Bitcoin and equity markets rallied in the aftermath of the Fed’s 75 bps interest rate hike last wednesday.
As we mentioned last week, the market got all the clues it was looking for to find some relief and move higher. The Fed signalled that it is not looking to shock the markets further - and said that future rate increases would be more gradual and determined by economic data.
In short, it signalled that it will stop hiking aggressively - for now.
This was enough to make the interest rates on the 5-year and 10-year notes to drop, lowering the real return of the U.S. dollar.
As the dollar weakened, equity markets and bitcoin got a tailwind and moved higher.
As we’ve also covered here - bitcoin is closely correlated to the size of the monetary supply.
As Lyn Alden pointed out in the chart above, this is the longest period of non-growth of the monetary base since mid-2009 and mid-2003. While growth on the monetary base is held in check for now - the long-term trend is very clear.
Another development that made waves was the fact that open interest on Ethereum options has surpassed that of bitcoin for the first time ever.
The hype around ETH options comes in anticipation of the Merge to Proof of Stake which is anticipated to happen in September. More on this in our DeFi section of today’s blog issue.
Moving over to bitcoin fundamentals and the derivative markets - first a look at the funding rates for perpetual futures swaps on bitcoin.
As you can see from the chart, the funding rate can be a great sign of investor sentiment. Currently, we find ourselves in negative funding territory - meaning there are more short investors than long investors - and they are paying to be short - meaning they are not doing the carry funding trade (buy spot, short the perpetual future). In other words, investors are paying for downside protection for bitcoin on the perpetual swaps markets.
Also of interest, the discount on GBTC shares reached a new record low of -35%.
Investors could be looking to rotate their holdings from GBTC to other ETF offerings as there seems to be a significant amount of GBTC units subject to the 3AC bankruptcy/liquidation process.
In terms of catalysts for the week ahead, we have relevant corporate earnings from Microstrategy, PayPal, and Block this week.
To wrap up this section, let’s check in on Nigeria and Argentina this week:
In both places, headlines have been what you would expect - the dollar has continued to soar vs. their local currencies.
In Nigeria, the Naira reached a new low in the “free market”:
And, not surprisingly, we continue to see headlines about Nigerians rushing towards digital assets for refuge:
In Argentina, inflation continues to be a real problem for citizens - last week their “official” inflation figures were posted showing 64% annualized inflation for July - the highest in the region (behind Venezuela).
Also, not surprisingly, the Central Bank published a restriction that prohibits those who have purchased bitcoin or cryptocurrency from purchasing dollars at the official rate from the government (the artificially cheap ones).
The government already shut the door for Argentinians to protect their savings, now it is going after the small windows and cracks. In my lifetime, these types of restrictions don’t stop until there is a change in government.
Equity markets had a good week last week on the back of the Fed’s decision. The drop in the 5 and 10-year yields boosted tech company valuations helping the Nasdaq and the S&P 500 return to the mean on their 6-year upward trend.
As described in the Bitcoin section, the Fed mentioned that subsequent interest rate increases would be based on data - and the data that everyone focused on was the “Prices Paid” component in the Institute for Supply Management’s Purchasing Managers Index.
Why this data is interesting, is because this peculiar component happens to precede Gross Domestic Product by about 4 months as per the following chart:
While this is actually bad news for the U.S. economy, markets rallied on the news - because it means that the Fed’s efforts are finally starting to take its toll on the manufacturing sector.
This makes this week’s non-farm payrolls data very interesting. The Fed has openly stated that at this time, it is a one-mandate Fed, focused squarely on bringing down inflation. However, once unemployment starts rearing its ugly head, public pressure can be quick to make politicians recalibrate their priorities.
In terms of earnings season, this week we get Microstrategy, Paypal, and Block.
Gold also benefited from dropping bond yields and the recent relative weakness in the U.S. dollar - booking a second consecutive week in the green.
Additionally, it also got a tailwind ahead of Nancy Pelosi’s planned trip to Taiwan, which has elevated China-U.S. tensions. As we’ve covered here in the past, gold tends to benefit in uncertain geopolitical environments.
