Will U.S. Default?

​​Crypto Market Week in Review (12 May 2023)

Markets

This week the markets were largely flat. Both the U.S. Treasuries and the S&P 500 were little changed. Only large-cap tech shined as Nasdaq 100 rose by about 1% during the week, reaching the highest level since August 2022.

The week was dominated by the U.S. political news regarding a debt ceiling. The opposition Republican party clashed with the current administration, demanding spending cuts. Donald Trump went as far as suggesting a U.S. default if the current administration does not concede. The U.S. CDS rose to the highest ever and became higher than the CDS of some emerging market counties, but we note that the specifics of a CDS payout calculation overstate the actual U.S. default risk in the current situation.

The markets were supported by the U.S. macro news, as the all-important U.S. inflation data published this week was better than expected, confirming a price growth slowdown. YoY CPI declined below 5% for the first time since April 2021, almost halving compared with its highest level reached in June 2022. However, the current level is still very elevated historically, and core inflation barely declined from the peak.

U.S. CPI and core CPI (YoY, %)

Major cryptocurrencies fell, underperforming most risk assets. Both Bitcoin and Ethereum dropped by about 10% since the last Friday's close. There was a frenzy in “BRC-20” tokens minted on the Bitcoin network, hugely increasing transaction fees. Binance even temporarily halted Bitcoin withdrawals because of much higher transaction fees. Ethereum average gas price was also elevated, being the highest since May 2022.

The crypto volatility market remained unfazed despite relatively large spot moves. Both Bitcoin and Ethereum DVOL indexes were little changed since the last Friday's close. The Ethereum DVOL index reached a new all-time low this week but recovered back to last Friday's level. Ethereum options open interest remained near its lowest level since May 2022. Bitcoin options open interest failed to recover after the latest expirations and remained at the early March level (before the banking crisis started to fuel interest in Bitcoin).

Bitcoin Options Open Interest

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