Connecting the Dots
Episode 76 - Black Gold to Fuel Digital Gold?
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: Still watching multiple macro factors, with oil interesting this week. Are some of the headwinds turning to tailwinds for BTC?
Crypto Native News: Marketnode announces a series A led by HSBC, Uniswap shares its financials, Gnosis Pay partners with Visa.
Institutional Corner: New York State Department of Financial Services issues guidance to virtual currency entities, NYSE partners with CoinDesk Indices to launch cash-settled index options, Hong Kong to conduct inspections of crypto firms, PayPals stablecoin now runs on Solana, Mastercard goes live with a new crypto product.
Charts of the Week: Memecoin leverage and best returns in May. BTC with best YTD returns.
Top Jobs in Crypto: Featuring Empire Media Network, Quant, Gemini, Nickel Digital, Archax
Macro Chart of the Week - Over the last three months, consumer confidence for the lowest-income cohort has fallen dramatically to the lowest levels since the depths of the pandemic, reflecting the disproportionate share of stress this cohort is taking on from high interest rates today. Hat tip to Rick Reider for the chart.
Macro Update
This is where we connect the dots between macro and crypto.
Black Gold to Fuel Digital Gold?
A quiet, holiday shortened week provided little in the way of macro direction for markets which traded with a soft undertone. Month end considerations perhaps weighing after stocks and Bitcoin record solid gains in May 🕺
Treasury yields closed the month lower in keeping with our view that the market was over extended in the “US reflation” narrative, although both US yields and the dollar recovered in the second half of May and reflect this on-going “macro purgatory” as sticky inflation holds back the market from fully embracing the peak rates thematic. Fed speakers also continue to side with a higher-for-longer mantra, paralysed by the credibility fears of cutting too soon. The Fed’s Kashkari spooking markets on Tuesday by saying “I don’t think anybody has totally taken rate hikes off the table.”
The Fed’s preferred inflation measure, Core PCE came in a touch softer MoM at 0.2%, with YoY standing still at 2.8%. Nothing to alter the current Fed status quo. The signs continue to build however of an economy slowing, with a weaker Chicago PMI languishing deeper in recession territory and at a 4 year low of 35.4. The Atlanta Fed’s GDP Now forecasting Q2 GDP falling to 2.7% from 3.5% the week prior, dragged lower by falling personal consumption expenditure growth.
Oil is also interesting, continuing to trickle lower, despite continued OPEC supply restrictions and on-going geopolitical conflict. Oil is now 12% off its highs and up just 7% YTD. It’s hard to play a “reflation” narrative with oil falling and lower oil typically pulls 10 year inflation expectations lower which in turn pulls 10yr US yields lower…which in turn can help push Bitcoin higher 😃 Indeed, WTI at current levels suggest 10yr yields back towards 4.20%
Yields heading lower? WTI Vs US 10yr inflation Vs US 10 yr yields
Unsustainable…
Off-setting the yield drag from oil however, is continued debt sustainability fears as the market needs to digest the accompanying bond issuance. Weak auctions of 5 and 7 year treasury’s last week reigniting some of those fears and weighing on bonds. However, if you think there’s a Fed put for stocks, the put for bonds is even bigger!
A bigger concern for us continues to be USDCNH. With the policy divergence Vs the US, the currency continues to come under pressure, requiring intervention efforts to keep a lid on USDCNH. This is achieved via selling USDCNH (some of the dollar reserves will need to be raised via selling treasuries.) Those sold dollars then need to be bought back against other currencies to maintain the USD weighting in the FX reserves which feeds a broadly stronger dollar and higher yield dynamic.
Japan also continues to struggle under the weight of relative policy divergence vis-a-vis the US and is trying to slow a domestic bond sell off (via purchasing JGB’s) which reinforces currency weakness (due to monetary expansion) leaving them chasing a vicious circle.
Of course, the short term impacts of the resulting higher dollar and higher US yields act as a headwind to Bitcoin. However, it also serves to highlight the unsustainable nature of the global fiat system in a higher US rate environment. This resolves itself in one of 2 ways. Either something breaks and China is forced to devalue their currency and Japan loses complete control of either the currency or the bond market (they’ll sacrifice the currency) or the Fed starts cutting rates, alleviating the pressure. Both scenarios are bullish Bitcoin, driving either a move to the extreme left tail of the risk distribution (risk off) where BTC acts as a hedge against the failure of the fiat system, or to the right tail (risk on) as BTC rides the low rates, rising liquidity tide.
We remain of the view that this most likely resolves via the latter scenario. The Fed is looking for excuses to cut and whilst frustrated by sticky inflation, it won’t take much for the Fed to see the risks of breaking something as justification to get the rate cut cycle under way, especially in an election year. Furthermore, we also remain of the view that the lagged impacts of Fed policy are starting to feed through as the recent survey data is beginning to show.
Market positioning in the “reflation trade” looks stale and as we price in a slowing growth, US yields and the dollar will begin to break down and turn from a headwind, to a tailwind in what is otherwise a very constructive backdrop currently for Bitcoin and the wider crypto space. Black gold breaking down may well be the signal for digital gold to break up 👀
Native News
Key news from the crypto native space this week.
Singapore-based digital market infrastructure firm Marketnode announced that it closed its Series A investment round, led by HSBC and its existing shareholder Temasek. The exact amount of the funding was not disclosed but Marketnode said it will use the investment to expand financial market infrastructure for key asset classes in the financial sector, including digital fixed-income and structured products. The release said that the company aims to build a multi-asset ecosystem starting in the Asia-Pacific. Marketnode President Rehan Ahmed said “The marriage of Marketnode’s [financial market infrastructure] operational expertise and HSBC’s market leading global platform represents a unique opportunity to shape the next generation of trusted and neutral market infrastructure.”
