Risk off Markets and Centralization Debates — Week in Review

Key Takeaways:

• Bitcoin risks dip below $59K as PlanB flags 200-week MA; institutions dominate flows.
• Google white paper claims 20x quantum gain, raising risks for Bitcoin and Ethereum cryptography.
• $260M-$285M Drift Protocol exploit signals rising DeFi hacks as Circle response questioned.

Markets Wobble as Oil Shock Looms, Institutions Tighten Grip on Crypto, and Quantum Risks Enter the Frame

Bitcoin and Ethereum both traded sideways on the week, while Solana led most of the altcoin market down another leg.

Stock indices made a surprise move to the upside, with the S&P500, Nasdaq, and Dow Jones all up 4.34%, 3.3%, and 2.9%, respectively. Ram Ahluwalia pointed out that the S&P 500’s move up in the first half of the week was largely a mechanical bid driven by quarter-end volume compression rather than structural buy-side pressure.

Meanwhile, precious metals threatened to resume their multi-year bull market as gold and silver both printed green weeks. Gold is now up 14.7% from its March 23 low.

The war in the Middle East continues, yet the fog of war appears to be getting thicker. When people such as Jamie Dimon state that success in Iran is more important than markets, it indicates a cessation is at the very least weeks away.

The broader economic backdrop is only just beginning to sour as the physical oil shock has yet to land. Rory Johnston, on Hidden Forces this week, said:

“We still haven’t actually felt the physical impact of the loss of Hormuz supply yet. The final ship hasn’t yet arrived. That final ship will likely be arriving in Asia this week, in Europe next week, and in North America the week after that. After that ship arrives, behind it, there’s nothing but air.”

Of course, we’ve already seen some governments preparing for the incoming shock. Mr. Johnston said this was happening mostly from Asian countries, which, as soon as the Strait was closed, began immediately curtailing energy usage.

Some curtailment has started in Europe. There was the toothless EU pronouncement that its people should travel less, and “reduce highway speed limits by ten kilometers [an hour]”. Australia, nominally in Asia but European in policy, received a similarly ineffectual address from its Prime Minister. The Indian Prime Minister reiterated the need to protect regional energy infrastructure in West Asia without any hard power promises.

The U.S. economy might’ve looked good before the conflict, perhaps the best it’s been since late 2023, but this oil shock looks recessionary. Ram Ahluwalia warned that an inflation shock and rising energy costs are preparing to batter consumer spending, and “analysts have not yet reduced forward earnings estimates.” In other words:

“Risk Off.”

Warren Buffett agrees, saying he’s waiting in cash for more downside. Jamie Coutts warned that global liquidity aggregates and the DXY are flashing bearish signals.

Luke Gromen outlined the grim choices for the US Treasury, arguing that printing USD into an oil spike is the most likely outcome, a sentiment he reiterated to his peers. Adding to the dollar debate, J.P. Mayall released an interesting thesis arguing that foreign central banks accumulating gold isn’t a sign of de-dollarization, but rather indirect exposure to U.S. Treasuries.

While equities have rebounded and kept most of those gains, crypto bounced and retraced most of them. Technicals are offering a veritable Rorschach test for traders. PlanB posted a rare bearish update, noting he wouldn’t be surprised to see a dip below the 200-week moving average ($59k) and realized price ($54k). Conversely, Jamie Coutts looked at Z-score indicators and concluded that, probabilistically, Bitcoin is close to its trough. CryptoQuant posted that Binance’s ETH reserves dropping while stablecoins climb, creates a highly supportive setup for price expansion.

Technical analysis, or astrology for men, probably doesn’t matter. As Pledditor reminded everyone, if you look at the accumulation over the last six months, much of this market is really just Michael Saylor. Retail has largely walked away, leaving the space to massive corporate and institutional actors. Recall from the newsletter two weeks ago:

“Listen to the recent podcast with Haseeb and Santiago on why they think “tokens are dead.” Santiago argues tokens don’t capture real value, while Haseeb points out that the current marginal buyers are institutions, and institutions, by and large, don’t buy tokens.”

