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Weekly Report: 14th November 2022

 Fund Flows

Investors see the FTX collapse as an opportunity with inflows totaling $42m


Digital asset investment products saw the largest inflows for 14 weeks totaling US$42m. The inflows began later in the week on the back of extreme price weakness prompted by the FTX collapse. It suggests that investors see this price weakness as an opportunity, differentiating between "trusted" third parties and an inherently trustless system.

Inflows were seen across all regions, most notably the US, Brazil, and Canada which saw inflows of US$29m, US$8m, and US$4.3m respectively. Switzerland was the outlier, seeing minor outflows totaling US$4.6m, although it remains the country with by far the most inflows year-to-date. 

Bitcoin was the primary focus with inflows totaling US$19m, the largest since early August this year. However, short-bitcoin investment products also saw inflows totaling US$12.6m highlighting that while sentiment is predominantly positive, it has spooked some investors. 

Ethereum saw a second week of minor inflows totaling US$2.5m. Multi-asset saw its largest inflows since June 2022 of US$8.4m suggesting investors see it as a relative safe haven, while there was very little activity in altcoins.

Blockchain equities saw the largest weekly outflow since May 2022 totaling US$32m, implying that the more conservative investors in the asset class flew to safety. 

Macro Environment

Global markets, seeking some long overdue inflationary relief, rebounded on the heels of Thursday's softer-than-expect US Consumer Price Index reading. The print saw the pace of headline inflation slow for a 4th consecutive month to +7.7% in October, paving the way for a lesser 50 bps hike in December's FOMC meeting. The reduction in magnitude was spearheaded by slower rises in the cost of gasoline, electricity, and energy - up 17.5%, 14.1%, and 17.6% respectively for the month of October. US midterm elections saw an unsure Dollar (DXY) trace lower over the potential for a 2-year period of legislative gridlock which would arise with a Republican victory in congress - in response, Thursday's CPI print triggered a steep -2.15% daily retracement, sending the DXY to a weekly low of 106.281 on Friday. Major currency pairs flourished in the midst of a weaker dollar, the AUD and JPY were standout performers. the AUD/USD pair gained +4.04% WoW hovering at $0.67 heading into the weekend. A newly confident Japanese Yen regained much of its lost ground, up +3.11% on the day. The USD/JPY pair plummeted from its closely watched 145 USD/JPYsupport level and ended the week lower -4.99% at 139.519. US Treasury yields fell sharply, as surging demand for governance bonds pushed US treasuries for their greatest daily rally in 13 years - in excess of 30 bps for both 2 & 10 Year Treasury yields. Both were lower at 3.84%, and 4.34% at weekend.

The unprecedented deceleration in inflation sparked the largest rally in equities since 2020, seeing the SPX gain 1.97% on the day, while the riskier NASDAQ 100 composite snatched gains in excess of 2.2%. Both indexes carried gains into the weekend, the SPX up 5.5% and NASDAQ at 8.45% on Friday's close - renewed strength in markets driving the VIX lower -12% WoW.

DeFi

Amid FTX’s bankruptcy, FUD has spread to tokens that FTX Ventures and Alameda Research had invested in – most notably, Solana. Last week, the total value locked (TVL) into Solana-based DeFi protocols plummeted 63% from $1 billion to just over $370 million. The decrease in TVL is reflected in the price action of SOL, which is down more than 33% in the same period. Throughout the year, Solana has faced numerous outages, exploits, and other attacks; the impact of FTX might be the nail in the coffin which mitigates token and DeFi ecosystem growth.

Serum, a DeFi liquidity protocol created and funded by Bankman-Fried, has been forked for the benefit of Solana’s DeFi ecosystem due to the platform’s TVL falling after FTX became insolvent. Developers and Anatoly Yakovenko, co-founder of Solana, forked Serum, altering upgrade authority and fee revenues, managing all value with a multi-sig wallet. With many protocols relying on Serum’s markets for liquidity, value, and liquidations, a fork of the DeFi platform was necessary given that a relevant private key was connected to FTX, hence compromised. Subsequent to the fork, liquidity providers, including Solana’s Jupiter, turned off Serum as a liquidity source.

Source: CoinShares, Zerocap

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