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Week of Monday July 19th to Sunday July 25th.
Bitcoin: Bitcoin closed the week down -7.24% at $31,776. It was the lowest weekly close for bitcoin since the week of December 21st, 2020. Bitcoin started the year at ~29,000. The current price represents a ~+10% increase year-to-date. For context, gold is down approximately -7% year to date and the S&P is up ~+16% in the same period.
A quick update on the GBTC trade - the number of bitcoin under management that the fund holds remained unchanged during last week. We will continue to monitor this throughout the rest of the month.
Looking at the futures curves, we continue to see backwardation in several of the major platforms - with many showing the September contract just a few dollars above current spot prices.
Bitcoin generally tracks inflation expectations, and it has been correlated with the yield on the 10-year treasury note so far in 2021. Even in the face of June’s higher-than-expected inflation reading of +5%, the yield on the 10-year treasury note dropped -4.13%.
Yields in bonds drop because buyers bid up the price of the bond, therefore reducing the implied interest that the bond pays at maturity.
Who is buying treasury bonds at these levels - and why?
The chart below by Tyler Neville shows that the Fed has roughly been purchasing as many bonds as the Treasury issues.
In other words, the Fed has been purchasing all of the bonds that the Treasury offers for sale. Doing so keeps interest rates low and signals to the market that “investors” agree with the Fed and their “transitory inflation” view.
What does this mean? It means that the real inflation pressures in the market are likely still at play - and that treasury yields could be much higher if the Fed was not intervening by making purchases.
Headlines like the one above “Palm Beach Median [Home] Sales Price Doubles in the second quarter” signal that asset price inflation is still alive and well in the U.S.
How does this affect bitcoin? We have covered here that bitcoin tracks inflation expectations, and the Fed is doing everything it can to keep those expectations at bay. It is doing so by tactically participating in the market, and keeping a consistent narrative.
While all of this should be putting upward pressure on bitcoin, we do have some market dynamics that are also keeping that at bay. For one, we have the crackdown in China, which is bringing down volumes globally.
In addition to that, we have the ongoing scrutiny on Tether, which we detail at length in our What’s Ahead section.
And last, but certainly not least, there are still remaining signs of excesses in the market, and some assets that are yet to capitulate - a great example is Dogecoin. We break this down in our DeFi section.
These forces are netting out to negative price pressure on bitcoin, and the same may continue for the remaining months of summer.
S&P 500: Last week handed the S&P 500 it’s first down week after booking 3 consecutive all-time highs in previous weeks. The drop came on the back of a higher-than-expected CPI read for June and earnings reports for several major banks.
As per the headline above, most banks beat expectations - but looking under the hood, there are some signs of concern. First, several of them reported lower revenue in important lines of business, as was the case with Goldman Sachs and JP Morgan’s trading revenue, and Wells Fargo commercial and investment banking revenue.
Second, most of the “beats” on the bottom line come from releasing provisions for future lending losses - which are one-time events. The speed of growth in banking revenue seems to be decelerating from the last quarter.
The week ahead is quiet from a Federal Reserve standpoint, however, there is important economic data and corporate earnings which we cover in our What’s Ahead section.
Gold: It was a pretty flat week for gold, ending +0.16 higher at $1,810/oz. The price action is interesting as treasury yields had a significant drop during the same period. The yield on the 10-year note was down -4.13% after July’s CPI inflation read.
Some of the “narrative” behind the reaction in yield prices, is that most of the increase in the index was attributed to the increasing price of used vehicles in the U.S. Which is considered to be a “supply chain” constraint and expected to blow over like the melt-up (and melt-down) in lumber prices.
Having said that, there are experienced investors like Lynn Alden, who share the view that with soaring home prices, rent - which is a big part of CPI, will be rising rapidly and consistently as contracts roll over, and this will continue to put upward pressure on CPI readings into the fall.
What this may result in, is inflation remaining sticky, and causing the Fed to take action earlier than expected. This does not mean that people expect the Fed to raise rates before the end of the year - but just tapering its purchases of Treasury bonds could cause yields to rise naturally.
