Debt Default Deadline Continues To Approach As Biden Discusses With McCarthy; Tornado Cash Fully Taken Over Through A Governance Proposal Attack

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Our Daily View

What We Are Covering Today

• Biden and McCarthy to resume talks on Monday as debt default deadline approaches; Biden's optimism shines in hopes for improved relations with China (more in Macro & TradFi)
• Tornado Cash taken over through a malicious governance proposal; The Cosmos ecosystem announced the “Mesh Security” initiative (more in DeFi & CeFi)
• Declining Bitcoin network activity, growing self-custody trends signify shifting dynamics and increasing security consciousness (more in On-Chain)
• Uptick in BTC 7-day IV over the weekend; increased divergence in 7-day 25-delta skew between BTC and ETH (more in Crypto Derivatives)
• BTC dominance maintains strength. ETH/BTC pair nears crucial breakout point (more in Crypto Technical Analysis)

Macro & TradFi

Investors are bracing for increased currency volatility and potential equity losses as the US faces challenges in reaching a debt-limit agreement. House Speaker Kevin McCarthy and President Joe Biden are scheduled to meet, with negotiations set to resume on Monday. Time is of the essence, as Treasury Secretary Janet Yellen warns that the US may be unable to pay its bills by mid-June. This debt-ceiling debate adds to existing uncertainty surrounding the Federal Reserve's upcoming policy decision in June, worrying strategists at JPMorgan Chase and Morgan Stanley.

Meanwhile, US President Joe Biden expressed optimism about improving relations with China in the near future, following a previous setback over an alleged spy balloon incident. The administration is considering lifting sanctions on Chinese Defense Minister Li Shangfu, and Biden has expressed hope for a scheduled phone conversation with Chinese President Xi Jinping. However, tensions remain over issues such as Taiwan, with Biden reaffirming US intervention if China were to invade Taiwan. China, on the other hand, insists that the matter should be resolved by the Chinese and has criticized the US for its sanctions and export controls. Despite these tensions, the US has recently engaged with China on various fronts, including meetings between officials from both countries.

Lastly, U.S. stocks experienced a decline on Friday, primarily in the Consumer Services, Telecoms, and Financials sectors. The Dow Jones Industrial Average lost 0.33%, the S&P 500 index declined 0.14%, and the NASDAQ Composite index declined 0.24% at the close in NYSE. In commodities trading, gold futures rose, while crude oil prices experienced a slight decline. The DXY also broke its five day winning streak, falling by 0.44% last Friday. Elsewhere, Japanese stocks remain equity-market darlings as both the Nikkei 225 and Topix indexes continue their upward momentum, with gains of 0.74% and 0.17% respectively.

DeFi & CeFi

• Tornado Cash experienced a malicious governance attack
• Aave V2 experiences a bug on Polygon, causing the inability to withdraw $110M worth of assets
• OKX to enable withdrawals to zkSync Era network
• Bitcoin NFT marketplace DIBA goes live
• Paraspace Co-Founder Jay Yao resigns
• Osmosis, Axelar, and Akash introduce Mesh Security Model that lets chains secure each other

On 2023/05/20 at 07:25:11 UTC, the Tornado Cash governance system was attacked through a malicious proposal that granted the attacker 1.2M votes. With only 7M maximum legitimate votes, the attack effectively grants the hacker full access to Tornado Cash’s governance system. This means that the attacker can withdraw all locked votes and drain all tokens in the governance contracts. On the other hand, the good thing is that the attacker is still unable to drain individual pools through this. Through further examinations, the attack was conducted by adding an extra function in the proposal codes which was called after the malicious proposal was passed by the community to update the proposal logic and grant himself fake votes. As of now, the attacker has already withdrawn 10K TORN and sold all.

Meanwhile, Osmosis has led the development of the new security model - “Mesh Security” in the Cosmos ecosystem. Funded by Osmosis, Axelar, Akash Network, and ATOM Accelerator DAO, Mesh Security aims to consolidate validator stakes from multiple blockchains to secure against potential breaches of staking takeovers in each other. Unlike other Interchain Security (ICS) solutions, Mesh Security combines the market caps for added security instead of a top-down approach from a parent chain. In addition, Mesh Security will not require existing validators to run additional nodes, nor will it require cross-chain linkage of validators on each chain. Instead, Mesh Security allows delegators to stake on both chains in the form of bonded tokens. If the validator misbehaves on one chain, the staked amount on both chains will be slashed. However, validators will also receive staking rewards from the partner chains to compensate for the additional risks. The full development of Mesh Security is planned to be completed in 3 phases, each to take roughly 3 months.

On-Chain

Recent analysis from @Glassnode indicates a noteworthy shift in Bitcoin's network settlement as its Total Transfer Volume (TTV) has declined to $2.73B per day. This suggests fewer transactions are occurring, and less Bitcoin is being transferred on a daily basis.

The figure is particularly lackluster in comparison with the high-activity- level experienced during the Bull Market. To put it into perspective, the network throughput is currently at a staggering 79% lower than its peak of $13.1B observed in the midst of the 2021 primary Bull Market, suggesting a significant shift in the dynamics of the network's performance. This reflects the broader downtrend in market conditions with less activity and lower trading volumes.

Analysis on Santiment have shown an increasing number of Bitcoins and Ether being taken off exchanges and moved into self-custody. Ethereum is currently at 10.1% Exchange supply, the lowest since its genesis. Bitcoin’s Exchange supply is also the lowest since December 2017 at 5.7%. This represents a shift away from reliance on third-party exchanges, indicating a growing sense of security and ownership among crypto owners.

