Patrick joined Paul Gordon to review the last week in the crypto markets.
Thoughts on Price Action
The week was a nervous one for traders characterized by panicky traders, a massive sell-off and a huge dip in prices.
The week started with a dip in the 30k range, and then even below on Tuesdays. Order books show that massive bits coming into both ether and bitcoin.
(01:31) “If a support gets touched a few times in a bearish trending market then, in fact, it’s weakening the support and not strengthening it. We’re back to the 34k level which was a magnet or a liquidity pool before. So we rest here now and hope that every other sort of headline might trigger a move of a few thousand dollars easily,” Patrick said on technicals from the week’s trading activity.
The 200-day moving average has acted as key resistance for bitcoin in recent weeks. Last week from the perspective of some technical analysts Bitcoin bounced but when it looked like it was already going through, it got capped at again at the 200-day moving average. Conversely, Ether had been trading above it and found support there yesterday. These two key levels would be levels to watch going forward, Paul suggested.
On the other hand, the BTC/Ether spread still look very weak, Patrick said.
A comparison of how ETH/USD performs, a pair that is currently above the 200-day moving average, with a corresponding change in ETH/BTC would indicate how consistent the moving average metric has performed.
Open Interest in Bitcoin Futures
Another key marker that traders have been looking at is the open interest in Bitcoin Futures. It has dropped significantly from its April highs, down by almost 60%.
(03:56) Patrick believes the majority of the open interest decline rather than liquidations is coming from the unwind of carry trades.
(04:02) “People who were running long spots short the future and nicely carrying a good interest rate down the curve, that’s gone now. The curve is mostly flat now. We’re in the single-digit percentage points for the December contract so people are mining these trades and that is shown in the open interest,” Patrick explained.
The MicroStrategy Debt Strategy
MicroStrategy has been a key mover of the market in recent times. Their strategy for financing bitcoin purchases has been heavily focused on debt. The issuance of their most recent USD 500million bond coincided with a strong rally in Bitcoin price. The bond has dropped below par as a result of the sell-off in the past few days.
The idea of financing the purchase of Bitcoin with debt especially as a convertible instrument does not make a lot of sense, Patrick said.
(05:53) “You have certain triggers that could come up where you lose control
on what you do with the investment. For example, you need to contact the board if you run into negative equity on such an investment,” Patrick explained.
On the other hand, Patrick believes that corporations should think about having BTC on their balance sheet. Companies could leverage Bitcoin as a cash reverse or store of value over long periods or ease wealth transfer between countries if they are global, but certainly not with debt financing.
(07:34) Should some trigger cause a liquidation from MicroStrategy,
it could have a huge impact on the market overall.
(08:22) “People need understand that in the crypto market, there are not that many institutions looking at Bitcoin as a value investment and say now it’s cheap so I buy. If 100,000 bitcoins hit the market, it just goes lower, probably two to zero,” Patrick said.
It is even likely for people to intentionally manipulate the market by activating triggers that lead to conclusions they are already aware of.
Politics and Clamp Down on Bitcoin Mining
(09:39) Rumours of the Chinese government clamping down on Bitcoin mining are getting real as the days go by as evidenced by significant drops in several indicators.
The Hash rate has dropped more than 50% from its previous high and the seven-day moving average has dropped by 40%. Lower hash rates are increasing profitability for active miners and Chinese miners are looking to evacuate China with the hardware to operate elsewhere.
(10:41) This political interference with mining in China may not be bad at all, Patrick suggests. In fact, in the medium to long term, it may be a good thing for Bitcoin and the larger crypto mining industry. China is notoriously shady in how it conducts its business. It is not very accessible to the western world, it is not open to regulations and the government has a history of hunting businesses solely on political biases.
The only worse effect in the short term may be the influence it would have on the perception of the retail trader.
(11:26) “The retail guy sees China is banning bitcoin and bitcoin trading and mining then starts to think this is all bad. Let’s sell bitcoin and maybe even some miners had to sell some bitcoins to finance their move,” Patrick said.
With the difficulties miners are facing in moving from China because not many other locations exist for miners, we can expect the reduced hash rate to be stabilized. The increased profit for miners means reduced pressure to sell Bitcoin, and that in the medium-term could positively affect the price of Bitcoin.
A lot of investments have already gone into projects in China so this transition would be hard on some people but overall medium to long term, this would be positive, Patrick said.
FATF Proposal on VASPs
(14:11) The Financial Action Task Force (FATF) the global organization for fighting money laundering has proposed new guidance in its recent plenary for how they seek to regulate Virtual Asset Service Providers (VASPs). The new guidance would cover DeFi and NFTs and enforce the travel rule amongst VASPs.
As with many regulatory interventions, the tussle is between easing operation for incumbents and making it burdensome to operate under shielding policies.
(14:51) “The BIS (Bank for International Settlements) also proposed
RWA(Risk-Weighted Assets) charges for cryptocurrencies and they used the highest possible level to it so it doesn’t make it easier for me as a regulated broker to run the trading desk with such charges right. It just makes it expensive,” Patrick commented.
(15:32) By the same measure, if VASPs will find it difficult to transact with other regulated counterparties or traditional finance counterparties, regulations such as these will delay the process of mass adoption.
Eventually, for DeFi to succeed, companies would need to find a way to comply or regulators would need to take steps towards companies that make it a little bit easier for them, on the way to mass adoption for users who get better services than exist now.
How Companies Should Approach Changing Perspectives of Regulators
In the recent past, central banks together with regulators were adamant about progressing the move to digital currencies. However, it is becoming clear that their stance keeps changing towards adoption.
A recent paper this week by the BIS extols CBDCs (Central Bank Digital Currencies) although they previously have been unreceptive to the idea. The acceptance of CBDCs by the BIS means they would be setting their own rules on how they should be regulated. For people building in DeFi and crypto, this trend of regulators and institutions coming late to the party is not new. Yet this begs the question of how DeFi developers should approach such regulations, whether to ignore them and build their solutions or somehow foresee their coming.
(18:02) Patrick believes that particularly, the BIS’s flip-flopping was because they needed to wait till regulators in different countries were more aligned on they were going to regulator VASPs. As soon as the BIS saw that regulators had properly implemented AML and KYC checks for movement of tokens amongst other things, they understood that they would not become problematic.
(18:48) “There are lots of studies out there showing the advantages of having a CBDC and it’s now a case of if you don’t have a proper project and you’re not getting on board with it, then you’re going to be left behind,” Patrick said.