Connecting the Dots
Episode 112 - Zoom Out
Welcome to the new subscribers that have joined us over the last week. The aim of this newsletter is to help you navigate the world of crypto. There’s an incredible amount of information out there so we try to distil it into the things you MUST know each week, covering both macro and crypto.
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Onto the newsletter. Here’s what you’re getting this week:
Macro Update: Our latest view on the macro and its impact on crypto markets.
Crypto Native News: MetaMask to add support for Bitcoin and Solana, MARA reports record revenue and earnings.
Institutional Corner: The U.K. government has introduced a new bill expanding its powers to seize and destroy crypto linked to criminal activity, BlackRock to allow bitcoin into its model-portfolio universe, CME to launch Solana futures, Standard Chartered say further bitcoin downside to come.
Charts of the Week: Bybit hack the largest of all time, bitcoin weekly trade volumes at post election low.
Top Jobs in Crypto: Featuring Chainlink Labs, ONE, Figment, BRIA AI and Trireme.
Macro Update
This is where we connect the dots between macro and crypto.
Zoom Out
Well that escalated!
The US growth fears that dragged stocks lower into the end of last week, continued, amidst more weak data and compounded by confirmation that Trump tariffs on Canada and Mexico will go ahead as planned on 4th March, whilst an additional 10% tariff will be levied on China.
The Fed’s preferred inflation gauge, Core PCE, was the data highlight of the week and confirmed inflation had cooled from 2.9% to 2.6% YoY as expected, although remains uncomfortably above the Fed’s 2% target. Adding to growth concerns, despite personal incomes rising 0.9% in Jan, spending contracted 0.2%, supporting the fall in the Conference Board’s consumer confidence index, which recorded the sharpest monthly drop since August 2021, dragged lower by forward looking “expectations.” Inflation expectations also rose from 5.2% to 6% giving a “stagflationary” feel to the data which is the worst combination from a risk point of view as markets fear Fed inaction to slowing growth given the inflation constraint.
The more growth exposed Nasdaq ending the week down circa 3.5%, whilst Bitcoin and the broader crypto space, as the high beta risk plays, saw substantial drawdowns on the momentum trade unwind. At one point, Bitcoin was trading lows just above 78K 😬
Needless to say, we’ve been blindsided by this risk off, especially as the cross-asset macro indicators fed our confidence that the break higher for Bitcoin was imminent. The perils of a 70 vol asset class!
However, these pull backs are very typical in a bull market and NOTHING that occurred in this past week has given us cause for concern. Perhaps we had talked ourselves into the idea that Bitcoin would see more shallow pull backs relative to past cycles, given the institutional adoption story dominating flows into Bitcoin. The wider altcoin space had already seen substantial, typical bull market drawdowns and we felt, potentially, had bottomed given the largest liquidation event in crypto history, just a few weeks ago.
Outside of the macro, it feels like the recent memecoin rugpulls have weighed heavy on Solana which has dragged down the broader alts alongside Bitcoin. That weight, combined with the broader hit to risk on growth and tariff concerns, finally culminated for a decent Bitcoin flush.
Where from here?
The question then is how does this play out from here? It’s difficult to catch a falling knife and call the bottom when we experience a de-risking as we’ve just witnessed. Sell flows are typically “mechanical” in nature as portfolios are systematically “grossed down.” However, last week’s capitulation felt like the type that marks a local bottom in markets, with the relative strength index (RSI’s) moving into the most oversold levels since the August 5th “carry trade unwind” flush out. We feel therefore that we’ve likely seen the lows for Bitcoin in this corrective pull back.
The macro case that we have previously outlined continues to unfold perfectly to feed our conviction that this crypto bull market still has plenty of room to run and the largest gains remain ahead of us. It’s worth outlining some of those positive macro drivers here 👇
US dollar and yield tailwinds:
We wrote early in Jan about fading the US “reflation” story. When all the talk was of US growth exceptionalism which consequently drove US yields and the dollar higher, forming a strong macro headwind to the positive idiosyncratic drivers for crypto, we expected that to fade and reverse.
The stronger run of data in Q4 was largely a function of the pre-election spending causing a sugar high and adding to the typically, seasonally strong data in December. That indeed has started to play out and the dollar and US yields have reversed lower as markets re-price the growth outlook for the US amidst a softer data pulse. The efforts of DOGE to reduce the deficit are also requiring a market re-price of the growth outlook.
