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Crypto and TradFi Down as USD Soars: Chung’s Weekly Digest (10/3)

Our financial market analyst Chung Yee says: Signs of market stress are showing as the U.S. dollar becomes a safe haven. Crypto is not immune to this trend.

US Dollar Hegemony, Implications for Crypto

The greenback continues to strengthen as traders and investors turn to the U.S. dollar as a safe haven, fearing that the U.S. Federal Reserve’s (Fed) interest rate hikes will persist. The strengthening of the U.S. dollar is causing dollar-denominated debts to cost more to service in local currencies. The relative decline of the British pound and Euro threaten to harm Europe’s financial stability.

European countries such as Germany are being hit hard by inflation and may face a recession if not remedied.

Tightening liquidity has also significantly impacted the crypto market. Bitcoin ($BTC) is struggling to stay above $19,000 and the total crypto market capitalization has dipped below the $1 trillion mark. Market volatility will prevent traders and investors from holding on to risk assets.

Some observers on social media are calling for a cyclical market bottom but the worst seems to be far from over

If the world sinks into a global recession, troubled financial institutions and banks might collapse. In the short term, Bitcoin would tank because it is categorized as a risk asset. However, Bitcoin has an alternative narrative to consider. It was created as a result of the 2008 global financial crisis and was intended to serve as a hedge against conventional assets.

Weekly Recap

Market Sentiment

The market is far from entering a recovery phase. Volatility has abated since the 3AC and Terra fiasco. Projects are still struggling to stay afloat in the bear market as liquidity tightens. The crypto market does not exist in a vacuum and the global economic outlook has a strong influence on this asset class.

The Fed will eventually pivot from its current hawkish stance. Currently, the market is ripe for accumulation. Bitcoin still holds a strong narrative as a superior store of value and this narrative can play out in Bitcoin’s favor in times of crisis.

Whilst the price of Bitcoin has dropped considerably, its hashrate continues to climb, charting a new all-time high. The network’s security is now stronger than before and activities on the network did not decline.

Crypto regulation could be a savior for the crypto market. With the right legislation, institutions can onboard crypto assets as a hedge. Last Wednesday, Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam said in a fireside chat at NYU School of Law that Bitcoin could double in price in a CFTC-led regulation.

Coins to Watch

  • Aave ($AAVE) - This project is one of the leading platform in the Decentralized Finance (DeFi) space.
  • The platform enables lending and borrowing without intermediaries. Unlike other newer DeFi protocols, Aave has a track record.
  • This project is a DeFi blue chip with a mature ecosystem that has been time tested.
$AAVE will likely lead the DeFi sector when the crypto market recovers
  • The main concerns for projects in the DeFi space is the security of its protocols giving $AAVE an edge over its newer competitors.
  • Cardano ($ADA) - Cardano remains one the top-10 crypto asset by market cap.
  • The anticipation of the Vasil hard fork has led a short-lived rally that brought the price of $ADA past $0.50.
  • The Vasil hard fork is the second largest event in the crypto ecosystem after the Ethereum’s merge.
  • Like Ethereum, Cardano is a project that has stood the test of time. It has a strong user base and is focused on building its ecosystem.
Cardano could erode Ethereum’s dominance as the leading smart contract platform and is a viable choice as an alternative layer-one platform
  • Polygon ($MATIC) - a layer-two solution that works atop the Ethereum network.
  • Ethereum after the Merge will attract more activities and interests from investors and projects alike.
  • Polygon is a solution to achieve scalability and to lower transaction costs. Those are the two major problems that Ethereum has yet to eliminate.
  • $MATIC has held its price quite well because the token is used to pay for on-chain transactions.
  • Trading volume for $MATIC remains strong because of its utility.
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