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Week of Monday August 2nd to Sunday August 8th.
Bitcoin: Bitcoin closed its second consecutive week of gains on sunday. Closing higher by +12.45% at $39,893 - on increasing volume. While close was below the $40k level, it was still the highest weekly close since the week of May 10th.
The rally caught many off-guard, a lot of this volume came from short liquidations.
According to Arcane Research, $750 Million worth of shorts were liquidated last Monday. This is the largest bitcoin short squeeze ever recorded in one day.
The increased volume of liquidations may also be due in part to the proliferation of USD collateral-based bitcoin derivatives. In the past, most bitcoin derivatives were collateralized with bitcoin, making liquidations more difficult as the collateral value rose in parallel with the loss in value of the short position. However, when the collateral placed is dollars or stablecoins, the liquidations happen much faster as the collateral value remains static as bitcoin price rises.
The move higher has placed all futures curves across major exchanges in contango (future prices are trading higher than spot) - all of the backwardation that we saw over the last few weeks is gone.
The implied basis on the bitcoin futures in the CME remains low in absolute terms, but did tick higher on the move. This suggests that, while demand for futures grew, there are institutions arbing down that yield by taking the other side of the trade. They are happily selling the futures at a ~2.5% premium, and buying spot bitcoin to hedge the trade.
And it’s not just institutions that are participating in the rally. Data from Glassnode shared by Willy Woo, an on-chain analyst and trader, suggests that bitcoin holders with less than 1 BTC have also been accumulating during the recent move.
Market conditions are looking healthy overall - and bitcoin does seem like it is preparing to make another move higher.
Venture capital investments in the industry are hitting record levels.
The third quarter of the year may well dwarf the $4.4 billion that were invested in Q2. FTX and Fireblocks alone have already announced rounds amounting to more than $1.2 billion in funding. Over time, more and more traditional institutions get skin in the game. With such exposure comes a vested interest in the long term success of the industry.
Looking ahead, it should be an interesting week as Google begins accepting advertising for bitcoin/crypto wallets and exchanges as of Tuesday Aug 3, 2021. This should bring increased attention to the industry as companies look to deploy their advertising dollars and increase awareness.
Outside of price action, it was great to see some positive mainstream media coverage around bitcoin in Nigeria from The Guardian.
The article highlights how bitcoin is helping merchants and other segments of the Nigerian economy keep their businesses running in light of unfair capital controls. While it highlights how it is “creating problems” for the government, it focuses on how it is “solving problems” for real people.
Elsewhere, the elephant in the room is the potential “crypto” regulation that was introduced last week in the U.S. as part of the bipartisan infrastructure bill. We will discuss how this could affect bitcoin and crypto markets in general in our What’s Ahead section later today.
S&P 500: It was a week of narrow trading for most indices with the S&P 500 finishing lower by just -0.11% at 4,403. The Dow Jones and the Nasdaq finished down -0.36% and -1.01% respectively.
The Fed announced that it would hold the target of 0-0.25% on the benchmark rate. It also announced that it was a long way from stopping its bond purchasing program. Under the current program, the Fed is spending at least $80 billion on Treasury bond purchases and $40 billion on mortgage-backed securities each month.
Last week we covered how the Fed keeps interest rates on treasury bonds low by participating in the treasury bond market. You may be wondering - how does that translate to my mortgage rates being so low? The answer is also the Fed. In addition to treasury bonds, it also buys mortgage-backed securities, which are just bonds made up of a bunch of mortgages. This backstops that market and ensures that there will always be a liquid market to sell “mortgage bonds” - encouraging banks to underwrite new mortgages.
To put things in perspective, if we assume an average mortgage of $250k, then the Fed’s $40 billion/month equates to approximately 160,000 homes/month. According to the U.S. Department of Housing, there were 676,000 new homes sold in the month of June. This means that the Fed is purchasing an equivalent of 24% of all new mortgages underwritten in the U.S. per month in the form of mortgage-backed securities.
Don’t be surprised if we start to hear about a “real estate bubble” soon. On a very similar thread, we covered here how investors such as Lyn Alden expressed that rents would be rising rapidly in the coming months.