Uniswap Foundation, the non profit behind Uniswap, shared its financials. According to the balance sheet shared by Uniswap, at the end of the first quarter it held $41.41m in fiat and stablecoins, along with 730,000 UNI tokens. The fiat and stablecoins are designated for grant commitments and operational activities, while the UNI tokens are reserved for employee rewards. Read the full details HERE.
Gnosis Pay announced a new partnership with Visa that will help broaden the use of digital currencies in everyday payment settings. Through Gnosis’ decentralised network, Gnosis Pay allows entities to provide an on-chain spending account linked to a Visa debit card that can be used at Visa accepting merchant locations worldwide. For Gnosis Pay’s consumer offering, the partnership translates into a “more seamless experience; digital currencies can now be used for everyday transactions with ease, helping to eliminate inefficiencies and offering a more agile experience for users.” In February 2024, Gnosis Pay shipped its first batch of Gnosis Cards to users across Europe. Today’s partnership sees Gnosis Pay establish an additional and direct link with Visa to help accelerate the growth of the programme.
Institutional Corner
Top stories from the big institutions
On Thursday, the New York State Department of Financial Services Superintendent Adrienne Harris issued that guidance calling on VCEs to update customers on their outstanding requests and complaints. Companies designated as "virtual currency entities" (VCEs) in New York will need policies and procedures in place to "promptly address customer services requests and complaints," according to the details. The state defines VCEs to include companies that have New York's BitLicensees, as well as those chartered as limited purpose trust companies under the New York Banking Law, to engage in virtual currency business activity. In other words, this basically means cryptocurrency businesses that are licensed to operate in New York. “Consumers have a right to a transparent and timely process for resolving complaints and answering questions, irrespective of the company or product in question,” Harris said in a statement. “This guidance outlines clear expectations for a positive customer experience, which benefits both consumers and business.” Read the full guidance HERE.
The New York Stock Exchange, part of Intercontinental Exchange, Inc., announced it is collaborating with CoinDesk Indices to launch cash-settled index options tracking the CoinDesk Bitcoin Price Index (XBX), the longest-operating spot bitcoin index. ICE and the NYSE intend to work with CoinDesk Indices and the relevant regulatory agencies to develop specific product offerings. Last year, ICE Futures Singapore collaborated with CoinDesk Indices to update its bitcoin futures contracts, CoinDesk Bitcoin Futures (BMC), to utilize XBX for its monthly contract settlement. Jon Herrick, Chief Product Officer, New York Stock Exchange said in a statement “As traditional institutions and everyday investors are demonstrating their wide-ranging enthusiasm for the recent approval of spot bitcoin ETFs, the New York Stock Exchange is excited to announce its collaboration with CoinDesk Indices,” “Upon regulatory approval, these options contracts will offer investors access to an important liquid and transparent risk-management tool.”
Hong Kong's Securities and Futures Commission (SFC) will conduct on-site inspections of the crypto trading platforms interested in continuing to pursue their licensing applications as a key deadline looms. By June 1, 2024, all crypto platforms providing trading services known as virtual asset trading platforms (VATPs) in Hong Kong must be either licensed by the SFC or “deemed-to-be-licensed,” which is a temporary arrangement during the process to get fully compliant. Beyond that deadline, it would be a "criminal offence to operate in Hong Kong" in breach of anti-money laundering and counter-terrorism laws.
PayPal today announced that its PayPal USD (PYUSD) stablecoin now runs on Solana. In its statement on Wednesday, the payments platform said that the move would bring "significant benefits for commerce use cases" by making PayPal's stablecoin faster and cheaper to use. The announcement added “The availability of PYUSD on Solana provides users with the choice of multiple blockchains allowing for increased flexibility and control. The Solana blockchain is known for processing massive amounts of transactions at high speeds with extremely low costs, providing significant benefits for commerce use cases. As the most used blockchain for stablecoin transfers, according to data from blockchain analytics platform Artemis, Solana has emerged as the leading blockchain to run tokenized transactions and is ideal for PYUSD as it continues to be used for payment use cases.” Read the full release HERE.
Mastercard announced that it has gone live with its Mastercard Crypto Credentials product. Mastercard Crypto Credential helps verify interactions among consumers and businesses using blockchain networks. It provides the assurance that the user has met a set of verification standards and confirms that the recipient’s wallet supports the transferred asset. For the first time, crypto exchange users will be able to send and receive crypto using their Mastercard Crypto Credential aliases, instead of the typically long and complex blockchain addresses. The live transaction capabilities are enabled on the Bit2Me, Lirium and Mercado Bitcoin exchanges, allowing them to enable blockchain transactions simply and securely between Latin American and European corridors. Users in Argentina, Brazil, Chile, France, Guatemala, Mexico, Panama, Paraguay, Peru, Portugal, Spain, Switzerland and Uruguay will be able to send cross-border and domestic transfers across multiple currencies and blockchains. Read the full release from Mastercard HERE.
Charts of the Week
Because charts are just as important as macro.
Memecoins including WIF and Pepe display a high open interest to market cap ratio, indicating higher levels of leverage vs the majors of BTC and ETH. Hat tip to KaikoData for the chart
Memecoin basket had the biggest monthly returns in May. Hat tip to CCData for the chart.
BTC with the best year to date returns (at 58.8%) vs other major indices. Hat tip to Mohamed El-Erian 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!
Senior Cryptocurrency Content Creator at Empire Media Network
Blockchain Research Developer at Quant
Senior Associate Institutional Sales at Gemini
Quantitative Portfolio Strategist at Nickel Digital Asset Management
Crypto Researcher / Financial Promotions at Archax
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.