Crypto Corner - Summary of the week 24/01/2022

Written by: Yves, Head of Trading at Wirex

The Bitcoin price (BTC/USD) is still looking for stability after last Friday’s rout (-10.4%). Although Wednesday’s FOMC decision was in line with expectations, Jerome Powell appeared cautious during the conference that followed. The committee decided to hold the benchmark rate unchanged for this session, showing no alarmism, only commitment to shrink the size of the Fed’s balance sheet in ‘a predictable manner’, and increase the rate soon, at ‘the appropriate time’.

The markets, traditional and crypto, bounced back before the Fed’s announcement, expecting reassurance and visibility on monetary policy. The Bitcoin price bounced back from the low $33,000s on Monday, to weekly highs around $37,000 on Tuesday. Initially, the market reacted positively to the Fed Chairman’s optimism, driving the price above $38,900 for a short period of time. But the push faded during the conference as questions were raised over the potential risks ahead for the economy. Wednesday’s performance ended flat, and the market is still torn between the Fed’s timid optimism and the investment banks’ alarmist views.

Goldman Sachs reiterated its pessimistic projections for inflation, pointing towards the substantial wage growth in 2021: the YOY rate jumped to its highest level on record in April and remained above 8% throughout the year. But the reference levels used to produce the growth metrics are the first months of COVID restrictions in 2020, when wages hardly increased at best. Looking into a breakdown by sector, the hospitality sector is unsurprisingly showing the best growth figure. It is a sector that suffered most during the pandemic. Similarly impacted sectors in 2020 are showing extraordinary growth. But other professions did also gain systematically since 2019, revalued to fit the current ‘work-from-home’ economy: delivery, home (furnishing, equipment) or web related professions have high double digit wage growth.

Even though the 2021 wages growth levels are substantial, they are unlikely to hold a few months from now. When asked about the risks perceived for the economy, Jerome Powell acknowledged that there is a risk to see inflation move higher or persist longer, but signified that this is not currently the ‘base case’ scenario. Still, the monetary policy tightening should intuitively adapt its pace to account for the fast recovery of the economy.

With a growing economy, a low unemployment rate, higher wages and high inventory levels, all indicators are now in the green. But inflation without control could slow down the economy.

All cryptocurrencies are in the red again this week, most showing double digit losses. The DeFi and Ethereum-killers native tokens are severely hit: Solana (SOL: -28%), Polkadot (DOT: -21%), Avalanche (AXAX: -17%), Polygon (-15%), Luna (-34.5%), Uniswap (-29%), Aave (-25.5%). With a negative performance of only -6% this week, the first cryptocurrency’s dominance is back near its November levels at 42.6%. $281m of borrowers’ debt positions were liquidated in the past 7 days across the Aave, Compound and MakerDAO protocols according to Dune analytics. These liquidation levels, the highest seen in the past 6 months, are testing the solidity of the new DeFI frameworks.

Daily liquidations for AAVE, Compound and MakerDAO - source: Dune Analytics

Stablecoins are also being tested this week after a revelation allegedly identified the CFO of the Wonderland project as a co-founder of the Canadian crypto exchange QuadrigaCX that collapsed as the result of a fraud. Abracadabra and Wonderland are part of the same conglomerate, namely “Frog Nation”. All tokens related to ‘Frog Nation’ collapsed this week. Abracadabra’s stablecoin (MIM) lost its peg on the announcement. MIM and Terra’s stablecoin (UST) are closely linked as 37% of the collateral used to borrow MIM from the abracadabra protocol is in UST (Terra’s stablecoin). Therefore UST could also be at risk if significant MIM redemptions were to occur. The DeFI and stablecoin projects are so interlinked and leveraged that the contagion risk is significant and difficult to assess. The MIM-UST pool on Curve is currently the most active with a $1.57b daily volume. Users could decide to withdraw anything but MIMs or USTs from these stablecoin pools, adding further pressure on their peg. Terra UST is currently quoting near $0.99. It reached its lowest since May 2021. MIM dropped below $0.975 and quoting near 0.985 at the time of writing.

Collateral backing the MIM stablecoin. Terra’s stablecoin (UST) represents 37% of the mix: source: abracadabra


The above is an opinion piece and therefore should not be taken as financial advice. Please do your own research thoroughly when looking at Cryptocurrency.

Great read, now fingers crossed for quick market recovery :melting_face: