Connecting the Dots
Episode 85 - When the market gets scared, the smart investor buys Bitcoin
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: When the market gets scared, the smart investor buys Bitcoin. Find out why below.
Crypto Native News: Genesis repaying creditors, Marathon Digital reports large losses for Q2, OpenEden brings tokenised T-bill to the XRP ledger.
Institutional Corner: Bank of England planning experiments with DLT and CBDC, US Senator Lummis wants to introduce a Bitcoin Act, Futu Securities launches crypto trading and the Bahamas passes a new crypto law.
Charts of the Week: USDT market cap continues to grow, Bitcoin mining difficulty reaches all time high.
Top Jobs in Crypto: Featuring Ministry of Defence, IAC, Laser Digital, Kraken, Binance, Galaxy Digital and Gemini.
Macro Update
This is where we connect the dots between macro and crypto.
When the market gets scared, the smart investor buys Bitcoin
Well, that escalated!
A huge week for macro and a huge week for our bullish Bitcoin thesis 🚀
We have described the last few months as “macro purgatory” whereby the resilience of the lagged, backward looking data were keeping the Fed sidelined and Bitcoin range bound, unable to embrace the inevitable rate cutting cycle.
Despite the forward looking indicators pointing to a US slowdown and clear signs of a weakening in the labor market over recent months, the Fed has been waiting to see the whites of the eyes of that labor market deterioration to give them the confidence to get the cutting cycle underway. This week, it punched them in the face!
Just as they kept rates too low for too long, waiting to see the whites of the inflation eyes, they have now kept rates too high for too long and the market has quickly reacted to price a Fed that is behind the curve. The Fed will inevitably need to cut more aggressively and return the liquidity hose more quickly than most in the market are expecting. Given the lagged impacts of monetary policy (typically 18 months to 2 years) the Fed reacting now will have little impact to stop the US slow down and so as they cut rates and it has no immediate impact, they know little else but to keep cutting and then employ all the QE madness.
If we like Bitcoin’s predictability for stable monetary policy, then we also like the Fed’s predictability for unstable monetary policy and mistakes that continue to debase fiat currency in perpetuity propelling the value of hard assets ever higher!
Recessionary signals…
Despite a week in which we had the FOMC, where a typically balanced JPow did tee up an expected September rate cut, Friday’s employment report was the big mover for our markets. On Tuesday, signs of labor market softness were highlighted by the Labor Department's JOLT’s job quits data that showed voluntary quits of 3.28mio, the lowest since November 2020. This is typically a good lead on the labor market as when jobs are hard to find, less people voluntarily quit to go find a higher paying job. Thursday’s jobless claims also rose to an 11 month high, whilst continuing claims were shown to be at the highest levels since late 2021. ISM manufacturing released the same day also unexpectedly fell to 46.6, the lowest level since last November and marking 2 years of contraction in the manufacturing sector. The embers of recession fear were burning bright into NFP.
Friday’s NFP then sent the market into full recessionary panic. Headline payrolls came in at 114k Vs 179k expected and was the largest downside surprise in more than 2.5 years. Perhaps more significant was the surprise jump in the unemployment rate to 4.3%, a metric JPow himself said is more relevant than headline payrolls themselves. Wages also softened, 0.2% on the month, down to 3.6% YoY from 3.8%. The weakness in the report was both material and broad. So much so, markets are now pricing a 73% chance of a 50bp cut in September, with both Citi Bank and JP Morgan calling for back to back 50bp cuts from the Fed.
US dollar and yields repricing…
US yields consequently repriced lower across the curve, with 2yr closing at 3.88% and 10yr at 3.79%. We continue to think these moves in the bond market have a lot further to go, as we’ve been highlighting in recent weeks. With the 2s10s inversion now just at 9bps, we expect a continued bull steepening (yields lower/bonds higher across the curve but with the bigger move lower in 2yr yields) - as we’ve highlighted previously, the yield curve inversion is a sign that policy is too tight. Yet it’s the un-inversion and bull steepening that signals the recession is on our doorstep. We look to be approaching that stage 👀
With lower US yields, the broader dollar traded lower, down circa 2.5% on the week. Again, we believe this move has much further to go as markets reverse the “policy divergence” trade, whereby US growth outperformance kept the Fed sidelined Vs others cutting rates (the Bank of England the latest major central bank to cut rates on Thursday.)
This has significant implications for China. Data last week pointed to a continued slowing in China, with official manufacturing PMI’s falling to 49.4 in June, whilst the private Caixin measure of manufacturing unexpectedly fell to 49.8 from 51.8. We suggested post the Third Plenum that China would ramp up stimulus and they promptly followed with a surprise rate cut to major short and longer term interest rates. Liquidity injections have also picked up, as highlighted in the below chart by the brilliant team at CrossBorder Capital:
China have desperately needed to ramp up stimulus but have been constrained by their desire to maintain currency stability. Consequently, they have been intervening in the FX markets, selling FX reserves to support the CNY, which has a liquidity draining effect on markets. We also believe that to discourage capital outflows, they are incentivised to keep a lid on Bitcoin and Bitcoin typically fails to break higher whilst China is battling their currency weakness against the dollar. With the US slowing and the re-pricing in US yields, pressure on the currency has been relieved, USDCNH falling from 7.27 to 7.16. This is providing the cover for China to pursue more aggressive stimulus to arrest a slowing, deflationary economy.
