With the outbreak of war in Ukraine, crypto markets saw only a brief sell off which was quickly followed by ‘buy the dip’ demand from investors. With crypto prices already down up to 30% YTD for Ethereum, ~40-50% for the majority of the L1 group and up to 70% or more for some DeFi names. In the following days, markets have continued to rally with bitcoin, leading the move driven by macro considerations and bitcoin’s increasing relevance as a store of value for emerging market investors, along with the increased likelihood for bitcoin and other cryptocurrencies to be adopted as reserve assets. Moreover, the capital controls introduced in Russia along with the queues outside retail banks and the closure of, for example, Apple Pay have served as a reminder of the permissionless nature of crypto and DeFi. Similarly, with rising energy prices, long term interest rates have begun to decline, with the 10 year Treasury yield currently at 1.78% compared to slightly above 2% last week. Rate hikes are generally less effective against inflation if that inflation is being driven by energy prices and ultimately geopolitical considerations. The bond market is therefore assuming the Fed is under slightly less pressure to hike rates, despite the stagflationary shock from higher energy prices. We feel ultimately bullish for cryptocurrencies since this implies lower real yields for dollar based fixed income.

Bitcoin dominance has continued to rise and is currently at 44%, up from the January lows of ~39% but below the July highs of ~49%. We see the latest moves (up from $38k to $44k yesterday following Russian capital control announcements) as being driven by fresh capital rather than short side liquidations or long derivative volumes, given liquidation volumes have been relatively low and open interest has been slightly falling. Over the last few weeks, open interest in bitcoin has fallen slightly, from ~360k contracts to 330k contracts at present and this has likely been due to a reduction in short positions. However, looking back to December, there was a build up of open interest throughout the month as prices fell from ~$49k to $40k which means there is likely a meaningful number of short positions with an entry level of $45-$49k which have not been squeezed out yet. As a result, they will likely begin to experience losses should the market continue to rally, which may result in further short squeeze which could add momentum to any rally.

On chain metrics continue to be largely supportive. Long-term holders have continued to accumulate throughout the recent weakness and have shown few signs of selling so far. Most of the distribution has come from short term investors, particularly those that bought the top. We can also see from realized price distribution analysis that this concentration of coins acquired in the low $60k range in November have now shifted to new holders with a concentration in the high $30k range. These new buyers are in profit and under no pressure to sell, but time will tell how long-term oriented these new holders are, as they may act as a source of sell pressure should markets continue to rally.

btc liquidations graph

Outside of the geopolitical space, newsflow has been fairly limited. In the L1 space, the stand out name has been LUNA, which has rallied over 80% since the lows last Thursday. This has largely been driven by the ongoing inflows into UST, the stablecoin of the Terra network, as UST deposits on Anchor offer rates of 19.5%. UST market cap is currently $13.1m which compares to just over $10bn at the start of the year.