Like clockwork, recent data suggests that median rent price is rising to the tune of 3% in the top 100 cities in the U.S. This will impact inflation readings and should keep that number “sticky” over 2%.
The Fed’s current reserve repo facility topped $1 Trillion for the first time ever - showing how much demand there is for “safe yield” in money markets. The Fed’s facility pays 0.05% and is overflowing. In its statement last week, the Fed also said that it would be opening up 2 more standing repo facilities and it would make one of them available to central banks internationally.
It’s a quiet week in terms of Fed activity but we get an in-depth look at the jobs market this week with the July unemployment rate. The Fed follows this rate as closely as it does inflation. We go over the announcements in detail in our Whats Ahead section.
Gold: It was a positive week for gold, moving higher by +0.71% at $1,814/oz.
We have covered here that gold is inversely correlated with the real returns of treasury bonds. We also covered how the Fed acting in the bond markets and real inflation running higher could benefit gold in the coming days.
Last week gave us a perfect example of that dynamic at play.
During the last 7 days, the real returns of 10-year treasury bonds broke a new low, and gold moved higher in that same timeframe.
If this dynamic persists, it should continue to drive gold prices higher - along with most other assets.
DeFi: It was a very positive week price-wise for the DeFi index, closing higher by +17.44%. Ethereum also had a positive week finishing higher by +16.51% at $2,556.
The big news in the DeFi space came from none other than Goldman Sachs, who filed for a DeFi & Blockchain ETF last week.
While the headlines sparked a conversation around what the underlying investments would be, and whether those could be considered “DeFi” or not, the main point here is that Goldman sees investor appetite in the concept of DeFi. Beyond the specifics, this is a very powerful investor appetite signal.
There is a lot of uncertainty around how the potential new regulatory framework in the U.S. will affect DeFi. While volatility could be in the cards, many investors seem continuously willing to take the risk.
Difficulty Commentary: Bitcoin mining difficulty had a difficulty increase during the last adjustment for the first time since May, when the crackdown in China started.
During Saturday’s adjustment, difficulty went up by +6.03% to 14.49 TH. While still well off the all-time highs, it appears that hashrate has stopped leaving and is now coming back.
Transaction costs have remained quite low throughout the rally. On-chain transactions don’t get much cheaper than this.
What's ahead for the week:
The U.S. infrastructure bill that is making its way through congress has introduced a regulatory framework for crypto and stablecoins. This is a big deal for several reasons. The main one is that both parties want this infrastructure bill to go through. This gives it a very high probability of passing in some way.
The proposed changes would essentially require all industry participants (from companies to protocols) to properly identify their counterparties and to report the transaction for tax purposes.
To be abundantly clear - the industry should seek to clarify this framework to ensure that miners, developers and end users retain as much privacy as possible to continue developing the community and industry.
The move to regulate the industry will certainly introduce challenges around privacy - and that has - rightfully, been a big focus around the conversation. And while regulation may create challenges around privacy, it also comes with benefits to the industry and end consumers. The benefits come in the way of consumer protections, and a clear framework for more companies to adopt this technology and operate at high standards to offer services to a broader audience.
One of the main reasons that billions or people and trillions of dollars have not poured into the space was the lack of regulatory clarity. Having a clear framework in the largest economy in the world should be seen as a testament to the industry’s success.
We will do everything we can to directly or indirectly support the shaping of a fair and open regulatory framework that allows our industry to flourish.
We will also continue to monitor any developments and share how we believe they could impact the industry and markets in general.
As always, we wrap up with a summary of the upcoming economic data and earnings reports for the week:
Google starts accepting bitcoin/crypto exchange and wallet advertisements.
The main event on Wednesday is the ADP Unemployment report that comes out at 8.30 AM EST. The Fed is closely mirroring the unemployment rate as a barometer for the economic recovery. Look for the market to cheer a number above 628,000 unemployment claims and potentially sell off with a lower number.
Uber and GoDaddy report
GameStop will join the S&P 400 MidCap index on Wednesday.
DropBox and Square report.
Continuing and Initial Jobless claims are also scheduled for 8.30 AM EST.
The main attraction will be the unemployment report due at 8.30 AM EST. Analysts expect the unemployment to come in at 5.7%. Look for the market to cheer a higher number and potentially sell off on a lower number.
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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