Connecting the Dots
Episode 86 - Surveying the Wreckage
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: A huge week for markets, read where that leaves us now.
Crypto Native News: FTX/Alameda to pay creditors, Ripple and SEC reach settlement, Xapo Bank to offer interest bearing bitcoin and fiat accounts, Stripe partners with Bitstamp, Crypto spot trading volumes rise.
Institutional Corner: Robinhood crypto revenues rise.
Charts of the Week: BTC Dominance at its highest level since April 2021, Bitcoin perpetual futures open interest saw the largest daily drop since August 2023.
Top Jobs in Crypto: Featuring Revolut, Jump Crypto, Totally, Crypto.com, One and Trust Wallet.
Macro Update
This is where we connect the dots between macro and crypto.
Surveying the Wreckage
A huge week for markets which had a “something broke” moment. We signed off last week’s note suggesting to strap in for a volatile few weeks, and boy did we get that!
The macro itself was relatively quiet this week, but the technical breakdown of markets was the dominant focus. Let’s dive into that to take a look at what happened and how this likely plays out from here.
The carry trade. Everybody’s talking about it…
We wrote about the Yen carry trade last week which has become the topic de jour.
TLDR; Japanese rates have been at zero for a very long time, having suffered an asset price collapse in the 90’s and a persistent disinflationary economy resulting from the huge debt pileup (Japan’s debt/gdp is north of 260%) and an aging population (yes, this does sounds very familiar for Western readers and it’s why long term we believe we remain in a structurally disinflationary world - especially when we add the disinflationary impact of tech and AI).
The “carry trade” allowed investors to borrow for free in Yen at zero rates and use that to buy higher yielding assets, be it Nikkei, Nasdaq or other higher yielding currencies and bonds. This trend has been exacerbated post Covid when the inflationary impacts of highly stimulative policies to deal with the pandemic saw the Fed and other major central banks aggressively hike rates, all the while Japan continued with negative interest rate policy (NIRP) and on-going bond purchases. This drove one big, levered momentum trade, encouraged by low levels of risk asset volatility.
The “carry trade” has actually been unwinding for several weeks, driven by the breakdown of USDJPY as Japan intervened in the currency market, as well as the softer US data flow helping drive a rise in Fed rate cut expectations, narrowing the rate differential. Indeed, USDJPY’s sharp decline early/mid July coincided with the top and subsequent decline in the Nasdaq, as seen in the below chart.
Nasdaq Vs USDJPY - USDJPY leading lower
As the USDJPY leg of this levered momentum trade began to break down, the positions in the other legs of this highly correlated trade also needed to be reduced. Then ahead of Monday, the BoJ raised rates to 25bps. Initially, this was met with a dovish response as their bond buying taper was less than expected. However, USDJPY soon resumed its downward path as weak US JOLTS and ISM manufacturing data started to raise US recessionary fears. These fears went into overdrive on the weak Non Farm payroll print and the jump in the unemployment rate to 4.3% which saw markets aggressively price in US rate cuts, with calls from some large US investment banks for back to back 50bp cuts.
USDJPY subsequently took another lunge lower and on the Asia session into Monday, we had what felt like the “throw in the towel” moment for the carry trade sparking the sell off in Nikkei, Nasdaq and broad risk. Risk asset volatility consequently spiked, with the VIX briefly jumping above 65 (this was trading as low as 12 in mid July) This spike in volatility drove an “all correlations go to one” moment and led to a broad grossing down of risk. When vol spikes, the value at risk (VAR) spikes and forces risk managers to reduce leverage and positioning. Even of the trades they like. Rather than “risk-off” then, it becomes “position-off” as all positions are grossed down.
Bitcoin, increasingly a macro asset, was also not immune to the grossing down of risk and was initially hit hard, trading sub 50k early Monday. Even gold was hit on Monday on this grossing down of positions, despite the “risk-off.”
Where next?
As the week progressed, markets stabilised with US stocks and Bitcoin fully recovering the losses to round out the week unchanged. Partly this was helped by stronger US data calming the recessionary fears, with ISM Services bouncing from a contractionary 48.8 back to an expansionary 51.4 whilst weekly jobless claims for the week fell to 233k from 250k.
