Cumberland is commenting on the recent volatility and potential opportunities to take advantage of it.
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Good Morning from Cumberland SG! With markets quiet on Monday (Happy President’s Day, Americans) and myself sick as a dog yesterday, treating this summary as a start-of-the-week write-up. Crypto has held up shockingly well despite February’s onslaught of enforcement actions; BTC was up 3.8% over the long weekend, with ETH lagging at up 1.6%. Frankly, I found this rally to be somewhat surprising. We’ve always had the view that regulatory clarity would be long-term bullish, even if it caused the market to sell off in the short-term. Speaking with experts in the past few weeks though, February has brought regulatory action, but very little in the way of regulatory clarity. The Kraken action hasn’t told us too much in terms of what actually is allowed when it comes to staking services. The Paxos action in particular, hasn’t (yet) taught us much about why BUSD was targeted, and what it means for other stablecoins.
So, why the rally? Stocks are doing… fine, but it’s hard to say this rally is driven by macro. If you go back to just about any “2023 predictions”, you would see regulatory actions as a perceived risk overhang. So while these actions are negative for crypto, they’re mostly expected, even if the form was not known. At the same time, the market is receiving positive signals from other jurisdictions, recently HK and UAE, and the lane for crypto to become a global asset class seems to be opening up. Crypto adoption in other jurisdictions also makes it easier for the US to open things up, a path which we’ve seen in other assets. (For example, Gold ETFs were first established in Europe, before becoming mainstream in the US).
But I didn’t start working in crypto so I could talk about regulators or macro. While ETH has rallied 1.6% over the weekend, other L1s have significantly outperformed. SOL is up about 16% (up 160% YTD) with NEAR following it in lockstep. (Does anyone have a good rationale for why NEAR has been tracking SOL so closely this year?) AVAX, ALGO, and XTZ are all up around 12%, while EOS rallied 20% last Friday and has hung onto those gains. Zooming out, with ETH up 40% YTD, most L1s, with their higher betas, are up between 60% and 120%. EOS had been the weakest performer in the sector until Friday’s move, suggesting that the catchup game is worth playing right now. At the moment, one of the smallest gainers in the sector, outside of ETH and EOS, has been ATOM. ATOM is up “only” 53% YTD, despite strong fundamentals and a healthy developer community; it’s a name where we expect to see a catchup rally if crypto remain buoyant.
In the DeFi sector, most attention is on the implications of Shanghai at the end of next month. LSDs have been the center of attention, because the unlocking of ETH staking makes pegs like stETH/ETH much more arbitragable, and thus more palatable from a risk standpoint. This has been one of the trades of the year, with LDO up 200% compared to ETH’s 40%. However, a little less attention has been on the stable DEXes which will benefit just as much from the growth of stETH, rETH, and other LSDs. CRV should enjoy a healthy uptick in TVL post-Shanghai; CVX should see a multiplier effect on that gain. Both these coins are doing well this year, with CRV up 140% and CVX +107%. CVX/CRV ratio is now below 5.5, and this is another viable catchup play; it would not surprise to see CVX catch up to bring this ratio back to 6 or even 6.5 in the next few weeks. (Feel free to reach out for further analytics on this pair).
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