The Wolf Den Crypto Newsletter

By Scott Melker aka The Wolf Of All Streets

The Wolf Den #575 - Lending Crunch Time





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September 8 · Issue #575 · View online
The Wolf Den Crypto Newsletter
Welcome to The Wolf Den! This is where I share my ideas about the market, technical analysis, education and advice regarding trader psychology and emotional control. The newsletter is released every weekday and is completely FREE.
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In This Issue:
  1. Lending Crunch Time
  2. How Ethereum On-Chain Metrics Have Evolved Before The Merge - IntoTheBlock
  3. Bitcoin Thoughts And Analysis
  4. Legacy Markets
  5. Fantasy Sports Meet NFTs
  6. Meta Is Building In The Metaverse
  7. FTX Teams Up With Gamestop
  8. Trading The Ethereum Merge | Macro Vs. Fundamentals - Josh Frank & Jeff Dorman
  9. My Recommended Platforms And Tools
Lending Crunch Time
Everyone and their grandmother is holding Ethereum pre-merge to receive free coins from the anticipated hard fork. To make the most of the situation, DeFi users are posting everything but the kitchen sink as collateral to borrow as much Ethereum as they can. They are also taking their Ethereum out of DeFi to stack it and squeeze every last bit of profit come the merge. The consensus approach right now is to gather as much Ethereum as you can, both borrowed and spot, collect forked tokens, dump the garbage and rake in a hefty profit.
Is it really that easy?
Lending platforms are caught in the middle of the gold rush. Because of the demand for spot ETH, DeFi communities are being forced to make tough decisions to protect their protocols while also absorbing as much profit as possible.
Here’s the game theory.
Aave, the most prominent DeFi lending platform, has opted for a defensive strategy by boarding up the windows and halting all Ethereum loans to mitigate risk. According to Aave, the three major areas of concern are: 
  • High ETH utilization potentially makes liquidations harder or impossible
  • High ETH utilization increases the ETH rate to a level where stETH/ETH positions are making negative APY
  • Already high ETH utilization causes regular ETH suppliers to start withdrawing their ETH
In layman’s terms, the concerns can be boiled down to “withdrawal runs, positions becoming uncollateralized, and cascading liquidations.” Basically, the protocol is at risk of overheating and becoming insolventat the same time if too much Ethereum is lent out and volatility strikes. The merge is a hurdle for Aave, not a get-rich-quick moment. 
Like Aave, Compound is also feeling the heat, but they have taken a more offensive approach to damage control. They are considering raising the borrowing rates to the point of disincentivizing borrowers. Here is the proposal - pay close attention to the second sentence.
The proposed maximum borrow rate of 1000% corresponds to a weekly cost 4.7% (daily cost of 0.66%), and corresponding supply rates at 100% utilization would be 800% per year (4.3% per week, 0.6% per day). These levels should be high enough to discourage full utilization of the cETH market (borrowings or withdrawals) until just before the fork block. Minimizing the expected amount of time when the cETH market is fully utilized will reduce risk of insolvent accounts or other market disruption.
The reasoning is as follows: more borrowers = more risk = higher interest rates = disincentivized over-leveraged lending. It’s potentially a strong solution, but this is where game theory comes into play. The major unknown right now is what ETHPoW will be priced at after the merge. The more valuable the token, the more incentive there is for borrowers to lever up on loans. But if ETHPoW tanks, all of the outstanding loans will have been for naught and could pose a systemic risk if they can’t be paid back. This is the current line of thinking being tossed around in everyone’s minds.
It’s a complex guessing game. 
Borrowers also need to consider the variance in APY when taking out a loan, which determines rates and LTV ratios.
Conclusion? By no means is the fork-free money unless you are simply sitting on a stack of spot Ethereum. This is a high risk game that everyone seems to be playing. For most traders, myself included, the smart and simple play will be to collect the free coins, let the market do its thing, and be prepared if a “sell the news” event takes place.
We have seen lenders blow up before… is it worth the risk?
How Ethereum On-Chain Metrics Have Evolved Before The Merge - IntoTheBlock
In this report, we bring to you the latest in on-chain cryptocurrency analysis. We look at the blockchain directly and analyze balances, transactions, and the overall activity of market participants. This gives us a unique insight into the future of the market.
This section is written in conjunction with IntoTheBlock (ITB). ITB is an intelligence company that leverages machine learning and advanced statistics to extract intelligent signals tailored to crypto-assets. IntoTheBlock tackles one of the hardest problems in crypto: to provide investors with a view of a crypto asset that goes beyond price and volume data. 
The Wolf Den research team uses IntoTheBlock to dig deeper and get the most important insights about the crypto market.
How Ethereum On-Chain Metrics Have Evolved Before The Merge
With Ethereum’s merge set to take place next week, all eyes are on ETH. This upgrade will have profound implications on the Ethereum network and on Ether the asset. ETH issuance will decrease 85% to 90% right after the merge (to 1700-1800 ETH/day). In addition to the issuance rate drop, staking yields are also expected to increase, likely attracting more users to stake.
Ethereum fees have been in a downtrend. As DeFi and NFT volumes have dwindled, demand to pay for ETH fees has dropped 75% over the past 3 months and 90% relative to a year ago.