Dovish comments from the Bank of Japan also soothed fears, with deputy governor Uchida saying that they are “watching markets with a sense of urgency” and that there will be “no rate hike during market instability” - the Central Bank put remains alive and well, party on 🎉
This continues to reinforce our view that fiat based economies, driven by high levels of debt are limited in their ability to “normalise” rates and will continue to need to maintain high levels of liquidity and low levels of real rates. They will hike until something breaks, but as soon as those things start to break, they will quickly revert to the financial repression that is required to keep the fiat system from imploding. Last week markets sent a warning that they are approaching their limit, which they duly acknowledged.
We continue to push back also on the idea of the BIG unwinding of the Yen carry/funding trade. As we highlighted, there is circa $4trn of foreign assets held by Japan, more than half of which are in long term debt assets. The macro bears suggesting we’re only at the start of the carry unwind presumably are referring to a large sale and repatriation of these assets back to Japan, which would cause much deeper sell off for equities.
However, the larger foreign held assets are owned by the big pension and lifer funds in Japan, who are long term investors and infrequently adjust the portfolio mix. 25bp rates domestically is not sufficient to begin a large unwind of their foreign portfolios. Indeed, even for shorter term speculative traders, the carry trade will make sense even if the JPY leg is no longer completely free. However, with the narrowing rate differential, these asset managers will likely increase the hedge ratios to protect against further JPY gains and this likely keeps downward pressure on USDJPY over the coming weeks/months. A broadly weaker dollar is positive from a liquidity perspective which in turn is positive for broad risk markets.
The worst is over?
There’s still potentially more de-risking to digest from last week's volatility shock. Larger funds may still need to gross down positions so there may still be these mechanical waves of selling as the models require them to reduce, although with the VIX already back at 20, it's likely in our view that most of the de-risking from these levered momentum funds has now run its course.
The other consideration is how many dead bodies are out there. With large volatility events, there will surely be some funds that blew up last week and as those dead bodies float to the surface, could drive some further unwinding of positions.
Yet the re-pricing in US rates alongside a weaker dollar is a positive catalyst for broad risk markets. Further, China now has the cover to ramp up stimulus given the pressure has now been lifted from their currency. Global liquidity is set to rise as major central banks ease to address the global slowdown that is under way. Overall, we remain constructive on broad markets and believe much of the risk unwind has likely occurred. There remains a lot of liquidity in the system and a lot of cash on the sidelines which we expect will start to flow back into this market.
For Bitcoin and the broader crypto complex, there is not the same level of positioning and so we feel more confident to suggest the de-risking in our space has completed. Rumors that Jump trading is unwinding their crypto business may be a negative flow factor, although we have no particular insight into that. Bitcoin also appears to short term, be negatively impacted by the rising probabilities of a Kamala Harris election victory (despite the Harris camp becoming more constructive on crypto.)
However, the macro has turned undoubtedly bullish over the past couple of weeks. Within our framework, we consider US rates, the dollar, global liquidity, risk and positioning. Rates, dollar and global liquidity are all pointing positively. Positioning is clean. Risk remains the question mark but continued stability in broad asset markets will start to allow Bitcoin to more fully connect with these fundamental drivers. The stage is set for Bitcoin to begin its next leg higher.
Native News
Key news from the crypto native space this week.
On Wednesday a New York judge approved a consent order meaning defunct crypto exchange FTX and trading firm Alameda Research will pay $12.7 billion to creditors, ending a 20-month-long lawsuit from the Commodity Futures Trading Commission (CFTC). The order bans FTX and Alameda from trading digital assets and acting as intermediaries in the market, but does not include civil penalties. The order also bans FTX and its sister concern, Alameda, from trading digital assets and acting as intermediaries in the market. Read the full order HERE.
The long running case between Ripple Labs and the SEC reached a milestone settlement, leading to a 17% rise for XRP. On Wednesday, a federal judge ordered Ripple to pay $125 million in civil penalties and imposed an injunction against future securities law violations. Although the case is said to have reached its end, SEC is expected to appeal the ruling – likely extending legal matters. Markets positively reacted to Ripple’s settlement as prices of XRP rose to 65 cents from 50 cents after the ruling, with trading volumes jumping to $4.2 billion over 24 hours from Tuesday’s $1.2 billion. There were just $6 million in short liquidations on XRP-tracked futures, suggesting the movements were spot driven. Meanwhile, open interest—or the number of unsettled futures contracts—on XRP-tracked futures rose by $200 million in the wake of the ruling, indicative of new money entering the market. Data suggests that over 60% of these traders have a long bias and expect prices to increase further.