With an ongoing war in Russia and tensions rising in Taiwan, coupled with a Fed that is signalling a potential slowdown in hiking rates, and you get a cocktail of circumstances that could allow for gold to stabilize or move higher in the months to come.
This is somewhat inconsistent with fund manager’s current positioning on gold - which is at the lowest level since 2018.
In the DeFi front, ETH and its main application tokens continue to show a strong momentum finishing last week +1.81% vs BTC and with DeFi Index slightly outperforming ETH. We had big volumes for ETH options expiration last Friday and Ethereum developers confirming the date for Goerli - the final testnet merge to the Beacon chain, being one of the drivers of the positive performance:
As covered last week, the Merge narrative is getting louder, especially after Ethereum developers confirming the main upgrade to mid-September. We will keep a close eye on this topic as the narrative develops and the final date approaches.
On the stablecoin field, Aave DAO approved the proposal to launch its overcollateralized stablecoin GHO as confirmed by Aave community:
As explained in the proposal, GHO will be offered to Aave users to be minted against a diversified set of crypto assets collaterals. And GHO holders will continue to earn interest on the supplied collateral, just like other lending transactions on Aave. At first, this new product will only be available on Ethereum blockchain where it holds most of its nearly $7B TVL.
After some public miners reduced their BTC holdings on their balance sheets, it would appear that miners are back again accumulating, as indicated by Glassnode's miner net position change.
According to data from The Block, Bitcoin miner's revenue came at $585 million for the month of July; representing a ˜16% drop from June's numbers.
During July, the total hash rate also fell below 190 million TH/s for the first time since March.
Although some public miners are not finding the space to be profitable right now, others have continued to excel; e.g. Bitfarms. The company has steadily increased their production throughout the year. In July, they mined 500 BTC, representing a 66% increase compared to January; as reported by Arcane Research.
In a bold and dangerous move, Chile is proposing to rewrite its constitution months after electing a populist leader. As a Venezuelan, I can’t help but feel worried, as asking to re-write the constitution shortly after an election is, perhaps, the single biggest red flag that I can remember from the Chavez era. As part of the new draft, the new constitution would allow the sitting president to get re-elected consecutively (previously not allowed in Chile). This, among other changes in the law-making process, are the subtle changes that slowly turn a politician from a soft democrat to a hard authoritarian.
As things go in Latin America, the promises of equality, social and environmental justice will be too tempting for the populous not to pass. Hidden within the web of articles, will be the complete restructuring of its institutions, and the very pillars of its society.
Most importantly, it literally resets the boundaries of what is possible for a brand new leader. He got to re-write the rules that govern the entire country within a month of being in office. After the new constitution gets passed, that shows him that there is _literally_ nothing he cannot do.
Now the question is, where do we go from here?
As we’ve covered extensively here, this issue is not limited to Chile. Look at the chart below, 80% of the world economy is experiencing inflation above 6%. It’s the highest level historically reached since the 70s and 80s.
The following chart shows another interesting insight.
This chart shows the value of residential real estate relative to the size of each continent’s population. Now, some might look at this chart and see over-financialization of assets in the western world. I look at this chart and see the unequal distribution of property rights across the world.
See - a person currently in Chile, having seen what happened to large landowners, farmers, and landlords in Venezuela, would likely be looking to place its assets for sale and start looking for places to buy in Miami. As per the article we covered a few weeks ago.
How does this impact bitcoin and crypto markets? Not everyone in Chile will be able to afford a house or condo in Miami. For them, a practical option would be to protect their savings via stablecoins and to build a bitcoin position in their portfolios that they can earn interest with and borrow from.
Now, here are the earnings and announcements that could move the markets in the week ahead:
Earnings: Microstrategy, Paypal
Earnings: Robin Hood
8.30 AM EST - Non-Farm Payrolls (U.S. labour market update)
It's a big week coming up, and as always, we'll keep you posted on any relevant news throughout the week right here and from our Twitter account.
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About the author
Mauricio Di Bartolomeo
Mauricio is the co-founder and Chief Strategy Officer of Ledn.io. He grew up in Venezuela where he and his family learned about Bitcoin. Now based in Canada, Mauricio holds HBA and MBA degrees from the Richard Ivey School of Business in London, Ontario in Canada.