Market Update: Crypto token prices absorb latest developments on the macro and geopolitical fronts

Written by ALT 5 Sigma
on August 5, 2022

Bitcoin and ether continue to trade constructively, building on gains from the June lows

Better news on the macro outlook could also translate into more Fed tightening

Geopolitical tension flared this week and could have implications for risk appetite and crypto prices

News highlights include new US legislation on crypto and a public pension fund move into crypto yield farming

Sentiment around the macro backdrop has improved somewhat, at least on the US outlook given the less hawkish Fed messaging and better readings from the latest US data. However, the outlook in Europe remains more somber, while geopolitical risks in Asia flared in a manner that could be more problematic to risk appetite—and crypto token prices—if they persist or worsen.

There have also been noteworthy developments in the digital asset space, including a further broadening of crypto adoption among institutional investors, as well as a new attempt in the US congress to define some regulatory boundaries for bitcoin and ether. For their part, bitcoin and ether have absorbed these developments fairly well and continue to trade in the constructive pattern established over the past month-plus.

Better data on US growth…

Broader financial market attention continues to be on the balance between still-very-high inflation and the risk of recession, a balance further complicated by the fact that the two conditions are not mutually exclusive.

This past week, the US ISM Manufacturing and Services indices both came in better than expected and remain above the 50% boom/bust level separating a growing economy from a contracting one. These surveys are often used as leading indicators of future economic growth and as such, they hold some influence among market participants and are important to monitor.

…and surprising strength in the labor market

The US July employment data also revealed continued strength in the labor market, with payrolls rising 528K, double the expected gain, a drop in the unemployment rate to 3.5% from 3.6%, and a hefty 0.5% m/m rise in hourly earnings, keeping the y/y rate at 5.2%. In short, the labor market remains tight and that has several implications for risk appetite and, by extension, crypto assets.

Good news on the economy is welcome…for the most part

On the positive side, a tight labor market demonstrates a degree of underlying strength in the economy. High employment supports consumption which accounts for roughly two-thirds of overall economic growth. It also counters the growing concerns about a pending (or current) economic recession. And while the recession debate will be ongoing, the latest data point towards a better performing economy. Other things being equal, that translates into better investment returns, a condition that should also be positive for crypto assets.

But if it brings more Fed tightening it could challenge risk assets, including crypto

On the less positive side, a stronger labor market, including higher wages, suggests that inflation could remain higher for longer. And that may argue for more Fed tightening than the market currently expects, especially after those expectations were scaled back after the previous week’s dovish messaging at the FOMC meeting.

That in fact has been the initial reaction to the jobs data, with 2yr US Treasury yields jumping 20 basis points, factoring in some of those risks. If Fed tightening expectations increase on a sustained basis, it will likely weigh on the prices of risk assets (i.e., Nasdaq), creating headwinds for crypto token prices in the process.

US inflation data next week a key focus

In the coming week, the US July CPI report on August 10, and will be a key focus. The consensus forecast is for CPI to slip to 8.8% y/y from 9.1% in June, due in part to lower energy/gasoline prices. That outcome would be in the right direction. However, it is still at an exceptionally high level and is consistent with “some” additional Fed tightening. And the outcome of the CPI data will be the next guidepost for both the market and the Fed assess future scale and pace of rate hike expectations.

Geopolitical risks in Asia could have knock-on effects for financial markets

Geopolitical risks ratcheted higher this week after US House of Representatives Speaker Pelosi visited Taiwan amid formal and strident protests from the People’s Republic of China (PRC). As a consequence, the PRC launched large-scale military exercises adjacent to Taiwan, an event that not only raises military tensions in the region, but also highlights the risk for a more problematic turn in US-China relations going forward.

A further escalation in US-China tensions could indeed have negative spillover effects on financial markets. At the very least, such incidents can see a reduction in risk appetite and a “flight to quality” in financial markets that would likely have negative spillover effects on crypto assets. Moreover, it could also [further] complicate existing global supply chain disruptions and impede economic growth. And that too would be negative for the investment climate generally with potential spillover drags on crypto assets.

Price action in bitcoin and ether

Amid all of these factors, crypto token prices have in fact been trading in a relatively more stable fashion recently, and remain in the constructive pattern that has developed in the past month-plus. Bitcoin continues a slow grind upward, establishing a series of higher highs and higher lows since its June cycle low. Ether briefly traded above the $1,700 resistance level we have flagged in recent weeks, defined by the top of the June gap lower ($1,700-$1,250). It is testing resistance at the 100-day moving average at $1,685, and a sustained break above that would reinforce the near-term bullish bias in the token price.

