Summary
- Q1 QCP Business Update
- Thought Piece: “51% Attack” on Fiat
- Market Observations + Trade Ideas Review
In our last Quarterly, we identified institutional participation and DeFi
Option Vaults (DOVs) as the emerging drivers for growth in crypto
options.
QCP option desk highlights:
- Q1 DOV volume is close to the total volume for 2021.
- Alt-coin options volume have more than doubled the total volume for 2021.
- BTC/ETH options continue to dominate as the instrument of choice for institutions entering the market.
We’ve been in a holding pattern for most crypto derivative markets, with overall volumes lower from Q4 last year.
However, ETH and Alt-coin option volumes have been relatively resilient and we continue to see growing interest there.
We introduced new Exotics in Q1 and we have been receiving a lot of interest to trade:
- ERKI – European Reverse Knock-In Option
- ERKO – European Reverse Knock-Out Option
- European Digitals
Do reach out to any of our team for further details.
Crypto Thought Piece: “51% Attack” on Fiat
The Weaponization of Centralized Finance
In response to Russia’s invasion of Ukraine, we witnessed an unprecedented form of economic warfare in unthinkable scale and size, with the global Fiat-based monetary system as the primary weapon.
Crippling a Superpower
- The Russian Central Bank had roughly two-thirds of their $643bn of
international reserves in G7 denomination frozen in an instant. - Russia is the world’s largest commodity producer and energy
(hydrocarbon) exporter. These reserves were their savings from over 20
years of export proceeds. - Major Russian commercial banks were removed from SWIFT, excluding
them from a global payments network covering 200 countries and 11,500
financial institutions. - US financial service institutions, including the world’s largest payment
providers Visa and Mastercard, and major US and European banks,
pulled out of Russia. - Private banking safe havens Singapore and Switzerland (neither of which
are part of NATO or the EU) also sanctioned major Russian entities and individuals, contravening their traditionally neutral history.
Source: Central Bank of Russia
This was the first time in the 50+ year history of the modern economy that the Fiat financial system has been weaponized to such a degree and with such devastating impact.
In blockchain, a “51% attack” benefits the controller/attacker, but ultimately undermines trust in the chain.
This attack by the controllers of the global financial system on a core member of the system will have the same effect.
It might not appear to be the case for those not directly impacted, but trust in the Fiat system has been fundamentally shaken.
How did the system end up in such a state?
The modern world is divided into Surplus and Deficit countries that accumulate Savings (Reserves) and Debt (Liabilities) respectively, over time.
In 2001, the liberalization of the WTO turbo-charged global trade. With this came a rapid build-up in global Fiat FX reserves by Surplus countries.
As a result, total FX reserves grew from just $2 trillion in 2001 to $16 trillion today.
Source: World Bank
Control in the financial system is achieved through the dominance of one’s currency. And it is very clear who holds the power in the current world order.
USD makes up 60% of global Fiat reserves EUR makes up 20%. This aligns nicely with 80% of global trade invoicing denominated in USD and EUR.
Russia was keenly aware of the balance of power and the potential risk.
Since the 2014 Crimea Annexation, Russia had clearly become fearful of currency weaponization and significantly increased the proportion of Gold and RMB holdings, in lieu of G7 currencies.
And yet, the G7 allies were still able to instantaneously confiscate roughly two-thirds of Russia’s reserves. All that was left was the Gold sitting in a vault in Moscow, along with their Fiat and Gold held by China.
A part of the centralized Fiat system, every currency held is just a claim against the issuing country – a claim that can be voided at any time by the issuer.
Sadly, the biggest impact was on ordinary Russians.
Those who held their net worth in Rubles were faced with a generational surge in inflation as the Ruble nose-dived 30%.
Those who held other currencies were left stranded too, as payment providers Visa and Mastercard, along with other large foreign EU and US banks, unilaterally pulled out from Russia.
Source: Bloomberg
This “51% attack” against Russia is a watershed for the centralized Fiat-based economy.
It is now clear that Fiat cash can become worthless if one runs afoul of those who control the system.
24 March 20: Extraordinary Nato, EU & G7 summit in Brussels
For the large surplus countries like China, this is a huge worry. Their current account surplus (annual income) was $315 billion last year, with $3.3 trillion in total reserves to date ($1.1 trillion in US Treasuries alone).
Source: Bloomberg
Concern about the integrity of the USD-based Fiat system is not new.
In 2008, the Global Financial Crisis which started the US, almost drove the world
to a systemic collapse, partly due to the centralized nature of the system.
Surplus nations started questioning the safety of the USD-based system, leading
to the gradual re-accumulation of Gold. (And, of course, sparking the creation of
Bitcoin in 2008!)
