🟣 Liquidity, liquidity, everywhere

Understand liquidity, and you understand bitcoin's price, Arthur Hayes says

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Daniel Shapiro & Donovan Choy
August 13, 2024

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Welcome back to 0xResearch. Here's what we’ve got for you today:

  • Bitcoin is trading at fair value

  • Arthur Hayes predicts liquidity upturn into EoY

  • Dominance of Base L2

The weekly session opened after bitcoin had rejected $62k. Once the US session began, buyers defended the monthly volume weighted average price (VWAP) before price swiftly moved to $60k before getting rejected. Interestingly, bitcoin is currently trading around $59k which is almost exactly the value of the yearly VWAP. Buyers and Sellers have determined price to be sitting at fair value.

ETH has actually showed more strength than bitcoin or solana since the weekly open, and has not broken bullish market structure. Typically, over the last two years the market dumped after ETH showed strength. It will be critical to observe if this trend continues, or is finally broken. The ether strength appears to be coming from spot accumulation on Binance.

Considering perpetual futures and CME futures open interest have been wiped 20% - 30% as well as funding rates being sub 9% and even intermittently negative, expect chop with a slightly upward bias.

Water, Water, Every Where: Analyzing Liquidity’s Role in Financial Markets

Arthur Hayes released an essay last night discussing the critical role of liquidity in financial markets. Hayes argues that understanding how liquidity is created, managed, and manipulated by key institutions like the US Treasury is essential to predict the direction of risk assets, such as bitcoin.

The US Treasury, under Secretary Janet Yellen, plays a pivotal role in determining market liquidity. Hayes highlights the concept of "fiscal dominance," where the Treasury's need to fund the government overrides concerns about inflation. This dominance shifts power from the Federal Reserve to the Treasury, especially when the debt-to-GDP ratio exceeds 100%. At this point, the Treasury becomes the primary driver of liquidity in the economy.

Hayes discusses how Yellen is expected to issue large quantities of Treasury bills to inject liquidity into the financial system. T-bills are short-term government securities that banks and money market funds (MMFs) prefer over longer-dated Treasurys due to their lower risk and higher liquidity. By issuing T-bills, the Treasury can draw money out of the Fed's balance sheet, where it has been "sterilized," and inject it into the broader economy, thereby boosting asset prices.

A key point in Hayes' essay is the correlation between the issuance of T-bills, the level of the Fed's Reverse Repo Program (RRP), and the price of bitcoin. As T-bill issuance increases and money moves out of the RRP, liquidity is injected into the market, leading to a rise in bitcoin's price. Hayes predicts that as Yellen ramps up T-bill issuance toward the end of 2024, bitcoin could see significant gains, potentially reaching $100,000.

Hayes argues that Yellen's liquidity management is heavily influenced by political considerations, particularly the upcoming 2024 US election. He suggests that Yellen will intensify liquidity injections to create a strong market rally, which could boost the chances of the Democratic candidate, Kamala Harris. However, Hayes warns that this liquidity-driven rally might be short-lived, with potential volatility post-election as the US debt ceiling issue resurfaces.

Given the expected increase in liquidity toward the end of 2024, Hayes outlines his trading strategy: to take advantage of the current market weakness by loading up on crypto assets, particularly bitcoin. He plans to take profits before the election, anticipating a peak in market liquidity in October. Post-election, he advises moving to safer assets and waiting for the US debt ceiling issue to be resolved before re-entering the market.

Despite the short-term volatility, Hayes remains bullish on the long-term outlook for bitcoin and other risk assets. He predicts that once the US debt ceiling is raised, a new bull market will begin, fueled by continued liquidity injections from the Treasury and possibly the Federal Reserve. He also hints at the potential for a global liquidity boost from China, which could further drive the market upwards.

— Daniel Shapiro (X: @_dshap)

All 1000X listeners know that when Jonah and Avi give guidance on the markets, it’s best to pay heed. 

Catch them live and in person at Permissionless III in October as they answer the perennial question: “Where are we in the cycle?”

Base L2 dominance continues:

Base continues to dominate the Ethereum L2 space. The L2 recorded daily transactions of 3.9 million yesterday, putting it above Polygon PoS, Arbitrum, Blast and Optimism. Base’s success is a net benefit for Optimism too, seeing as 2.5% - 15% of Base’s sequencer revenue is paid to the Optimism treasury. The Optimism treasury has netted about 2637 ETH ($6.9 million) in sequencer revenues from Base since its launch one year ago.

The bulk of active address activity comes from Uniswap. Based on Artemis data, at least 77% of active address activity accounts from Uniswap in the last 30 days among the top 15 dapps, despite it having only 36% of its main DEX competitor Aerodrome’s TVL. The next largest share of activity on Base are USDC transfers, with 7.4% (23K) of active addresses from Circle.

— Donovan Choy (X: @donovanchoy | Farcaster: @donovan)

Chainlink’s first-mover advantage, platform offering and key partnerships have positioned it as the undisputed leader in the RWA infrastructure space.

Lido has generated over $100m in the last year alone. It is the 4th highest revenue-generating app across all apps in 2024. With year to date earnings of $26m, it also maintains a top four status in profitability. Despite strong fundamentals, the LDO token has decreased by over 60% in 2024, leading to Lido's valuation dropping to historic lows. It currently trades at a 9.0x price-to-sales (P/S) ratio, among the lowest in its peer group. Upcoming and current initiatives like Vaults and the Staking Router are poised to further solidify Lido’s dominance.

Now that the SEC has all but stamped out ICOs, making new supply is how development teams and other entities pay themselves.

CubeSigner brings hardware security to Babylon nodes to reduce slashing risk.

The insights, views and outlooks presented in the report are not to be taken as financial advice. Blockworks Research analysts are not registered broker/dealers or financial advisors. Blockworks Research analysts may hold assets mentioned in this report, further outlined in the Firm’s Financial Disclosures.