“This is what happens when an unstoppable force meets an immovable object,” — The Joker
The quote from an insane fictitious genius perfectly encapsulates the mood in crypto this week. By virtue of decentralization, crypto has long been touted to be censorship-resistant, but rulings by TradFi’s regulators tend to be the final say.
What happens when both of these supposedly “immovable” forces meet heads on? It appears that the inevitable clash is imminent, and drama ensues. Grab your popcorn, as we have front row seats saved just for you!
Gensler and the Infrastructure Bill
Regulation has been the proverbial bogeyman in crypto — typically, it’s been swept under the rug as FUD. However, this week we saw the Chair of the U.S. Securities and Exchange Commission (SEC) coming out to clarify his stance on crypto.
The gist: Crypto tokens fall under the definition of securities, which by extension means — SEC jurisdiction. With clearer guidance from the U.S., this will likely influence other regulators’ stances as well.
Next up, we move onto the much-debated Infrastructure Bill — which in a nutshell defines the scope of crypto taxation stateside. If poorly defined, taxation could go beyond its intended targets — U.S.-based exchanges, and stifle U.S. crypto innovation across the board. Proposed regulations also appear to be more punitive on Proof-of-Stake (PoS) networks and decentralized finance (DeFi); naturally, the industry has come together to push for bill amendments.
Ironically, crypto has become a victim of its own success. The sheer size of the industry’s growth — especially in the proliferation of DeFi — means that it’s now ready for the regulatory limelight. These are unavoidable and growing pains of any new asset class. In fact, this cements crypto’s future position in the global financial order.
Almost at an uncanny timing, the most significant EIP to date, EIP 1559, has now arrived at the shores. Token burns aren’t novel to crypto — but this is the first time it has appeared on such a dynamic scale. We kid you not! It’s not even a stretch to say that this will impact nearly every significant sector within crypto, from DeFi to NFT.
While there’s a definite satisfaction watching ETH burn away in real-time — there’s an inherent paradox. Tokens burn their largest contributions during times of high base fees, which simultaneously disincentivizes network usage. Simply put, how will ETH investors grab their cake (deflationary rent extraction), while eating it (network growth)?
What is certain, however, is that ETH supply can’t be predetermined ahead of time anymore. This means more uncertainty for all stakeholders, e.g. higher gas volatility could inhibit growth for protocols or oracle operators.
August returns-to-date have clearly voted in favor of ETH. Keep an eye on ETH/BTC correlations to quantify structural changes brought about by the ETH fee burns.
As if in defiance of regulatory headwinds, bullish sentiment has improved month-to-date, exemplified by futures basis levels.
Similar to Implied Volatility (IV) crashes during post-equity earnings events, ETH near IV levels also spiked in anticipation of the event — and were crushed post-event.
On an absolute IV basis point — broadly speaking — the curve is still trading weakly vs. BTC, representing undervalued assets relative to value.
Also, most notable is the spike in NFT volumes and prices, the previous spikes (headlined by Metakovan’s landmark purchase of Beeple work) was a prelude to ETH going to almost $5,000 earlier this year.