August 2021 commentary
Charts of the month
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.
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.
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.
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.
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.
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.