Latest US legislation would address SEC-CFTC turf war over bitcoin and ether

In Washington, a new piece of legislation in the Senate would designate bitcoin and ether as commodities and therefore have them fall under the oversight of the Commodity Futures Trading Commission (CFTC). The chances of this actually being signed into law are not yet clear. But if that happens, it would end the current turf fight between the CFTC and the Securities Exchange Commission (SEC) over regulatory oversight of these key crypto tokens.

A public pension fund moves into crypto yield farming

Separately, there was another important step along the road to greater institutional investor adoption of crypto assets. In Virginia, the county of Fairfax pension fund has started investing in crypto lending platforms in an effort to boost returns. The fact that the pension fund is for public sector employees makes it all the more important in terms of legitimizing crypto investing and crypto as an asset class.

Disclaimer:

Digital Assets Weekly Market Update is for informational purposes only and does not constitute, either explicitly or implicitly, any provision of services or products by ALT 5 Sigma (“ALT 5”). Investors should determine for themselves whether a particular service or product is suitable for their investment needs or should seek such professional advice for their particular situation. ALT 5 Sigma. makes no representation or warranty to any investor regarding the legality of any investment, the income or tax consequences, or the suitability of an investment for such investor. ALT 5 Sigma does not solicit or provide any financial advice. This is at the sole discretion of the individual.

Picture of ALT 5 Sigma

ALT 5 Sigma

Next-Generation Blockchain Powered Financial Platforms

Important Disclaimer

Not available in certain jurisdictions; including but not limited to the Province of Quebec, State of New York and the United Kingdom.

You must read the Risk Disclosure Statement below, you can also review this on the website @ https://alt5sigma.com/riskdisclosure/ upon acceptance.

Please accept if you understand the statements above for access to the website.


Risk Disclosure Statement
Last Updated: October 17, 2024

This risk statement (the “Risk Statement”) is presented to you at the time of opening your Account with ALT 5. You must acknowledge having received, read, and understood this Risk Statement in order to open and operate an Account and use the Services. Please read this Risk Statement in its entirety.

ALT 5 believes that its clients should be aware of the risks involved in using the Services and these Services may not be appropriate for you, particularly if you use funds which you cannot afford to lose. The volatility and unpredictability of the price of Digital Assets relative to fiat currency may result in significant loss over a short period of time.

By opening an account with ALT 5 to use the Services, you are acknowledging that you have received, read and understand the risks set out herein. This Risk Statement does not necessarily capture all of the risks associated with Digital Assets. Please refer to the terms of the Client Account Agreement for a more detailed description of your relationship with ALT 5 and the Platform. This Risk Statement provides a summary of certain risks you should take into account when deciding whether to engage in the Serices. It also provides a general description of what is meant by the term, “Crypto” (which is defined below).

No securities regulatory authority has expressed an opinion about any of the Digital Assets that are available through the Platform

While ALT 5 has conducted due diligence, in accordance with its written policies, to evaluate each of the Digital Assets before making them available on the Platform and has concluded that none of the Digital Assets constitutes a security or derivative, there is a risk that ALT 5 has incorrectly determined that none of the Digital Assets is a security or derivative. There is also a risk that ALT 5 ’s conclusion that any particular Digital Asset is not a security or derivative may change over time.

Risks in Trading on the Platform
The following is a non-exhaustive list of risks you should consider when using the Services to purchase, hold, or sell Digital Assets.

  1. Platform Risk

Crypto-asset trading platforms, including ALT 5, may cease operations or permanently shut down due to fraud, technical glitches, hackers, or malware, which could have an adverse impact on the value of Digital Assets. ALT 5 reserves the right to not offer a quote should there be technical difficulties, extreme volatility, or counterparty problems. ALT 5 will put a notice on its website in these extreme circumstances.

  1. Short History Risk

Digital Assets are just over a decade old, and as such, it is unclear whether the economic value, governance or functional elements of Digital Assets will persist over time. The Digital Asset community has successfully navigated a considerable number of challenges since the introduction of blockchain technology. That said, the continued engagement of the Digital Asset community is not guaranteed, and any future challenges that the community is not able to navigate could have an adverse impact on the price to purchase or proceeds received from the sale of a Digital Asset.

  1. Price Volatility

The price of Digital Assets on public trading platforms has a limited history. Digital Asset prices have historically been volatile and subject to influence by many factors including the levels of liquidity on trading platforms, public speculation on future appreciation in value, swings in investor confidence, and changes in regulatory characterization.

  1. Potential Decrease in Global Demand for Digital Assets

If speculators, investors, merchants, or consumers stop purchasing, using, holding, or dealing in Digital Assets, or the rate of adoption of Digital Assets slows, then the price of Digital Assets may be adversely impacted. There is no guarantee that Digital Assets will maintain their long-term value in terms of purchasing power in the future or that the acceptance of Digital Assets for payments by mainstream retail merchants and commercial businesses will continue to grow.