Xapo Bank says it has become the first UK bank to enable interest-bearing bitcoin and fiat accounts after successfully passporting its banking license into the country. The passporting scheme is a framework that allows firms based in Gibraltar to extend their banking license to the UK, facilitated by the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA), the Bank of England and Gibraltar authorities. According to a statement, Xapo’s platform claims to offer 1% interest yields on bitcoin without the need to stake, lend or lock up the assets. The firm did not provide details on where the interest yield would come from. Its users can spend their bitcoin via Xapo’s debit card, send direct GBP payments to UK bank accounts, invest in S&P 500 stock, acquire select cryptocurrencies, and access stablecoin payment rails with USD bank accounts. Xapo Bank has been regulated by the Gibraltar Financial Services Commission since 2021 and could offer certain services in the UK but was not a regulated UK bank until now. Xapo Bank Seamus Rocca said “This means we are allowed to offer our banking services directly to the UK market. Achieving this is no easy feat and shows we meet the UK’s high regulatory standards,” “We are eager to expand our membership in the UK, assisting valuable members in diversifying their wealth through bitcoin and secure banking.”
Payments processor Stripe announced that it was working with with crypto exchange Bitstamp to accelerate its expansion in the European Union by making fiat-to-crypto on-ramp easier for users. Stripe offers a customisable widget that developers can embed into their product to allow conversion of crypto and instant settlement of transactions. The widget won't be available to U.K. customers, the two companies said in a press release. Bitstamp will help the fintech firm manage fiat-to-cryptocurrency conversion and transfers to consumers. This, in turn, will expand the crypto exchange’s Bitstamp-as-a-service product, the white-label version of its crypto trading services to banks and fintechs.
According to the latest Exchange Review report from CCData, spot trading volumes rose by 14.3%, totalling $1.44 trillion, while derivatives trading volumes saw an increase of 21%, reaching $3.50 trillion. The share of the derivatives market climbed to 70.9%, the highest level recorded since December 2023. The report cites several factors for the uptick in trading volume, including the launch of spot Ether exchange-traded funds (ETFs) in the United States and positive sentiment from US political figures at the Bitcoin conference in Nashville, Tennessee. report highlights Bybit as a standout performer in July. The exchange’s spot trading volume increased by nearly 23%, reaching $132 billion. This figure represents the third-highest monthly volume in Bybit’s history, boosting its market share to a record 9.18%. Read the full report HERE.
Institutional Corner
Top stories from the big institutions
Robinhood’s crypto transaction-based revenues increased 161% year-on-year to $81 million in the second quarter. The $21.5 billion in trading volume was a 137% increase from Q2, 2023, but a 40% fall from the Q1, 2024. Robinhood attributed this to a downward swing in monthly active users in Q2 as crypto prices fell. Robinhood CEO Vlad Tenev said “When the crypto markets are hot there’s a huge immediate spike in monthly active user engagement metrics but then when crypto cools down that tends to drop more.” Robinhood saw a 27% drop in total customer trades and 18% fall in the average notional trading volume per trader. Still, Robinhood’s $81 million from crypto revenues was more than double what it made from equities in Q2. Their The largest revenue stream was options, which which accounted for $327 million in revenue. Read the full release from Robinhood HERE.
Charts of the Week
Because charts are just as important as macro.
BTC Dominance at its highest level since April 2021. Hat tip to me for the chart!
Bitcoin perpetual futures open interest saw the largest daily drop since August 2023, on Monday. Hat tip to Kaiko Data 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!
FinCrime Manager for Crypto at Revolut
Validator / Blockchain Infrastructure Manager at Jump Crypto
Lead Go Developer for Hybrid Crypto Trading at Totally
Senior Manager, Treasury and Finance Strategic Initiatives at Crypto.com
Customer Success Manager at One
Product Manager - DeFi / Earn at Trust Wallet
Director, Product, Earn and Wealth at Kraken
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.