Investors Soak Up Coinbase Bonds - Sept 20, 2021

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The Bitcoin Economic Calendar:

Week of Monday September 20th to Sunday September 26th.

Market Commentary:


Bitcoin: Bitcoin finished last week higher by +2.63% at $47,245. From a relative strength perspective, it was one of the few assets that finished the week in the green. Most equity indexes, along with gold, ethereum and the DeFi index all finished the week lower. 

From a technical perspective, bitcoin continues to trade right within the ranges that we defined a few weeks ago at $48,800 and $46,000. The first one acting as resistance and the later as support. There are also support and resistance levels further out at $43,000 and $51,000 respectively. We are seeing bitcoin test the lower support level this morning, trading as low as $42,500 but now back over $43,000.

Also this week, option contracts representing over 71,500 BTC are expiring on Friday. There are a couple of factors to keep in mind here, as they make this particular expiration week rather special. 

As you can see from the above chart, the buildup in contracts for September expiration is the largest for the year so far. This is partly because it is a quarterly expiration. Quarterly options tend to be the most liquid because they are the most common among options platforms. 

Another interesting insight we can draw from the options market is the recent disconnect between implied volatility and realized volatility. 

While this sounds fancy, you can think of implied volatility as how much the option market “thinks” BTC is going to move, and realized volatility is how much the price “actually” moves. 

The current divergence between the two is noticeable. If we look at historical patterns, realized volatility tends to converge to implied volatility. In other words, implied volatility can sometimes act as a leading indicator of realized volatility. According to the above graph, the options market seems to be expecting a big move in BTC soon. 

In summary, there is a large concentration of open call contracts over the $50k strike - which means that market makers will try their best to keep BTC price under that level until end of day Friday. However, if price rises above $50k, it could catapult higher as makers are forced to hedge their risks by buying more bitcoin on spot - therefore “squeezing” price higher.

Another insightful market event from last week was Coinbase’s bond sale. 

The company’s original offering was planned for $1.5 Billion. After receiving offers for $7 Billion, it was able to increase its offering by 25%, to $2 Billion. There are 2 bond offerings, one maturing in 2028 and another one in 2031, with 3.25% and 3.65% interest rates respectively.  

Interestingly, Standard and Poors rates Coinbase's bonds as “junk”, yet they were more than 4X oversubscribed. Institutions are fighting to get a piece of Coinbase debt. Other publicly traded companies will certainly take notice. 

S&P 500: Last week we saw a continuation of the risk-off trend with all major indexes finishing lower and the U.S. dollar index rising. The S&P 500 had its second consecutive week of losses finishing down -1.15% at 4,418. The Dow Jones and the Nasdaq gave back -0.07% and -0.67% respectively.

The Evergrande story continues to grab headlines as the market (and the Chinese government) brace for a potential default. 

The U.S. dollar index rose by +0.65% and the MSCI China Index dropped by -4.15% last week. Evergrande is scheduled to make interest payments this week, it likely will not be able to do so - and the market could continue reacting negatively. 

The big market event this week in the U.S. is the Federal Open Market Committee meeting being held by the Federal Reserve. Jerome Powell will give a press conference on Wednesday and it will be interesting to see if they reference any risk of financial risk contagion from China. 

To highlight how contagion is spreading to other markets, let’s take a look at an example. 

When the Chinese real estate market suffers, the entire supply chain suffers with it. Builders need a lot of raw materials (commodities) to build. Australian mining companies are large suppliers to the Chinese market. Rio Tinto is an Australian-based mining company.

It is down -23.51% over the last 5 weeks. The velocity of the drop seems to be accelerating with the stock losing -7.02% last week.

Elsewhere in the Chinese markets we are seeing bond values for other real estate developers come down aggressively. 

The precipitous drop in bond prices is causing a liquidity crisis in China, forcing the Central Bank to pump $14 Billion into the Reverse Repo market. 

To explain why Central Banks do this - they lend cash to banks in exchange for select securities as collateral, typically Treasury bonds. This prevents banks from having to liquidate Treasury bonds to replenish their cash reserves. Selling bonds drives bond prices down and yields higher. This is the first sign that China is trying to prevent the contagion from hitting its banks.

Developments from both the Fed and Evergrande will continue to keep investors on their toes.

Gold: While gold typically does well in times of financial uncertainty, the recent slowdown in the pace of inflation and the fears of financial troubles in China seem to have pushed investors to seek shelter in the U.S. dollar and certain U.S. treasury bonds over gold. Gold finished the week down -1.91% at $1,745/oz. 