  1. Potential for Illiquid Markets

If there is a relatively small volume of buy and sell orders in the marketplace, it may become difficult to execute a trade of Digital Assets. Unexpected market illiquidity may cause major losses to the holders of Digital Assets.

  1. Transfers of Digital Assets are Irreversible

Transfers of Digital Assets are irreversible. An improper transfer (whereby a Digital Asset is accidentally sent to the wrong recipient), whether accidental or resulting from theft or unauthorized access, can only be undone by the receiver of the Digital Asset agreeing to send the Digital Asset back to the original sender in a separate subsequent transaction. To the extent your access credentials are taken over by another party (with or without your permission) and transfers are made, you may be unable to recover the Digital Assets. You are responsible for maintaining the security of your access credentials.

  1. Concentration Risks

With respect to certain Digital Assets, a significant percentage of their total outstanding units are held by a disproportionately small amount of Digital Asset wallet addresses. If one of these top holders were to exit their Digital Asset position, a block sale of a large amount of a Digital Asset could adversely affect the price of that Digital Asset.

  1. Uncertainty in Regulation and Prohibited Access

The regulation of Digital Assets continues to evolve in jurisdictions which may restrict the use of ALT 5’s Platform and or Digital Assets or otherwise impact the demand for Digital Assets. As such, our Services are NOT available to residents of Quebec, and to retail clients who do not fall under the exempted categories in the United Kingdom as well as residents of the State of New York.

  1. Financial Institutions May Refuse to Support Transactions Involving Digital Assets

Financial institutions provide bank accounts to facilitate transfers of fiat currency in connection with Digital Asset transactions. Regulated banks and other financial institutions may refuse to process funds for Digital Asset transactions or to process wire transfers to or from Digital Asset trading platforms, Digital Asset-related companies, or service providers, or maintain accounts for persons or entities transacting in Digital Assets.

  1. A Digital Asset’s Blockchain May Temporarily or Permanently Fork and/or Split

Many Digital Asset blockchain networks are powered by open-source software. When a modification to that software is released by developers, and a substantial majority of miners consent to the modification, a change is implemented and the blockchain network continues uninterrupted. However, if a change were to be introduced with less than a substantial majority consenting to the proposed modification, and if the modification were not compatible with the software in operation prior to its modification, the consequence would be what is known as a “fork” (i.e., a split) of the blockchain. One blockchain would be maintained by the pre-modification software and the other by the post-modification software. The effect is that both blockchains would operate in parallel, but independently. There are precedents for this occurring, for example on both the Bitcoin and Ethereum blockchain networks. In the future, such a fork could occur again, and affect the viability or value of a Digital Asset. ALT 5 may choose not to support any future fork of the underlying blockchain of the Digital Assets available on the Platform, in which case you might not have any rights to the new digital assets that may be created as a result of that fork. By using ALT 5 you forfeit any profit, loss, or voting right claims to any Digital Assets forked on the Platform.

  1. Cyber-Security Risk

Digital Asset companies, such as ALT 5, and their service providers may be subject to operational and information security risks resulting from cyber-attacks. These include, among other behaviors, stealing or corrupting data maintained online or digitally, denial of service attacks on websites, the unauthorized release of confidential information, and various other forms of cyber-security breaches. This in turn could cause ALT 5 to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures, and/or financial loss.

  1. Airdrops

Third parties may send Digital Assets into wallets operated by ALT 5 or ALT 5 ’s third-party safekeeping platform (“Digital Asset Airdrops”). Should ALT 5 be issued any additional Digital Assets alongside the ones held by ALT 5 or ALT 5 ’s third-party party safekeeping platforms, we would not be responsible for any consequences arising from such an issuance, including any perceived or actual losses or missed gains. ALT 5 will decide in its sole discretion whether or not to support the Digital Asset Airdrops or whether or not to distribute the Digital Asset Airdrops to our clients, with or without prior notification. By using the Services, you forfeit any profit, loss, or voting right claims to any Digital Asset Airdrops to ALT 5.

  1. Issues with Cryptography Underlying Digital Asset Networks

Cryptographic and algorithmic protocols are used to protect the secrecy of codes regulating the blockchain system used to effect transfers of Digital Assets. In the past, flaws in the source code for Digital Assets have been exposed and exploited, including flaws that disabled some functionality for users, exposed users’ personal information, and/or resulted in the theft of users’ Digital Assets. The cryptography underlying the Digital Assets could prove to be flawed or ineffective, or developments in mathematics and/or technology, including advances in digital computing, algebraic geometry, and quantum computing, could result in such cryptography becoming ineffective. Any of these circumstances could result in the theft of users’ Digital Assets by malicious actors. Moreover, functionality of Digital Asset networks may be negatively affected such that they are no longer attractive to users, thereby dampening demand for Digital Assets.

