Recession or Risk-On Session?

As expected, the days leading up to the rate hike day on July 27 had some noticeable volatility. On July 26, BTC saw a slight dump from $22k to $21k but ETH, which previously led the market, dropped from $1.55k to 1.37k. The sell-off was likely a derisking event by traders in anticipation of the FOMC meeting, which turned out to be in line with market expectations i.e.  75bps hike. On the surface, it does not change the fact that inflation is still high, which also marked the first time in the modern history of the Fed that it has had back-to-back 75bps hikes. However, the underlying tone is more suggestive; that the Fed is unwilling to go higher than 75bps because this is likely the peak of inflation. At the same time, Powell acknowledged the negative impact of rate hikes on economic growth and would slow rate hikes based on a data-centric approach. 

Some of the interns best work pic.twitter.com/4HHxcUZVe8

— Hsaka (@HsakaTrades) July 28, 2022

All these positive factors provided additional fuel for the continuation of the relief rally for the day. Strangely enough, despite the US economy contracting for the second straight quarter (-0.9% GDP at an annualized period for Q2), investors were left unperturbed. We explore more on this below. ETH, in particular, is still outperforming BTC (reaching $1.78k) as ETH/BTC consolidates at the 0.07 range, looking for an opportunity to break out.

Source: CoinGecko

We are ‘not’ in a recession?

There is broad consensus among economists and pundits alike that a negative GDP for two-consecutive quarters is a technical recession. The US saw a -1.6% drop for the first quarter, followed by -0.9% in Q2, which meets the above definition. 

However, shortly after the National Bureau of Economic Research (NBER) announced the GDP figures, President Biden held a press conference, reaffirming that despite slowing growth, the US is not in a recession. Quoting Fed Chairman Jerome Powell, Biden believes there are too many areas that are experiencing economic growth in Q2 for this to be considered a recession, including the “job market, consumer spending, and business investments.” 

In a separate interview event, Treasury Secretary Janet Yellen reiterated that a recession is a “broad-based weakening” of the US economy that naturally includes “substantial layoffs, business closures and strains in household finances.” Like Biden, Yellen also emphasized the need to look at different economic components which form the makeup of the country’s GDP rather than focusing solely on the final GDP figure. 

Officially though, the NBER is the official arbiter of recessions, and according to them, a recession is a “significant decline in economic activity that is spread across the economy, and that lasts more than a few months,” leaving ample room for a broader definition as opposed to the commonly accepted one. 

Understanding the US government’s framing of what constitutes a recession is essential for gauging market sentiment. It is worth remembering that the US mid-term elections are in November 2022, less than four months away. It is obviously in the current administration’s best interest to showcase its effectiveness as a government while pandering to populistic sentiments. The word recession must never be uttered. It is therefore unlikely for the NBER to make any declarations anytime soon. 

Nonetheless, despite the mixed signals, price action remained positive. We can therefore surmise that either the market agrees that we are not in a recession, or the market has priced in the risks of the current/imminent recession.

Earnings Season

Last week was jam-packed with not just recession-related events but earnings reports of major companies. Big Tech was largely positive. Microsoft and Google reported stable revenue growth and margins, causing stock prices to rise by 7.5% and 7.4%, respectively. Meta, on the other hand, suffered considerable losses (-5.9%) as it posted its first drop in quarterly earnings for the first time in history

Apple and Amazon boasted higher-than-expected-revenue earnings, which led to a 10.4% and 3.2% spike, respectively. Chevron and Exxon Mobil saw similar positive results (8.9% and 4.6%, respectively) after exceeding forecasted results. However, Roku dropped by 23.1% after missing its estimates. Intel suffered a similar fate and dropped by 8.6%.

Despite the mixed bag, the overall consensus is positive. The weight of negative sentiment that has solidified over the past few months is finally easing, signaling a sign of market overreaction. Many anticipated negative findings across the board, but the latest results indicate there is strength and resilience in some companies. Consequently, the S&P 500 rallied to 4,130, recovering its early June 2022 range.

Source: TradingView

ETH Miners Strike Back

As Ethereum marches closer to the Merge, another narrative has also been quickly gathering steam - what do ETH miners do when ETH transitions to Proof-of-Stake? It’s an awkward situation - until the Merge happens, you still need miners to secure the network. Even right up to the end when the Merge is triggered, the process could still take days, if not weeks. But once the chain transitions to PoS, miners are suddenly “discarded”.  

The conversation around this has been fascinating. Reports from mining pool operators have actually been kinda positive - they’ve acted more like coordinating entities rather than running mining operations and are well positioned to make the move to staking. Actual miners, however, are in a lousy position. Some online estimates that there is ~$5B worth of GPU and ETH ASIC mining machines in the market. Those that have invested significantly into mining rigs recently could be facing a long road to even breakeven on their investments. 