  • Decreasing fees means less ETH is being burnt
  • Less ETH burn = Greater inflation
  • Over the last 30D, we have burnt 1200 ETH/day on average
  • Last 90D, burn is 2150 ETH/day on average
So where does this leave ETH inflation post merge? Combining ETH issuance reduction with the burn numbers from June to September, we project ETH net issuance to range from -1% to +0.5% following the merge
  • Net Issuance = Issuance - ETH burn
  • If fees remain low or continue to decrease, ETH will be slightly inflationary, though less so than the current 3.5%
Bitcoin Thoughts And Analysis
Bitcoin confirmed bullish divergence with oversold RSI on the daily chart and every time frame below. The weekly divergence is still possible, although less likely if price rises from here before Sunday.
NO SIGNAL is guaranteed, but this one has a very high hit rate for being at least a local bottom. Keep in mind that price can drop again and form a larger and more powerful divergence. Bottoming is a process, not a price. If you are trading this, keep that in mind for stop losses.
This is my favorite signal, and rarely confirms in the manner we just saw. Price “should” head up.
Watch for hidden bearish divergence to form and signal another drop is likely to make a bigger bull div.
For now, this looks really good for a potential bottom to form.
Legacy Markets
Stocks Drift as Traders Brace for Jumbo ECB Hike: Markets Wrap - Bloomberg
US equity futures and European stocks meandered in cautious trade, with investor attention focused on how aggressive the European Central Bank will be in the fight against inflation when it announces its interest rate decision later. 
What to watch this week:
  • European Central Bank rate decision, Thursday
  • Fed Chair Jerome Powell due to speak, Thursday
  • Chicago Fed President Charles Evans and his Minneapolis counterpart Neel Kashkari due to speak, Thursday
  • EU energy ministers extraordinary meeting on emergency intervention in electricity markets, Friday
Are you bullish on energy-related assets? This week’s MLIV Pulse survey focuses on energy and commodities. Please click here to participate anonymously.
Some of the main moves in markets:
  • Futures on the S&P 500 were little changed as of 6:16 a.m. New York time
  • Futures on the Nasdaq 100 were little changed
  • Futures on the Dow Jones Industrial Average were little changed
  • The Stoxx Europe 600 rose 0.1%
  • The MSCI World index rose 0.3%
  • The Bloomberg Dollar Spot Index rose 0.1%
  • The euro was little changed at $1.0001
  • The British pound fell 0.3% to $1.1496
  • The Japanese yen was little changed at 143.88 per dollar
  • The yield on 10-year Treasuries declined two basis points to 3.24%
  • Germany’s 10-year yield was little changed at 1.57%
  • Britain’s 10-year yield declined one basis point to 3.02%
  • West Texas Intermediate crude fell 0.5% to $81.54 a barrel
  • Gold futures rose 0.1% to $1,730.30 an ounce
Fantasy Sports Meet NFTs
Sorare teams up with NBA for a new NFT fantasy basketball game
Having found success in Soccer and MLB, Sorare is teaming up with the NBA to offer, “an officially licensed NFT-based fantasy basketball game this fall.” Digital cards can be minted and then added to a fantasy lineup to compete against friends and family. Although not the same as NBA Top Shot, the new game holds the promise of bringing in both crypto fans and sports fans. NFTs are definitely the future of sports collectible trading. It’s just a matter of time until they find a solid long-term niche.
Meta Is Building In The Metaverse
Why Meta Is Shelling Out $150 Million To Construct 10 Schools In The Metaverse |
Despite Facebook’s rocky transition to Meta, it’s a strong signal to see the company spending $150 million on its Immersive Learning Project to build virtual campuses. To implement the concept, Meta is partnering with 10 real universities to allow their students access to this new virtual learning experience. One of the universities is the University of Maryland, which now will have the chance to have, “buildings, grassy lawns, a duck pond, and other amenities.
Other participating universities include “Alabama A&M University, South Dakota State University, University of Kansas School of Nursing, Florida A&M University, West Virginia University, New Mexico State University, California State University, Dominguez Hills, and Southwestern Oregon Community College.” The money might create a cool new product, but success will ultimately boil down to whether or not the learning experience is improved. Will the metaverse be a solution looking for a problem or is there actually a real need for this experience?
FTX Teams Up With Gamestop
FTX partnership boosts GameStop despite mixed quarterly results
I would have never seen this coming for the dying brick-and-mortar game store that was starting to resemble Blockbuster… until they became famous for the short squeeze. According to an official press release, “the partnership is intended to introduce more GameStop customers to FTX’s community and its marketplaces for digital assets.” Through the partnership, GameStop will sell FTX gift cards and likely look to capitalize on digital collectibles, Web 3.0 gaming, and possibly the metaverse. This unlikely bond holds a lot of potential for crypto gaming.
Trading The Ethereum Merge | Macro Vs. Fundamentals - Josh Frank & Jeff Dorman
Trading The Ethereum Merge | Macro Vs. Fundamentals
This podcast will be recorded live on YouTube at 9:30 AM EST, then shared on audio platforms this afternoon. Tune in!
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On-chain and fundamental analysis, research, predictions and indicators, all in one place. Highly recommend.
The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to “Buy,” “Sell,” or “Hold” an investment.
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