Connecting the Dots
Episode 96 - Calm Before the Risk Melt Up Storm
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: Kraken reveals a new blockchain, Komainu buys Propine Holdings.
Institutional Corner: Microsoft to vote whether to buy Bitcoin, CFTC says its handcuffed on crypto regulation, South Korea to ramp up crypto regulation, Chainlink continues its work with the large financial institutions, Pennsylvania passes a digital assets bill.
Charts of the Week: EURC stablecoin supply reaches an all time high, MicroStrategy trading volume on the rise, DAI supply rises.
Top Jobs in Crypto: Featuring RE7 Capital, Coinbase, Hivemind, Glassnode, Binance and Outlier Ventures.
Macro Update
This is where we connect the dots between macro and crypto.
Calm Before the Risk Melt Up Storm
Consolidation appeared to be the theme this week, and we expect more of the same now, just one week out from the election.
As Trump odds continue to climb, “Trump trade” stocks also continue to perform and perhaps giving a helping hand to the bond vigilantes which saw 10yr yields close 16bps higher on the week at 4.24%.
We continue to hold a bullish view of bonds, despite macro heavyweights such as Stan Druckenmiller recently declaring his bearish position. The market is playing this “reflation” trade on the back of recent stronger US data, combined with expectations of a Trump Presidency and helped with the stimulus bazooka being fired by China. Yet just as we dismissed the “recession” trades that markets were keen to engage just a few weeks ago, we also believe talk of “reflation” is premature and expect a slowing (not collapsing) disinflationary US economy will keep the Fed in rate cutting mode and bond yields across the curve will continue the trend lower. We remain in Goldilocks 🥣
Fading reflation…
Indeed, of the little data available this week, the US Lead Economic Indicator tumbled to its lowest levels since 2016, largely on the back of the global manufacturing slump. The Fed’s Beige book also reported little economic growth across most of the US and noted demand for workers “eased somewhat” whilst “inflation continued to moderate.” No signs of reflation here and little to deter the Fed from its rate cutting path.
The move higher then for both the US dollar and yields we view as a correction to a trend, one that we feel has gone too far. 4.30% is a big level in 10yr yields and we expect it to top out there.
The US dollar is more complicated. We’re never overly bearish the dollar and typically the window to short dollars is a small one. Usually, the dollar sells off into Fed rate cuts, but as the Fed are cutting rates in response to a slowing US economy, the rest of the world is usually slowing more and other economies are forced to cut more. The next dollar leg lower comes as the global economy is reflating and the Fed keeps rates too low for too long. That window abruptly closes however once the Fed prepares the market for the start of the rate hiking cycle and the dollar wrecking ball begins its journey to new highs!
Case in point on the current stage of this cycle, the Bank of Canada on Wednesday cut rates 50bps to 3.75% and comes on the back of three cuts of 25bps prior. Meanwhile in Europe, the composite PMI showed an economy in contraction, coming in at 49.7% in October, whilst in the UK, the composite PMI hit an 11 month low at 51.7%. The US remains the cleanest shirt in the laundry and as such, material, sustained weakness is difficult to maintain.
Short term headwinds…
A stronger dollar however isn’t in and of itself bearish for Bitcoin, especially when it comes amidst a global rate cutting cycle. We do feel however the move higher in USDJPY which hit highs this week above 153 has acted as a headwind, especially with USDCNH following the pair higher, at one point trading above 7.14. With BoJ officials once again expressing some concern around JPY weakness, we can reasonably expect they are acting to “smooth” the rise in USDJPY with FX interventions which, by selling down FX reserves acts to tighten liquidity. This potentially adds additional weight to US treasuries too if those USD balances they sell to defend the currency are raised via selling treasury holdings. Ditto for China’s PBOC.
So headwinds for Bitcoin and into month-end where liquidity tends to tighten, the week ahead may also see us struggle for direction and lack momentum to break the 70k level, especially with the US election looming. Headlines late Friday from a WSJ article suggesting the Federal Government is investigating Tether doing little to help, despite the Tether CEO calling the story “old noise” whilst Israel’s airstrikes against Iranian military targets over the weekend also dented sentiment.
Calm before the storm…
Patience then for the week ahead and the election set to provide some short term volatility. However, failing the low likelihood of a “blue sweep” we see little reason here to be bearish risk assets broadly and continue to expect Bitcoin to outperform throughout Q4 with the liquidity cycle continuing to pick up.
On Thursday, cash balances held at the Fed under the Reverse Repo facility fell as low as $202bn. This was at $465bn at the start of October and represents a $263bn cash injection into markets. No wonder bears have been left with sore heads so far in October! As the RRP runs closer to zero, the Fed will likely need to end quantitative tightening.
Further, as we approach the debt ceiling deadline in Jan, the Treasury General Account has been built to levels comfortably above target and ready to deploy, another huge source of liquidity support for markets, especially into the new year. With the election out of the way, even with a Harris win (assuming a split congress) we’re shaping up for one monster rally into year end and beyond. This is the calm before the risk melt up storm 🚀
Native News
Key news from the crypto native space this week.
Cryptocurrency exchange Kraken has unveiled a new blockchain called Ink. It is an Ethereum-based layer-2 blockchain powered by Optimism's OP Stack. Ink will offer on-chain wealth management tools for seasoned digital asset traders and crypto-curious clients. The network, which rolls out on testnet in November, will be interoperable with Optimism's Superchain, a network of layer-2s that share security and infrastructure. “As part of the Superchain, Ink is laying the groundwork for an interoperable and pluralistic on-chain ecosystem that will attract developers and make Ink the ideal platform for the next generation of DeFi applications and protocols,” Ink founder Andrew Koller said Thursday.