Ethereum Classic Hashrate (all time); Source: bitinfocharts.com 

Thus far, Ethereum Classic (ETC), the “original” Ethereum chain, seems to have been the largest beneficiary of this conundrum. Since April 2021, hashrate on ETC has experienced a massive jump, tripling within a few months and is now sitting at above 30TH/s. The price of ETC though, is a slightly more complicated story.

Source: CoinGecko

The price of ETC pumped in April 2021 when the hashrate spiked but has since lost ~80% of its value in line with the broader decline of the crypto market. However, following the Ethereum Kiln testnet merge in mid-March 2022, the price of ETC close to doubled before retreating again, and in the last two weeks, prices have gone from ~$13 to ~$40 on news of the impending merge. These two pumps did correspond with hashrate spiking on the ETC network, suggesting that it was being driven by at least news of miners migrating. 

Chinese miners currently have three different opinions on Ethereum’s switch to POS.
1, @BITMAINtech supports ETC
2 @ChandlerGuo leads the discussion on forking POW ETH
3 @BixinWallet expressed support for other POWs such as kadena starcoin aleo ckb and conflux.

— Wu Blockchain (@WuBlockchain) July 29, 2022

However, outside of ETC, Chinese miners have started to band together to discuss possible alternatives as the reality of the impending Merge sinks in. The most prominent personality may well be Chandler Guo, who was a strong proponent of ETC during the initial Ethereum hard fork, but instead of getting behind ETC, is now suggesting a fork of existing POW ETH. It’s a monumental task, to say the least; the Ethereum ecosystem now is very different from where it was in 2016, with many dApps built on top of it. While in 2016, it was just convincing CEXes to support ETC for trading and fiat on / off-ramp, in 2022, you also now need to convince the myriad dApps to support this new POW fork. There’s a practical reason for that - you need dApps that users want to use to provide utility for POW ETH and sustain the price of the native token (in USD terms). 

Source: The Block

Recently, up to 90% or more of miner revenue has come from block rewards, which are issued in native tokens. Just as miners suffered when the prices of BTC and ETH fell significantly in the first half of this year, any new POW fork native token would also need to reach a minimum price threshold to be sustainable for miners. 

ethpow will coming soon pic.twitter.com/v9eAbWO2BZ

— Chandler Guo (@ChandlerGuo) July 27, 2022

Thus far, Chandler has touted that he has strong traction with the Chinese ETH miner community, and discussions have also started about whether a DAO will be formed to govern the fork. It is unclear how far these discussions have progressed, but given that this is an existential crisis for ETH miners, not to mention the time urgency, expect more updates to emerge in the next few weeks. 

Finally, a cursory check of the other POW chains mentioned in #3 above didn’t see any noticeable increase in hashrate, possibly a sign that the effort by Bixin has not gained any traction thus far.

Some Thoughts 

1. Macro fundamentals have not changed. The NBER reported that June’s personal consumption expenditures index climbed by 6.8%, hitting its highest level since January 1982. The Ukraine-Russian war shows no signs of stopping and can turn market sentiment for the worse on a whim. China continues to prioritize minimizing Covid cases over everything else, locking down Wuhan once again. It will be a long while before the global economy stabilizes as we deal with a disrupted supply chain, inflation, and overall economic drawdown.

2. It should be a quiet-ish week for macro; as for the US, there is only the July Nonfarm Payrolls data to watch for on Friday, August 5th, to give us an indication of whether the US labor market remains tight. However, watch for speeches given by Fed officials as the market will look to digest their overall stance and outlook. On the equity market end earnings season continues though most heavy hitters already announced results last week. In other markets, there are expectations that RBA (Royal Bank of Australia) and BoE (Bank of England) will both announce further rate hikes this week to combat inflation.

3. We have reached a key resistance point for ETH at $1.8k. Looking at the short-term price action, there have been quite a few Darth Maul-like whale buys and sells every time there appears to be a breakout above $1.7k and below $1.66k. The past few rallies that have failed during the bear market had swift drawdowns over a short period (usually a day or so). However, we appear to now be consolidating under resistance for several days, suggesting that a fierce battle is taking place between the bulls and bears. Bull traders will likely look for higher lows for safer entries between $1.4k - $1.5k, targeting $2k. Bears, however, will be betting on that weekly resistance staying strong and ending this bear market rally once and for all. 

4. A superficial but relevant observation is the amount of cope on Twitter. Strong opinions by an ever louder majority usually become a counter-trade signal. CT, for the most part, appears to be full of sidelined capital, ticking off one of the checklists for a short-term bottom signal.

5. While June was a horrible month for digital asset funds in terms of outflows, the institutions were back in full force in July, recording $474M of inflows into crypto funds, as reported by CoinShares. BTC and ETH were unsurprisingly the assets that saw the most inflows, while all other assets were either flat or slightly up. YTD flows are +$496M, a positive sign of continued institutional interest in the space despite the bear market.

This article was produced in collaboration with Zhong Yang Chan. You can follow him on Twitter here.