Cloudy Skies

Risk assets retraced ahead of and after the FOMC meeting where Powell stated the following:

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses… Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.”

Powell proceeded to mention his mentor, Paul Volcker, who was responsible for beating inflation in the early 1980s while also inducing a 10.8% unemployment rate. Powell’s comments at FOMC were his clearest yet that the Fed will not prematurely pivot. “Don’t fight the Fed”. The Fed must maintain credibility and my view has strengthened that they are unlikely to change their stance until major cracks start to form.

A way to visualize these major cracks could be through the VIX or high-yield credit spreads, shown below. A spike in these would indicate the beginning of solvency issues and would likely trigger a concern from the Fed.

VIX vs High Yield Spreads

Source: Tradingview

To this end, it’s been a strange summer because crypto experienced an isolated capitulation in June while other risk markets remained relatively strong. As equities staged a major recovery in July, Bitcoin struggled to follow suit. So, the lingering question was, if Bitcoin was sideways during risk-on, how will it trade risk-off? Macro is a dark cloud that is hanging over the crypto market right now.

SPX vs Bitcoin

Source: Tradingview

Don’t Fight the Fed, Don’t Fight the Trend

This brings us to the importance of not fighting the trend. The below table illustrates this. RSI is typically used as a mean reversion signal meaning that extremely high values should predict a decrease in price towards the mean and extremely low values should predict an increase in price toward the mean. With Bitcoin, this has not been the case. In fact, it has shown the opposite effect, which is why we typically caution against fighting the trend.

Source: Tradingview


ETH Merge and Positioning

RSI doesn’t demonstrate any predictive power for Bitcoin short-term mean reversion, but funding rates do. Over the last week, ETH had its most negative funding regime of the past year. This is partially due to ETH spot holders hedging their long exposure entering the Merge which is projected to occur on September 13th. When the merge happens, holders of ETH will also receive any forks such as ETHPoW which is currently trading at about 3% of ETH’s value. But the current yield is -10%, which may indicate the negative funding is not only hedging but a bearish directional bias in ETH perpetual futures market.

The merge trade is clearly a focal point in the market, observable in the surge of open interest.

A significant amount of open interest is positioned for a $3000 strike, a 100% increase in price from current levels.

Idiosyncratic Crypto Themes

The Arbitrum Nitro upgrade brought increased addresses, daily transactions, and TVL to the chain and its applications.

Arbitrum Active Addresses and Daily Transactions

Source: Gokustats

GMX was one of the primary benefactors. Its TVL, denominated in ETH, reached new highs.


Source: DefiLlama

The 7-day average of fees for GMX surpassed Uniswap, Synthetix, and Bitcoin.


And open interest for GMX maintained a multi-month uptrend.


Atom has struggled with value accrual but is making strides to change that. Cosmos Hub validators will soon be able to stake their ATOM for yield and multiple projects are launching stablecoins that will use ATOM as collateral. As a result, more ATOM is bonded, and ATOM has been one of the best performers in the market.


Some NFTs had an isolated bull market over the last month. DigiGaigaku was the prime example. They launched with a free mint and ended the month with a floor price of over 10 ETH.



Macro continues to be a cloud over the crypto market. We expect a high volatility macro event to signal that the coast is clear for crypto. However, a significant amount of leverage has been cleared from the crypto market allowing specific themes such as The Merge, Arbitrum Nitro, ATOM value accrual, and NFTs to outperform.



Plaintext Capital