M21 MARKET UPDATE – February 2023

This update intends to inform you about relevant market developments and market insights in the digital asset market.

	January	February	Delta
Total market (Billion)	$1.004	$1.013	+0.90%
Bitcoin (dollar)	$23,125	$23,140	+0.06%
Ethereum (dollar)	$1,585	$1,599	+0.88%
Nasdaq 100 (points)	12,360	12,040	-2,59%
S&P 500 (points)	4,070	3,970	-2.46%

KEY TAKEAWAYS

The Federal Reserve (FED) increases rates by 0.25% on February 1, this brings federal interest rates to the 4.50% to 4.75% range.
FED chairman Powell’s speech iwas perceived less hawkish by investors, causing a continuation of the uptrend of the digital assets market.
January 2023 inflation data (published February 14) are above analyst expectations, meaning inflation is cooling off slower than expected. This caused a decline in all markets, including the digital assets market.
February employment data (published March 10), February inflation data (published March 14) and the FED meeting of March 21 and 22 will have a large impact on the direction of the crypto market on short term.
Hong Kong proposes a new regulation that will legalize the trading of cryptocurrency starting from July 2023. The announcement of the legalization is part of a bigger plan for Hong Kong as it strives to become the Asian cryptocurrency hub.

Macro-economic Developments

On February 1 the U.S. Federal Reserve (FED) announced a 0.25% rate increase from last month, bringing interest rates to the 4.50% to 4.75% range. This rate increase was widely anticipated by markets, with analysts pricing the odds of a 25 basis points hike at 98%, and the odds of a 50 basis points hike at 2%. Neither major indices nor the digital assets market reacted strongly to the announcement, with BTC only rising 0.07% immediately after the news.

This marks the eighth time the Fed has raised interest rates since the beginning of 2022. The central bank outlined its plan to tighten monetary conditions in November 2021 to fight raging inflation; back then, interest rates were at 0%. After being criticized for not taking inflation fears seriously, the Fed quickly moved to raise rates on a monthly basis—first by 25 points, then 50 points, then 75 points on multiple occasions. By doing so, the bank raised the cost of borrowing, which in turn strengthened the value of the dollar.

However, the Fed’s hawkishness was criticized by a number of entities, including the United Nations, which warned in October that the central bank risked causing a global recession by raising rates too quickly. The Fed finally began cooling down the aggressivity of its hikes last month, when it raised rates by 50 basis points instead of 75.

The FED seems to be getting a grip on inflation, but at the same time, FED chairman Jerome Powell also indicated in his ensuing press conference that high interest rates will be needed for a longer period of time to bring the market back into balance. This also means that the overheated labor market must cool down somewhat and that unemployment will therefore have to rise slightly. However, the data on the labor market in the US presented on 3 February 2018 still paint an opposite picture. While a slight increase in unemployment was expected, unemployment in the US fell from 3.5% to 3.4%. This confirms Powell’s story that more will be needed to bring the market back into balance. Investors interpreted Federal Reserve Chair Jerome Powell’s comments as slightly dovish (at least for future rate hikes), which added to the recent risk-on sentiment we saw in January following a slew of disinflation data.

However, this risk-on sentiment changed on February 14 when the inflation data over January 2023 was published. The annual inflation rate in the US slowed only slightly to 6.4% in January of 2023 from 6.5% in December, less than market forecasts of 6.2%. This slowdown in the decline in the inflation rate brings concerns that the current interest rate increases are not sufficient and larger interest rate increases are necessary. In the upcoming FED meeting on March 21 and 22 more clarity will be provided in this regard.

Digital assets

Next to the macro-economic developments, there were two important developments that impacted the digital assets market:

Hong Kong – the Asian crypto hub

On February 16, other news from Asia came to light as Hong Kong proposed a new regulation that will legalize the trading of cryptocurrency. The cryptocurrency market responded positively to the news as it signals the potential for significant capital inflows during the coming months. The announcement of the legalization is part of a bigger plan for Hong Kong as it strives to become the Asian cryptocurrency hub. This is an ambitious plan, and the actual launch date itself is quite far away, so the move higher is more of a knee-jerk reaction at this stage.

In June 2023, Hong Kong will officially make crypto buying, selling, and trading fully legal for all its citizens. This also includes mainland Chinese institutions, which is obviously a huge market. Some of the bullish catalysts down the pipeline also include launching bitcoin and ether futures ETFs; Samsung looking to launch a spot bitcoin ETF; Singapore’s biggest bank, DBS, seeking approval to offer bitcoin in Hong Kong; and IB, a 337 billion broker, launching bitcoin and ether trading services. A fully open Hong Kong also means that money from China can easily flow back into digital assets despite the ban on crypto for individuals.

