US Government Debt Ceiling Shows Progress; Coinbase Sued for Insider Trading

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Our Daily View

What We Are Covering Today

• US government debt ceiling debate makes the first sign of progress in months (more in Macro & TradFi)
• Maverick pushes new incentive programme to maintain price stability in liquidity pools; Coinbase executives and board members sued for insider trading (more in DeFi & CeFi)
• Bitcoin transaction fees highest since July 2021; Stablecoin balance on exchanges fell to 2-year low (more in On-Chain)
• Options IV remains sluggish going into FOMC; BTC-ETH IV spread near parity (more in Crypto Derivatives)
• BTC's slowing momentum and ETH's bearish descending triangle pattern reveal market indecisiveness, suggesting potential downside risk for both (more in Crypto Technical Analysis)

Macro & TradFi

Treasury Secretary Janet Yellen warned that the US government may default on its debts as soon as 1 June 2023, earlier than the prior estimate in July. In response to the warning, the White House invited top Republicans and Democrats to discuss the potential raising of the country’s roughly $31.4 trillion borrowing limit on 9 May 2023, marking this as the first sign of progress amidst months of debate. Failure to raise the debt ceiling could have serious economic consequences as the US government debt is a safe-haven asset that indirectly affects interest rates worldwide. Investors are already showing concerns, with many buying ultrashort-term Treasury bills that will mature before the possibility of default.

The debate on the debt ceiling comes at a fragile time for the US economy. The Federal Reserve has implemented an aggressive series of interest rate hikes to counteract inflation, and US GDP increased at a slower rate in the first quarter of 2023 compared to the previous quarter. Job openings fell to their lowest level in nearly two years in March, and layoffs rose sharply. Morgan Stanley and Citigroup have also announced job cuts in response to rising cost pressures.

The stock market took a sharp downturn on Tuesday as investors reacted to the looming Federal Reserve interest rate decision and concerns about the banking sector. The DJIA led the decline, falling 1.1%, while the S&P 500 and Nasdaq Composite followed and declined 1.2% and 1.1%, respectively. The Federal Reserve is expected to proceed with another interest rate increase on Wednesday, aimed at cooling inflation that remains above target. On the other hand, wagers are building that the central bank may start cutting rates over the next few months. Larger regional banks, such as Zions Bancorp, Comerica, and KeyCorp, were among the S&P 500’s biggest losers, all declining more than 9%, and energy sector stocks were also affected, with Brent-crude futures falling $5 per barrel.

DeFi & CeFi

• Maverick unveiled novel incentive system to maintain price stability
• Coinbase shareholders filed a lawsuit against executives and board members for insider trading
• Biden administration pushes for tax on crypto mining
• Bybit launches crypto lending services
• Coinbase opens crypto derivative exchange in Bermuda
• Citi reduces Coinbase rating from buy to neutral
• Digital bank Revolut provides crypto investment in Brazil
• Blend surpasses $16M in loans after launch on May 1
• Cosmos-based project Sommelier runs cross-chain DeFi vaults on Arbitrum One using interoperability protocol Axelar

The board members of Coinbase are facing a lawsuit alleging insider trading after the company opted for a direct listing of its existing shares on 14 Apr 2021, instead of a traditional IPO in which new shares are issued. The direct listing allowed the board members to dump their shares worth $2.9B while an IPO would have a lockup period where insiders would not be able to sell their shares. Additionally, the suit alleges that Coinbase only released material information that would negatively affect the share price to the public after board members had sold their shares. The news includes the loss of customers due to them changing the transaction fee structure and its plan to raise $1.25B through issuing new convertible notes which would dilute existing shares.

Meanwhile, Maverick, a DEX platform, has implemented an automated market maker (AMM) algorithm that rewards liquidity providers with a portion of the trading fee. The new incentive model offers an additional layer of reward, where token issuers reward liquidity providers for maintaining liquidity in tighter price ranges, encouraging price stability. Lido Finance has joined the program as one of the first protocols and will deploy incentives in the form of $LDO to Maverick's wstETH-ETH liquidity pool.

On-Chain

The amount of stablecoins held in centralized exchange addresses has reached its lowest point since May 2021, indicating that investors are increasingly risk-averse. The balance of stablecoins has decreased by over half since reaching a record high of $44 billion in December 2021, due in part to regulatory crackdowns on BUSD and USDC. Tether (USDT) has become more dominant while BUSD and USDC have lost ground. Despite the rise in Bitcoin price in 2023, the market has yet to see new money inflows.

