Connecting the Dots
Episode 16 - Losing Control
What a week its been. 9 month highs for Bitcoin, a raft of crypto news and a sprinkle of Paris Blockchain Week on top.
We’ve got a monster edition of Connecting the Dots for you today, with lots of developments in the crypto native space this week.
Hello to all of the brilliant people I met at Paris Blockchain Week. The world of institutional crypto trading is in safe hands, if this event is a barometer. There’s talent, commitment and creation across the crypto space and were proud to be a part of it.
In case you’re new this 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 distill it into the things you MUST know this week.
As always, our only ask is that you share this with your colleagues, friends and family to help us, help them.
If you want more regular analysis and opinion, follow our twitter account at https://twitter.com/LDNCryptoClub for daily updates.
Onto the newsletter. Here’s what you’re getting this week:
Macro: At this point, the Fed have lost control of the narrative and lost control of the policy. Markets are back in the driving seat and will dictate policy from here.
Crypto Native News: CrossX is launched and backed by some big names, B2C2 founder Boonen launches new venture called PV01, Coinbase receives a Wells Notice, Circle applies for a French digital asset service provider license, Deribit launches the industry's first Bitcoin implied volatility futures and OKX announce they will no longer provide crypto services in Canada.
Institutional News: Final vote in MiCA on April 19th, the White House’s 2023 Economic Report of the President is pretty damming on cryptocurrencies and UAE expects to complete the first round of its CBDC strategy.
Chart of the Week: Fed lending explodes.
Top Jobs in Crypto: featuring Aaro Capital, Hudson River Trading, BCB Group, Ripple, Coinbase and Laser Digital.
Macro Update
We’re macro at heart, this is where we try to connect the dots between the macro and crypto.
Losing Control
Another volatile week as focus remains squarely on the banking sector following a weekend which saw Credit Suisse “bailed out” by UBS in a government assisted takeover. The deal, which came with government (read taxpayer) guarantees on CHF 9bio of “difficult to assess assets” alongside CHF 100bn liquidity support from the Swiss National Bank also saw Additional Tier1 (AT1) debt of CHF 16bn written down to zero. Ouch!
Markets whipsawed on headlines that the US were considering blanket deposit insurance, but that was dismissed on Wednesday when Yellen stole JPow’s limelight with headlines that they “have not considered anything to do with blanket insurance or guarantees for assets”
Bank share prices continued to get hit hard and as the game of whack-a-mole continues, Deutsche Bank were the latest bank to raise concerns as their 5yr CDS spiked sharply higher and stock price plummeted 15% on this rotating contagion.
Amidst all of this, the data highlight came from the Fed with its FOMC policy rate decision on Wednesday. The Fed hiked 25bps (to a 4.75% to 5% range) as largely expected into the meeting. In a dovish twist, the statement that “ongoing increases in the target range will be appropriate” was replaced with “some additional firming may be appropriate”.
This is as close to announcing a pause as the Fed will give you, with Powell highlighting how the tightening in credit conditions as a result of the banking volatility was doing the Fed’s job and could be considered as the “firming” required to bring inflation to target. Powell dismissed the notion that rates would be cut, as markets are subsequently pricing.
JPow and the Fed at this point have lost control of the narrative and lost control of the policy. Markets are back in the driving seat and will dictate policy from here. Indeed, the market is now pricing a pause in May and 25bps of cuts at the following 5 meetings to bring Fed funds rate back to 3.50-3.75% by year end. This is a MASSIVE move in front end rates and suggests a market pricing a full blown recession as the banking crisis hits main street.
Banking sector stress will continue to dictate into a quieter week for data (aside from US core PCE price index and Eurozone inflation data on Friday). Ultimately however, banking stresses won’t end until the Fed starts cutting rates. Deposits are flooding out of banks in search of higher money market yields and the Fed’s hike on Wednesday will accelerate that move. The liquidity measures such as the BTFP only act to treat the symptoms but not the cause of the issues in the banking systems which is simply, Fed rates are too high.
Consequently, the Fed will continue to need to provide liquidity to the banking system to prevent its collapse which will see the Fed balance sheet explode and this is exactly what we’re seeing. Last week, the balance sheet expanded another $98bn taking the total expansion over the past 2 weeks to just under $400bn.
Bitcoin is a liquidity junky. The Fed has lost control. As the Fed balance sheet explodes, Bitcoin will also explode higher. This party is just getting started.
Native News
Key news from the crypto native space this week.