  1. Internet Risk

ALT 5 accesses Digital Assets’ blockchains via the internet, and its clients access ALT 5 ’s Platform via the internet. Thus, the entire system is dependent upon the continued functioning of the internet. ALT 5 maintains an independent and secure ledger of all transactions to minimize loss and maintains contingency plans to minimize the possibility of system failure; however, ALT 5 does not control signal power, reception, routing via the internet, configuration of your equipment, or the reliability of your connection to the internet.

  1. Open Loop System

When you enter into a Digital Asset transaction with ALT 5 to buy and sell Digital Assets, that transaction provides you with certain rights and imposes certain responsibilities; In particular, the contract you sign with ALT 5 enables you to deposit, buy, sell, withdraw (with some limitations), and hold Digital Assets in your own private wallet. We refer to this as an “open loop” system. Please note that some Digital Assets may not be eligible for withdrawal from the platform for technical reasons.

  1. Risk if Entity Gains a 51% Share of a Digital Asset Network

If an entity gains control over 51% of the computational power (hash rate) of a Digital Asset network, the entity could use its majority share to interfere with the operation of that network in ways that could undermine trust in the network.

  1. Possible Increase in Transaction Fees

There are transaction fees applicable to certain Digital Asset transactions. These transaction fees have historically been relatively low, but there is no assurance that they will remain low. Higher transaction fees may result in a decrease in the value of the relevant Digital Asset(s).

  1. Possible Increase in Service Fees

Certain fees ALT 5 charges you for the Services are based in part on the fees charged to ALT 5 by its third-party service providers. Those third-party service provider fees are subject to change, which may result in ALT 5 increasing its fees.

  1. Safekeeping of Digital Assets

As provided in the Client Account Agreement, ALT 5 may hold your Digital Assets on your behalf, directly in a hot wallet temporarily, and indirectly through a third-party safe-keeping platform or in cold wallet storage on an ongoing basis. ALT 5 has developed a robust set of policies, procedures, and controls to safeguard the Digital Assets in safe keeping. However, the “open loop” nature of the system means that while you are able to transfer Digital Assets on and off the Platform, there is an inherent risk that a part or all of your Digital Assets may be lost without any means of retrieving them. You may access the Digital Assets that you have purchased on the Platform by placing an order to sell the Digital Assets or by requesting a transfer of those Digital Assets to your own private wallet.

  1. Safe Keeping Risk Insurance

ALT 5 and any third-party safe keeping platform it may retain have insurance to protect the Digital Assets they hold. However, it is important to note that the insured sum may not be sufficient to cover all of the potential losses that may be incurred by ALT 5 or by any third-party safekeeping platform, and any losses of Digital Assets held in safe keeping may only be covered partially by existing insurance. As such, you are reminded that you may withdraw any Digital Assets that you purchase on ALT 5 ’s Platform or hold through ALT 5’s Platform into your own private wallet(s) immediately upon execution of a transaction at your sole discretion and acknowledge that you have complete control over the Digital Assets you have in your account.

  1. Threats to ALT 5 ’s Physical Assets

ALT 5 ’s physical assets, such as its personnel, hardware, buildings, or data processing infrastructure could experience a range of threats, such as fire, flood, natural disaster, theft, vandalism, or terrorism. As such, there exists a risk of partial or full loss of your Digital Assets due to the aforementioned events.

  1. Use of Leverage

ALT 5 does not offer its clients margin or any other type of loan, but we cannot prevent clients from borrowing cash from other sources to purchase Digital Assets on the Platform. However, using borrowed money to finance the purchase of Digital Assets involves a potentially greater degree of risk than purchases made with cash. If you borrow money to purchase Digital Assets, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the Digital Assets purchased declines.

  1. Halting, Suspending, and Discontinuing Digital Assets

ALT 5 maintains written policies that govern the halting, suspending, and discontinuing of Digital Assets from trading on the Platform. In accordance with those policies, ALT 5 may decide to halt, suspend, or discontinue certain Digital Assets from its Platform, for any reason whatsoever, including but not limited to, business decisions made in ALT 5 ’s sole discretion, changes in market trends, changes in the demand for the Digital Asset, changes in legal or regulatory risk associated with the Digital Asset, changes in relevant blockchain support for the Digital Asset, or changes in third-party safekeeping platform availability of the Digital Asset. In such circumstances, ALT 5 will seek to give clients as much time as possible, on a best-efforts basis, in accordance with ALT 5 ’s written policies on this, to sell or withdraw Digital Assets through the Platform.