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Crypto Alpha Recap

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Crypto Alpha Recap

16.03.2023: Arbitrum token confirmed. DeFiance Capital completes $100M token fund. Fidelity Crypto went live. Coinbase introduces Wallet-as-a-Service products. Cosmos launches Replicated Security.

coinershub
Mar 16
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Crypto Alpha Recap

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Wild couple of days. The US Fed announced $25B in funding to backstop banks after we saw the collapse of Silvergate, followed by the closing of Silicon Valley Bank (second largest failure in US history with $209B) and Signature Bank New York on Monday. All three institutions are expected to return full deposits, whether held by reserves or FDIC and US regulators' deposit guarantees. 

It allowed USDC to regain its peg after it went as low as 0.88 cents over the weekend, as it led to doubt in the ability of Circle to process withdrawals and maintain the 1:1 peg. Circle was custodying around $3.3B in SIVB, 8.25% of USDC's $40B market cap. Fiat-collateralized stablecoins are tokens issued on public blockchains that aim to track an underlying fiat currency. For every 1 USDC issued, a promise of $1 is kept in reserve off-chain to back these tokens and handle redemptions accordingly. 

This is a friendly reminder that systemic risk goes both ways and highlights the dangers of excessive reliance on centralized infrastructure. It was ironically making a bullish case for crypto again and why the basic primitives like self-custody, on-chain transparency, and disintermediation are more acute than ever. 

Macro: CPI came in as expected with Core YoY: 5.5% (Est. 5.5%), CPI YoY: 6% (Est. 6%) and has fallen for the eighth consecutive month. PPI came in cool. 

PPI -0.1% M/M, Exp. 0.3% / PPI 4.6% Y/Y, Exp. 5.4% 

PPI Core 0.0% M/M, Exp. 0.4% / PPI Core 4.4% Y/Y, Exp. 5.2%

Markets are now pricing in one more rate hike (25bp priced in around 71%) as the base case, with a pivot in 3 months and 100-125bps of cuts by EOY. ECB raised rates 50bps - more trouble for banks?


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Special Nugget:

Quo vadis USDC?

The digital asset industry is short three crypto-friendly banking institutions in the US and finds itself within an increasingly hostile regulatory environment. New York-based Signature Bank was shut down by state regulators, citing systemic risk. It's the third bank collapse, following Silvergate Bank's voluntary liquidation and Silicon Valley Bank's shutdown. The FDIC took receivership of the bank to protect depositors. Full deposits are expected to be returned, whether by reserves held or via FDIC and US regulators' deposit guarantees. Crypto-only banks Silvergate couldn't recover and is another victim of the FTX contagion, while Signature Bank was closed for not providing data. 

But why should you care about silly banks if you are fully on-chain, is it connected? Everywhere. Unlike USDT (Tether), USDC was always the most trusted stablecoin as its issuer Circle has severe audits and proof of funds. That all changed when it was known that they had USD 3.3B stuck in Silicon Valley Bank (1 of 6 banks used for its ~$40B reserves) last Friday. USDC depgged and hit a low of $0.878 over the weekend before regaining its peg on Monday after the backstop. As degens had to realize that trust in USDC ultimately relies on trusting the TradFi banking system and the government.

DeFi is built on USDC liquidity; it was considered the safest collateral to such an extent that Compound v2 hard-pegged it to $1. But during the weekend, Circle cannot honor redemptions. Why? Banks are closed. The only option was to market sell USDC on DEX/CEX, impacting the peg. 

Let's recap how the peg is maintained for USDC:

  • When USDC < $1.0, arbitrageurs buy USDC and redeem with Circle for $1.0.

  • When USDC > $1.0, arbitrageurs sell USDC for a profit.

Not even announcements from Circle stating USDC will remain redeemable 1 for 1 with the U.S. Dollar & "will stand behind USDC and cover any shortfall using corporate resources, involving external capital if necessary" could stop the PTSD of the UST stablecoin implosion with Terra. Most traders took a "better save than to be sorry" approach. As always, if you panic, panic early; taking a 1% cut is nothing. I was a little late to the party but finally cut my exposure, swapped USDC at 0.975 for Tether, and rebought hours later at 0.93. USDC hit new lows shortly after, and I used a different approach. In hindsight, the best alpha would have been just longing ETH. 

