Market deep dive: US inflation figures started a risk-on sentiment in the market


The crypto market showed some strength this week after the lower than expected US inflation figures started a risk-on sentiment in the market. 

The tech heavy Nasdaq is up +1.6% over the week (regardless of the 20 bps move up in the US 10 year). 

Since last week, BTC$ has been trading +4.5% at 24k, and ETH$ edged +14.2% higher, currently at 1.9k. 

On Monday, the U.S. Department of the Treasury’s Office of Foreign Asset Control (OFAC) sanctioned Tornado Cash, making it a felony for U.S. citizens and entities to interact with the protocol. They claim that Tornado Cash has been used to launder cryptocurrency worth more than USD 7bn. While sanctions on a protocol are unprecedented and the broader implications are still uncertain, Circle already froze USDC linked to Tornado Cash addresses. An unknown person trolled celebrities by sending them small amounts of ETH from sanctioned addresses, probably to create a mess and make a point on how difficult it will be to impose the sanctions. It is doubtful, however, that the celebrities who received the ETH will be in conflict with the sanctions, as they did not willingly interact with the protocol. Then again, if their wallets are flagged, they might have trouble using them going forward. 

The Ethereum mainnet merge, currently expected for September 15, seems to be on track as the last of the three testnet merges (Goerli) was successfully completed this Wednesday. 

Currently, the most discussed topic around the merge is how the hardfork will be handled by the Ethereum community. There are stakeholders, e.g. miners, who are heavily invested in expensive equipment with a strong interest in keeping ETH PoW alive after the merge. At first glance, this is beneficial for Ethereum holders, as they will hold/get an equal amount of the PoW and PoS tokens. While a hardfork for a cryptocurrency like bitcoin is relatively simple, the consequences for an ecosystem like Ethereum are much more widespread. One example: stablecoins, e.g. USDC and USDT, would technically double after the hardfork; in reality, the ones on the ETH PoW chains will simply become worthless after the merge as Circle and Tether will not allow double redemptions. Liquid staked ETH (sETH), obviously, will also become worthless on the ETH PoW chain, as there will not be another merge to PoS. NFTs will effectively be doubled, and it will be interesting to see what value is given to an NFT on the PoW chain vs. the PoS. 

In addition to this, it is almost impossible to foresee the consequences for all the DeFi protocols and everything that is built on Ethereum. ETH PoW is already traded on some exchanges, e.g., currently at a huge discount of 96% vs. ETH, which might be an implication that the market is pricing in a quick death of ETH PoW after the merge. 

On the macroeconomic side: Wednesday’s release of US inflation figures for July pushed the market higher as they came in lower than expected. MoM inflation was flat due to lower energy prices (+0.2% expected) and core inflation, excl. Food & Energy, remained at +0.3% (+0.5% expected). While these numbers might indicate that inflation has peaked, many more months of data are needed to confirm that the danger of a wage-price spiral has been averted effectively. 

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