The price of a good is a function of the value of both of the items being exchanged. Most often, that is a form of “money” in exchange for a good or service. Over time, we have been conditioned to think that “dollars are stable” and that price fluctuations in goods or services are not necessarily a reflection of the value of the “dollar” itself, but rather a reflection of the changes in the perceived value of what is being exchanged.

For example, when a home increases in value over 2 or 3 years, people don’t intuitively think that the “dollars” in which the house is priced in have become less valuable - they tend to attribute the rise in price of the home to an increase in value due to “rising immigration” or “gentrification of the neighborhood”. In reality, the change in price of the home is a function of both the changes: in the value of the “dollars” in which it is priced, and the house itself. 

People that grew up in an inflationary market, like myself, have learned forcefully that a good can go up in price astronomically in one currency, but actually drop in price in another currency. We learned that the price of your currency can change faster than the price of a good. Therefore, we think of prices as an incredibly dynamic concept.

As an investor, it is very important to discern the changes in the value of currencies as much as the changes in the value of goods and services in order to reach the right conclusions.

We’ll show why this matters and how it relates to bitcoin with the following example:

The U.S. dollar index (DXY) - or informally known as the “Dixie”, is used to measure the value of the dollar against a basket of six foreign currencies. These are: the Euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona.

Since October of 2022, the U.S. dollar index has dropped by more than -8%. As we’ve covered in the past, when the U.S. dollar drops in value relative to other currencies, assets priced in USD tend to benefit. The chart below highlights the performance of several assets over the last 3 months - and the same performance holding USD constant over that period for each asset:

As you can see from the chart, once we add back the USD variability to the respective assets, we see a much clearer picture of the “true” performance. This shows how the variability in a currency can make some asset returns look “better” than they would, and others “worse off”. 

In the case of Bitcoin and cryptocurrencies, the drop in the U.S. dollar index has shouldered some of the pain and uncertainty that has been introduced by recent events, and it is likely playing a role in the current rally. For context, here is the historical correlation between the U.S. dollar index and bitcoin prices over time. 

The inverse correlation between the U.S. dollar index and bitcoin prices are clear as water.

Of course, there’s a lot more that goes into calculating the price of an asset. But all things being equal, a cheaper dollar means more expensive bitcoin in dollar terms. 

Then why is bitcoin dropping when the U.S. dollar index is also dropping?

The answer typically has something to do with risks or changes being experienced in that particular asset class and not in others. In the case of bitcoin, and crypto more broadly, there are several forces impacting this industry that are not present in others:

• Multiple multi-billion dollar frauds and bankruptcies that impacted millions of clients
• Damaged investor morale/confidence (stems from 1)
• Potentially more bankruptcies to come (DCG/Genesis)
• Regulators working overtime to create frameworks for the industry
• Negative media coverage

The reasons above could serve to justify the negative performance of bitcoin relative to the other assets mentioned. 

Similarly, U.S. equities are facing the pressure of higher interest rates, and a Federal Reserve that consistently reminds us that they do not like market rallies in this environment.

But the same pressures are absent in the gold and copper markets. In these assets, we can better appreciate the tailwind that is the drop in value of the U.S. dollar index. 

As the bitcoin and crypto industry heal from the factors mentioned above, bitcoin should start trading closer to its inverse correlation with the U.S. dollar index.

Why is this important? Let’s take a look at the U.S. dollar index chart over time:

A few things to note here:

1. Dating back to 1976, we can see that the U.S. dollar index has been making “lower highs” on the chart and “lower lows” over time. The long-term trend is for a weaker U.S. dollar over time.
2. Every time we have seen a parabolic rise in the U.S. dollar index, it has been followed by an equal or similar parabolic drop, and returning to the original price before the rally.

As the Federal Reserve approaches its “terminal interest rate”, meaning that they don’t plan to raise rates beyond that, investors are starting to think (and position) in the opposite direction. Owning U.S. treasury bonds is great when rates are high, but risk assets historically have better returns when rates start to drop. Investors expect the Fed to reach its terminal rate this year and beyond that, to start cutting interest rates. We are approaching the “peak bonds” moment, and this could bring more weakness to the USD, which could act as a tailwind to keep markets stable.

S&P 500

Markets rallied and bond yields dropped last Friday after a stronger-than-expected jobs market ticked “all the right boxes” for the Fed. It showed more job creation than expected while also showing a reduction in the rate of wage increases (i.e. less inflationary pressures/expectations). 

However the real test for markets could be in the upcoming Q4 2022 earnings season, which kicks off Friday with banks. 

As a preamble to this earnings season, Goldman Sachs is reported to be doing its biggest layoff since the great financial crisis. 