Twitter avatar for @cedzufrei
cidix {313} @cedzufrei
Betting on a quick repegging. Swapped borrowed USDT (ETH collateral) against USDC. There is a small probability that USDC gonna depeg further, but the likelihood of restoring it is higher. The short-term duration mismatch should be fine in the long run if we look at the data.
4:26 PM ∙ Mar 11, 2023

But why did SVB blow up in the first place? Deposits in SVB grew from $60 billion in 2019 to over $189B in 2022. They bought $80B in Mortgage Backed Securities (MBS) with an average yield of 1.5% as interest rates were at historic lows. When rates rise, fixed-income prices fall. And SVB held $120b in securities but didn't hedge their interest rate exposure.

SVB, indeed was picking up pennies in front of a steamroller. Its strategy to invest deposits in long-term fixed-rate bonds — without hedging — was to make an extra 0.4% yield. Additionally, when interest rates rise, SVB's cost of funds (i.e., interest-bearing deposits) increases while its interest income on loans might remain fixed (if it invested primarily in FIXED-RATE USTs!). This leads to a decline in profitability, i.e., lower "NIM" (net income margin). When SVB declared a $1.8B writedown on a $21B sale of almost its entire AFS (available-for-sale) fixed-income portfolio, it caused a bank run, and it's failing.

Meanwhile, Moody’s has cut its outlook for the entire US banking system from stable to negative, and Credit Suisse had to secure a credit line up to CHF 50B from Swiss National Bank. Truly bottom times, banks are collapsing left and right.

Interestingly we are seeing little to no outflows as stablecoin market cap is sitting at $130.4B. As for USDC, there are two paths moving forward.


Meme of the Day:


General:

  • Arbitrum’s long-awaited airdrop to go live next week and will hand 12.75% of its governance token’s supply to its community.

  • Coinflex rebranding to Open Exchange (OPNX), 3AC co-founder’s latest crypto venture.

  • Fidelity Crypto quietly went live, finally giving millions of users access to bitcoin and ether investments. 

  • Coinbase introduces Wallet-as-a-Service products to simplify web3 onboarding.

  • Swiss bank Sygnum is seeing increased client inquiries, particularly from hedge funds, in light of Silvergate shutdown. 

  • US DoJ is probing Jane Street, Jump, and Alameda over Terra stablecoin bailout group chats.

  • U.S. Federal Reserve is activating its long-awaited real-time payments system in July.

  • Binance is converting the remaining $1B industry recovery funds from BUSD to BTC, ETH, and BNB.

  • OpenAI’s newest version of Chat GPT-4 is taking the crypto world by storm.

  • Goldman Sachs filed a patent for blockchain tech to integrate with the settling mechanism.


DeFi & NFTs:

  • Lending protocol Euler has lost around $197m in DAI, WBTC, sETH, and USDC. in a flash-loan attack. The hackers seem to be the same ones that exploited some BSC projects a few weeks ago. Euler Finance’s offer to hackers: Keep $20M or face the law. Affected protocols: Angle, Balancer, Yearn, and Alchemix.

  • Aztec announced the closure of Aztec Connect (zk.money). Deposits will be disabled in a week, and users will continue being able to withdraw with no fees for one year.

  • Cosmos approved a proposal to launch v9-Lambda and released Replicated Security, allowing other chains in the Cosmos ecosystem to lean on its network security. It leverages the Security and provides value accrual to the ATOM ecosystem, as up to 25% of the app chain fees are distributed as rewards to Cosmos Hub stakers.

  • Gearbox V3 teaser: ReDEFIning leverage and lending.

  • Lido expects staked Ethereum withdrawals in May.

  • Uniswap is now live on BNB Chain.

  • dYdX passed the vote to reduce trading rewards by 45%.

  • Meta plans to stop working on NFTs.


Funding:

  • DeFiance Capital completed the first close of a $100M liquid token fund.

  • Alpha Transform Holdings announced $100M for two new funds.

  • Proven, working on zk proof of solvency, raised a $15.8M round led by Framework Ventures.

  • Kresus, building a “goof-proof web3 super-app”, raises $25M series A.

  • Violet launched Mauve DEX and raised $15M, backed by Coinbase Ventures & Brevan Howard.

  • Matchday, a soccer-centric Web3 gaming startup, raised $21M in seed funding.

  • Crypto payroll startup Toku raised $20M led by Blockchain Capital.

  • Web3 developer tools provider Cubist raised $7M in seed funding led by Polychain Capital.

  • Layer 1 blockchain Shardeum raising $5M in a strategic round at a $250M token valuation.