As we mentioned, the U.S. dollar index rose by +0.65% last week, and so did the yield on the U.S. 10-year treasury bond - closing higher by +2.01%.

Gold tends to suffer when the real return of U.S. treasuries moves higher. As a reminder, real return is calculated by subtracting the annualized inflation from the bond’s yield. As yields move higher and inflation moves lower, real returns on treasuries will rise and gold could continue suffering. 

The big catalyst for bond yields that could impact gold will be the FOMC meeting this week.

DeFi: It was a rollercoaster week in the DeFi space with the DeFi Index closing the week down -2.25% for its second consecutive down week. Ethereum also closed its second consecutive down week finishing -2.27% at $3,328.

There were several relevant events that happened during the last week. A meaningful one in terms of mainstream media awareness was the fact that The Economist dedicated the cover of its most recent issue to DeFi. 

The article is interesting in that it examines the potential benefits and risks of DeFi and presents the space as a potentially promising area within the crypto landscape. This is somewhat unusual for mainstream media - and a change for the better. 

Another news that impacted markets was the fact that OpenSea, the largest NFT trading platform, admitted that one of its employees had been trading with insider information.

It’s a big blow to the growing NFT community and something that may have more enduring consequences for OpenSea. It is one of the first large-scale scandals within the NFT space and it will be interesting to see how the market and the community react. 

Lastly, Solana, which had been rising for 8 consecutive weeks had its first down week - finishing down -12.29% as it suffered a significant outage last week.

The network was down for 17 hours on Tuesday as it was flooded by transactions and suffered the outage due to “resource exhaustion”. 

Difficulty Commentary: Our next difficulty adjustment should become effective sometime this evening (EST), and is projected to bring difficulty higher by +3.30% to 18.99T THs. 

Checking in on the mempool, transacting remains very cheap and fast - with next block confirmations hovering around sub 10 satoshis/vbyte. 

The crackdown against miners in China has not lost its intensity, with the government now targeting miners that are “disguised as data researchers” and/or secretly mining bitcoin.

Perhaps the Chinese government thought it was opportune to let miners know that they are still very much after them - regardless of anything else that may be happening in the country. 

Any miners at scale left in China would be foolish to not try and reestablish their operations elsewhere.

What's ahead for the week:

Fall starts this week and it already looks promising for bitcoin ETFs. There has been a lot of action on that front recently - with evidence of a potential approval sometime between October 18th, and November 1st. 

The approval calendar below is courtesy of Eric Balchunas, ETF analyst at Bloomberg. 

As we have mentioned in recent issues, the SEC has signalled that it will likely be approving a futures-based bitcoin ETF before a physically-held bitcoin ETF.  The first such application up for approval is Valkyrie’s - due for a decision on October 18th. We could be celebrating more than the 14-year anniversary of the whitepaper next month. 

Beyond Valkyrie, other ETF applicants - like Fidelity, are trying to make every effort to try and get their applications approved as well. 

With the GBTC premium still trading at ~15% discount to Net Asset Value, investors seem to think that the fund is unlikely to become an ETF anytime soon.

As always, we wrap up with a summary of the upcoming economic data and earnings reports for the week:


8.30 AM EST - Existing Home sales in the U.S. (August)

Expectation is for 5.99 million sales - however, investors will be more interested in the pace of price appreciation in U.S. real estate. The median existing home sale price for August rose by 17.8% on a year-over-year basis. The market will likely cheer a slower year-over-year number for September and vice versa. 

2.00 PM EST - Federal Open Market Committee meeting statement

2.30 PM EST - Jerome Powell press conference

Powell’s press conference on Wednesday will likely be the main event of the week. Investors will likely get to hear more details on the Fed’s tapering plans. A big surprise would be if the Fed were to say that it already has started tapering. This would explain some of the recent divergence in price action between the 10-year and the 30-year treasury yields. 

It will also be interesting to see if the Fed makes any reference to potential headwinds from Chinese markets. 


8.30 AM EST - New Home Sales (expectation for 708,000 new home sales)

The number of net new homes here will be important as it will put the Fed’s current $40 Billion per month purchase program of mortgage-backed securities in context once again. For reference, the Fed’s $40 Billion represents about 25% of all net new mortgages for all new homes sold in the U.S. 

We will also get to hear from the Fed on how it intends to taper this program. The tapering should put upward pressure on U.S. mortgage rates which could have a cooling effect for the real estate market.  

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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