No Definitive Agreement Has Been Reached On The Debt Ceilings Despite A Productive Discussion; Tornado Cash Attacker Proposes To Restore Protocol Governance

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Our Daily View

What We Are Covering Today

• House Speaker McCarthy and President Biden hold productive discussion on debt default; Federal Reserve officials debate interest rate increases (more in Macro & TradFi)
• Digital Currency Group (DCG) misses $630M payment to its subsidiary, Genesis Global Capital; Tornado Cash attacker proposes to restore governance control (more in DeFi & CeFi)
• BTC accumulation among retail investors contrasts with historically low crypto trading volumes amid market uncertainty (more in On-Chain)
• Increased volatility risk premium for both ETH and BTC as RV falls; continued large open interest and volume in end-June contracts (more in Crypto Derivatives)
• ETH/BTC pair: Ethereum's strength signals potential upside (more in Crypto Technical Analysis)

Macro & TradFi

House Speaker Kevin McCarthy and President Joe Biden had a productive discussion but did not reach a deal to prevent a potential US debt default. Treasury Secretary Janet Yellen previously warned that the Department would likely run out of cash by early June, with default possible as soon as 1 June. Republicans aim to reduce domestic spending over an extended period, while Democrats propose smaller cuts over a shorter timeframe and seek defense spending limits. McCarthy emphasized that defense cuts should not be considered, and he also mentioned that the 72-hour review rule for legislation would not be waived, increasing the pressure for an agreement on the matter.

Meanwhile, Federal Reserve Bank of St. Louis President James Bullard and Minneapolis colleague Neel Kashkari remarks on Monday pertaining the need for further interest rate increases by the Federal Reserve. Bullard supports two more rate hikes in 2023 to curb inflation, while Kashkari suggests that if the central bank pauses at the next meeting, it should signal that tightening measures are not over. Chair Jerome Powell's recent indication of a possible pause in June to assess the impact of previous rate hikes and strains in the banking sector has fueled the debate. According to interest-rate futures contracts, investors currently perceive a likelihood of approximately 15% for officials to raise interest rates by 25 bps next month.

Lastly, on Monday, the stock market experienced mixed results as the Dow Jones Industrial Average declined by 0.42%, the S&P 500 index showed a slight gain of 0.03%, and the NASDAQ Composite index rose by 0.50% at the close of trading on the New York Stock Exchange. Treasury yields remained relatively stable, with the two-year yield decreasing by 2 basis points, while the 10-year yield remained unchanged. In the commodities market, gold futures saw a minor decrease of 0.3%, whereas crude oil exhibited an upward trend, with WTI prices surpassing $72 per barrel. Meanwhile, the Nikkei 225 and Topix indices in Japan continued their upward trajectory, recording gains of 0.35% and 0.53% respectively.

DeFi & CeFi

• DCG misses a $630M payment to Genesis Global Capital
• Tornado Cash attacker proposes to restore governance control with questionable intent
• Narwhal Finance concludes a strategic round at a valuation of $25M involving Animoca Ventures and others
• Layer-1 blockchain TON Foundation announces a $25M accelerator program
• Huobi Global forced to stop operations in Malaysia
• BitMEX plans to launch a dedicated service in Hong Kong
• Crypto exchange Hotbit halts CEX operations

Last week, blockchain-focused investment firm, DCG, missed a repayment of $630M to its own subsidiary, Genesis Global Capital. The firm has been struggling with finances since the crypto contagion of 2022. This raised concerns about the possibility of a default among creditors of Genesis, including cryptocurrency exchange Gemini. Genesis reportedly owes Gemini an outstanding amount of over $900M. Earlier this year, Gemini co-founder Cameron Winklevoss raised the issue on Twitter and threatened to sue DCG and CEO Barry Silbert. Gemini has announced that with the other creditors, it will consider the option of forbearance, allowing DCG and Genesis to reduce or temporarily pause payments. Gemini has filed a motion with the bankruptcy court to propose a reorganization plan with Genesis without the need for DCG’s consent.