It is possible that an Asian stablecoin will also emerge in the next market cycle. China and its neighbors have been working hard to distance themselves from the U.S. dollar hegemony, so this could also be a political play. In 1997, the 99-year lease of Hong Kong between the United Kingdom and China ended and since then China has been trying to influence Hong Kong politics. Over the past years, China’s influence has become increasingly clear, but Hong Kong has still maintained autonomy concerning certain aspects such as immigration and tax. This autonomy also made it possible for Hong Kong to legalize the trading of cryptocurrency.

Currently, it seems that China is willing to allow the trading of cryptocurrency in Hong Kong as it can act as a sandbox. The legalization of trading cryptocurrencies will also make it possible for Chinese businesses to enter the cryptocurrency market through the Hong Kong jurisdiction. Currently, in China itself there is still a ban on trading cryptocurrencies and mining. We have seen China ban and unban cryptocurrency on multiple occasions. The latest ban on cryptocurrency in China came into force in September 2021.

As billions of worth of dollars are pouring into the economy and Hong Kong is exploring the option of legalizing cryptocurrency trading, many are believing that China and or the Asian market will initiate the next bull market. While the rest of the world is raising interest and trying to cool down its economy, China is injecting and trying to heat it. This may cause larger amounts of capital to enter the cryptocurrency sector as the money supply increases through Asian markets.

Binance at the center of attention

Similar to the months December 2022 and January 2023, Binance was at the center of attention as their stablecoin issuer Paxos came under investigation by the New York State Department of Financial Services. Paxos is the issuer of the stablecoins Binance USD (BUSD) and Pax Dollar (USDP). As a result Paxos has halted the issuance of both stablecoins, As the month of February continued, it came to light that the SEC intends to sue Paxos for violating investor protection laws. It is important to note that Binance is not the owner of the stablecoin BUSD, Paxos is.

Nevertheless, the investigation into BUSD causes issues for Binance as it uses the stablecoin extensively with its trading pairs. Ever since BUSD has become the third largest stablecoin with a total market capitalization of $16B. As the investigation transpires, Binance will need to explore new options for its BUSD-trading pairs and financial reserves. You can read more about the events of the first half of the month in our market update of February.

In addition to the investigation of their most used stablecoin, Binance.us, an independent partner of Binance, has come under investigation as $400M was transferred from the independent partner to a trading firm related to Changpeng Zhao (CZ), the CEO and founder of Binance.

On the 16th of February, an article was published by the news outlet Reuters which discussed that Binance transferred over $400M from Binance.us to trading firm Merit Peak. This raised some questions as documents of Merit Peak state that CZ is a manager at the firm. The article in Reuters discusses that Binance had secret access to a bank account that belonged to its independent U.S. partner and transferred large amounts of capital to the trading firm. The transfer of capital took place during the first three months of 2021, it remains unclear whether customer funds were transferred with these financial transactions. The investigation into Binance.us has to highlight whether the transactions include customer funds.

TECHNICAL ANALYSIS

As the Bitcoin (BTC) market value is still 40-45% of the total digital assets market value (BTC dominance), BTC is still the primary digital asset to lead the digital assets market sentiment. In January the BTC price increased with an impressive 45% growth. Bitcoin broke straight through the 100 daily moving average and the 200 daily moving average levels, after it was below these two important moving averages for more then a year.

After a month of growth without any serious correction in January 2023, BTC reached a price level of $24.20o on February 2. In the following 10 days the market experienced a healthy 12% correction to $21.500, marking an important higher low against the previous lows of the $16K level. A higher low is often a sign for a potential trend reversal. BTC found support at $21.5K and started another leg up to reach $25,150 on February 16, exactly the level of the 200 weekly moving average. Despite several attempts to break through this major resistance level, BTC failed to get above the 200 weekly moving average and started to decline from 25K to around $23K end-of-month – almost at the same level of February 1.

Ethereum and the Total Digital Assets market value showed a similar pattern, also closing the month February at nearly the same level as February 1.

Looking forward, from a Technical Analysis perspective it is important that the BTC price remains above the $19K support level. A drop below this price level would mean that the potential mid-term upward trend reversal is invalidated and more downside in price can be expected.

To confirm the upward trend that started in January 2023 BTC should break above the 200 weekly moving average at $25K. If that happens, we can expect more upside to $28-29k, which also aligns with an existing CME futures gap. Future gaps often work like a magnet for price since market tends to fill these gaps sooner rather than later.

