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Markets record worst returns in decades

Digital Assets Insights Vol. 12

Jul 14, 2022

Macro overview

Macroeconomic data continues to point to a softening economy… The June Consumer Confidence Index fell to its lowest level since February 2021. On June 29th, the U.S. Bureau of Economic Analysis revised its estimate of 1Q2022 real GDP quarterly annualized growth lower to -1.6% versus its last estimate of -1.5%, driven primarily by a decrease in personal consumption. U.S. Initial Jobless Claims continued to trend higher. The S&P 500 Index closed at -16.45% return for 2Q22, the worst since the 1970s and the third worst quarter since the 2008 recession (-22.56% in 4Q2008, followed by -20.00% in 1Q2020 recession periods). During the first half of 2022, the S&P 500 had its worst half-year since 1970, the Dow had its largest first-half drop since 1962, and, at roughly 30%, the Nasdaq experienced a historical drop -- the major indices are all indicating that the equity market has already priced in a recession!

Gasoline prices globally have risen due to high demand, lack of Chinese exports, and low global refining capacity due to COVID and sanctions on Russian energy exports. While AAA reports that U.S. daily average gas prices are falling, elevated gas prices illustrate a historical price shock in motor fuel cost, an important component in the Consumer Price Index (CPI) (Exhibit 1), as each penny increase in gasoline price suggests $1.5 billon increase in annual cost for consumers. Higher gasoline prices weigh on consumer sentiment and real consumer spending, boosting inflation expectation. Gasoline prices are expected to continue their downward trend due to recessionary pressure.

Exhibit 1: Daily National Average Gasoline Prices Regular Unleaded vs. 2-year Implied Inflation Breakeven Rate

Source: Bloomberg as of July 11, 2022

The Bureau of Labor Statistics’ June employment report released on Friday highlighted the strength of the U.S. labor market and further supported a 75-bps rate hike later in July. We will continue to monitor macro statistics as they point to an impending recession.

This week in Cryptoland...


June saw great declines as BTC recorded a -41.07% return for the month, the worst ever, and a -59.97% return for the quarter, the second worst behind 3Q2011 (-68.07%); and ether returned -48.22% for the month and -69.38% for the quarter.

On July 11, 20-day rolling correlation between BTC and TQQQ rallied back to 0.60 versus 0.33 on June 13 (Exhibit 2). The correlation collapse from mid-May to late-June reflected idiosyncratic risk in cryptoland during asset-specific deleveraging and risk-repricing. However, as crypto becomes more highly correlated to the overall markets again, it will be subject to shocks in macro variables. Recessionary fear will likely dominate the crypto market as it has in the technology space.

Exhibit 2: BTC Price to TQQQ (Proshares Ultrapro QQQ) Correlation

Source: Bloomberg as of July 11, 2022

In June, we commented “A strong dollar puts the economy under pressure, which equates to a global liquidity squeeze.” Greenbacks broke out 105 resistance last week and stayed elevated at 108 (Exhibit 3). The aforementioned recent idiosyncratic risk in cryptoland lifted BTC and DXY 20-day rolling correlation to positive. We expect correlation to return to normality, i.e. negative, over the next few trading sessions.

Exhibit 3: BTC vs. DXY (US Dollar Index)

Source: Bloomberg as of July 11, 2022

Speaking technically… The 100-day moving average (100MA) continues to ride on top of the 50-day moving average (50MA) since crossing over on May 15. Today, momentum oscillators put BTC in the overbought territory, while price momentum indicators stay neutral, pointing to the potential breakout to breach the current support of 19,000. The bearish setups and macro factors linked through an increasing correlation between the crypto and equity markets lead us to reiterate our theory of a full-cycle retracement. Furthermore, Mt. Gox creditors are expected to release approximately 140,000 BTC in August, putting greater price pressure from the supply side. The next support level to watch for BTC is 16,000.


The front end of the ATM implied volatility curve is oversold and has collapsed to mid-50% p.a. for BTC and mid-70% p.a. for ETH. BTC risk sentiment is still skewed to puts with a Put/Call ratio of 0.61. On the contrary, ETH shows a bullish sign of 0.35 as traders accumulate longs. On Deribit, $180 million anchored at 15,000 BTC put strike and $13 million at 18,000; $70 million anchored at 900 ETH put strike and $110 million at 1,000.

Spotlight on...

Chainlink (LINK)

In 2017, Sergey Nazarov and Steve Ellis created Chainlink, allowing smart contracts access to reliable and real-world data, not relying on external data to execute their agreements. Chainlink provides the ability to transfer data on and off the blockchain in a secure and decentralized manner, with access to all the major blockchains, including Ethereum, Solana, and Avalanche. It also combines and interacts with other off-chain services such as payment gateways, execution of contracts, and other actionable services on any API.

Chainlink’s decentralized oracle network, a secure and decentralized middleware, consists of providers and purchasers of data:

  1. Purchasers of real-world data submit a service level agreement (SLA) that outlines data requirements and deposit LINK.
  2. The oracles obtain the requested data from external sources and route it to smart contracts on Chainlink, which collects the responses and assesses their validity. This aggregated and validated information is then routed to the purchaser’s blockchain.

Chainlink aspires to become a standard solution for such use cases as financial data, financial agreements, insurance, and NFT, to name a few. The protocol allows for external data such as sports games and stock prices to be entered into the blockchain through smart contracts.

LINK is the native token used to reward network operators for retrieving data from off-chain feeds, formatting data into accessible formats, and performing off-chain computations. In 2021, Chainlink was able to secure a value of 75 billion as the platform supports more than 1,000 projects. LINK has a max supply of one billion coins, of which 467 million have been distributed. LINK sits at a price of $6.41 today with a market cap of just under 3 billion. It is down 67% since the start of this year.

Market Update

Tracking the weekly movement of the major cryptocurrencies.

  • The biggest movers among the top 20 market cap coins were MATIC (+22.53%) and AVAX (+18.34%).
  • Bitcoin and Ethereum increased by 9.56% and 10.45%, respectively, this week. While not included in the chart, USDC consistently tracks the US Dollar with 0% change.

Top 20 Cryptocurrencies – 7-Day Price Change

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NFTs/metaverse in the news:

Web3.0 in the news:

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