Connecting the Dots
Episode 75 - Changing Political Winds
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.
As one reader described it “The most succinct, easy to digest macro summary I have read in all crypto newsletters!”
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Onto the newsletter. Here’s what you’re getting this week:
Macro Update: They say in politics that there are decades where nothing happens and weeks where decades happen, this was one of them. Read why below.
Crypto Native News: Phantom wallet flies in app store rankings, OKX withdraws Hong Kong VASP license.
Institutional Corner: Eight spot ether ETF’s approved, the US House of Representatives passes the CBDC Anti-Surveillance State Act, Trump takes election donations in crypto, the Fed say only 7% of Americans own crypto and WisdomTree received approval to list ETPs on the London Stock Exchange.
Charts of the Week: ETH perps open interest reaches all time high, net short positions on BTC CME futures.
Top Jobs in Crypto: Featuring Kraken, BCB Group, Nickel Digital, Revolut, Binance, Copper, Paysafe.
Macro Chart of the Week - According to Bank of America fund manager survey commodities saw their largest monthly allocation increase in history last month. Hat tip to @BarChart for the chart.
Macro Update
This is where we connect the dots between macro and crypto.
Changing Political Winds
Well, that escalated!
Macro took a back seat this week as a 180 turn by the SEC on the ETH spot ETF drove ETH 25% higher, pulling the broader crypto space higher in tandem.
The move started on Monday when Bloomberg ETF analyst’s Eric Balchunas and James Seyffart tweeted that they were upping their odds on ETF approval from 25% to 75% based on chatter they were hearing that the SEC were set to do a 180 and approve the spot ETF. This was followed by headlines that the SEC asked exchanges to update 19B-4 filings on an “accelerated basis” for the spot ETHER ETF’s. The spot ETF’s were subsequently approved on Thursday, catching a market completely off-guard and under-positioned.
The 19b-4s approval relates to Exchange rule changes, allowing exchanges to list the spot ETH ETF’s. We now await the S-1 filings (registration statements) by the issuers to be approved before the ETF’s can begin trading, which may be a few weeks away, yet seems like a formality now.
The bigger picture implications of this cannot be understated. Firstly, implicitly, in approving this ETF, the SEC are no longer classifying unstaked ETH as a security, but as a commodity, removing huge uncertainty that has clouded ETH and the exchanges listing and trading it. They are no longer violating securities laws. Second, not classifying ETH as a security will also set a precedent for other alt-coins which have a greater chance of now being classified as a commodity.
Changing Political Winds…
The greatest significance however relates to the changing political winds that have ultimately driven this 180 turn by the SEC. Opposition to crypto has always been “political.” Elizabeth Warren and her “anti-crypto army” are playing pure politics and adopting an uneducated, ignorant view of the greatest development in financial technology in decades. Perhaps because of the threat it poses to centralised control and more likely, the threat it poses to her new found lobbyist Wall Street friends. There are no principles or values in politics, whichever side of the political aisle politicians claim to represent. Just money, power and aligning with an ideology that they think gets them elected. Donald Trump has made crypto very much a partisan issue recognising the potential support it can garner from the electorate. As Galaxy’s Mike Novogratz highlighted, there are more crypto owners in the US than there are dog owners! Democrats are starting to realise that an anti-crypto stance is not a hill worth dying on.
The shifting political tides first became evident with a significant block of Democrats breaking ranks to vote to repeal the SAB 121 bill which would force banks that custody crypto to record those assets under custody on the balance sheet (making it prohibitively expensive for banks to provide crypto custody services.) Biden still has the power to veto the repeal vote. Yet following the SAB 121 vote, on Wednesday, the House voted to pass the FIT21 Crypto Bill by a massive 279-136 votes with more than 70 Democrats breaking ranks to vote with the Republicans. This bill aims to establish a regime to regulate the US crypto markets, setting consumer protections, installing the Commodity Futures Trading Commission (CFTC) as a leading regulator of digital assets and the watchdog of non-securities spot markets. It still has to pass the Senate, but this time, the White House issued a statement that the President would NOT veto this bill should it get passed. This perhaps increases the chance that Biden will also refrain now from vetoing the SAB 121 repeal vote.
They say in politics, there are decades when nothing happens and weeks where decades happen. The shift in the political dynamic in the US in relation to taking a pro-crypto stance feels the latter in turns of its significant impact. Despite the strong gains on the week, Crypto feels a little shell shocked by the significance of these events. This new, supportive political narrative will be a huge tailwind over the coming weeks and months which we expect to drive significant inflows into crypto.
Liquidity dominating rates…
In terms of the macro, little to significantly change the positive backdrop that we’ve outlined over recent weeks. S&P Global PMI composite Index jumped to 54.4 in May, the highest level in 2 years, with signs of re-acceleration in the service sector and more worryingly, selling price inflation was shown to have ticked higher. This forced the market to price more “hawkishly” odds for rate cuts, with little over 1 cut priced now for 2024, Vs 2 just a couple of weeks ago post the weaker CPI and Retail sales print. 2yr US yields up circa 15bps on the week at 4.95%.
Whilst 2yr yields above 5% would create a more significant headwind for risk and crypto, we still view the positive liquidity dynamic, with the QT taper seeing $35bn of additional re-investment into UST’s from the Fed, alongside the 2bn weekly Treasury buybacks set to start next week as more significant relative to rates currently.
