Morning Crypto Briefing, May 23: Crypto Consolidation Continues As Buck Slides

Key Points

• Cryptocurrencies are higher on Monday as the US dollar slides and equities firm, though are mostly still within recent ranges.
• Bitcoin was last trading just above the $30,500 mark and ethereum in the upper $2,000s.
• Remarks from Fed’s Powell, Fed meeting minutes, US GDP and Core PCE inflation are this week’s main macro events.

State Of The Market

An ongoing pullback in the strength of the US dollar coupled with an upbeat start to the week in the global equity space means that cryptocurrency markets trading with a positive bias this Monday. The total market capitalization of the cryptocurrency market hit $1.30 trillion for the first time since last Wednesday on Monday, though has since pulled back to around $1.295 trillion, meaning it is higher by over 1.0% on the day.

A weaker US dollar means that USD-denominated cryptocurrencies (and other commodities like precious metals) are cheaper for international buyers, thus boosting their demand. Meanwhile, with cryptocurrencies viewed as highly speculative assets, they have developed an increasingly close correlation to the stock market, which is also viewed as highly speculative, so higher stock prices are also benefitting the crypto prices.

Near $1.3 trillion, total crypto market cap continues to trade within the $1.20-1.35 trillion range established over the past ten or so days, continuing the theme of stabilization. Whilst this has got some crypto bulls hoping that the bottom might be in (total market cap is currently down about 40% on the year and nearly 60% versus last November’s record highs), no substantial rebound is likely in the absence of a rebound in sentiment in global (namely US) equities.

Crypto traders will likely continue to closely monitor price action in the S&P 500 and Nasdaq 100 in the week ahead. The most important events that could trigger price action are Tuesday’s remarks from Fed Chair Jerome Powell, Wednesday’s release of the last FOMC meeting minutes, Thursday’s release of the second estimate of US Q1 GDP growth, and Friday’s release of April US Core PCE inflation (the Fed’s favored inflation gauge).

Expectations that the Fed will tighten interest rates rapidly in the coming quarters to reign in multi-decade high inflation levels in the US have weighed heavily on asset classes such as US equities and crypto in recent weeks. Upcoming Fed events and US inflation data in the coming week will keep this theme in focus, potentially capping any possibility of a rebound.

Meanwhile, indications of a slowdown in US economic activity (be it business surveys or Q1 earnings of major US retailers) are growing, adding to the potential headwinds. This week’s second estimate of Q1 GDP, which already showed a shock contraction, will thus be in focus.

Crypto Price Action

Bitcoin was lasting trading higher by just under 1.0% just to the north of the $30,500 level, in tandem with the broader bounce in crypto markets. That leaves the cryptocurrency still trading within recent $28,700-$31,500 ish ranges, in fitting with the broader theme of consolidation. At current levels, bitcoin’s market cap is around $580 billion and its market dominance is just under 45%.

Ethereum, meanwhile, is also trading higher, though by closer to 2.0% and in the upper $2,000s. Both cryptocurrencies are honing in on their 21-Day Moving Averages in the respective $31,800 and $2,250 areas. At current levels, ethereum has a market cap of just above $250 billion and a market dominance of just under 19.5%.

In notable ethereum-related news, co-founder Vitalik Buterin over the weekend confirmed that the transition of the ethereum blockchain to proof-of-stake from proof-of-work will likely take place this August. Core ethereum developers had last week hinted at a similar timeline.

Meanwhile, Buterin reportedly said over the weekend that, in wake of the latest crypto market tumble, he is no longer a crypto billionaire. Buterin was formerly acknowledged as the world’s youngest crypto billionaire. He wrote the etheruem white paper at the age of 19 in 2014.

Looking at some of the major altcoins, Solana’s SOL, Avalanche’s AVAX and popular ERC-20 dog-inspired meme coin Shiba Inu were all more than 4.0% higher in the last 24 hours, according to CoinMarketCap data.

In separate notable crypto news, Litecoin activated its new procacy protocol update over the weekend called Mimblewimble. LTC/USD was last trading higher by a little over 3.0% and at two-week highs in the $74.00 per token area, giving it a market cap of around $5.0 billion.

DeFi, NFTs News

As the broader Decentralised Finance (DeFi) space continues to lick its wounds post the collapse of the massively popular Terra ecosystem two weeks ago, crypto entrepreneur Justin Sun’s layer-1 Tron blockchain is a bright spot.

Trade value locked (TVL) in the total DeFi space remains stable around the $100 billion mark, where it has been for about 10 days now, data on DeFi Llama showed on Monday. But the TVL in the Tron ecosystem recently jumped to its highest level of the year so far above $5.0 billion, making it the third-largest blockchain by TVL behind ethereum and the Binance smart chain (BSC).

