In this newsletter, we take the temperature of our Crypto Risk Barometer, spell out the implications of the latest FOMC meeting on crypto, and analyze Smart Money activity on layer 2s, with a focus on Base.
Macro & Markets
Enjoy the ride down in rates
Two weeks ago, we flagged an ongoing streak of weakness in US growth data. This trend became obvious in the April employment data released last Friday. To quote only two metrics, nonfarm payrolls were up by 175k in April, this is almost 30% less than the 242k monthly average of the past twelve months. The rest of the report was weaker than in prior months, including the number of hours worked and average hourly earnings, but not dismal. To us and to the market, this paints the picture of a normalisation to pre-covid levels. Indeed, the second data point we highlight measures supply-balance of the labor market and is back to 2019 levels:
Markets reacted strongly to the job report: in the immediate aftermath of its release, rates fell (the US 2-year yield lost 12bps post-release), and equities, credit, and crypto cheered the “not too hot not too cool” data. BTC/USD regained important levels, crossing above the 20-day exponential moving average, albeit on low volumes (still needs confirmation).
What now?
We do think that there is still some energy left in this crypto (and equity) bull cycle even as we are probably entering its latter phase (more on this below).
The FOMC meeting last week, especially the press conference, told us that Fed Chair Powell saw the risk of unemployment rising as much more relevant than the risk of inflation staying high for longer. According to the Fed Chair (with likely some dissension in the Fed Committee), rate hikes are not on the table, and the choice is between holding and cutting rates. Powell went through a couple of scenarios whereby the Fed should:
- cut rates if: The labor market is strong and inflation remains sideways
- hold rates in case of: Unexpected weakening of the labor market or greater confidence that inflation is moving towards the 2% inflation target rate
To us this means that crypto markets can enjoy the ride down in rates a bit longer. The jury is still out on inflation (gasoline will add 10bps to the headline YoY CPI in April compared to the March print, and rent inflation will likely remain sticky), but lower real growth gives (and a weaker labor market) will give, in our view, implicit permission to the Fed to start cutting rates at some point this year.
This, until we get data that signal a recession as opposed to a mere growth softening (not the case yet).
Crypto Risk Barometer
Turning away from our discretionary/ macro view, to focus on pure quantitative signals, our Crypto Risk Barometer says “Neutral” still (details here).
Below are the detailed components.
The Smart Money Stablecoin moved above the red threshold on April 30, 2024, and turned risk-off.
Our two favorite indicators remain in contradiction. The BTC call-put spread is close to but not yet risk-on (green threshold).
The BTC price momentum is risk-on, and increased with the post-employment-report move up in BTC.
How long will this last phase of the bull cycle last?
Even with the “good news” of likely lower rates in the coming weeks, the main risk on the horizon of H2 2024 is a recession that would send crypto and other risk assets lower. Risk assets have completely priced this macro scenario out, and we therefore see the risk of downside as asymetrically higher than the risk of upside, at least for equities and credit.
The Equity Risk Premium of the S&P 500 is close to all-time lows:
For Crypto, we rely on our Breadth Indicator (see here for description and backtest), that tells us that we are about 68% through this Bull cycle.
Top tokens
The top ranked tokens by momentum are (dashboard here):
… and by Alpha Discord chatter (dashboard here)
What to focus on this week
On the macro front, this will be a light week. The Bank of England meets on Thursday 9 (consensus is for the policy rate to be held at 5.25%).
In crypto, the Solana community conference will take place on Friday 10.
This week on-chain
Retail Users
Using Nansen data to define our ‘Retail users’, we map out retail flows for a multichain world. We highlight the following chains in the analysis: Ethereum, Arbitrum, Base, and Optimism.
Total funding to new retail has gone down considerably from the highs set at the end of March. This lines up with the downtrend in markets across the board and this weakness has continued through the first week of May.
Weekly New Retail Participants
The number of unique retail wallets has also gone down considerably along with the funding amount.
Weekly Retail Average Funding (USD)
Average funding is also down across the board. In short, retail activity has gone down considerably over the last few weeks due to the decrease in funding amounts and new wallet activity.
L2 Activity
Below, we map out the transaction activity across EOA wallets on Arbitrum, Base and Optimism. To do this, we filter out most contracts, exchanges, MEV bots, NFT wash traders, and any wallets belonging to an entity as labeled by Nansen (with the exception of public figures). This should give us a better picture of what the 'real users' of these chains activity look like, as opposed to transactions sent by bots or other noisy actors.
Although transaction activity peaked at the beginning of April, activity is still much higher than it was at the beginning of 2024. Most of the transaction growth can be attributed to Base, which has been seeing a lot more activity from mid-March till today.
Base
Top 7 Day Performers
Looking at the top tokens by 7-day performance, the returns on Base tokens have gone down considerably. However, we are seeing stronger price action on TOWER, TYBG, RSR and FRIEND relative to other tokens over the last 24 hours.
Smart Money
Switching gears from wallet activity, we dive into smart money behaviors through the lens of their token holdings and chain preferences.
Their top holdings on Base comprise mainly of memes, ETH and other ETH variants (WETH, ezETH), DEX tokens and a game called Fren Pet (FP). Its interesting to dive into the top tokens held by these smart money wallets and watch the balance changes for any large entries/ exits.
Smart Money Chain Preference
Next, we want to show a more cross-chain view of smart money activity. We measure smart money transaction counts across some of the top EVM chains/ L2s. Below, we visualize this data on the daily timeframe and show percentages of overall smart money activity, grouped by chain.
Base remains the most active chain, followed by Polygon, Arbitrum and Avalanche. At a high level, this can show us potential new chain-specific metas if smart money activity spikes on a given chain. As is the case with Base in early February, this preceded a large increase in Base activity that coincided with many profitable trading opportunities.