This may foreshadow a difficult quarter and forward guidance for banks. Investors are showing similar concerns for the energy sector, with such high volatility on oil over last year. 

Lastly, when it comes to retail sales, well… this chart can say it better than I can:

U.S. business inventories are incredibly high. And, as is evident from the chart, it appears to be rolling over. Don’t be surprised if you start seeing more “deals” and “sales” at your local retailers as businesses look to turn over their inventory buildup.

All this to say, the weeks ahead could be quite volatile in the equity markets.

Gold

Gold prices soared +2.32% last week and is now up by more than 4% in the last 3 weeks. As we’ve been covering here - there’s been growing momentum for gold within the investment community, but commodities strategists have also pointed out a new “mystery buyer” that could be driving the recent rally.

Over the weekend, the Chinese Central Bank announced that it had purchased 30 tonnes of gold for its reserves. 

This follows a previous 32 tonne purchase in November. As we have been covering amply here, this is a trend that should continue as Central Banks look to divest their reserves away from other government’s debt.

It’s been a quiet week in DeFi land. Last week ethereum in bitcoin terms rallied by more than 4% to 0.075 BTC/ETH. 

Generally speaking, altcoins have caught a bid with tokens like Compound, Maker and even Solana all rallying in double digits last week. Given the extreme losses a lot of these have experienced, and a crowded short trade, the rallies are not surprising - but it’s whether they can hold on to the gains in the weeks to come.

Difficulty Commentary 

The publicly traded miner Core Scientific, which filed for Chapter 11 bankruptcy in December, has been on centre stage last week, with a couple of big headlines involving them.

The first one was that they announced they would be shutting down all of Celsius’ crypto mining equipment. The 2 firms have been in litigation over a 2020 hosting contract and Core Scientific claims it is costing them $2 million per month in revenue. 

They also announced a new $17 millionM loan from none other than BlackRock, one of the world’s largest asset managers, which is part of the ongoing restructuring proceedings. 

It is encouraging to see that BlackRock, which is the largest shareholder according to FactSet data, continues to support a bitcoin miner as they restructure. It shows that they have not written off the investment and believes it has a future.

The Week Ahead 

Everyone’s back at it this week and it will be packed with market-moving economic data and events. On the macro side, our beloved Fed member speeches are back, with Jerome Powell headlining on Tuesday and 2 other Fed members during the week. On Thursday we’ll get a read at U.S. inflation with CPI data for December. Expectation here is for inflation to come in lower at 6.6%, down from November’s 7.1%. We will also get the U.S. Federal Budget which should kick start a conversation about the debt ceiling debate. Last, but certainly not least, we get the start of U.S. equity season with financial giants like JP Morgan Chase, Bank of America, Wells Fargo, BlackRock and more reporting on Friday. Details below.

On the bitcoin side, the stalemate continues with Genesis/DCG and its creditors. Over the weekend Coindesk reported that the DCG conglomerate, which includes Genesis, was being probed by the Department of Justice. This should most certainly put a wrinkle on any fundraising efforts by DCG. 

There’s also momentum building around a movement by existing GBTC (Grayscale Bitcoin Trust) investors to allow the fund to redeem units for bitcoin. For context, until now, investors could only buy units in the fund by converting BTC to units, but the fund does not currently allow for units to be converted back to BTC. A recent group formed by David Bailey called RedeemBTC.com has reportedly rallied over 20% of GBTC investors together over the past 3 weeks - and it continues to grow.

While the situation may not get resolved imminently, it will continue to generate headlines that could move markets.

As always, here’s a summary of the events and data that could move markets in the week ahead:

Tuesday

09.00 AM EST - Fed Speech - Jerome Powell, Chairman of the Federal Reserve.

Thursday

07.30 AM EST - Philadelphia Fed President Patrick Harker speaks.

08.00 AM EST - St. Louis Fed President James Bullar speaks.

08.30 AM EST - Consumer Price Index for December. Analysts expect a 6.6% year-over-year number for December, down from 7.1% in November. 

08.30 AM EST - Core Consumer Price Index for December (excluding food and fuel). Analysts expect a year-over-year increase of 5.7%, down from 6.0% last month.

08.30 AM EST - Initial and continuing jobless claims in the U.S. The expectation here is for a slight increase in initial jobless claims from 204,000 last month to 210,000.

02.00 PM EST - U.S. Federal Budget data.

Friday

Earnings Reports: JP Morgan Chase, Bank of America, Wells Fargo, BlackRock, Citigroup, The Bank of New York Mellon

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.Notice for U.S. Residents: Effective April 4, 2022, U.S. clients will no longer be able to earn interest on any newly deposited funds in their BTC and/or USDC Savings Accounts, where available; however, they will continue to earn interest on their pre-existing balances in their BTC and/or USDC Legacy Savings Accounts.