Digital assets trading firm Crossover Markets is launching a new crypto trading venue, CrossX. The firm has received $6.35 million in seed funding from trading firms such as Two Sigma, Flow Traders, Laser Digital and Wintermute Ventures. Jeff Wecker the Chief Technology Officer at Two Sigma said “As the digital assets space evolves, diverse and reliable execution venues for institutional trading are critical," "We are excited to support a team with a track record of success in traditional finance in their effort to bring necessary technological innovation to the digital assets markets.” Cross X was co-founded by traditional finance veterans Brandon Mulvihill and Anthony Mazzarese, who ran the FX prime brokerage business at Jefferies. The firm says "CrossX is many times faster than typical crypto exchanges, providing clients access to the fastest pricing and trade executions”
B2C2 founder Max Boonen has launched a new venture called PV01, with the aim of digitising the bond markets. Targeting both the traditional fixed income and digital asset markets, PV01 is designed to underwrite bonds, tokenise those bonds and as a dealer, provide liquidity in those securities, all on public blockchains. The result will be a more efficient way for issuers to raise capital and investors to purchase high-quality debt, providing broader access for the market to investment opportunities through tokenization. PV01's model provides better visibility into ownership using smart contracts and a frictionless method of transferring debt. Boonen said "Historically it has been difficult for investors, especially smaller ones, to hold bonds. They typically are only accessible to large institutional participants leaving many investors on the outside looking in" PV01 secured a $9M initial investment round was secured in December 2022 with lead investors including Tioga Capital, BlockTower Capital and Sino Global Capital.
Coinbase shares fell 16% following the news that it received a Wells Notice from the SEC. (A Wells Notice is a formal letter to a company to say that they will be bringing forth an action against them, usually an investigation into securities law or a regulatory violation). The notice from the SEC signals that the agency plans to sue on the grounds that the crypto exchanges tokens and other products, including aspects of its staking service Coinbase Earn and Coinbase Wallet, are securities that should be registered. Coinbase Chief Legal Officer said “Coinbase will continue to operate as usual and the company is confident in the legality of its assets and services.”
Circle, the stablecoin issuer, has applied for a French digital asset service provider license and an electronic money institution license. A successful registration will mean Circle can offer its products to customers in France, and "onshore" its euro-backed stablecoin EUROC. Jeremy Allaire, co-founder and CEO of Circle “We are excited to kick our European growth strategy into high-gear with this application.” Circle already holds licenses from various U.S. states and in Singapore and is best known for its dollar-backed USDC stablecoin.
Deribit is launching the industry's first Bitcoin implied volatility futures on March 27th. BTC DVOL futures are built on DVOL (the Deribit Bitcoin Volatility Index). DVOL is a measure of the expected or implied volatility of the BTC market, providing insight into investor price expectations and the overall health of the market.
OKX announced that they "will no longer provide services or allow users to open new accounts in Canada starting on 24 March. According to OKX, existing Canadian customers must close open positions in options, margins, perpetual, and futures by June 22, 2023. Fiat or tokens must also be withdrawn by the said date. They said "Your funds will remain safe in your account until you withdraw them. You will be able to withdraw dollars to your linked bank account and cryptocurrency to your self-custody wallet or your cryptocurrency account on another exchange. " In February, the Canadian Securities Administrators (CSA) published a notice requiring crypto exchanges to sign new, legally-binding undertakings while they await registration with the regulators. Among a number is issues, the new undertaking prohibits "buying or depositing Value Referenced Crypto Assets (commonly referred to as stablecoins) through crypto contracts without the prior written consent of the CSA."
Institutional Corner
Top stories from the big institutions.
A Date for the Diary – 18/19 April. According to an agenda published on the European Parliament website, the Markets in Crypto Assets Regulation, known as MiCA, will be the topic of an April 18 discussion in the European Parliament. Under normal Parliament procedures the final vote on MiCA will take place the following day, 19 April.
The White House’s 2023 Economic Report of the President was released on Monday. The report compiled by the U.S. Council of Economic Advisors and published on Monday, describes cryptocurrencies as an ineffective means of payment and store of value. It claims the primary utility of digital assets is cultivating artificial scarcity to drive price volatility and calls for greater regulatory oversight of the sector. Notably, the White House excluded central bank digital currencies (CBDCs) and nonfungible tokens (NFTs) from its definition of crypto assets. Kristen Smith, the CEO of Blockchain Association said “While other countries are increasingly receptive to the burgeoning crypto industry, some in government appear increasingly allergic to its promise, sending companies and innovators offshore.”
The report goes on to say that web3 advocates suggest that crypto assets offer decentralised monetary functions, could increase financial inclusion among unbanked or underbanked communities, improve existing payment systems (especially cross-border settlement), and could act as a store of value or hedge against inflation. The authors conclude that “So far, crypto assets have brought none of these benefits.” Read the full report HERE (Scroll to page 211).
On Thursday, the United Arab Emirates (UAE) said it expects to complete the first phase of its central bank digital currency strategy around mid-2024. The Central Bank of UAE (CBUAE) also revealed an engagement with G42 Cloud, a cloud platform from the region, and New York-based blockchain firm R3 as the infrastructure and technology providers respectively.
Chart of the Week
Because charts are just as important as macro.
The Fed lending exploded over the last 2 weeks. A must watch chart for the coming weeks!
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!
Crypto Trading Support Engineer at Hudson River Trading
Transaction Monitoring Analyst at BCB Group
Senior Product Manager, Crypto Settlement at Ripple
Institutional Operations Analyst (EMEA) at Coinbase
Strategy Lead at Laser Digital
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.