August 3, 2022|Commentary

Commentary from the Desk: August 3, 2022


This week, we are closely following 3 key themes:

1. Macro environment is supportive for risk assets
2. ETH continues to be the focus into the Goerli testnet merge
3. A surge in Merge-focused derivative activity

**Before we jump in: On Monday, DRW Partner & Global Head of Cumberland Chris Zuehlke joined CNBC to break down his outlook for bitcoin and the overall crypto market. Lots to mull over from Chris’s commentary. Watch it here.

1. Macro environment looking supportive for risk assets

Q2 earnings performance has been solid so far, with ~70% of companies beating earnings and margin forecasts. Indeed, consensus earnings from the Street are starting to go down, but only slightly, with margins continuing to expand into 2023.

While valuation multiples are down ~20% since the peak (and far more in higher growth tech stocks which we see as the closest proxy for crypto), multiples have recovered by ~10% since the lows, helped by FOMC last week. Given an improving inflation/rates outlook (discussed below) and earnings healthier than feared, we believe the outlook for equities appears supportive and given high correlation to crypto we believe this should be positive for the crypto space.

And perhaps most importantly, the Cleveland Fed’s CPI projections for July shows inflation cooling around 0.3%, which the lowest it's been since January 2021, and a major drop from the 1.3% of June 2022. This is supported by oil prices falling to the low-mid $90s, clear signs that the labor market is starting to ease and other key commodities like grain down 20% from the May peak. This is a clear indication that inflation is now coming under control – and we think should be taken very positively by the market.

Adding to the momentum, 10-year U.S. treasuries are down from a peak of 3.5% to 2.8%. The 2s vs 10s spread is currently around 30bps, the widest spread since 2000. This is generally a very powerful leading indicator for an upcoming recession and highlights the extent to which the Fed has front loaded rate hikes.

2. ETH noise continues to dominate the spotlight

Over the past few weeks, the noise and action in the Ethereum space has continued. Most of it has been around the upcoming Merge and the final Goerli testnet merge is scheduled for mid-late next week. The question is to what extent a successful final testnet merge will be a catalyst for investors. On the one hand, perhaps the market sees this as a foregone conclusion and in fact it may be so esoteric that it fails to gain much attention; on the other it may be seen as a removal of the final technical blocker for the mainnet merge, essentially materially increasing the likelihood of a September merge. As such we may see material capital inflow into Ethereum in the coming weeks given the event derisking, especially given an improving macro backdrop.

On a separate note, Ethereum miners are proposing to fork the main Ethereum chain, which means taking a hard copy of the existing ETH network and running it separately in parallel.

For example, if you own ETH, you will transition to the proof-of-stake ETH and also receive an “airdrop” of this new forked proof-of-work version 2 of ETH, along with the forked versions of the ERC-20 coins.

Will that be a potential threat to the new proof-of-stake ETH? Probably not. Will it have value? It depends. These ERC-20 tokens are unlikely to be supported by the major protocols and therefore the platform is unlikely to have much underlying value by L1 standards at least.

3. A surge in Merge-focused derivative activity

This potential fork and airdrop is leading to backwardation in the futures market as people are going long ETH spot and shorting the future against it for a potential free airdrop with the price exposure hedged. The more credible this ETH fork is then the more valuable it will be and as such we would expect to see more backwardation across the futures curve.

Outside of that, there’s been a strong uptick of global macro hedge fund activity around the Merge. Investors are buying more creative long-term call option structures, with December showing the largest concentration open interest.

Also for the first time ever, the value of ETH option open interest has surpassed the value of BTC options open interest, sitting at $5.7bn vs BTC’s $4.3bn at time of writing. In addition, the put-call ratio on ETH options has fallen to 0.26, indicating bullish options positioning.

Other Going-on ICYMI:

Nomad/Connext, an optimistic bridging protocol, was hacked late Monday evening. An official post-mortem from the Nomad team has yet to be released.

Several Solana users were exploited on Tuesday evening. While the specific details of the hack have yet to be identified, it seems to be a wallet infrastructure issue. The hacker was able to steal $6m from more than 8,000 wallets.

Aave released a new decentralized multi-collateral stablecoin called GHO, which was just approved in a governance vote and native to the Aave Protocol. Specific details as to how this stablecoin will be implemented will have to be voted on by the DAO.

● There has been a lot of discussion around Uniswap’s potential revised fee switch. The DEX currently imposes a 0.3% fee for trading tokens on the platform. The proposed fee switch would move 0.25% of the 0.3% fee to LPs, and the remaining 0.05% will go to the DAO but it is uncertain whether this will result in a return to token holders or be used for other purposes.

● Generalized cross-chain token bridge and messaging protocol Synapse launched Synapse Chain, a new smart contract execution layer built atop Synapse’s generic cross-chain messaging system and value bridge.

● Web3 investor Variant introduced a new $450m fund called Variant Fund III which will focus on investing in builders of the user-owned web. The fund make-up includes both a $150M seed fund and a $300M opportunity fund to double-down on projects with demonstrated traction from the Variant portfolio and beyond.

“The information (“Information”) provided by Cumberland DRW LLC and its affiliated or related companies (collectively, “Cumberland”), either in this publication or document, or on or through, is for informational purposes only and is provided without charge. Cumberland is not and does not act as a fiduciary or adviser, or in any similar capacity, in providing the Information, and the Information may not be relied upon as investment, financial, legal, tax, regulatory, or any other type of advice. The Information is being distributed as part of Cumberland’s sales and marketing efforts. Cumberland makes no representations or warranties (express or implied) regarding, nor shall it have any responsibility or liability for the accuracy, adequacy, timeliness or completeness of, the Information, and no representation is made or is to be implied that the Information will remain unchanged. Cumberland undertakes no duty to amend, correct, update, or otherwise supplement the Information. In addition, any person wishing to enter into transactions with Cumberland must satisfy Cumberland’s eligibility requirements. The

Information has not been prepared or tailored to address, and may not be suitable or appropriate for the particular financial needs, circumstances or requirements of any person, and it should not be the basis for making any investment or transaction decision. THE INFORMATION IS NOT A RECOMMENDATION TO ENGAGE IN ANY TRANSACTION. The virtual currency industry is subject to a range of risks, including but not limited to: price volatility, limited liquidity, limited and incomplete information regarding certain instruments, products, or cryptoassets, and a still emerging and evolving regulatory environment. The past performance of any instruments, products or cryptoassets addressed in the Information is not a guide to future performance, nor is it a reliable indicator of future results or performance. Investing in virtual currencies involves significant risks and is not appropriate for many investors, including those without significant investment experience and capacity to assume significant risks. Any person seeking to invest in or trade virtual currencies should do so only after engaging in their own research and obtaining their own advice as to whether virtual currencies may be appropriate in the context of their individual circumstances.

Cumberland is a principal trading and market making firm, and Cumberland may be subject to certain conflicts of interest in connection with the provision of the Information. For example, Cumberland may engage in transactions in a manner inconsistent with the views expressed in the Information, and transactions entered into by Cumberland could affect the relevant markets in ways that are adverse to a counterparty of Cumberland. If any person elects to enter into transactions with Cumberland, whether as a result of the Information or otherwise, Cumberland will be acting solely in its own best interests, which may be adverse to the interests of such persons.”

Back to commentary