This macro cycle has been distorted somewhat following the extremes of covid, but also by the insane deficits Joe Biden was running, which kept US growth artificially strong. Structurally, nothing has changed in the US to sustain these very high real rates, but fiscal dominance has meant “higher for longer.” This period looks set to come to an end and we suspect markets remain under priced for the amount of Fed rate cuts that will ultimately need to be delivered.
The recent move into expansion territory for Manufacturing ISM also points to global manufacturing emerging from recession, which will see relative growth outperformance for the rest of the world Vs US, keeping the dollar moving lower. This turn in the business cycle is also a positive tailwind for broader risk.
Liquidity rising:
Global liquidity is rising. A falling dollar is a boost to global liquidity, given its the lubricant of global trade and given the amount of dollar based debt held outside of the US that needs financing.
A falling dollar will also allow China to ramp up stimulus and attempt to arrest the deflationary spiral, which will be a huge boost to global liquidity.
Global M2 is also starting to rise and break out 📈
With the US debt ceiling, there is currently no net new debt issuance and now that the “extraordinary measures” that were enacted to keep the government running have been exhausted, we are starting to see the Treasury General Account (TGA) drawdown, as we have written about. As a reminder, this is the cash account the US Treasury holds at the Fed. This has fallen from 830bn to 680bn in the last week with plenty still to draw down and is a pure cash injection into our markets.
The Reverse Repo rose over $160bn in the past week as banks window dress their balance sheets, which has off-set the TGA drawdown, but should flow back into markets next week.
There’s a lot of cash to come into this market until the debt ceiling lifts, when we will likely then face another liquidity squeeze as the TGA gets rebuilt (we’ll cover this and what it means when it comes more cleanly into focus.)
Oil is also falling, down 13% since the inauguration, with “drill baby drill,” a slowing economy alongside a Middle East ceasefire and potentially a Russia/Ukraine peace deal.
Zoom out…
Overall, liquidity conditions are supportive and rising, to keep risk and crypto pushing higher, despite this recent correction on growth concerns.
We remain a function of rates and liquidity. Knee-jerk risk-off moves on growth fears are quickly faded as the market prices lower rates, which reflexively ease financial conditions and stimulate risk.
We also believe we remain in a "goldilocks" environment of a slowing, not collapsing, disinflationary US economy which allows the Fed to continue cutting rates without some of the more impactful, negative consequences of a deeper recession.
As we write, Trump headlines have broken re Trump’s executive order directing the Presidential Working Group to move forward on a Crypto Strategic Reserve, re-emphasising the promise to make the US the Crypto Capital of the World.
Bitcoin remains underpriced for the paradigm shift that is unfolding in the regulatory and political environment for crypto. Yet Trump headlines will continue to provide two way volatility.
This is why we drown out the noise, keep focused on a macro framework which is overlaid with the exponential, secular trend that will keep Bitcoin outperforming all other macro assets. Sometimes, you just need to zoom out.
Native News
Key news from the crypto native space this week.
MetaMask will add support for Bitcoin and Solana this year as part of its near-term product developments to improve its user experience. MetaMask said it is expected to start full bitcoin support in the third quarter of this year. Support for Solana is aimed to launch in May, marking the first non-EVM chain to be integrated into MetaMask. The press release said "All MetaMask users will be able to buy, sell, swap, and interact with dapps across the entire Solana ecosystem. Existing Solana users will get access to the same security, reliability and rich features of MetaMask, along with access to all the chains you use with MetaMask today." MetaMask revealed that it will "abstract away" gas fees by introducing new features, such as gas-included swaps that allow users to swap tokens without having to hold ETH in their accounts. MetaMask said this will be applied to all transactions in March. In addition this week, Consensys and the U.S. Securities and Exchange Commission have agreed 'in principle' to end the case against MetaMask. Read the full press release from MetaMask HERE.
Bitcoin mining company MARA Holdings reported record revenue and earnings in Q4 2024. The company posted a 37% increase in revenue, reaching $214.4 million, compared to $156.8 million in Q4 2023, owing to a 132% rise in the average price of Bitcoin mined. The Florida-based firm’s net income for the quarter grew by 248%, totalling $528.3 million, compared to $151.8 million in the same period last year. Read the full release from MARA HERE.
