Securitize Capital Market Commentary — May 31th, 2022
Macro
Equity and credit continued to actively trade as credit spreads tightened and the S&P 500 rallied to more than 4,000. The index remained unaffected by 11.5% YTD decline in pending home sales and the downward revision of 1Q22 GDP to -1.5% quarter-to-quarter. Seasonally adjusted new single-family homes sold has dropped abruptly, 16.6% below the revised March rate (Exhibit 1), reflecting higher mortgage rates and low affordability in the housing market. Headwind for GDP growth was broad-based and sprung from nondurable purchased goods, residential investments, government spending, and exports. On June 1, the FOMC began chipping away at its $9 trillion balance sheet with a $30 billion reduction in Treasury securities and a $17.5 billion reduction in mortgage-backed securities, with another $60 billion and $35 billion, respectively, scheduled for September.
Exhibit 1: Seasonally-adjusted New Single-Family Homes Sold
Source: Bloomberg as of May 27, 2022.
We continue to view the market through a risk-off lens. We experienced a 7–8% bear market rally during the week, as investors rebalanced their books to close a brutal month of May. We continue to argue for a relative-value approach to risk allocation, with cash being the ultimate haven under recessionary scenarios. Indeed, despite of inflationary erosion of value, cash continues to outperform risky assets in every selloff.
Cryptoland
Spot
BTC had been trading range-bound with volatility normalizing at around 65–70% p.a., tracking U.S. tech stock with short lags (Exhibit 2).
Exhibit 2: BTC vs. TQQQ (3x Leveraged Nasdaq 100 ETF)
Source: Bloomberg as of May 31, 2022
The excitement of the week was ETH, which decreased from $1,950 to $1,700 last Thursday, leading to large liquidations in perpetual swap contracts, further exacerbating ETH spot selloffs. This coincided with a “security breach” on the Ethereum Beacon Chain, the Proof-of-Stake (PoS) chain that does not yet carry any transactions. The Beacon Chain was split in two for approximately 1.5 minutes before reorganizing into a single chain, dropping seven blocks that had been produced during that time. Experts speculated this may have been due to a recent soft fork Proposer Boost, designed to give more weight to blocks that were proposed on time rather than those delayed, yet the network allowed the two chains to coexist for seven blocks, as nodes that implemented the Proposer Boost voted for one side of the fork while the other nodes voted for the other side. In our April 29th commentary, we argued for a post-merge yield of 15%+ p.a. A delay in PoS implementation will reduce ETH2.0 return expectations and cause traders to turn to BTC as a crypto native “safe haven” asset, leading to growing BTC dominance over ETH (Exhibit 3).
Exhibit 3: ETH / BTC Cross
Source: Bloomberg as of May 27, 2022
Options
Options markets continue to reflect downside stress with both BTC and ETH risk reversals. Heavy protection buyers at 1,400 strike ETH puts for June suggested that ETH gapping to 1,400 would trigger liquidations in spot, pushing implied over realized volatility as traders cover short volatility positions. We watch ETH at 1,400 price levels.
Spotlight: USD Coin (USDC)
USD Coin (USDC) is the second biggest stablecoin, and fourth in ranking by market cap for all cryptocurrencies. This stablecoin is reserve-backed by the U.S. dollar and short-duration U.S. treasuries. Market cap of USDC is currently just less of $54 billion, $5 billion more than it was 20 days ago. Despite its name, USDC is not issued or backed by the U.S. government and is not a legal tender, but rather USDC’s reserve assets are held in segregated accounts with regulated U.S. financial institutions. This stablecoin maintains its peg by minting one coin every time a dollar is used to purchase USDC on an exchange and burning one coin every time USDC is sold and converted back to dollars on an exchange. USDC operates on the blockchains of Ethereum, Algorand, Solana, Stellar, and TRON.
USDC is managed by Centre, a consortium co-founded by the cryptocurrency exchange Coinbase and Circle, a financial technology company. Per its disclosure report, there is currently $52.9 billion of USDC in circulation, while Circle’s reserve backing count is holding $53 billion as of May 20. Of this amount, $12.8 billion is held in cash with an additional $40.2 billion in short-duration U.S. Treasuries.
While stablecoins like USDC experience less price volatility than other cryptocurrencies, they may be subject to increased scrutiny by regulatory agencies, particularly as USDC continues to gain popularity as:
- a hedge against volatility in cryptocurrency markets;
- dollar exposure for foreign investors;
- blockchain interconnection; and
- a hedge against foreign inflation for non-U.S. investors.
On the Ethereum blockchain, investors have recently preferred USDC over Tether, which we covered in last week’s commentary. USDC has seen $5 billion deposited in the last 20 days at the expense of Tether. Wallet addresses on the Ethereum blockchain that hold more than $1 million USDC surpassed the number of wallets that hold USDT, reflecting investors’ confidence in USDC as a regulated crypto asset (Exhibit 4).
Exhibit 4: USDC vs. USDT # of Millionaire Addresses
Source: Coinmetrics as of May 27, 2022.
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