Trakx Weekly Update: Crypto Slumps as Trade Fears Return

Key Crypto Market Figures

CTIs Weekly Performance

Digital asset prices tumbled last week, driven by a sharp sell-off on Friday (see below) that dragged our flagship large cap Top10 Crypto CTI down by almost 10%. Such was the magnitude and breadth of the slump that only one of our indices, the defensive Inflation Hedge CTI, finished in the green, gaining just 0.1%. Worst affected was the AI CTI, which dropped over 27%, a loss nearly matched by the NFT Metaverse CTI (-25.5%).

Global Trade Fears Return

The sell-off was triggered by renewed trade tensions after President Trump announced he was considering an additional 100% tariff on Chinese imports. The move came in response to China’s new export controls on rare earths, critical materials in many high-tech products. With China controlling roughly 60% of global mining and 90% of processing, the announcement spooked markets worldwide. The result was a $400 billion drop in crypto market capitalization — the largest single-day loss on record — alongside a $2 trillion wipeout in US equities.

Some calm returned over the weekend after Trump softened his tone on social media, posting “Don’t worry about China, it will all be fine! Highly respected President Xi just had a bad moment.” – a reassurance that helped cryptocurrencies partially recover Friday’s losses.

Ethena Depeg?

One casualty of the deleveraging event was USDe – Ethena’s stablecoin – which dropped to $0.65 on Binance. While the price drop appeared to indicate that USDe had depegged – not a good look for a token whose price is supposed to be, well er stable – in reality the price drop only occurred on the Binance platform, elsewhere USDe continued to trade around parity. According to various sources on X, manipulators exploited Binance’s pricing system, which values collateral tokens (including USDe) using its own spot market rather than oracle data, a known vulnerability that is due to be fixed this week.

Additionally, there was speculation of insider trading amid reports that a trader opened large short positions in Bitcoin and Ether around half an hour prior to the Trump announcement, positions that made the investor who placed the trade almost $200 million.

The Debasement Trade

The timing of Friday’s dump was unfortunate, as earlier in the week Bitcoin caught up with its analogue equivalent hitting a new all-time high, buoyed by fears that governments are losing control of their debt burdens. This idea — that excessive borrowing and money printing will erode the value of fiat money — has now been dubbed the “debasement trade” by JP Morgan and is gaining traction beyond crypto circles. Recent political turmoil, including the US government shutdown and the French Prime Minister’s resignation after just 26 days, has reinforced investor concerns about fiscal stability, especially as high-profile tradfi figures such as Ray Dalio (Bridgewater), Ken Griffin (Citadel), and Paul Tudor Jones (Tudor Investment Corp.) have all recently echoed similar warnings.

Luxembourg Takes The Lead

Finally, to end on a positive note, Luxembourg became the first member of the Eurozone to deliberately invest in crypto (as opposed to holding it as a result of criminal seizure) after it allocated 1% of its $800 million sovereign wealth fund to Bitcoin ETFs. Set-up in 2014, FSIL has an investment mandate that aims to invest conservatively with a portfolio previously comprising of 57% bonds, 40% equities with the residual 3% in cash. According to Bob Kieffer, Luxembourg’s Director of the Treasury, the new allocation to Bitcoin sends “a clear message about Bitcoin’s long-term potential.”

Sources: Trakx, Coingecko, Alphavantage

Market Trends

• Bitcoin’s Flash Crash Sees $7B Crypto Liquidation as Trump Ramps Up China Trade War: Coindesk
• ‘Not a true depeg,’ says Ethena founder as USDe faces Binance-only slip: Ambcrypto
• Trader who made $192M shorting the crypto crash is doing it again: Cointelegraph
• Gold climbs over $4,000; silver, bitcoin surge as ‘debasement trade’ flight to havens continues: Yahoofinance
• Luxembourg Sovereign Wealth Fund Invests in Bitcoin: Decrypt
• Strategy’s mNAV falls to 19-month low as BTC outperforms: Protos

Trakx CTIs Performance

Sources: Coingecko and AlphaVantage

*Return of bitcoin is calculated since 01/05/2020, while CTIs performances were calculated since their respective launch date.
**Includes simulated performance.
***The risk signal is determined according to the historical volatility level, the higher the riskier.

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Disclaimers: No Investment Advice. Index returns and statistics are for illustration only. Index returns do not reflect any transaction costs or expenses. Past performance does not guarantee future results. The information provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the newsletter content as such. Trakx.io does not recommend that any cryptocurrency should be bought, sold, or held by you. Readers shall conduct their own due diligence and consult their financial advisors before making any investment decisions.