Bitcoin transaction fees have spiked to their highest level since July 2021, with over $7.6 million paid in fees for ordinal inscriptions on Tuesday. This increase in demand is attributed to the BRC-20 token standard, which allows for the creation of tokens and meme coins on the Bitcoin network. This has resulted in over 1 million new inscriptions being added to the network in less than a week. While high fees incentivize miners and enhance network security, they also increase the cost of transactions on the network.

Crypto Derivatives

• BTC and ETH funding rates remain positive
• 30-day ATM IV fell to 50.00% and 50.33% for BTC and ETH respectively
• 30-day 25-delta put skew tightened to 0.01% and -1.25% for BTC and ETH respectively

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

The futures market saw $45.31M in liquidations with the majority coming from shorts at $30.75M as majors rallied ~2%.

On the options front, IV remained flat, with no new significant buyers of volatility ahead of the FOMC. Currently, both BTC and ETH 30-day IV are trading near parity, which is unusual given that ETH volatility tends to be 10~20 points higher than BTC. As for the contracts expiring on 4th May, IV remains bid across the backwardated term structure as it prices in event IV for the forthcoming FOMC meeting, albeit sluggishly in comparison to previous meetings where IV has typically traded at a higher level. Put skew, on the other hand, continues to tighten as activity on the put side sees light.

On the flow side, the majority of activity is coming from the 5th of May expiration, with the bulk of volume in puts, notably at the 27.5K strike level for BTC. In addition, the 27K level is also a critical threshold as dealers short gamma, in which a break below this key point would exacerbate volatility to the downside. Meanwhile, the 31K level serves as a potential resistance zone as dealers have positive gamma exposure in that area.

Elsewhere, top trades hitting the tape include the purchase of 500x BTC-05MAY23-27500P and 2500x ETH-05MAY23-1800P (@tradeparadigm).

Finally, the VIX added 1.7% points to 17.78%, while the VIX1D index doubled to 19.82% from 10.06%.

Crypto Technical Analysis

On the TA front, the Heikin Ashi 4-hour chart for BTC illustrates a slowing momentum, with candles clustering around the 3MAs on the daily timeframe. This pattern could lead to a potential downside of 4.5% to the support level at $27.2K. On the Heikin Ashi daily timeframe, BTC is range-bound, with support at $27.2K and resistance at $30K, indicating indecisiveness among market participants. The RSI, which remains neutral at 50.60 and 49.43 for the 4H and 1D time frames respectively, supports this observation.

In the case of ETH, the 4-hour timeframe shows a descending triangle pattern, typically considered bearish, suggesting that the market is anticipating a downward move. Adding to this bearish outlook, the price is facing resistance from the 50-period moving average at the 4H time frame and currently hovers around the support level of $1.86K. If the price breaks this support, the next support zone is at $1.72K, representing a potential downside of approximately 7%. On the daily timeframe, the recent crossing below the 50MA reinforces the bearish view. The RSI for ETH is currently at 48.25 and 49.92 for the 4H and 1D timeframes respectively, indicating neutral buying and selling pressure.

Access institutional-grade commentary on TradFi × Crypto markets

By Treehouse Research

Read Past Issues

Daily Readings

TradFi

• Wells Fargo CEO says regional banks are strong, but expects turmoil

• HSBC soothes shareholders by restoring dividend as profit triples

• PNC promises up to $15 bln in short-term debt to provide additional liquidity

• Indexes fall 1% as regional banks tumble, investors fret before Fed

• Fed in stride to pole-vault 5% policy rate, then perhaps catch its breath

• Exclusive: White House: Fed interest rates having negative effect on banking

• Morning Bid: Crisis over? Don't bank on it

• US labor market softens as job openings drop, layoffs at highest level in over 2 years

• Soft lending and inflation data pave way for smaller ECB hike

• Euro zone factory downturn deepened in April - PMI

Crypto

• White House Pushes for Punitive Tax on Crypto Mining

• Cryptoverse: Digital coins lure inflation-weary Argentines and Turks

• US congressmen chide presidential advisers over crypto stances in economic report.

• Interest rate hike speculation triggers outflows from crypto investment products: Report.

• Coinbase officers, board members face suit over alleged insider trading during listing.

• 3AC founders run into fresh trouble in Dubai over new exchange OPNX.

• Coinbase International Exchange launches amid SEC crypto crackdown in the US.

• Bybit joins crypto exchanges offering crypto lending services.

• Binance, Circle chime in on UK's proposed crypto regulatory framework

Deal Flow

• How JPMorgan's Dimon won the First Republic deal

Yours sincerely,
Treehouse Research 🌳