The institutions seem to be having a great time. Franklin Templeton didn’t just create another crypto product; they launched a dedicated crypto division. Long-time skeptic Morgan Stanley appears to be making final tweaks to launch their spot Bitcoin ETF next week.

This institutional and corporate creep isn’t always pretty. Coinbase was allegedly lobbying against a de minimis tax exemption for Bitcoin while pushing for one that benefits USDC. Meanwhile, Sam Altman’s Worldcoin Foundation opted to dump $65,000,000 worth of WLD in OTC sales right at the all-time low.

The biggest crypto story this week came from a bombshell Google quantum research paper that claims a 20x reduction from earlier quantum systems to execute attacks on elliptic curve cryptography, the backbone of Bitcoin, Ethereum, and most blockchains. Nic Carter, Haseeb Qureshi, and Coinbase CEO Brian Armstrong are taking this research seriously. If one quantum paper wasn’t enough, Nic Carter and Justin Drake pointed out that another breakthrough paper landed the same day.

The Bitcoin community, however, seems largely stuck in denial. Mert Mumtaz called out one of the main methods of doing so: whataboutism. Jordi Visser, who argued we should ignore the quantum threat to Bitcoin because AI agent swarms will break TradFi banks first, provided a great example of whataboutism.

An even more common form of denial has been the use of ad hominems. Bitcoiners attacked the Google paper because a co-author “actually works for the Ethereum Foundation.” Nic Carter’s concerns can be dismissed, apparently, because he invested in a company focused on making products quantum-resistant. These are not serious people if they go after the character or motives of people with quantum concerns instead of their claims.

Jonas Schnelli told the people with quantum concerns that they are the devs and need to step up. I hope Nic Carter isn’t right when he replied:

“For a BIP to go through, one of about 5 people have to champion it. We both know who they are. No BIP has gone through without them in the last decade.”

The quantum security threat is in the future, but we’re dealing with an uptick in defi hacks right now. Mr. Qureshi posted that the uptick in exploits will likely get worse before they get better, as attackers utilize the latest AI tools while defenders lag behind.

As if to prove a point, hours later, a $260 to $285 million exploit on Drift Protocol happened. The hacker systematically drained mostly JLP and stablecoins and actively swapped the stolen assets for ETH. Austin Campbell noted this is exactly the scenario where Circle should have been required to freeze the USDC. ZachXBT shared his frustration that Circle was so slow to act. He wasn’t the only one.

Last week into this week saw a classic crypto discussion between centralization and decentralization. This time centered around Canton, which many within the crypto community feel is too centralized.

Canton’s Director of Sales claimed Canton has the “deepest pool of institutional liquidity.” Omid Malekan replied that no one is trading on Canton, and there’s no verifiable economic activity. Austin Campbell agreed that nobody is trading at scale on the chain.

On verifiability, Shaul Kfir, co-founder of Digital Asset, the company that designed, built, and continues to develop the Canton Network, admitted that a supply cap cannot be verified on Canton.

Rebecca Rettig of Jito Labs wrote a thread framing the debate as one between permissioned v. permissionless chains, and permissionless wins. Omid Malekan wrote Canton’s permissioned governance model is the same model as every privately-owned system in tradfi.

Helius’s Mert Mumtaz quipped, “Canton is a very fun way of spelling ‘web 2 database with a token’”. Basically, it’s not a blockchain.

Solana underwent its own internal centralized v. decentralized debate this week about the blockchain’s ongoing consensus evolution. FCFS (First-Come-First-Served) and MCP (Multiple Concurrent Proposers) are two contrasting approaches to block production and transaction ordering. To simplify, FCFS is faster, simpler, and more centralized than the current consensus setup, while MCP is slower, more complicated, preserves pricing, and is more decentralized.

Solana co-founder Anatoly Yakovenko favors MCP, but thinks the current hybrid setup is the worst of both worlds.

Finally, AI x crypto is getting a lot less attention compared to a month ago, but Algod continues his relentless Bittensor bull-posting, predicting multiple breakout subnets this year and an exponential increase in quality driven by frontier lab talent.

-David Sencil