The economic war on Russia might not have the same worldwide impact but the
erosion of trust is not going to be ignored.
Non-aligned nations will now certainly be looking to reduce their reliance on the Fiat system.
Going back to hoarding Gold and Commodities, the traditional Anti-Fiat, is one obvious option.
However accumulating physical assets has downsides – storage and transportation is limited and expensive, and bartering is inefficient.
Cryptocurrencies are quickly becoming an attractive alternative as an independent financial asset that is digitally storable, fungible and insulated from international control.
In light of recent events, it is our view that we will soon see a major central bank or sovereign buy BTC – and that will be long-term bullish as BTC gradually moves towards being a reserve asset.
For individuals, holding crypto has become an absolute necessity for protection against a weaponizable Fiat system.
Beyond just a store of wealth, the rapidly developing DeFi ecosystem offers a broad spectrum of innovative financial solutions. Everything from speculative products to fixed income, derivatives and even insurance.
In time to come, DeFi will become the primary avenue for personal financial management in place of banks and financial institutions.
Especially as people around the world start to realise that crypto and DeFi are a safe haven in a financial world order where the controllers can easily pull the rug from under your feet.
Conclusion
- February’s “51% attack” on Fiat is a monumental event in the post-Bretton Woods era.
- It undermines trust in a centralized Fiat-based financial system that’s fundamentally based on trust.
- For nations, it will propagate a greater divide between the reserve currencies
controlling this system, and those on the outside. - For individuals, it will significantly perpetuate the trend towards a trustless,
permissionless system, where no single entity holds control. - This means DeFi protocols by design will ultimately disintermediate all forms of finance – from savings to payments to investing.
Market Observations + Trade Ideas Review
Crude Oil has upturned traditional correlations and is the main driver of markets now, with higher Crude prices negative for risk markets.
Crude vs. USD
The most interesting and significant correlation break has been Crude and the USD. They are now positively correlated due to Crude’s direct impact on inflation and therefore the Fed’s tightening, which drives Crude’s new role as negative risk in global markets.
To a lesser extent this also reflects the USD’s eroding petro-USD status.
Source: Bloomberg
Crude vs. Gold
Crude and Gold now trade with the largest positive correlation in more than a decade. Inflation is the direct driver, but also the world’s increasing demand for hard assets.
Source: Bloomberg
Crude vs. Nasdaq
Crude’s new role as risk dampener (Higher Crude = Higher inflation, Lower growth and Higher interest rates) shows in the flip to a negative correlation to Equities.
Source: Bloomberg
For BTC, the Bull & Bear narrative are evenly balanced now versus our 2021 year-end piece.
This balance is reflected in the YTD ranges persisting in BTC and ETH.
However, bullish strength is forming and will likely lead to a break above 2022 highs (set on 1 Jan) of 48,000 in BTC and 3,777 in ETH.
Bull Case
- Overall market is still positioned short in Equities and Crypto – strong potential for short squeeze to continue into Q2.
- Following this “51% attack”, an even more pressing need for diversification out of Fiat reserves / savings.
- Terra moving $3bn of reserves into BTC over a short time, with $10bn as the long-term goal – opens the door for VC capital in the space to directly move into BTC, akin to Microstrategy opening the door for traditional bond/equity capital.
Bear Case
- Most hawkish Fed since pre-2008 GFC
a. Completely misread inflation last year
b. Misreading the upcoming recession risks now
c. Implies they will keep tightening aggressively until something breaks - IRS Tax date 18 April: selling for tax related payments to keep prices from overshooting
BTC – YTD range persists between 46k on the topside and 35k on the downside, with bullish accumulation building – potential for a breakout above 46k to test the 50k-52k-54k zone before the major ATH resistance.
Source: TradingView
BTC & NASDAQ – This recovery in BTC seems to be contingent on the NASDAQ recovery as well.
For our bullish scenario to play out, BTC has to break this lockstep correlation with Tech.
Unless this correlation can break in-time, we remain wary of a late-Q2/early-Q3 retest of the lows in NASDAQ that drags BTC down with it.
Source: TradingView
ETH – Largely tracking BTC but the market is starting to play on the ETH 2.0 narrative into the second half of the year through long-dated options with strikes above 10k.
3.4k is a key bull/bear pivot – next resistance channel at the 3.8k-4k level.
Source: TradingView
US2s10s Vs. Nasdaq – Who got it right?
The complete divergence since the March FOMC meeting was driven by technical factors – but ultimately it is our view that there will have to be a convergence based on economic factors. Most likely, in our opinion, that Nasdaq will have to reprice lower to the new 2s10s level – this would dampen any exponential upside in the near-term.
Source: TradingView