Especially in an environment where the Fed has all but ruled out further hikes and are instead looking for reasons to cut. Meanwhile, the Biden administration continues to run emergency level deficits; China is effectively doing QE and monetising the beleaguered property sector; Lagarde said there is a “strong likelihood” that the ECB will be the next major Central Bank to start cutting rates in June.
With this new supportive political narrative, it’s really difficult to see what stops a push to new record highs in Crypto over the coming weeks. As the Biden administration is starting to understand. Underestimate the power of crypto at your peril.
Native News
Key news from the crypto native space this week.
Cryptocurrency wallet Phantom Wallet has now secured the third position on the Apple App Store in the utility category, just behind Google and Google Chrome Apps. This comes after Phantom Wallet recently clocked seven million monthly active users, according to an April 29 post on X. Although Phantom started as a Solana-only wallet, it has since added support for Bitcoin, Ethereum and Polygon blockchains as well. As for the overall Apple app store, Phantom Wallet now ranks 32nd across all categories, behind X and the artificial intelligence (AI) chatbot, ChatGPT.
OKX announced on Friday that it was withdrawing its Hong Kong VASP license “at this time.” The statement said that OKX will cease to provide centralised virtual asset trading services to Hong Kong residents by 31 May 2024 in accordance with regulatory requirements. They add that customer funds remain safe and withdrawal services will not be affected and that after 31 May customers will only be able to withdraw. OKX Web3 self hosted wallet services will not be affected and will remain available to Hong Kong users.
Institutional Corner
Top stories from the big institutions
The U.S. Securities and Exchange Commission approved eight spot Ethereum ETFs. The SEC approved 19b-4 forms for the ETFs from BlackRock, Fidelity, Grayscale, Bitwise, VanEck, Ark, Invesco Galaxy and Franklin Templeton. The Securities and Exchange Commission's Trading and Markets Division, not the agency's commissioners, made the decision to approve forms for a slew of spot Ethereum ETF’s. Although the 19b-4 forms have been approved, the ETF issuers need to have their S-1 registration statements go effective before trading can begin. Read the full release from the SEC HERE.
On Thursday, the House of Representatives considered and passed Congressman and Majority Whip Tom Emmer’s (MN-06) flagship legislation, the CBDC Anti-Surveillance State Act. In a vote of 216 - 192, the House of Representatives passed Emmer’s bill that would prohibit the Federal Reserve from issuing a surveillance-style central bank digital currency (CBDC) that could give the federal government the ability to monitor and control individual Americans’ spending habits. Congressman Emmer said “For more than two years, we have worked to educate, grow support, and pass this important legislation, which prevents unelected bureaucrats from issuing a financial surveillance tool to fundamentally undermine our American values. My legislation ensures that the United States' digital currency policy remains in the hands of the American people so that any development of digital money reflects our values of privacy, individual sovereignty, and free market competitiveness. This is what the future global digital economy needs. We are proud to have led this effort and thank my colleagues for their support.”
Donald Trump’s campaign launched a website where donors can make contributions to his joint fundraising committees via Coinbase. The new portal was announced in a statement where the team declared he is the first “major party Presidential nominee” to accept digital currency. As a reminder, Trump has invested in crypto both politically and personally since his time in the White House. His $7 billion net worth is comprised of about $3 million in cryptocurrency, according to Forbes’ estimates, and he launched a set of NFT “trading cards” in December 2022.
According to the latest annual household survey by the Federal Reserve, only 7 percent of American adults currently hold or use crypto. This marks a decrease from previous years, with a drop of 3 percentage points from 2022 and 5 percentage points from 2021. The Federal Reserve’s findings were derived from a comprehensive study conducted in October 2023 with 11,488 US adults. The report suggests a “declining interest in crypto as an investment and a medium for financial transactions. Amidst broader discussions about the viability and future of digital currencies, this trend indicates a cooling of enthusiasm.” See the full report from the Fed HERE.
WisdomTree has received approval from the UK's Financial Conduct Authority to list the WisdomTree Physical Bitcoin and WisdomTree Physical Ethereum exchange-traded products on the London Stock Exchange. The asset manager is among the first issuers to have its prospectus for cryptocurrency ETPs approved by the FCA, and the listing date is expected to be Tuesday, May 28. WisdomTree Head of Europe Alexis Marinof said "The FCA approval of our crypto ETPs’ prospectus is a significant step forward for the industry and UK-based professional investors seeking exposure to the asset class. While UK-based professional investors have been able to allocate to crypto ETPs via overseas exchanges, they will soon have a more convenient access point"
Charts of the Week
Because charts are just as important as macro.
Ethereum perps open interest reached an all time high this week. Hat tip to Axel Adler for the chart.
Hedge funds are net short across BTC futures products on the CME, according to the latest CFTC COTs report. Likely due to the basis trade, long spot, short futures. Hat tip to KaikoData 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!
Product Manager, Platform Custody & Crypto Funding at Kraken
Product Manager - Trading & Liquidity (Crypto/Fiat) at BCB Group
External/Independent Pod Manager for Crypto Multi-Manager Fund at Nickel Digital
Product Marketing Manager (Crypto) at Revolut
Internal Audit - Senior Auditor (French speaking) at Binance
Middle Office Associate at Copper
Relationship Manager for Crypto at Paysafe
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.
Great work as always 👌