Crypto Derivatives

• BTC and ETH funding rates remain positive
• 30-day BTC ATM IV slightly rose to 43.42% while ETH ATM IV fell to 41.9%
• Deribit Implied Volatility Index (DVOL) is 47% and 46.09% for BTC and ETH respectively
• 30-day 25-delta put skew for ETH and BTC is at 8.67% and 2.32% respectively

Top 3 CEX USDT perp funding rate arbitrage based on last 24-hour lookback:

The futures market saw $98.25M in liquidation over the 3 days with 57.8% coming from longs at $56.86M.

Overall, BTC ATM IV term structure continues to remain in contango, however, the near-dated options (up till about 1 month to expiry) reflect increased implied volatility over the weekend while the rest of the curve (further-dated options) continue to show signs of decreasing IV. In comparison, for the ETH ATM IV term structure, there was a slight decrease in IV across the curve over the weekend. Looking at 7-day implied volatility vs realized volatility, there has been an increase in volatility risk premium due to an uptick in IV (possibly due to BTC quickly rising above and later falling below the $27K level over the weekend ) while realized volatility for both BTC and ETH generally remains flat.

Compared to last week, it is worth noting a divergence in the 7-day 25-delta skew (Put IV - Call IV) between ETH and BTC: the ETH skew stands at 9.14% (put premium) while the BTC skew is at -3.05% (call premium), highlighting possibly increased hedging or greater bearish sentiment regarding ETH's price performance compared to BTC as ETH investors seek downside protection.

Over the last 24 hours, most BTC call volume entered contracts expiring more than a month out, on 30 Jun. Looking closer at the open interest for the strikes expiring that day, most call contracts are concentrated around the $35K strike price and most put contracts are concentrated around the $22K strike price while max pain is at $24K.

The top traded strategies over the last 48 hours for BTC have been bull diagonal spreads and bull call spreads, both highlighting increased bullish sentiment. On the other hand, across the same time period, the top traded strategies for ETH were bear diagonal spreads and call calendars, reflecting mixed sentiment between bearish and bullish strategies.

Lastly, the VIX rose slightly to 16.81.

Crypto Technical Analysis

The Bitcoin Dominance (BTC.D) provides valuable insights into the overall market outlook. It measures the percentage of Bitcoin's market capitalization compared to the total cryptocurrency market. Currently, we are witnessing a sustained relative strength of Bitcoin compared to other cryptocurrencies, with altcoins lagging behind. Monitoring BTC dominance is crucial because many altcoin pairs are experiencing declines in their BTC price. It is likely that BTC will continue to outperform ETH and other altcoins. Examining the daily chart of BTC.D, we observe that Bitcoin's dominance is expected to increase. BTC.D has consistently maintained elevated levels above a 47% dominance threshold, consolidating at this level. Notably, we have observed the formation of three bullish continuation patterns known as bull flags in the past. This trend is likely to persist until there is evidence suggesting otherwise. Moreover, since Nov 22, each retracement of BTC.D has respected the 100-day Exponential Moving Average (EMA).

Shifting our focus to the four-hourly chart of the ETH/BTC pair, we can observe that ETH has outperformed BTC since the Shapella upgrade in Apr 23. However, it has struggled to maintain a level above 0.068. Within this timeframe, an ascending triangle pattern has emerged, indicating an imminent decisive breakout for Ethereum. Two possible scenarios arise: First, if ETC manages to surpass the resistance at 0.068, it could lead the altcoin markets on an upward trajectory. However, this scenario is contingent upon favorable macro market conditions. Alternatively, the second scenario is more likely, where BTC continues its outperformance, prompting market participants to seek safety in BTC.

Examining the daily chart of BTC, we can observe that it has successfully held the support level at $26.6K. Previously, when the price briefly dipped below this level, it was swiftly rejected, invalidating the bearish head and shoulders pattern. A breach below the neckline would result in a rapid downward movement toward the next support at $25K. However, there has not been a definitive show of strength from BTC following the bounce off the $26.6K support, we closely monitor this level for indications of bearish sentiment.

Access institutional-grade commentary on TradFi × Crypto markets

By Treehouse Research

Read Past Issues

Daily Readings

TradFi

• Biden says he won't agree to bipartisan debt-ceiling deal solely on Republicans' terms

• Australia to regulate buy-now-pay-later sector

• Oil supply won't be affected by stricter price cap enforcement, IEA says

• Confidence returning to UK housing market as asking prices jump: Rightmove

• Nearly half of UK firms to defer investment due to tax rises, survey finds

• Fed's Kashkari open to holding rates steady in June, WSJ reports

• Greek PM Mitsotakis says has won decisive mandate to govern

• Yellen says June 1 is 'hard deadline' for raising debt ceiling

• Samsung, SK Hynix shares rise after China fails U.S. rival Micron in security review

• India regulator proposes curbs on derivative-linked share moves

• Here are stocks to own to take the debt ceiling, bond market out of your investing equation.

Crypto

• Crypto Miner Marathon Pledges $500K in Matching Funds to Brink for Bitcoin Development.

• Attacker Takes Over Tornado Cash DAO With Vote Fraud, Token Slumps 40%.

• Is MetaMask withholding customers' crypto for taxes? No, it’s not..

• Biden won't accept debt deal protecting crypto traders — G7.

• Influencer served settlement demand via NFT following $7M token presale.

• US presidential candidate Vivek Ramaswamy to accept Bitcoin for campaign donations.

• Binance provider in Brazil gets payment institution approval.

• 'Big Short' author Michael Lewis says he's almost done writing SBF book

• Swiss canton Zug increases bitcoin, ether tax payment threshold above $1.6 million

• Swaprum DEX team disappears with $3 million in apparent exit scam on Arbitrum network

Yours sincerely,
Treehouse Research 🌳