If this plays out in the coming months, it could be a favourable environment for gold prices, which tend to benefit when bond yields stay low but inflation rises.
DeFi: It was a rough week for the DeFi index, closing -17.87%. Although bad, it did not make a new weekly low this year and held a key support level at 6,250. Ethereum was also down -11.59% for the week - it was the lowest weekly close since the week of March 22nd, 2021.
Beyond the price action, we saw another exploit headline in DeFi this week. While not surprising, these types of attacks do seem to be getting more common.
The ThorChain protocol lost up to $7.6 M worth of ethereum during an exploit attack. It is worth noting that these types of attacks are not necessarily common in all DeFi protocols, typically the newer ones that have not been “battle tested”.
Looking at the altcoin market for clues of excess, we see that some names like dogecoin still look like they have a lot of room to go down.
While it has been on a continuous slow bleed since Elon Musk appeared on Saturday Night Live on May 8th, there is still a long way down and it seems to be staring at a cliff.
If dogecoin capitulates, it will put further pressure on the rest of the market.
There are still some signs of excesses around the edges that the market needs to fully digest in order to settle and make another leg higher.
Difficulty Commentary: After projecting a drop as low as -9% last week, hashrate started climbing back and the negative adjustment was only -4.81% to 13.67 TH.
While this may not necessarily be the “low” for hashrate, we are starting to see headlines around bitcoin mining asset relocation from China to North America.
Late last week the news broke that Black Rock Petroleum, a publicly traded oil and gas exploration company based in the U.S., plans to operate up to one million miners across 3 natural gas production sites in Alberta, Canada.
Expect to see more of these as opportunistic investors with strategic access to low-cost power in friendly jurisdictions scoop distressed mining assets from China.
What's ahead for the week:
There is an interesting trend emerging within the market capitalization of stablecoins. According to data from Messari, the market capitalization of Tether has dropped by about ~300 Million since June 2nd.
While it is a very small drop in percentage terms (the total market capitalization went from 64.4 B in June 2nd, to a high of 64.5 B on June 27th, and a current low of 64.1 B as of July 17th).
During the same time frame, we have seen USDC’s market cap rise from 22.8 B to 26.4 B - that’s a ~16% increase. The market capitalization of Dai has also increased by ~17% in the same time frame.
Among the forces influencing this market dynamic are the increased regulatory crackdown in China, which is putting pressure on Tether activity, as well (and could also be impacting bitcoin prices). Additionally, there is an increasing amount of scrutiny around Tether in financial media.
Both the Financial Times and CNBC printed headlines around Tether last week - highlighting it’s questionable reserves disclosure.
This has pushed Tether’s dominance, relative to its stablecoin contenders, to an all time-low.
If the current trend keeps up, Tether could represent less than 50% of the total stablecoin market capitalization in the coming months.
It’s a quiet week at the Fed level as they prepare for July 27th’s FOMC meeting. On the economic front, we get a temperature check in the U.S. housing market with building permits and new housing starts on Tuesday.
8:30 AM EST: Building Permits and New Housing Starts in the U.S.
Expectations are for an increase of ~1.6 million. The market may cheer a lower number as it means the Fed may need to keep rates lower for longer as an incentive for building activity. This is a great engine of labour openings, which the Fed desperately needs to get the unemployment rate to its target levels of about 4.4%.
Netflix and Interactive Brokers also report earnings on Tuesday.
Nasdaq reports earnings on Tuesday. It will be interesting to see if investors draw any parallels from Nasdaq and Coinbase activity.
Twitter reports earnings before the bell. We also get initial jobless claims and existing home sales on Thursday.
Look for the market to cheer a number below 5.93 Million in existing home sales and a number above 348,000 initial jobless claims.
American Express reports earnings before the bell.
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 @hodlwithLedn
Canadian Central Banking Updates:
Current Target Interest Rate: 0.00 - 0.25%
Current Overnight Money Market Rate: 0.23%
U.S. Central Banking Updates:
Current Fed Interest Target Rate: 0.00 - 0.25%
Current Effective Federal Funds Rate: 0.09%
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