH since the London Hard Fork went live at the beginning of the month. Now, part of the ETH consumed for transactions and interactions with Smart Contracts is burned, compensating the continuous issuance of coins to the miners (stakers/validators once ETH 2.0 is released). The NFT Summer craze recently has contributed to the reduction of ETH net issuance to almost zero, with a cumulative burn of approximately $400m in less than a month. Source: TheBlock

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Market neutral quantitative approach to investing in cryptoassets.

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Fasanara Digital

Fasanara Digital

Market neutral quantitative approach to investing in cryptoassets.

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