Just ten days ago, Tron’s TVL was around $3.7 billion, with $700 million of this rise coming over the weekend. Most of that jump came from a rise in the TVL on Tron’s largest DeFi protocol JustLend from around $1.8 billion to nearly $2.5 billion over the weekend.

Crypto investors can get a 30% yield on Tron’s algorithmic stablecoin USDD. USDD maintains its peg to the US dollar using a similar mint/burn mechanism to how Terra’s UST stablecoin did and many crypto analysts are worried that USDD could drag Tron and its ecosystem into a “death spiral” just like the de-pegging of UST did. For now, fears that history could repeat itself with USDD is not preventing massive inflows. Whether this will continue is another thing.

Separately, another notable NFT hack took place over the weekend. $70,000 worth of ETH was stolen after well-known NFT artist Beeple’s Instagram account was hacked over the weekend to post a phishing link to his followers.

Crypto Flows

Last week saw a modest net inflow of $280.7 million worth of bitcoin into crypto exchange wallets from private wallets, with $8.6 billion moving in and around $83 billion moving out. That’s not too surprising given cryptocurrency markets remain volatile and uncertainty remains high.

By contrast, ethereum saw a net outflow of around $950 million from exchange wallets, with $4.8 billion being moved into wallets versus about $5.7 moved out. That was despite last week’s near 5.0% drop.

Exchange flows in Tether’s stablecoin USDT stabilized, with a net outflow of about $190 million from exchange wallets. About $5.2 billion was moved into exchange wallets versus about $5.4 billion into private wallets.

Recall that, in wake of UST collapse from its peg two weeks ago, USDT also saw a wobble, falling as low as $0.97. While the US dollar-pegged stablecoin quickly regained its 1:1 peg with the buck after successfully fulfilling the demand for massive USDT redemptions, the market cap of the stablecoin has tumbled. As of Monday, it is around $73 billion according to CoinMarketCap, down about $10 billion since before the UST debacle.

In the past, USDT has faced accusations that it is not fully backed by US dollars or liquid equivalents. Circle’s USDC, the second-largest USD-pegged stablecoin by market cap, has not faced such allegations. As investors withdraw cash from USDT, a portion seems to be flowing into USDC.

USDC’s market cap surpassed $53 billion over the weekend, CoinMarketCap data shows, a jump of nearly $5.0 billion from pre-UST collapse levels. USDC is backed 1:1 with real US dollar/liquid equivalents. Circle this week committed to providing weekly updates on its USDC reserves and liquidity operations, a move that will likely further boost confidence in the stablecoin that many already deem as the “safest” in the cryptocurrency space.

Regulatory Landscape

US Congressman Byron Donalds recently introduced a bill that would prevent regulatory authorities from preventing US citizens from allocating their 401(k) pension savings to crypto. Fidelity has been in the limelight in recent weeks after it announced plans to allow 401(k) account holders to allocate up to 20% of their nest egg to bitcoin, subject to pension plan sponsor approval (i.e. the employer). The Department of Labor has been highly critical of this move, though has said it does not intend to prevent pensions savers from investing in crypto if they so choose.

President of the European Central Bank Christine Lagarde over the weekend said in an interview that crypto is “worth nothing” and “based on nothing”, before calling cryptocurrencies highly speculative and very risky investments. Lagarde cited the example of her son’s investments in the space, which she said have not been totally successful. Though Lagarde is a critic of crypto, she is an advocate for the creation of a digital euro that, she says, would be backed and guaranteed by the central bank.

Elon Musk tweeted over the weekend that the “true battle is between fiat and crypto… On balance, I support the latter”.

A WSJ report released over the weekend citing publically available blockchain data accused the crypto industry of having an insider trading problem. According to the report, several anonymous wallets have shown patterns of buying tokens in the days leading up to a major exchange listing, only to then sell the tokens immediately after. Allegedly, the practice is prevalent on most major exchanges like Binance, Coinbase, and FTX – when these exchanges announce plans to list a token, it often triggers a sharp rally in the cryptocurrency.

The WSJ report cited the example of a wallet that bought $360,000 Gnosis coins in the run-up to its listing on Binance in August. After the listing announcement, Gnosis rallied as much as 7x and the wallet unloaded its coins, making a $500,000 profit on the trade. FTX and Binance both publically denied any knowledge of insider trading within their companies. The accusations strengthen the argument for bringing cryptocurrency exchanges within the regulatory fold.