Connecting the Dots
Episode 69 - Reassuring Predictability
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: A look at the current macro picture and what does the conflict in the Middle East mean for Bitcoin?
Crypto Native News: Bitcoin's circulating supply that last moved on-chain at least a year ago hirs a low, Uniswap received a notice of SEC enforcement action and TON Foundation expands its on and off ramps.
Institutional News: Bitcoin and Ether ETF’s to be approved in Hong Kong,
Charts of the Week: ETH liquidity improving, ETH being accumulated at unprecedented levels.
Top Jobs in Crypto: Featuring The Tie, XTX, Fidelity Digital Assets, Syntropy, DWS and Digital Era Bank.
Macro Chart of the Week - No inflation in China….Consumer prices rose by just 0.1% from a year ago, confirming structural demand issues due to the endless decline in house prices (one reason why China retail gold demand is on the rise) and downbeat consumer confidence). Hat tip to Jeroen Blokland for the chart.
Macro Update
This is where we connect the dots between macro and crypto.
Reassuring Predictability
A big week for macro data was overshadowed into the weekend with the escalating Middle East conflict, with Iran launching a drone and missile attack on Israel. Bitcoin, which knee-jerked lower on Friday when news of an impending attack broke, briefly dipped below 61k on Saturday evening as Israel came under fire, before sharply recovering to stand above 64k at the time of writing.
We’ll conclude with some thoughts on what the escalating conflict means for Bitcoin, but first the data 👇
US inflation data for March came in hot, rising 3.5% YoY up from 3.2% prior, with core inflation staying at 3.8%, disappointing expectations for a tick lower to 3.7%. Rising shelter costs and gasoline prices underpinned the rise and dealt a blow to hopes for a June rate cut which has now been pushed to September, with markets only expecting 2 rate cuts in 2024, from 7 at the start of the year.
Bond markets reacted accordingly, with 2yr yields spiking to 5% and 10yr to 4.60%. A softer PPI print however took some heat out of the numbers, rising a softer 0.2% in March and well below February’s 0.6%. However, the Fed is not getting the confirmation it requires to kick off the rate cutting cycle.
What does that mean for our markets?
Well, not much, in our view. The economic data matters so much in that it impacts the direction of Fed policy. Should a re-acceleration in inflation force the Fed to re-start the hike cycle and further tightening of policy, then we could see a more sustained correction lower for Bitcoin and stocks. However, the Fed continues to affirm that they have hit peak rates (latest Fed minutes confirmed they expect to cut rates at some point this year.) Underpinning that view is concern on the spiralling deficit which is limiting the Fed’s room to maneuver (as well as a belief that the disinflation process will continue, albeit with “bumps in the road”.)
Consequently, real rates (nominal rates adjusted for inflation) are coming lower. Either stronger inflation keeps the Fed and nominal rates on hold or we get softer inflation prints and the Fed will be quick to cut rates. Knee-jerk dips in stocks and BTC on stronger inflation data therefore quickly get bought into.
The international dynamic is also important. Higher US rates are causing problems in a global monetary system dependent on dollars. USDJPY continues to test above BoJ “red lines” now above 153. China needs to ease to counter a deflationary economy (this week's CPI coming in a softer 0.1% and down from Feb’s 0.7% rise which previously gave hope of reflation) and also need to keep pace with their biggest export competitor, Japan, yet don’t want the currency instability. China and Japan are also the biggest foreign buyers of US debt and Yellen needs them to continue to buy as she grows concerned about losing control of the treasury market. All roads lead to financial repression and currency debasement. The fact that gold continues to print record highs in a rising yield environment, in our view, is anticipating lower real rates.
Elsewhere, the ECB left rates at 4% as expected but tee’d up a June cut saying that if June’s updated inflation assessment were to increase confidence that inflation was converging to target in a sustainable manner then it would be “appropriate to reduce the current level of monetary restriction.” Asked if stronger US inflation would impact the timing of cuts, Lagarde responded that the ECB is “data dependent, not Fed dependent.” EURUSD consequently closed at its lowest levels since November. With the Bank of England also set to cut rates in June, major central banks remain in easing mode. The Fed, on pause for now, will just be a little later to the party. The supportive “peak rates” thematic remains in-tact 🚀
Back to the escalating conflict in the Middle East which is set to dominate Bitcoin and broad asset prices this coming week. Geopolitical led risk sell offs are typically short and sharp and we bounce quickly higher after the initial knee jerk reaction.
War costs money and means more government debt, supported by lower rates and liquidity. Ultimately, this could be the catalyst to accelerate the next leg higher for Bitcoin.
Why then did Bitcoin sell off?
When there’s a risk event and a VaR shock (value at risk) the first step is to reduce risk positions, including positions you like. Risk managers are forced to reduce all risk.
Shoot first, ask questions later 🔫
Assets that typically rally in the knee-jerk reaction are typically those that the market was short. Notice on Friday, even gold, which is seen in traditional markets as the ultimate safe haven, sold off as long risk positions are reduced. Dollar strengthens because there’s over $17trn of dollar denominated debt issued outside of the US. The world runs a huge pseudo-short dollar position!