Tornado Cash’s attacker submits an unexpected proposal to restore governance status, returning control to TORN token holders. This change also removes the malicious code added into the protocol by the attacker. Tornado Cash community member Tornadosaurus-Hex mentions in the forum that the proposal will likely go through when voting closes on 26 May 2023, considering the amount of governance tokens that the attacker holds. Despite a 10% increase in TORN token price, many in the community remain skeptical about the intent behind the proposal, speculating that the attacker could be planning to sell and dump the token by raising prices through the proposal. Nonetheless, the community has limited say in the proposal since the attacker controls a significant portion of the governance token.

On-Chain

Analysis of BTC addresses over the past 14 days, juxtaposed with BTC price trends and 7-day changes, has yielded some insightful observations. Data suggested that there is a marked increase in BTC accumulation, represented by clusters of purple, predominantly among wallets holding less than 10 BTC during periods of price dips. Over the past month, there is a strong inclination among most address tiers towards holding and acquiring more BTC. Interestingly, this pattern seems less pronounced within the 10,000 to 100,000 BTC balance tier, suggesting that retail investors are the driving force of the accumulation of BTC rather than whales.

On the other hand, the latest report from @Santiment indicates that we are experiencing historically low levels of trading volume. Altcoins are significantly impacted, but the trend is widespread, affecting even BTC and ETH. The combined trading volume of these two largest cryptos is currently at its second lowest level since September 2019. An explanation for this phenomenon could be that many investors are adopting a 'wait and see' approach due to potential macroeconomic factors, regulatory news, or ahead of significant updates in the crypto space.

Crypto Derivatives

• BTC and ETH funding rates remain positive
• 30-day BTC ATM IV slightly fell to 43.08% while ETH ATM IV rose to 43.66%
• Deribit Implied Volatility Index (DVOL) is 47.57% and 48.08% for BTC and ETH respectively
• 30-day 25-delta skew for ETH and BTC is negative at -2.26% and -0.44% respectively

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

The futures market saw $45.87M in liquidation yesterday with 58.3% coming from longs at $26.74M.

On the options front, BTC ATM IV term structure has not made a major move in the last few days as it continues to remain in contango. IV has dropped 3% compared to yesterday at the very front of the curve but has risen about 1% for the further-dated options. Likewise for the ETH ATM IV term structure, IV has increased slightly both at the front and at the back of the curve since yesterday but fell slightly at the middle of the curve. Examining 7-day implied volatility vs realized volatility, this curve also reflects an increased volatility risk premium as realized volatility fell (possibly attributed to the small price retracement in BTC), with IV continuing to remain elevated.

The 7-day 25-delta skew in BTC continues to rise in a stair step formation and was recently priced at 2.14% call premium. However, the current call premium is closer to 0.16%, more neutral in terms of directional bias. On the other hand, the 7-day skew for ETH is near -3%, indicating a greater put premium than last week, where it hovered around -1%. This divergence in skew between ETH and BTC could suggest ETH investors may have greater demand to hedge their downside relative to BTC.

Onto flows, most ETH call volume went into contracts expiring on 30 June. Examining the open interest of the strike prices for that contract, most call contracts are nearly at-the-money at $1800, which is closely followed by the $2000 strike. Notably, there is significant open interest in the deep ITM $400 put, while max pain is at $1600. For the same expiry, some noteworthy trades recorded by @tradeparadigm were 1,000 $22K puts being sold on BTC and 5,000 $2200 calls sold on ETH.

Since yesterday, the top traded strategies for BTC have been long straddles (which profit from an expansion in volatility) and short risk reversals, highlighting a bearish sentiment and uncertainty regarding volatility. For ETH, on the other hand, the top traded strategies have been long ratio call spreads (which profit from a sharp move higher in ETH) and bull put spreads, which are both bullish structures.

Lastly, the VIX rose slightly to 17.21.

