The Pious Pivot

By August 1, 2022Ethereum
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We cover macro, crypto markets, volatility, and more in this Zap, Friktion’s weekly market insights.


Global markets dipped in the week leading up to July’s Fed minutes meeting last Wednesday and big tech earnings.

Powell announced a 75 bps rate hike, easing market worries of increased hawkishness, while big tech earnings were slightly positive, with AMZN, GOOG, MSFT up week over week.

At the Fed meeting, Powell stated “While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data”. Markets took this as meaning the Fed won’t hike much more unless subsequent data forces their hand.

This interpreted dovishness triggered a rally across the board in equities, bonds, gold, and crypto markets.

BTC in the macro landscape

The market is now pricing in a pivot in Fed interest rate policy in Q1 2023 partly due to increased pressure from the current administration leading up to this year’s November midterms.

This rally comes in the backdrop of US GDP numbers for Q2 coming in at -0.9% for the quarter, indicating that the US is in a technical recession, defined by 2 consecutive quarters of negative GDP growth.

US GDP changes

Austerity measures have never been popular, begging the question on whether our society will face the issue head-on, or kick it down the road for our future selves to handle.

Viewing crypto as a hedge against irresponsible financial policy has been in fashion this cycle. We shall see if the asset remains a strong Schelling point for that sentiment going into the future.

Risk Radar

Keeping Powell’s statements in mind about being data-driven, US economic data releases remain key drivers of price action. The two components of the Fed’s dual mandate of maximum employment and reducing inflation will have their data released in the coming week, employment data on Friday Aug 5, and CPI the next week on Wednesday Aug 10.

Pivoting to crypto risks, the upcoming ETH merge to POW remains front and foremost. Read more about the merge here.

Galois Capital, who predicted the death spiral of Luna, expressed uncertainty over the fate of the ETH merge. He priced in a non-trivial chance that something goes wrong, potentially causing a fork in the Ethereum chain in POW vs. POS.

The market has been relatively quiet with regards to the ETH merge, with most placing their trust in the Ethereum Foundation devs in that the merge will happen seamlessly.

We agree with Galois Capital in expressing skepticism that the world will play out exactly how we foresee it, with many potential unknown unknowns lurking around. Complex systems are complex, and as we have seen with the Luna death spiral, things are never as safe as they seem.

Markets have begun to react to the noise, with stETH dipping ~1% in the past week.

ETH December futures have also flipped from contango to backwardation (future price < spot price), indicating increased market skepticism.

Keep an eye out and stay safe~

Crypto Markets

Crypto markets round tripped this week, dipping into FOMC and rallying afterwards.

Crypto Majors

ETH continues to outperform from zeal about the merge while SOL lags behind.

BTC 7d implied vs. realized

BTC realized volatility remains higher than implied, partly due to high ETH implied volatilities potentially causing sympathetic moves in BTC.

ETH Options OI vs. BTC Options OI Source: GenesisVolatility

ETH options OI (open interest) surpassed BTC options OI for the first time in history, a testament to the increased speculation and hedging going into the merge.

Volt Performance

Friktion options auctions all settled out of the money this week, locking in premiums for deposits.

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