Carry on…
Also helping relieve the pressure on CNY has been the sharp move lower in USDJPY. Despite a weakening economy, the BoJ last week hiked rates from 0-0.1% to around 0.25% and announced a plan to reduce quarterly JGB purchases by JPY 400bn. USDJPY falling on the week from 153.72 to 146.47. This move from the BoJ added to the sell off in equities as markets fret over the “carry unwind” whereby investors borrow cheaply in Yen to fund riskier, higher yielding trades. Many attribute part of the performance of the Nasdaq to this carry trade flow.
Whilst we acknowledge the risks of the carry unwind, we remain more sanguine than the usual macro bears calling for the collapse of US equities. As of the end of December, Japan’s foreign portfolio investments totalled some $4.2trn according to the Ministry of Finance, more than half of which is in long term debt assets. Of course, if all of these assets were to be sold and repatriated back home, then it would reverberate through global markets. However, there’s still insufficient yield back home to materially impact the decisions of typically longer term Japanese investors. Indeed, with BoJ hikes, alongside Fed cuts, costs of hedging out the JPY currency risk are reduced, so more likely we see increased hedging of JPY portfolios which will weigh further on USDJPY and the broader dollar. The move lower in USDJPY subsequently will have hurt the return for un-hedged Japanese investors and some adjustments are expected. However, we suspect shorter term investors will have made much of that adjustment, whilst longer term investors seek to protect against a strengthening JPY.
Further, offsetting the negative impacts from carry unwind, is the broader weakening of the dollar and lower US yields which significantly eases global liquidity conditions and provides a powerful offset for risk markets. It’s perhaps significant that the “carry unwind” has come alongside strengthening US treasuries. This in many ways invalidates the fears surrounding the Japan repatriation story, given Japan is the largest Foreign holder of US treasuries and yet UST’s have rallied hard.
Bitcoin on the launchpad…
Bringing this all together, last week triggered a significant shift in the macro paradigm as the US slowdown looks clearly underway and the Fed, behind the curve will need to cut more aggressively than previously expected. US yields and the dollar are consequently repricing lower which is hugely bullish for Bitcoin. Further, with China ramping up stimulus and liquidity injections, combined with a weaker dollar, global liquidity conditions are set to accelerate.
The rates, dollar, and liquidity inputs into our macro framework for Bitcoin then are all working positively. However, Bitcoin is also a risk asset (other than at the “left tail” of the risk distribution when it becomes the ultimate hedge against the failure of the traditional fiat system) and last week saw a volatility shock to markets with the VIX jumping from 16 to as high as 30 at one point on Friday.
When there’s a risk or VAR shock, risk managers are forced to pare down all risk positions in a “shoot first, ask questions later” response. Once those risks are better understood, risk positions are once again added and right now, Bitcoin for us looks the most obvious trade for a Fed that is behind the curve and set to slash rates and ramp up liquidity. Strap in for a volatile few weeks but don’t lose sight of the big picture. This is the moment Bitcoin was made for and we believe will fire the starting gun on Bitcoins move to 100k.
When markets get brave, the smart investor gets scared. When markets get scared, the smart investor buys Bitcoin 🚀
Native News
Key news from the crypto native space this week.
Genesis Global and its related entities announced that it has completed its restructuring process on Friday, after filing for bankruptcy protection in January 2023. According the the press release, the firm has also begun distributing approximately $4 billion worth of digital assets and U.S. dollars to repay creditors. When it filed for bankruptcy last year, Genesis disclosed it had over 100,000 creditors and had as much as $10 billion in liabilities. It owed approximately $3 billion to its top 50 creditors, including crypto exchange Gemini, asset manager VanEck and trading firm Cumberland. Wallets connected to Genesis began transferring $1.5 billion worth of bitcoin and ether on Friday and the firm said it has reached out to creditors with instructions on how to receive these funds.
Bitcoin mining firm Marathon Digital reported losses in the second quarter of this year, as the company’s operations were mainly impacted by “unexpected equipment failure” and April’s bitcoin halving event. Marathon, recently rebranded as MARA, reported a net loss of $199.7 million in the second quarter of this year, compared to a loss of $9 million in the same period last year. The company booked $145.1 million in total revenues in the second quarter of this year, up 78% year-on-year. Fred Thiel, chairman and chief executive officer of MARA said “During the second quarter of 2024, our BTC production was impacted by unexpected equipment failures and transmission line maintenance at the Ellendale site operated by Applied Digital, increased global hash rate, and the April halving event.” MARA’s shares closed down 7.78% on Nasdaq on Thursday, the day of the earnings release. Its share price has dropped 20.89% so far this year. Read the full report from MARA HERE.
