Crypto: Macro and On-chain report(End of June,2022)

9 min readJul 5, 2022

Weekly View:

BTC: The equity markets recovery stalled this week , as concerns around growth , corporate earnings and probability of recession continued. This correlated to crypto assets doing poorly with BTC dropping below $20k yet again, after a dead bounce cat rally last week. The hanging sword on the market of hedge fund Three Arrows Capital going insolvent finally dropped with the company filing for bankruptcy in the US under Chapter 15. In the coming days we should get more clarity around losses for the lenders including Genesis , Voyager Digital,Nexo, BlockFi among others. Voyager Digital seems to be in trouble right now as they have suspended withdrawals,trading , deposits and rewards , and are working on ways to salvage themselves. BlockFi might be acquired by FTX or some other big crypto player in the coming days as they struggle to keep upfloat without the revolving credit facility offered by FTX.Genesis one of the biggest crypto lenders also had big exposure to 3AC and Babel Finance, with losses estimated in hundred of millions of dollars. The even more negative news on this front that will jolt the market would be if Genesis decided to suspend withdrawals, as Genesis is not only the biggest but also the one with best practices and strongest balance sheet.

Specifically on BTC, Compass Mining lost their Maine facility for being unable to pay the power bill, signaling towards upcoming troubles for BTC miners. Though it is not clear if it is a result of bear market or mismanagement by Compass,though I do expect some more negative news around mining firms including facility closures , canceled orders of ASIC miners and liquidation of BTC treasury. I ran the numbers on BTC mining costs in November-December 2021, which clearly indicated that even the most efficient farms have a production cost of $9,000-$10,000 but mean probably lies around $13,000-$15,000(not including facility sunk costs) , this can be price below which capituation can ensue with many miners going out of business. Though some estimates put the estimated BTC production cost between $22,000-$25,000 , I think that is on the higher side than actuals especially for new miners like S19J, S19J Pro, M30S among others.

In another important development, the surprise in terms of GBTC converting to an ETF didn’t come , as Grayscale decided to sue the SEC for the denial over this. This also meant that the probability of positive surprise on spot BTC ETF hitting the market remains very low in the coming few months.

As the graph shows, the leverage ratio remains high , and there is still a potential for it to go lower from here, which might have a negative effect on the market prices. The leverage ratio can bottom out around 0.14–0.12 with the current value at 0.268.

On-chain indicators:

Mean Hash Rate:

Hashrate increased by 2.4% over the last week , from 207 EH/s to 212 EH/s. Though there is not a major observation but I do believe that the miner community is right now divided into two buckets: very efficient miners and old miners. My numbers suggest , the most efficient miners who are still profitable on their newer machines have a chance to survive while the ones with old miners are close to capitulation.Good thing is that the old miners(below 60 TH/s) have been phasing out slowly , the markets might still have a soft landing when and if their cost of production is hit by BTC price. I will try to go into more detail on this in the next report.

Number of Active Addresses:

Number of active addresses decreased by 1% over the last week(going from 900k to 888k), not much to read into it at the moment , continuing to paint a neutral picture , holding steady in a deeply bear market.

aSOPR :

aSOPR continues to be in the range between 0.96–0.97 suggesting eventual capitulation is yet to arrive, no change in

thesis from last week, lookout for 0.85–0.9 levels on this metric.

aSOPR Value: 0.973

SMA(7): 0.965

Equity Markets:

Major US indices had a negative week with Dow Jones correcting 1.28%, while S&P 500 and Nasdaq corrected 2.21% and 4.3% respectively.This is in contrast to China where the stocks have been in an upward trend for the last one month. Shanghai Stock Exchange Composite Index gained 1.13% in the last week and a total of 6.66% in the last month. For US markets the upside looks limited for now capped by the 50 day Moving average , a move above that can enthuse some optimism in the markets. The oil prices continue to hold steady near $110 , keeping inflation expectations high. Markets seemed to have priced in most of interest rate expectations, now the theme of discussion and sentiments is going to be around growth, possible recession , corporate earnings and pace of balance sheet tapering. Next week I will try to cover a more detailed view around the Fed tapering schedule and how its pace is related to market action.

Interest rates:

Rate hike probabilities in the July meet.

Rate hike probabilities in the September meet.

Above are the live probabilities of rate hikes being priced into the markets currently. For the July Fed meeting , the 75 bps hike is 82.6% priced in, which can change according to the macroeconomic data releases over the next couple of weeks. For the September FOMC meet , the market is pricing in 71% probability of 75 bps hike and 15% probability of 100 bps hike. While the September probabilities look very aggressive and we can be in for a positive surprise if inflation numbers cool down, another way of seeing it is that markets expect inflation numbers to stay high till September and hence are pricing in 100 bps hike with a 15% probability.We could be in for a positive surprise if inflation numbers soften , while numbers in-line with forecasts might have limited downside. In no way I am saying we are at the bottom but rather that instead of inflation, GDP numbers and corporate earnings would have a larger impact on the markets.

