Securitize Capital Market Commentary — June 13th, 2022
Macro
Last Friday, May headline CPI reading was at 8.6% (vs 8.3% market consensus), a 40-year high, setting hawkish tone for the June 15–16 FOMC meeting. Market quickly priced in a 75bps rate hike. DXY gapped to 104 and stayed elevated above 104. Broad correlated equity markets sold off, led by high beta tech and rates sensitive consumer discretionary names. Nasdaq was down 3.55% and S&P 500 2.91%. S&P500 real earnings yield spell-bounded in negative territory but continued its path to recover, reflecting high equity valuation (Exhibit 1). US Treasury curve continued bear-flattening as both front-end and long-end sell-off during Friday session. 2s underperformed on the curve with a 25bps sell-off, the largest since August 1994, to reach 3.06%. 5s30s curve inversion (about 7bps) resumed recession talk in the market, albeit, too early to infer from major US economic barometers, i.e. employment and consumer balance sheet metrics remain solid. Both CDX IG (92bps) and HY (530bps) experienced a post-pandemic wide; credit market had not priced in quantitative tightening and liquidity premia, we expect further widening. Looking beyond the recession debate, we continue to argue for an “all-weather” defensive portfolio, heavy in cash and cash equivalent allocations.
Exhibit 1: US Treasury 5s vs 30s Basis and S&P 500 Rear Earnings Yield with Recession
Source: Bloomberg as of June 10h, 2022.
Cryptoland
Spot:
BTC dropped below 29,000 after CPI reading release last Friday. The pain did not end here. Last weekend, potential Celsius Network insolvency weighed down on the market; and by Sunday night (Asia Monday trading session), Celsius stopped withdrawals for its customers. The market nosedived with double-digit losses for the day. The sell-off continued with heavy volume on Monday; BTC is at 22,000 and ETH 1,160.
Celsius Network offers retail customers to earn up to 17% per annum on cryptocurrency deposits by, partly, using Anchor Protocol, which offered a yield of 20% before the LUNA collapse. It managed to withdraw $0.54Bn (260k ETH) on May 11th and moved the assets to Aave v2 lending protocol in the form of stETH (staked ETH), which is a “synthetic” ETH and pegs 1:1 with ETH on smart contract. However, Celsius customers have started to pull their assets from the platform en masse as the close call spooked the clients.
To redeem stETH, Celsius can a) wait after the Ethereum network merge and the Beacon Chain launch or b) buy ETH with stETH in secondary markets, which is subjected to supply and demand dynamics. stETH is now 78% of the Curve stETH/ETH pool value; and liquid ETH is only 22%. Such imbalance pushed stETH to trade at a discount of 0.93ETH to 1ETH on Monday (Exhibit 2). Since a significant amount of assets are locked up in various of DeFi protocols, Celsius gated customer redemption requests Sunday night to avoid a classical “bank-run.” We expect stETH/ETH de-pegging to worsen as the Celsius illiquidity issue unfolds. Watching 0.8 stETH/ETH level.
The collapse of Anchor-UST-LUNA Ponzi during the week of May 12th (See our commentary on May 17th) caused permanent damage to DeFi ecosystem. We continue to caution investors against DeFi “yield farming” products, which are analogous to on-chain unrated leveraged structured products without institutional sponsorship.
Exhibit 2: Lido Staked ETH vs ETH
Source: CoinMarketCap as of June 13h, 2022.
Options:
Options markets continue to reflect downside stress with both BTC and ETH risk reversals. Front-end BTC skew is at 35% and ETH at 50% due to significant demand for downside vol. On Deribit, 80mn notional of 1,400 strike ETH puts for June is deep in-the-money now (See May 31st Commentary). Next strike to watch is 1,000 (120mn notional).
Spotlight — USDD (USDD)
On May 5th, Tron founder Justin Sun revealed that the blockchain will have its own native stablecoin. Rather than being backed by reserves, the stablecoin uses Tron’s native coin TRX to help the USDD stablecoin stay pegged to the dollar, along with $10Bn of crypto as collateral. Tron DAO “set its basic risk-free interest rate to 30% per annum.” USDD is an algorithmic stablecoin like UST-LUNA.
Here we highlight few irregularities:
1. Tron claims that they won’t run into that problem as they have “over-collateralized” by 279%. Their reserves currently include 14,040.6 BTC, 140M of Tether, and 1.96M of TRX ($715Mn). Tron DAO currently has 703M USDD circulating, which is 102% over-collateralization, 28% lower than their minimum collateralization ratio of 130%.
2. Tron’s over-collateralization includes previously burned TRX, which has been converted to USDD. Once tokens are burned, they should be erased from the blockchain and should not be available for collateral.
3. The burn and mint mechanism that Tron uses is questionable as their reserves don’t add up and the word “burn” is misrepresented several times on their website.
4. Tron considered their stable coin staking program to be “risk-free,” which is misleading to investors.
Overall, Tron still displays a significantly higher collateral ratio (80%) than Terra (20%) ever did which conceptually makes it a better project. However, current market turmoil cracked USDD-USD peg (Exhibit 3); USDD was at 0.97c to one dollar. To defend its peg, Tron Dao has added $650mn USDC over last few days to 2.5bn, effectively converting USDD to “asset-backed” stablecoin to avoid the demise of UST-LUNA. Current funding rate to short TRX is a negative 500% p.a. on Binance. A potential collapse of USDD-TRX will further deepen crypto winter.
Exhibit 3: De-pegging of USDD to USD
Source: CoinMarketCap as of June 13h, 2022.
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