Once positions are pared down and time taken to assess, risk can be added back on. As the consequences of geopolitical escalation are considered, Bitcoin is a clear beneficiary. Perhaps one of the biggest narrative shifts over the past year has been the Bitcoin as a “flight to quality” narrative. In particular, this has emerged as US debt sustainability has been called into question. This will lead to even larger US deficits as they feel compelled to provide more military aid to Israel. US Treasuries are no longer the safe haven of choice. Geopolitical uncertainty also allows the Fed to take an otherwise easier stance to ensure market stability, including providing liquidity if required. Additionally, Bitcoin is the hedge against the failure of existing world structures. The less stable the existing world order, the more appealing a trustless, decentralised network looks!
We expect then Bitcoin and gold will both accelerate higher once the initial liquidations and cleaning of positions are done. Funding rates are also now negative, implying net short positioning via perps which are now vulnerable to a squeeze.
Whilst caution is warranted into a volatile week, we don’t see any change to the macro paradigm to blow us materially off course from this bull run, which remains in its early innings still. Indeed, we’ve been encouraged by the resilience Bitcoin has displayed in the face of some strong cross-asset headwinds and volatility. Bitcoin continues to emerge from all challenges battle hardened and the fragility of the global, debt driven system continues to reveal itself and reinforce the longer term bull case for Bitcoin. And let’s not forget, amidst all the uncertainty, we’re about to see the Bitcoin block reward halved.
In a world driven by the unpredictable whims and agendas of our global elites, Bitcoin is reassuringly predictable 🙏.
Native News
Key news from the crypto native space this week.
According to blockchain analytics Glassnode, the percentage of bitcoin's circulating supply that last moved on-chain at least a year ago declined to the lowest since October 2022. As of the start of thew week, 12.95 million BTC, equating to 65.84% of the circulating supply of 19.67 million BTC, remained unchanged for over a year, the lowest percentage since October 2022. The metric peaked above 70% in January with the debut of the spot ETFs in the U.S. and has been falling ever since. Since late December, the percentage of the circulating supply that has not moved in at least two years has fallen to 54% from 57.4%. The decline likely represents profit-taking by investors who held coins for one year and over and marks a shift from the holding strategy seen through 2023.
Decentralised crypto exchange Uniswap received a notice from the U.S. Securities and Exchange Commission that it intends to pursue an enforcement action. Uniswap CEO Hayden Adams announced receipt of the so-called Wells notice on X, saying he wasn’t surprised, “just annoyed, disappointed, and ready to fight.” Wells notices are preliminary warnings that inform respondents of the charges the regulator is considering bringing against them. They usually lead to enforcement actions. In a press conference on Wednesday afternoon, COO Mary-Catherine Lader and Chief Legal Officer Marvin Ammori told reporters that the Wells notice was focused on Uniswap acting as an unregistered securities broker and unregistered securities exchange. It remains unclear whether the UNI token was implicated as a potential security in the SEC’s notice. Uniswap's native token, UNI, dropped 9.5% immediately after the news and has lost 18% over 24 hours post the announcement.
The TON Foundation has entered into a strategic partnership with digital asset financial services firm HashKey Group. HashKey Group, operator of one of only two licensed cryptocurrency exchanges in Hong Kong, is teaming up with the operator of the blockchain created by Telegram Messenger to give users an on- and off-ramp by exchanging their so-called Toncoins for cash. The TON Foundation said in a statement “The agreement applies to users in the Asia-Pacific region and will see the two organisations work on “new ecosystem projects by providing mentorship, networking opportunities, and other incubation activities”
Institutional Corner
Top stories from the big institutions
This week, news reports suggest the Hong Kong regulator, SFC, is expected to approve spot bitcoin ETFs this coming Monday. The availability to buy the ETFs is expected to commence around 2 weeks after. This week the SFC updated the list of “authorised fund companies.” This gives those companies the ability to issue crypto related fund products. 10 fund management companies had reportedly been preparing to launch spot bitcoin ETFs. 2 of the names on the update include Harvest Global Investment and China Asset Management. The ETF sponsors have already begun discussing listings with the Hong Hong Stock Exchange. Analysts have been quoted as saying the first spot bitcoin ETF in Hong Kong could reach a size of $20bn (though give no timescales).
Charts of the Week
Because charts are just as important as macro.
Liquidity on centralised exchanges for Ethereum has improved. aggregated 2% market depth shown below. Hat tip to Kaiko Data for the chart.
Stablecoin whales are accumulating ETH at unprecedented levels. Hat tip to Kate Young Ju
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!
Director of Business Development EMEA at The Tie
Trading Operations Specialist at XTX
DeFi Ecosystem Lead at Fidelity Digital Assets
Web3 Community Lead at Syntrophy
Risk Manager Digital Assets at DWS
Marketing Token Launcher at Digital Era Bank
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.