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A Crypto Winter?

“Inflation continues to be the prime concern for investors, causing the market to drop further. The Fed raised rates, while CPI remained high. The crypto market was rocked by UST depegging”

Market Overview

Inflation concerns were once again the dominant driver of the market. Over the last two weeks the S&P 500 has fallen over 3% while the Nasdaq 100 has shed over 5% of its value. Aramco, the Saudi oil behemoth, overtook Apple as the world’s largest company by market cap on the 11th May. Apple was the last big tech company to hold out to this bear market, but has fallen 6.4% since the beginning of the month. 

To quell inflation, the Fed raised rates by 0.5%, the largest hike since 2000. Following the Fed meeting, however, markets fared well. The S&P 500, Nasdaq 100, and Bitcoin rose 2.9%, 4%, and 5.2% respectively. The rise is largely explained by Jay Powell stating raising rates by “seventy-five basis points is not something the committee is actively considering”, defying market expectations. Over the last fortnight, the dollar has strengthened 2.5% against the pound. The Bundesbank boss called for a eurozone rate rise in July to control inflation. Despite this, it has been a poor month for the euro, with EUR/USD at 1.04, down from 1.1 at the beginning of April. Commentators are beginning to suggest that the dollar will hit parity with the euro over the next year. US CPI figures showed annual inflation of 8.3% in April, down 0.2 percentage points from March, but remaining very close to a 40 year high. Commodities continue to be extremely volatile, exacerbated by India banning wheat exports to ensure their own food security. Oil futures are up another 4.7% since the beginning of May and wheat is up 3.2%. 

A Crypto Winter?

Since 2nd of May, the global crypto market cap has fallen from $1.745 trillion to $1.27 trillion, bleeding over 27%. This loss can be attributed to correlation with the stock market and is exacerbated by the implosion of both UST and LUNA. Bitcoin fell 20% to $29600 with a brief stint under $27000. Ethereum followed in Bitcoin’s footsteps, falling by 30%. Bitcoin has now reached the price at which Tesla originally bought, meaning all of the EV-maker’s gains have been erased from its balance sheet. The Fear & Greed index currently sits at a 10, reflecting extreme fear. The state of the crypto market has many predicting a crypto winter, with prices being depressed for the long term. 

There is a growing movement across the crypto community to remove funds off exchanges. Monero, Algorand and Loopring, among others, have all had coordinated efforts to withdraw as many coins as possible from their respective custodians. This movement has been so successful that some exchanges have put limits on withdrawals. 

UST is now an unstable coin

The world’s third largest stablecoin, UST, depegged from the dollar, falling around 80%. Unlike more traditional stablecoins which are backed by USD reserves, UST is an algorithmic stablecoin. In theory, when UST drops in value, one can exchange one UST for $1 of LUNA (however many coins that might be). 

The volatility of the crypto market caused heavy sell pressure on LUNA, on which UST relies. With LUNA falling in price, more and more LUNA had to be created to meet the $1 redemption value for UST. This compounded LUNA’s descent. The lack of confidence in UST’s ability to match its $1 value caused more selling, creating a vicious circle. Ultimately, trillions of LUNA were minted and LUNA crashed from $81 a coin to $0.00005 in less than a week, while UST fell to $0.14 in the same time frame. 

Attempts were made to sustain UST, with Binance temporarily putting restrictions on what price one could sell UST at (limit orders had to be >$0.7). Terraform Labs, creator of LUNA, seems to have liquidated their Bitcoin reserves to prop up UST. Unfortunately, these attempts were both unsuccessful. 

In response to this crisis, Binance and other major exchanges have delisted UST and LUNA and key politicians have called for stablecoin regulations. 

In Other News… 

After just two days after their announcement to slash staking rewards, brought back limited rewards for card users. Users will now be able to receive up to 8% staking rewards with their cards. 

Germany published a national crypto tax guide on 3rd May, clarifying many previously unclear rules. Notably, crypto that is sold after one year is not taxed, making Germany one of the most crypto-friendly countries in Europe. 

On 4th May, California Governor Gavin Newsom signed an executive order to create transparent regulation for crypto. The order states that “responsible innovation has been encumbered by regulatory uncertainty, especially with regard to federal law” and through offering more guidance crypto companies should benefit. 

Musk delayed his acquisition of Twitter due to new figures showing less than 5% of accounts constitute bots and spam accounts. Additionally, SEC filings revealed Binance is funding $500m of the deal. 

Coinbase published its less than stellar quarterly earnings last week. The exchange’s revenue and net income fell 35.23% and 156% compared to Q1 last year. Shares dropped 26% the day of the earnings announcement. 

Sam Bankman-Fried, the CEO of crypto exchange FTX, revealed a 7.6% stake in retail investing app Robinhood. Robinhood shares soared nearly 25% on the news. 

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