Tokenisation platform OpenEden has announced that it will bring tokenised US Treasury bills (T-bills), a short-term US government debt obligation backed by the US Department of the Treasury, to the XRP Ledger (XRPL) and its users for the first time. Ripple will allocate $10 million to a tokenized version of U.S. Treasury bills (T-bills) that will become available on the XRP Ledger for the first time. The press release says that the tokenisation of T-bills onto the XRPL is a demonstration of how institutional access to decentralised finance (DeFi) is being driven by the tokenisation of traditional real-world assets (RWAs). The assets backing OpenEden’s TBILL tokens are invested in short-dated US T-bills and reverse repurchase agreements collateralized by US Treasuries. Minters are subject to stringent KYC and AML screening to ensure the highest security and regulatory compliance standards. Read the full release from Ripple HERE.
Institutional Corner
Top stories from the big institutions
The Bank of England said it's planning a series of experiments with distributed ledger technology (DLT) and wholesale central bank digital currencies (wCBDC) to keep abreast of changes in the payments landscape and assess the opportunities and risks of developments in financial technology. Governor Andrew Bailey said in the introduction to a discussion paper on Tuesday “Confidence in money and payments is fundamental to the Bank’s responsibility for monetary and financial stability," "As innovation in this space continues, our role must also evolve, to support a robust and dynamic U.K. economy." The paper says "Our programme of experiments would be grounded in a set of policy outcomes which we seek from innovations in wholesale central bank money. The programme would cover both wCBDC and synchronisation, as well as the relative merits of these two approaches." Read the full paper from the Bank of England HERE.
US Senator Cynthia Lummis has introduced the Boosting Innovation, Technology, and Competitiveness through Optimized Investment Nationwide (BITCOIN) Act (What a name!) This bill seeks to establish a Bitcoin reserve, reflecting strategies typically used for commodities like oil and gold. The BITCOIN Act proposes a decentralised network of secure Bitcoin vaults under the US Department of Treasury’s oversight. It aims to ensure top-tier physical and cybersecurity for the nation’s Bitcoin assets. The legislation calls for a program to acquire 1 million Bitcoin units, representing about 5% of the global supply. This strategy mirrors the US approach to gold reserves. Funding for this ambitious project would come from reallocating existing Federal Reserve System and Treasury Department resources. Furthermore, the bill emphasises the self-custody rights of private Bitcoin holders, ensuring that the strategic reserve does not impinge on individual financial freedoms.
Futu Securities International, Hong Kong’s largest online broker, has launched retail cryptocurrency trading in the city, offering shares of Alibaba Group Holding and Nvidia as a reward in an attempt to attract investors. Futu has started allowing Hong Kong residents to trade bitcoin and ether, the world’s two largest cryptocurrencies, directly on the brokerage platform using either Hong Kong or US dollars. The online retail broker said last month that it had received a securities licence upgrade from the Securities and Futures Commission (SFC), allowing Futu to offer virtual asset dealing services to both professional and retail customers in the city. While offering crypto trading on its main brokerage app, Futu is also pursuing a cryptocurrency exchange licence for its new platform PantherTrade. That platform is among 11 in Hong Kong that are currently “deemed to be licensed” for trading crypto, an arrangement that allows them to operate in the city as they await full approval from the SFC.
The parliament of the Bahamas, where bankrupt cryptocurrency exchange FTX was headquartered, has passed a new crypto law, The Securities Commission of The Bahamas announced on Tuesday. The announcement said Digital Assets and Registered Exchanges Act (DARE) 2024 "encompasses a wider range of digital asset activities, including advisory or management services, digital asset derivatives and staking services. Digital asset exchanges must adhere to increased investor and consumer protection requirements including stringent systems and controls requirements" They added "Building upon the foundation laid by the DARE Act, 2020, the legislation introduces comprehensive reforms designed to address the evolving landscape of digital assets and cryptocurrency markets." Read the full press release HERE.
Charts of the Week
Because charts are just as important as macro.
The market cap of USDT grew 1.61% this month to hit a new all-time high of $114bn. This marks its 11th consecutive month of growth. USDC also saw a significant rebound, increasing 5.36% to $33.6bn, its highest value since February 2023. Hat tip to CCData for the chart.
On Thursday, Bitcoin mining difficulty reached an all time high after a +10.5% adjustment. In absolute terms this was the largest difficulty increase of all time. In % terms it was the 24th biggest increase since 2016, the 73rd biggest since 2021 and the 119th of all time. Hat tip to Alex Thorn 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!
Alternate Crypto Custodian at the Ministry of Defence
Digital Asset Crypto Executive at IAC
Crypto Validator and Deployment at Laser Digital
Node Operations Engineer Crypto and On-Chain at Kraken
Social Media Manager at Binance
Head of UK Compliance at Galaxy 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.