Connecting the Dots
Episode 46 - Flight to Quality
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Onto the newsletter. Here’s what you’re getting this week:
Macro Update: US yields continue to rise on debt sustainability concerns, US 5 year CDS rising, banking sector concerns remain and there’s a confluence of positive Bitcoin drivers.
Guest Post - FRNT Financial on Larry Finks “flight to quality” comments.
Crypto Native News: Coinbase announced Ireland as its European crypto hub, the SEC drops its claims against Ripple executives, Chanalysis releases a new crypto report and Binance finds new partners for EUR’s.
Institutional News: The tokenised asset market could grow to $10tn according to 21.co, Argentina accelerates work on a CBDC.
Chart of the Week: Rising yields on term premia.
Top Jobs in Crypto: Featuring Crystal Blockchain Analytics, JK Barnes Recruiters, Revolut, the FCA, Venture Search and Alphachain Traders.
Macro Update
This is where we connect the dots between macro and crypto.
Flight to Quality
Rinse/repeat for markets with Middle East tensions continuing to dominate, although the previous weeks moves which we suggested were simply driven from a broad de-risking and position reduction were largely unwound as thematic plays were re-established.
In what felt like a more typical response to an intensifying geopolitical situation, oil and gold continued to climb and equities sold off. However US treasuries failed to receive the usual safe haven bid and we instead saw a resumption of the bond market sell off, with 10yr US yields tagging 5% 😳
As we’ve written about previously, the driver of this continues to be rising term premia with investors requiring extra yield to hold longer dated bonds as debt sustainability concerns continue to grow. Indeed, Biden making a request to Congress for an additional $100bn to support both Ukraine and Israel added to the debt spiral fears. Janet Yellen’s assertions that the US can “afford” to fight two wars bringing little comfort!
Rising yields on debt sustainability concerns has vastly different cross-asset macro implications versus a yield move driven by hawkish Fed expectations ✍️
As a sign of growing concern surrounding the US debt spiral, 5 year CDS prices (the cost to insure against a US default) are rising and back to levels seen earlier this year into the debt ceiling deadline. Of course, as a true “sovereign” that can print its own currency, the US will never nominally default, but will do so via stealth, printing money and debasing the value of the currency.
Bitcoin then performing its role as a hedge against the failure of the fiat system and in a world which looks increasingly unstable, a decentralised, borderless, immutable, non inflationary asset is increasingly being viewed as a “safe haven” with Blackrock’s Larry Fink characterising the latest Bitcoin rally as a “flight to quality” (see our guest post from the team at FRNT Financial who covered Fink’s comments and discuss Bitcoin’s evolving narrative as a safe haven amongst no-coiners.)
We continue to highlight the vulnerabilities in the US regional banking sector which, despite the reprieve post the collapse of SVB and subsequent emergency support measures, remain exposed to the sell off in US treasuries. Bank of America this week reporting this unrealized losses of $131.6bn on their holdings and whilst the systemically important banks (SIB’s) can sweep those “losses” under the carpet under the “held to maturity” loophole, regional banks that lack the liquidity and would potentially need to realise the losses are sitting nervously.
The KBW regional banks index which we’ve been tracking continued to break down this week and is a canary in the coalmine. The banking crisis was deferred, but continues to bubble under the surface. The system can simply not handle rates at these levels. Either rates come lower, or the Fed’s balance sheet will be forced to explode higher once more as they’re forced to inject more liquidity into the system. Bitcoin perhaps anticipating this eventuality.
Speaking of liquidity, China stepped up their liquidity provisions, injecting a net 289bn Yuan via one year loans, the biggest medium-term liquidity injection since 2020. The PBOC is trying to ease stress in the market as local governments rush to issue special refinancing bonds to repay outstanding liabilities. China also told state banks to roll over existing local government debt with longer maturities and lower interest rates. “Extend and pretend” a familiar play book for economies drowning in debt. Fiat economies are unable to escape the perpetual debt cycle!
China liquidity injections typically correlate positively with Bitcoin and is perhaps another factor underpinning the move higher this week. The Bank of Japan also conducted an emergency bond buying operation on Wednesday as they try to keep a lid on domestic yields. Printers are starting to go brrrr 🤑
Overall, we’re seeing a confluence of positive Bitcoin drivers. Geo-political instability, debt sustainability fears, forced liquidity injections, regional banks under pressure, increasing expectations of a spot BTC ETF approval. JPow’s comments this week also continued to signal a Fed on “pause” and likely done hiking. We thought the fragile risk environment will keep BTC contained given its high beta risk characteristics. Yet with the evolving narrative as a “flight to quality”, Bitcoin is emerging battle-hardened and looks set to make new highs for the year. A yield reversal if driven by dovish Fed expectations will keep our 40k year end target in play. Let’s go 🚀
Guest Post - FRNT Financial summary of Larry Finks “flight to quality” comments.