Crypto Technical Analysis

Following up on our analysis from yesterday, Bitcoin dominance (BTC.D) continues to demonstrate strength, maintaining its outperformance over altcoins. ETH's performance in the ETH/BTC chart remains noteworthy, although it has encountered resistance at 0.068. We observed the formation of an ascending triangle pattern, suggesting an imminent breakout that could potentially lead to an upward trajectory for altcoin markets if ETH manages to surpass the resistance level. However, market participants may turn to the safety of BTC should altcoins demonstrate any weakness.

Shifting our focus to the 4-hourly BTC chart, we observe that despite bouncing off the $26.6K support level, BTC remains range-bound and lacks a clear bullish impulse to confirm the resumption of the upward trend. Traders are exercising caution as there is uncertainty about the sustainability of this support level, and they await a convincing bullish signal for potential entry. A breach of the $26.6K support level could lead to a rapid price decline to $25K, considering the relatively low trading volume beneath this support level.

On the other hand, on 4-hourly ETH chart, we note that ETH has found support at the $1.8K level, rebounding from the breakdown to $1.73K last week. Taking into account the ETH/BTC chart, ETH demonstrates signs of strength relative to BTC, suggesting a favorable path towards the $1.89K resistance, which coincides with a Fibonacci retracement level. Downside supports can be found at $1.8K and $1.73K.

Access institutional-grade commentary on TradFi × Crypto markets

By Treehouse Research

Read Past Issues

Daily Readings

TradFi

• Japan's Mizuho expands in US banking with $550 mln Greenhill deal

• SoftBank Investment Advisers exploring structured credit fund - source

• JPMorgan sees rise in corporate defaults in Latin America

• Chevron to boost U.S. presence with $7.6 billion PDC Energy buy

• Ford seeks to reassure investors with EV, cost cut plans

• Canadian banks see earnings risk from commercial property loans, TD in focus

• Biden, McCarthy meeting ends with no deal on debt ceiling

• PacWest shares jump after $2.6 bln real estate loan sale

• Treasury confirms U.S. default as early as June 1 without debt ceiling hike

• BNY expands short-term investment options as investors chase yields

• Zoom lifts annual forecasts even as growth slows from pandemic peaks

• Micron expects revenue impact following China ban

• India's economy sustaining recent growth momentum, inflation slowing - RBI

• Isolating China will be 'impossible and dangerous,' analyst says.

Crypto

• Tether Trading Volume Falls to Multi-Year Lows, Market Cap Rise Is ‘Questionable:’ Kaiko.

• Dash Blockchain Halts, Binance Pool Suspends Mining Rewards.

• Web3 Infrastructure Company Upstream Launches ‘Learn and Earn’ DAO Course.

• Seeking Grants Deal with Osmosis, Privacy Blockchain Namada Proposes Airdrop.

• Sen. Warren’s Bill Signals Crypto Is Headed for a Clash With National Security Interests.

• Bitcoin Pizza Day Turns Sour as Meme Coin Shysters Profit Over $200K in Rug Pulls.

• SuperRare's Latest NYC Gallery Pop-Up Will Bring Human Connection Back to NFT Art.

• Crypto Lender BlockFi Shared Unapproved Reorganization Plan 'Prematurely,' Court Says.

• EOS Network Participants Should Consider Legal Action Against Block.one: EOS Foundation CEO.

• Web3 Move-to-Earn App STEPN Integrates Apple Pay for In-Game Purchases.

• Crypto Trading Platform Hotbit Terminates CEX Operations.

• UK Will Need New Laws to Accommodate Future Digital Pound, Lawyers Say.

• Malaysia Says Crypto Exchange Huobi Global Isn't Registered, Must Cease Operations.

• DEX Mangrove Launches on Polygon Testnet, Plans to Go Live on Mainnet in June.

• Gemini Says Genesis Parent DCG Missed $630 Million Payment.

• Tornado Cash’s TORN Token Up 10% as Attacker Submits Proposal to Undo Attack.

Deal Flow

• Bitcoin-focused trading fund is being launched by hedge fund BXB Capital

• Web3 App Development Platform Sort Raises $3.5M to Further Product Growth.

Yours sincerely,
Treehouse Research 🌳