Crypto Twitter:

Twitter avatar for @brian_armstrong
Brian Armstrong @brian_armstrong
Excited to keep updating the global financial system using crypto technology with our international expansion efforts - today with a big announcement in Singapore. The U.S. regulatory environment has fallen behind other major financial hubs (UK, SG, HK, etc) in terms of creating… https://t.co/gVbupF0XRZ
Twitter avatar for @coinbase
Coinbase @coinbase
Exciting news for our Singapore customers! Coinbase is introducing free bank transfers and Singpass integration, making it easier to join our platform. We've upgraded our help center, created Coinbase Learning and are offering 200+ assets for trading. 👀👇 https://t.co/iQgt51esvy
8:35 PM ∙ Mar 15, 2023
518Likes73Retweets
Twitter avatar for @LinusEkenstam
Linus (●ᴗ●) @LinusEkenstam
Here are some incredible things people are already doing with GPT-4 It’s been less than 3.5 hours 🧵 A thread
9:27 PM ∙ Mar 14, 2023
20,612Likes4,732Retweets
Twitter avatar for @cedzufrei
cidix {313} @cedzufrei
1/ Seeing a lot of misconceptions around some facts. Saudi National Bank is just one of the main anchor shareholders (~10%). The drop in CS's share price should primarily be seen as a loss of confidence and not as an indication that the big bank is at risk.
Twitter avatar for @Schuldensuehner
Holger Zschaepitz @Schuldensuehner
Credit Suisse plunges to fresh All-Time low as Saudi National Bank rules out assistance. Now down 96.7% below ATH. https://t.co/33KDigAlDc
2:36 PM ∙ Mar 15, 2023
3Likes1Retweet
Twitter avatar for @GCRClassic
GCR @GCRClassic
The old paradigm of fractional reserve banking will increasingly lose sustainability in the social media era Information flows quicker, causing a reflexive spiral of quicker bank runs that can easily be triggered Slowly, but surely, people will demand an alternative; a new path
Twitter avatar for @GRDecter
Genevieve Roch-Decter, CFA @GRDecter
Silicon Valley Bank's customer withdrawal made history. $42 billion was withdrawn Thursday. That's $4.2 billion an hour. Previous largest bank run in modern U.S. history was Washington Mutual bank in 2008, and totalled $16.7 billion over 10 days. History is being written.
12:54 PM ∙ Mar 14, 2023
1,558Likes230Retweets
Twitter avatar for @LidoFinance
Lido @LidoFinance
In addition to this, stETH withdrawals won’t launch on mainnet until all audits concerning on-chain code are completed (expected end of April). Adding another 2 weeks as a safety margin, the current expectation is for mainnet withdrawals to be live around mid May.
8:28 PM ∙ Mar 14, 2023
14Likes3Retweets
Twitter avatar for @0xjaypeg
jay @0xjaypeg
Here's an analysis on why @GCRClassic 's trade was brilliant Wish I could've had the foresight in the moment https://t.co/lavWAHbGFi
Image
Twitter avatar for @lookonchain
Lookonchain @lookonchain
How did smart trader @GCRClassic respond to the $USDC depegging? - Exchange 3.9M $USDT for 4M $USDC on DEX; - Deposit 30M $USDT and 4M $USDC to #OKX.(Maybe buy $USDC and take profit at 97c.) - Buy 11,655 $ETH with 17M $USDT at $1,459. https://t.co/nuwgtoi4el https://t.co/dPiUTXmDZq
5:42 PM ∙ Mar 14, 2023
Twitter avatar for @Route2FI
Route 2 FI @Route2FI
A mistake I do over and over: I see altcoins that break out but fade the strongest ones in the hope of catching some who haven't moved yet. Most often the strong coins keep pumping, while laggards keep lagging. And every time I fall for it.
8:53 PM ∙ Mar 14, 2023
321Likes28Retweets
Twitter avatar for @thedefivillain
VIKTOR @thedefivillain
Important lessons on narratives and trading from the last 2 months in the crypto market : 🧵👇
2:46 PM ∙ Mar 9, 2023
207Likes56Retweets
Twitter avatar for @CryptoDonAlt
DonAlt @CryptoDonAlt
There are moments when I'm sitting here wondering if I'm the idiot or if everyone else is USDC was one of those instances, I had high conviction it wasn't gonna go to zero BTC is another one right now, I feel like it's just dead simple.
Image
11:45 AM ∙ Mar 15, 2023
775Likes60Retweets

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