Institutional Corner
Top stories from the big institutions
The U.K. government has introduced a new bill expanding its powers to seize and destroy crypto linked to criminal activity. Following the Crime and Policing Bill’s first reading in the House of Commons, the bill is now undergoing its second reading and will soon proceed to the committee stage. The new legislation seeks to improve law enforcement’s ability to confiscate illicit crypto assets and return them to victims, while also bolstering the country’s overall approach to economic crime. A key provision of the bill grants the Crown Court extended powers to handle confiscation orders involving crypto. In addition to expanding seizure powers, the bill includes provisions to simplify the asset recovery process, allowing law enforcement to recover stolen funds and redirect them to victims. Read the full Bill HERE.
BlackRock said this week that it is allowing bitcoin into its $150bn model-portfolio universe. BlackRock is adding a 1% to 2% allocation iShares Bitcoin Trust ETF (ticker IBIT) in its target allocation portfolios that allow for alternatives. Analysts note that while it’s a small subset of BlackRocks entire model portfolio business, it opens up a new route of demand for IBIT. Model portfolios, which package together funds into ready-made strategies to sell to financial advisers have grown significantly in recent years. Michael Gates, lead portfolio manager for BlackRock’s Target Allocation ETF model portfolio suite said in investment commentary “We believe Bitcoin has long-term investment merit and can potentially provide unique and additive sources of diversification to portfolios.”
On Friday, the CME announced plans to launch Solana futures on 17 March, pending regulatory review. Market participants will have the choice to trade both a micro-sized contract (25 SOL) and a larger-sized contract (500 SOL). CME Group SOL futures will be cash-settled and based on the CME CF Solana-Dollar Reference Rate, which serves as a once-a-day reference rate of the U.S. dollar price of SOL and is calculated daily at 4:00 p.m. London time. Giovanni Vicioso, Global Head of Cryptocurrency Products at CME Group said "With the launch of our new SOL futures contracts, we are responding to increasing client demand for a broader set of regulated products to manage cryptocurrency price risk. As Solana continues to evolve into the platform of choice for developers and investors, these new futures contracts will provide a capital-efficient tool to support their investment and hedging strategies." See the full press release from CME HERE.
According to Standard Chartered’s most recent crypto research note, Bitcoin will suffer further downside. Standard Chartered's global head of digital assets research, Geoffrey Kendrick said he expects bitcoin to fall further to the $69,000 to $76,500 range over the weekend or by Monday. Kendrick suggests that the closing of the carry trades involving the bitcoin ETF’s are not large enough to explain the ETF outflows. Instead, he points to hedge funds increasing their short positions, which he believes signals that investors are actively betting against bitcoin. CFTC data shows that hedge fund short positions have increased from $7.9 billion to $11.3 billion since the U.S. election (as of Feb. 18), while ETF positioning increased from $23.5 billion to $40.2 billion before falling to $37 billion. "Of course, CFTC data may just represent other short futures (on exchanges), so viewing these in percentage increase is probably fairer. ETF positions up 71% since Nov. 5, CFTC hedge fund shorts up 43%," Kendrick said. He added that this suggests ETF investors remain largely long, making them vulnerable to panic selling if Bitcoin continues to decline.
Charts of the Week
Because charts are just as important as macro.
Bybit's $1.4B in ETH hack ranks among the largest crypto hacks of all time, eclipsing even the infamous Mt.Gox collapse and FTX implosion. Hat tip to CoinMetrics for the chart.
Bitcoin weekly trade volumes are approaching there lowest levels since pre-election (excluding the week of Christmas). Hat tip to Kaiko Data for the chart.
Top Jobs in Crypto
Well, we all want to work in Crypto don’t we. Here’s a bit of help on your job search!
Web3 Venture Capital & Strategic Partnerships Manager at ChainLink Labs
Institutional Business Development Manager, Europe, Figment
Cryptocurrency Web3 Analyst at Trireme
DISCLAIMER: The content in this newsletter is not financial advice. This newsletter is strictly educational and is not investment advice or a recommendation to buy or sell any assets or to make any financial decisions. Crypto markets are volatile, please be careful and do your own research.