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Monthly Macro Update (Aug 2022): Fire in the (Jackson) Hole

Photographer: Bloomberg

Markets in August was enjoying an early month continuation of an uptrend, only to be brought back to reality by the Fed when Powell's 8-minute speech reminded everyone that inflation control remains the number 1 priority, even if they have to let the economy suffer. We saw the DXY and long dated US treasury yields continue to climb (US 10year rose from 2.7% to 3.2% towards month end), as market still expects another 50-75bps hike in September. This coming month will be important as Fed is expected to ramp up Quantitative Tightening (QT) while continuing with its rate hike cycle.

Fed Balance Sheet vs S&P500

Crypto, as one may have guessed, continued to become a higher beta collateral damage to tradfi as the corn resumed its downtrend after tapping 25k. Whats more depressing to see was the underperformance against ETH (-7.4% month over month), which can be explained by the recent Merge narrative which is giving the token more positive attention.

Source: Tradingview

Given how little development Bitcoin is undergoing, it's no surprise we're seeing more volume and open interest being switched from BTC to ETH over the past month. This may trigger a lot of BTC maximalists but at this rate there's a chance a real flippening may occur, where BTC will just become a pure store of value (similar to gold), where ETH will take over as the main crypto as an ecosystem and a currency.

BTC vs ETH open interest. Source: Coinglass


The Merge is Coming

Apart from speculating on where the upcoming FOMC and CPI numbers may be, all eyes are centered around the transition from proof of work to proof of stake - which is scheduled to take place slightly ahead of time at around September 13th 2022. For the average user there's technically nothing you need to do as the network will upgrade by itself; however for those who want to speculate on post merge activity, upon the merge the chain will be forked (or split) into another chain, dubbed Ethereum PoW (proof of work). What this means is there will be a duplicated copy of all digital assets (and states) based on that very moment, on the PoW fork chain.

Since it's a copy, those assets on chain will likely be worth close to zero. However, because there are already a couple of large exchanges that declared they will list ETH PoW as a token, there's chance that ETH PoW will still have some residual value. One of the possible reasons you're seeing ETH price heading higher would be because users are converting their digital assets into ETH, so they could obtain more ETH PoW when the merge happens, and sell it on any available exchanges for value. You can also see many smart money trying to hedge their ETH exposure by selling the September contract futures just in case ETH dumps after the merge. You can clearly see that this has become a crowded trade as ETH futures is heavily backwardated:

At the desk here while we continue to remain long term bullish on ETH, we are neutral in the short term as the Macro backdrop continues to cloud over financial markets, crypto included. What makes things even more unpredictable is how we have a US CPI event roughly around the same time as the Merge. Unless one is accumulating crypto for the long run, we strongly advise anyone trying to trade the markets come the merge and CPI.

Here you can see that the vol market is heavily skewed towards the downside for the expiry closest to ETH merge:

Charting wise we're seeing some potential upward momentum on D1 and D3 as RSI and MACD are pointing higher with a potential diagonal breakout; however on D3 there's a potential ichimoku cloud as resistance around the 1750 area. Structurally there will be another area of resistance at around the last local top of 2000 (when the market reversed in mid-August).

On the other hand, if macro weakness decides to take over (i.e. high CPI, hawkish fed, energy crisis in Europe continues), we expect the key 1425 last cycle high support to break once again, sending ETH back to the 1000-1200 area. All in all, we are still too early to tell and will need to see how the price develops in the week of September 11-17.

Opinion: Tornado c(r)ashing the ethos of decentralization

When the crypto and defi movement started in late 2019/ early 2020, the maximalist painted a picture and sold the dream of how everyone can live in a world with censorship resistance and be truly take ownership of one's management of finances, all possible under the Ethereum Smart Contract Blockchain. Two and a half years later, the market cooled off from the high of over $180 Billion USD Total Value Locked (TVL) to a semi ghost town with only $60 Billion USD left in the ecosystem. While many point to the finger of Macro weakness (Quantitative Tightening) and the implosion of Luna's Algo Stablecoin UST, another reason why many funds fled the scene was because many realize it was a goldmine to cyber hackers, preying on unsophisticated on-chain users who entrusted their funds deployed inside the protocols. An estimated of $1.4 billion dollars have been stolen by hackers onchain; the funds were then sent to notorious mixers such as Tornado Cash to effectively 'clean' the stolen funds and make the funds untraceable by cybersecurity professionals.

As crypto becomes more mainstream and institutionalized, funds stolen away from these investors usually do go unnoticed by regulators. That's why in early August the US Treasury and The Office of Foreign Assets Control (OFAC), decided to blacklist any Ethereum Wallet addresses that are/or interacted with Tornado Cash. As their explanation blamed towards North Korean hackers for being the main beneficiaries of the service, it was clear that regulators didn't think twice on the logistics of the ban (or really understand how blockchain works). By banning any addresses that interacted with Tornado Cash, technically any recipient could be subject to a tornado cash deposit, even if it is not initiated by the recipient That was what exactly happened when a malicious user decided to bring everyone (famous) down into the water:

While Aave was kind enough to not freeze the recipients' funds, Stablecoin giant USDC (created by Circle) immediately cooperated with the regulators by freezing any USDC held in addresses that have interacted with Tornado. As USDC was one of the widely used stablecoin, this puts a very bad rep, not only to USDC, but Defi as a whole. How would one feel if a user used Tornado Cash in the past merely for privacy reasons, only to find its USDC funds frozen and unusable?

Adding fuel to the fire, the developer of Tornado Cash was arrested in Amsterdam a few days following the news, sparking further outcry from all of the crypto community. In our opinion, arresting a software developer for creating Tornado Cash would be equivalent to arresting a gunmaker for creating guns. Think about the repercussions of such precedence laid upon other software developers that originally wanted to build privacy technology, only to be potentially sanctioned by regulators in the future.

Should we continue to follow down this path, crypto will just become another centralized, uncensored online platform disguised as "DeFi". What's the point of building a decentralised network then? We do hope the crypto community will continue to push the boundaries on what's possible, preserving the fundamental values of a blockchain: decentralized, immutable, and free.


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