Connecting the Dots
Episode 41 - Crypto and The Dog That Didn't Bark
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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: The global rate hike train is coming to stop, the macro dynamic is still challenging for crypto but its showing resilience, Liquidity is turning higher from China, Japan and the US.
Crypto Native News: Bybit says it will leave the UK market, Genesis shuts down all crypto trading and VanEck releases its monthly crypto report.
Institutional News: Brevan Howard says blockchain and crypto are transformational technologies, Deutsche Bank announces a partnership with crypto firm Taurus, Franklin Templeton files for a spot bitcoin ETF.
Chart of the Week: Fed liquidity heading higher.
Top Jobs in Crypto: Featuring Ripple, Crypto.com, ONE, Blockchain.com, Fireblocks, Bitpanda Pro and Coinbase.
Macro Update
This is where we connect the dots between macro and crypto.
Crypto and The Dog That Didnt Bark
Last week’s big data release came in the form of US CPI, which jumped on the headline from from 3.2% to 3.7%, as base effects waned, yet core continued its slow grind lower from 4.7% to 4.3%.
Little to disrupt a Fed expected to pause this week, but continued frustration from a macro perspective as we remain in this purgatory, unable to fully cross over to the “other side” of the rate hiking cycle.
Indeed stronger retail sales underscored the US data resilience which will continue to keep the Fed maintaining optionality on a hike, even if the messaging appears to be “pause” with rates sufficiently restrictive to bring inflation to target.
The ECB also hiked (despite expectations for a hold) to 4% but in a dovish twist, signalled a pause of their own, stating that “interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” Weaker growth and employment data out of the UK also lending itself to expectations of “one and done.”
Overall, the global rate hike train is coming to a stop and this is a significant shift in the macro dynamic markets were forced to endure in 2022. Whilst the data resilience and stickiness of inflation does not yet allow for aggressive rate cut expectations to build, we expect as the lags feed more forcefully into Q4 that we will see rates start to fall and liquidity rise, driving the next leg of crypto higher.
One big concern to this view is the recent drive higher in oil prices which will add to the stickiness of headline inflation alongside greater Fed caution and a “higher for longer.”
Interesting however is that the rise in oil prices, in large part driven by OPEC supply cuts, isn’t feeding through to materially higher inflation expectations. 5yr break-evens at 2.27% suggests Mr Market doesn’t see this sustainably forcing inflation higher. Perhaps the squeeze on the consumer from artificially high oil prices accelerates the disinflation in non energy related goods as consumer demand dwindles, but it’s something we are monitoring and expect to reverse as global growth continues to slow.
The move higher in oil is also pushing yields higher, back towards the highs of August, leading the dollar higher in tandem.
The macro dynamic then for crypto is still challenging. What is encouraging however is the resilience crypto majors continue to display, with BTC looking comfortably supported into 25k. With more positive crypto native newsflow as the institutional list registering for spot ETF’s grows, there’s an underlying strength to crypto that is being masked by these macro headwinds.
If and when those headwinds abate, the rip higher we suspect will catch many by surprise.
One positive development is on the liquidity side. China continues to ease and inject liquidity, whilst the Bank of Japan’s balance sheet continues to expand under yield curve control.
However, more importantly, USD liquidity is also turning higher as the Reverse Repo (RRP) facility is running lower, now at $1.4trn having spent much of the year north of 2trn. This can be thought of as cash previously parked at the Fed every night, being injected back into the market seeking those higher T-bill yields. This is more than off-setting the negative impacts with continued Fed balance sheet contraction under QT.
Wednesday’s FOMC decision will drive some short term volatility, yet despite the negative headwinds of higher rates and a stronger dollar, BTC and the broader crypto complex is displaying an underlying resilience. This resilience feels like the “curious incident of the dog that did not bark in the night.” - Curious indeed 🤔
Native News
Key news from the crypto native space this week.
Ben Zhou, the co-founder and CEO of crypto exchange Bybit, said this week that the company may exit the UK ahead of new marketing rules that are set to go live in the coming weeks. Zhou said “We do see regulation becoming more strict. Most likely, we’ll have to retreat in many countries. I think the UK — we’ll have to exit very soon. We recently exited France,” Zhou also said the new rules will change the way solicitation works. “FCA has explicitly contacted all the major players — us, OKX, Binance, everyone — and asked what our plan is to deal with this new law. And the new law is that if you use English as a language, they will see you as trying to solicit their users, so you cannot claim that you are in reverse solicitation,” Zhou said. “Everyone is in trouble. So everyone is thinking of plans for how to deal with this new law.” See the new rules from the FCA HERE.
Genesis has ceased all crypto trading operations. The company announced last week that they were shutting down US operations, but the international spot and derivatives trading operations are also closing. This weeks statement says the decision was made voluntarily and for business reasons.
Investment firm, VanEck release a monthly report on crypto. This monnths report highlights some setbacks for decentralised finance (DeFi). DeFi exchange volume declined to $52.8 billion in August, 15.5% lower than in July. The findings are based on VanEck’s MarketVector Decentralised Finance Leaders Index (MVDFLE), which tracks the performance of the largest and most liquid tokens on DeFi protocols, including Uniswap, Lido DAO, Maker, Aave, THORChain and Curve DAO (CRV).The DeFi index underperformed Bitcoin and Ether in August, falling 21% in the month. Another key metric for the DeFi ecosystem, the total value locked (TVL), declined 8% in August, from $40.8 billion to $37.5 billion, slightly outperforming Ethereum’s 10% slump in the month. Read the full report from VanEck HERE.
Institutional Corner
Top stories from the big institutions
Speaking at a hedge fund conference in Germany, Gautam Sharma, Brevan Howards CEO of the Digital business said though there are a lot of challenges, blockchain and crypto are transformational technologies whose full potential has yet to be tapped. Sharma predicting a potential boom in digital assets similar to what the internet has seen in the past couple of decades and is looking to make “disproportionate returns.” Some selected quotes…“We truly believe that this is a very disruptive technology and it can unlock value in many ways,” “And we are here to enable our institutional investors to find ways to get access to this space.”
Following news that Deutsche Bank was applying for digital asset custody license earlier in the summer, this week Deutsche announced a partnership with Taurus, a Swiss fintech firm that offers crypto services. Alongside crypto custody, Deutsche Bank will also use Taurus’ infrastructure to offer tokenisation services for its customers. Paul Maley, Global Head of Securities for Deutsche Bank said “We believe the tokenized economy will continue to develop,” “We expect to see more and more traditional assets and cash payments eventually come “on-chain.”
According to a SEC filing this week, Franklin Templeton is the latest traditional asset management firm to file for a spot bitcoin exchange-traded fund. The investment firm has proposed a Coinbase-custodied ETF that would trade on Cboe BZX Exchange if approved. It also proposed using CME's CF Bitcoin Reference Rate – New York Variant for the pricing of the Bitcoin in its ETF.
Chart of the Week
Because charts are just as important as macro.
Fed Liquidity has been heading higher. A pre-cursor to ETH strength ?
Hat tip to Global Macro Investor 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!
Market Expansion Lead, RippleNet Payments at Ripple
OTC Sales Trader at Crypto.com
Operations Tech Support at ONE
Partnerships Lead at Blockchain.com
Business Development Representative at Fireblocks
Money Laundering Reporting Officer at Bitpanda Pro
Head of Mobile Business Development at Coinbase
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.