ONCHAIN ANALYSIS

A useful indicator that offers a comprehensive insight into the value of any cryptocurrency is the MVRV Z-score. The term “market value to realized value,” or MVRV, indicates whether a cryptocurrency is now overvalued or undervalued relative to its “fair value”.

When market value is significantly higher than realised value, it has historically indicated a market top (red zone), while the opposite has indicated market bottoms (green zone). Technically, the MVRV Z-Score is defined as the ratio between the difference of market cap and realised cap, and the standard deviation of all historical market cap data, i.e. (market cap – realised cap) / market cap.

According to data from Glassnode, the MVRV Z-Score was sitting at 0.244 as per 25 February 2023, having risen slightly off historical bottoms.

ADOPTION CASES

AMAZON NFT’s WILL BE TIED TO REAL-WORLD ASSETS

Amazon is laying the groundwork to give its customers the ability to purchase NFTs tied to real-world assets that are delivered to their doorstep. The move is a significant upgrade from the e-commerce giant’s earlier steps in developing its NFT platform, as indicated in our earlier newsletter.

And the company is planning to notify every Amazon Prime customer — at least in the US — of its digital collectibles initiative once it goes live, an additional two sources said. Amazon shoppers, for instance, would be able to purchase a fashion-oriented NFT tied to a pair of jeans — and pay with a credit card, sources said, just as they would with any other Amazon purchase.

BITCOIN X ORDINALS

The launch of Bitcoin nonfungible tokens (NFTs) — known as Ordinals — on January 21 has tipped the number of non-zero Bitcoin (BTC) addresses to a new all-time high of 44 million, according to crypto analytics platform Glassnode.

In a Feb. 13 report from Glassnode, the firm explained that for the first time in Bitcoin’s 14-year history, a portion of network activity is being used for purposes other than peer-to-peer monetary Bitcoin transfers: “This is a new and unique moment in Bitcoin history, where an innovation is generating network activity without a classical transfer of coin volume for monetary purposes.”

The analysis concluded that the Ordinals surge has contributed to a “short-term uptick in Bitcoin network usage of late” which has brought active users with a non-zero BTC balance to 44 million users.

SIEMENS ISSUES BOND ON BLOCKCHAIN

Germany’s third-largest publicly traded company Siemens has issued its first digital bond on the Polygon blockchain, with the main goal of reaching out to potential purchasers directly.

The press release states “a blockchain bond “makes paper-based global certificates and central clearing unnecessary,” the company said in the statement. “What’s more, the bond can be sold directly to investors without needing a bank to function as an intermediary.” The digital bond amounted to $64 million, with a maturity period of one year.

DEF JAM ENTERS THE NFT STUDIO

Reputable hip-hop music label Def Jam Recordings enters Web3, aiming towards curating a musical act around NFT avatars. The label announced a collaboration with Solana-based project Catalina Whale Mixer to create a virtual band called ‘The Whales’, with avatars being based on the NFT project and the tunes’ inspiration coming from both traditional and Web3 avenues.

The collaboration follows a similar venture Kingship, a virtual band put together using blue-chip NFT collection Bored Ape Yacht Club avatars.

WETRANSFER TURNS TO NFTs

WeTransfer, one of the largest file transfer companies in the world, has taken its first step into the NFT business by partnering with Minima, a Swiss blockchain firm. The partnership will see the two companies deploy NFTs on Minima’s network, which is set to go live in March in 180 countries, giving creators rights management for their digital property.

Consumers will have the ability to generate NFTs from their phones or any other device, according to the companies. In addition, consumers will be able to control how and with whom they share their digital assets, as well as tools to monetize these NFTs.

CONCLUSION

As a result of 1) the FED meeting on February 1 where first signs of a softer rate hike policy, and 2) the news that Hong Kong could be opening its doors to digital assets and investors, as part of its long-term ambition to become the crypto hub of Asia, Bitcoin moved to an eight-month high, close to the $25,250 level.

However, on February 14 it was published that the annual inflation rate in the US slowed only slightly to 6.4% in January of 2023 from 6.5% in December, less than market forecasts of 6.2%. This slowdown in the decline in the inflation rate brings concerns that the current interest rate increases are not sufficient to cool-off inflation and larger interest rate increases are necessary. This fear has resulted in overall decline in the digital assets market over the last two weeks of February, closing the month at around the same price levels and total market size as those as per February 1.

The big question for the digital assets market is: can the upward momentum sustain, even in the face of more Fed rate hikes? The upcoming February employment data (published March 10), the February inflation data (published on March 14) and the FED meeting on March 21 and 22 will provide more clarity in this regard.

DIGITAL ASSET SECTOR UPDATES

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