In An Interview With Fox Business, BlackRock CEO Larry Fink Characterised this weeks BTC Rally As A ‘Flight To Quality’ In Light Of The War In Israel & Other Geopolitical Concerns - Fink Has Previously Endorsed The View Of BTC As A Hedge Against Broader Uncertainty
The BlackRock CEO was asked to comment on the BTC rally, which was sparked by a crypto news outlet falsely reporting that the SEC had given a green light to the firm’s spot BTC ETF. Fink responded that the rally is an example of ‘pent up interest in crypto.’ Fink, who uses the term ‘crypto’ and ‘bitcoin’ interchangeably, goes on to mention that clients around the world have expressed ‘the need for crypto.’ Fink concludes that in light of global upheaval, ‘there are more people running into a flight to quality, whether it's in treasuries, gold or crypto.’ According to Fink, ‘crypto will play that type of role’ in regards to a ‘flight to quality.’ In a July interview with Fox Business, Fink made similar remarks. He described BTC as an alternative to gold ‘as a hedge against inflation, a hedge against the onerous problems of any one country, or the devaluation of your currency…’ Fink added that ‘bitcoin is an international asset, it’s not based on any one currency and so it can represent an asset that people can play as an alternative.’
At the end of last month we noted that BTC was rallying into a potential US government shutdown. We noted that the performance was akin to BTC’s price action during the March/April US banking crisis. BTC gained 34% over the period as the banking crisis unfolded. The token’s largest daily trading volume for far in 2023 came in April. As FRNT CEO Stephane Ouellette explained to Bloomberg, in April/March, ‘we actually saw [BTC] rally as a sort of safety-hedge against further banking unrest.’
Takeaway: BTC’s role as a safe haven against broader economic turmoil is well-established among the coin’s most dedicated investors, those adhering to the HODL mantra. In fact, the first block in the network featured the message ‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.’ Larry Fink’s remarks may serve to popularise the notion of BTC as a ‘flight to quality’ asset beyond the token’s core investor base and community.
Check out more content from FRNT Financial HERE.
Native News
Key news from the crypto native space this week.
Coinbase is focusing some efforts on European growth and this week announced Ireland would be its European Crypto hub. Coinbase has applied for a license under the EU’s new Markets in Crypto-Assets Regulation with the Central Bank of Ireland. If successful it will be able to “passport” its services across EU states. Currently, Coinbase holds an e-money institution license and virtual asset service provider (VASP) registration in Ireland, a crypto license in Germany and several national registrations in other member states across the EU. Coinbase EMEA vice president and regional managing director Daniel Seifer said “We are delighted to select Ireland as our MiCA hub. Ireland has a supportive political environment for fintech companies, as well as a globally respected regulator,” “Ireland is a leading jurisdiction in this space, and we look forward to working with regulators in Ireland, Germany and beyond, to bring this industry to its full potential with the advent of MiCA.”
The SEC said this week that it will no longer pursue claims against Ripple CEO Brad Garlinghouse and Executive Chairman Chris Larsen that they aided and abetted the the company in violating federal securities laws in its XRP transactions. The trial scheduled for next year was cancelled. The XRP price rose as much as 8% in the aftermath of the announcement and has consolidated above the 0.50 cents level.
This week blockchain analytics firm Chainalysis released two new chapters of its 2023 Geography of Cryptocurrency report. The report included a new section on Central, Northern and Western Europe (CNWE) and the second edition on Eastern Europe. According to the CNWE-focused report, the region was the second-largest crypto economy in the world over the past year, behind only North America. The region accounted for 17.6% of global transaction volume between July 2022 and June 2023, receiving an estimated $1 trillion in on-chain value during the time period. The U.K. has topped CNWE’s biggest crypto economies list and ranked third in the world in terms of transaction volumes after the United States and India. According to Chainalysis, the U.K. received an estimated $252.1 billion in cryptocurrency transactions in the past year. Other big crypto economies in the CNWE included Germany and Spain, which received around $120 billion and $110 billion in crypto transactions over the past year, respectively.
Top countries by cryptocurrency value received between July 2022 and June 2023
At the end of the week, Binance announced that it had partnered with new companies to facilitate euro deposits and withdrawals. the news comes one month after it lost its previous fiat partner, PaySafe. Binance didn’t specify which firms it had partnered with but it said that users had already started migrating to the new service providers.
Institutional Corner
Top stories from the big institutions
According to a report by digital asset management firm 21.co, the market for tokenised assets could grow to as large as $10 trillion in this decade as traditional finance institutions continue to adopt blockchain technology. The report says that “The convergence between crypto and traditional asset classes including fiat currencies, equities, government bonds, and real estate is experiencing and unprecedented growth, we estimate that the market value for tokenised assets will be between $3.5tn in the bear case scenario and $10tn in the bull case by 2030”. Currently 21.co values the tokenised asset market at roughly £116bn with smart contract network Ethereum hosting nearly $60bn of assets followed by Tron and Solana. the report also says that stable coins are the "“first successful tokenisation implementation”. Read the full report HERE.
After a series of recent remarks about the potential benefits of a central bank digital currency (CBDC) the Central Bank of Argentina said this week that it has accelerated the work on legislation to implement the CBDC workflow in the country. Speaking on Argentinian TV this week the central bank director Juan Agustin D’Attellis Noguera said the project will be presented “as soon as possible” and introduced to the national congress.
Chart of the Week
Because charts are just as important as macro.
Rising yields on term premia, rather than a strong economy or Fed. This has vastly different cross asset macro implications.
Hat Tip to Cross Border Capital 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!
Digital Assets Crypto Regulation Advisory Services at Crystal Blockchain Analytics
CTO at Crypto Prop Fund via J K Barnes Recruiters
UK Crypto MLRO Manager at Revolut
Technical Specialist in CryptoAsset Business Models at the FCA
Head of Delta 1 Ultra Low Latency Crypto Trading via Venture Search
Junior Cryptocurrency Trader at AlphaChain Traders
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.