Data Releases over the past week+ Other important indicators:

a. Core Durable Goods Orders (MoM) (May): The reading came in at 0.7% vs 0.3% forecast, suggesting a strong

manufacturing activity. Would give Fed confidence going ahead with aggressive rate hikes.

b. Pending Home Sales (MoM) (May): It came in at 0.7% higher than last month, against a forecast of -3.7% , suggesting a

stronger housing market. Although , important personnel from National Association of Realtors suggest this increase

might be an anomaly and actual housing market activity is expected to stay lower on the back of higher mortgage rates.

c. CB Consumer Confidence (Jun): At 98.7, the reading is lower than the consensus forecast of 100, suggesting bearish

outlook over the economy from consumers. It takes into account consumer expectations around inflation, interest rates,

stock prices. Vacation plans, consumer attitudes and buying intentions are also accounted for. It is very indicator for

gauging sentiments , and the current reading suggests expectations of a slowing economy.

d. GDP (QoQ) (Q1): Gross Domestic product is the most widely cited indicator of economic health. The current quarter on

quarter reading came in at -1.6% vs consensus forecast of -1.5% . A technical recession is when the economy contracts

for 2 consecutive quarters. A negative reading on this indicates that economy is slightly cooling down , might allow Fed

to go less aggressive on the rate hikes.

e. Crude Oil Inventories: The numbers for this week came in at -2.762M vs forecast of -0.569M , suggesting a strong

demand for crude and its derivatives. A stronger than expected positive number of this metric over few consecutive

weeks would suggest demand subsiding and inventories building up.

f. US 30Y Mortgage rate: The 30 Y mortgage rates continue to creep up , as the Fed has continued to hike rates. Would be

interesting to see how and when it trickles down to the housing market , but when it does , it can force Fed to think

somewhat dovishly. Please keep an eye out on Pending and Existing home sales, as they capture the number of

transactions happening in the housing markets.

g. US High yield debt spread(Junk bonds): The spread in high yield bonds can be used to evaluate credit

markets.The rising spreads can signal weakening macroeconomic conditions.Below is the chart of index tracking

high-yield bond spread:

While the spread has been on a rise since the start of 2022, the historical patterns suggest a move to 7–8% might be a ceiling without a full blown financial crisis. This also suggests the Fed has some room left to hike rates before it starts to turn dovish.

Data Releases over the upcoming week:

a. JOLTs Job Openings (May)

b. ISM Non-Manufacturing PMI (Jun)

c. Initial Jobless Claims

d. Nonfarm Payrolls (Jun)

e. Unemployment Rate (Jun)

Glossary:

Leverage Ratio:( Open interest on exchange/coin reserves with the exchange)
Active addresses: The number of unique addresses that were active in the network either as a sender or receiver. Only addresses that were active in successful transactions are counted.
SOPR: (Price sold / Price paid) or Realized Value(USD)/Value at creation(USD)
Initial Jobless Claims(US):Initial Jobless Claims measures the number of people who filed for unemployment insurance for the first time during the past week.
Conference Board (CB) Consumer Confidence measures the level of confidence consumers have in the economy. When consumers are optimistic, they tend to spend more which increases consumption and overall economic growth.
GDP: Gross Domestic Product (GDP) measures the annualized change in the inflation-adjusted value of all goods and services produced by the economy. It is the broadest measure of economic activity and the primary indicator of the economy’s health.
Core Durable Good Orders: Core Durable Goods Orders measures the change in the total value of new orders for long lasting manufactured goods, excluding transportation items. Because aircraft orders are very volatile and take a number of months to fill, the core number gives a better gauge of ordering trends. A higher reading indicates increased manufacturing activity.
Pending Home Sales:The National Association of Realtors (NAR) Pending Home Sales Report measures the change in the number of homes under contract to be sold but still awaiting the closing transaction. The report excludes new construction.
Crude Oil Inventories: The Energy Information Administration’s (EIA) Crude Oil Inventories measures the weekly change in the number of barrels of commercial crude oil held by US firms. The level of inventories influences the price of petroleum products, which can have an impact on inflation.
US 30Y Mortgage rate:A 30-year fixed-rate mortgage is a home loan that maintains the same interest rate and monthly principal-and-interest payment over the 30-year loan period.
US High yield debt spread: A high-yield bond spread, also known as a credit spread, is the difference in the yield on high-yield bonds and a benchmark bond measure, such as investment-grade or Treasury bonds.

References:

Crypto: Macro and On-chain report(End of June,2022)

Written by Karan Rajpal