Komainu, the crypto custody firm backed by Nomura, is acquiring Propine Holdings Pte Ltd., a Singapore-based custodian, subject to approval from the Monetary Authority of Singapore (MAS). In a statement released on Tuesday, Komainu said that the acquisition is expected to strengthen its presence in Singapore. “The combined platform will not only offer robust security and bank-grade governance but also meet the highest regulatory standards, catering to the growing demand for secure, compliant and battle-tested custody solutions,” the company said. Komainu's co-CEO Paul Frost Smith said in an interview with Bloomberg that the company plans to apply for a Major Payment Institution license in Singapore, which would allow the firm to offer full payment services. Read the full statement from Komainu HERE.
Institutional Corner
Top stories from the big institutions
According to a filing with the SEC this week, Microsoft shareholders will vote in December on whether the company should publicly consider adding Bitcoin to its balance sheet. The proposal, called “Assessment of Investing in Bitcoin,” will be presented during a December 10 meeting. The idea was put forward by the National Center for Public Policy Research (NCPPR), which points to business intelligence firm MicroStrategy’s success with Bitcoin. MicroStrategy’s Bitcoin strategy has reportedly outperformed Microsoft by over 300% this year, despite its smaller scale. The NCPPR argues that Bitcoin, while volatile, could help hedge against inflation and corporate bond yields. It suggested that companies like Microsoft should consider holding even a small percentage, such as 1%, of their assets in Bitcoin. In a company statement opposing the proposal, “Past evaluations have included Bitcoin and other cryptocurrencies among the options considered, and Microsoft continues to monitor trends and developments related to cryptocurrencies to inform future decision making,” Despite this, Microsoft’s board recommends that shareholders vote against the proposal. The company claims it already evaluates a broad range of investable assets, including Bitcoin, but doesn’t see a need to make a specific public assessment. Read the filing HERE.
Commodity Futures Trading Commission (CFTC) Chair Rostin Behnam reportedly said the agency was “handcuffed” as crypto regulation talks have reached a standstill in the United States. Behnam said at the Securities Industry and Financial Markets Association (SIFMA) annual meeting in New York this week that efforts to adopt a legislative framework regulating the digital asset industry have “stalled out so far.” However, he remained confident that a new Congress and president could make progress. “I’m not betting on anything happening necessarily at the end of the year, but there’s a unique appetite that this election, I think, has changed around digital assets and technology,” he said. He added that without any legislation, the agency is “really handcuffed” in “policing” the crypto market, which would leave investors “vulnerable.”
South Korea’s Minister of Economy and Finance Choi Sang-mok announced at a G20 meeting in Washington on Thursday that the country plans to ramp up regulation over cross-border transactions using cryptocurrencies to curb foreign exchange crime involving digital assets. Choi said that businesses that handle "cross-border transactions" of stablecoins and other cryptocurrencies will be required to pre-register with the authorities, as well as report details of such transactions to the Bank of Korea on a monthly basis. The reported transaction data will be monitored by South Korea’s tax, customs, financial and international finance regulatory bodies to track illegal transactions and use for research. According to the Korea Customs Service, around 88% of foreign exchange crimes, valued at 1.65 trillion won ($1.2 billion), had been involved with cryptocurrencies. Such crimes include illegal arbitrage and money laundering.
Chainlink, the decentralised oracle network built on Ethereum, has introduced new privacy-preserving technologies aimed at helping financial institutions securely transact across blockchain networks. This initiative brings together key financial and market infrastructures, including Euroclear and Swift, alongside major institutions such as UBS, Franklin Templeton, Wellington Management, CACEIS, Vontobel, and Sygnum Bank. In collaboration with blockchain ecosystem partners, Hyperledger Besu, Avalanche, and ZKsync, it demonstrated how Chainlink’s decentralised oracles, integrated with large language models (LLMs) like OpenAI's ChatGPT 4.0, Google’s Gemini 1.5 Pro, and Anthropic’s Claude 3.5, can validate and deliver critical financial data onchain. Using Chainlink’s Cross-Chain Interoperability Protocol (CCIP), this data was securely transferred across public and private blockchains. This approach addresses inefficiencies in corporate action processes, which currently cost firms millions annually due to manual data validation. Read the X summary from LINK HERE and the full report HERE.
Pennsylvania became the latest state to pass a bill establishing some regulatory clarity surrounding digital assets. The Pennsylvania House of Representatives passed a bill that protects residents' rights to self-custody digital assets, ensures their ability to use bitcoin as a payment and provides explicit guidelines around taxing bitcoin transactions. The House Bill 2481, dubbed the Bitcoin Rights bill, sailed through with strong bipartisan support, winning by an overwhelming majority of 176 votes to 26. The vote included 76 Democrats and unanimous backing from all 100 Republican members. As a reminder, Pennsylvania is a crucial state for both Republicans and Democrats, roughly 12% of the 13 million people who reside in the state hold crypto.
Charts of the Week
Because charts are just as important as macro.
The Circle-issued EURC stablecoin has reached an all-time high supply of more than 90 million, fuelled by substantial growth on the Coinbase-incubated Ethereum Layer 2 network Base.
MicroStrategy’s trading volume reached 17.65% of Nvidia's in October, despite its market cap being only 1.5% of the chip giant.
DAI supply risen 40% to over 6.2bn, a 12-month high.
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!
DeFi Business Development at RE7 Capital
Institutional Sales Associate, Derivatives Sales at Coinbase
Senior Macro Analyst - Blockchain/Digital Assets at Glassnode
Futures Business Development Manager at Binance
Liquid Markets Strategy Lead at Outlier Ventures
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.