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Week of Monday July 12th to Sunday July 18th.

Market Commentary:

Bitcoin:  It was another week of narrow trading ranges for bitcoin, closing at $34,258  - down -2.92%. It was the lowest weekly close since February 2021. 

Taking a closer look at  the market, we start to see some interesting patterns emerge. 

For one, the  bitcoin options’s put/call ratio has been dropping significantly since its peak on April 14th. This coincided with the most recent all-time high.

You can think of this ratio as the number of investors looking for downside protection divided by the number of investors looking for upside participation. This number is coming back to historical equilibrium levels as price settles. 

Looking at the perpetual futures funding rates across major platforms, we see that after spending several weeks decidedly in negative territory, funding rates are starting to teeter around 0%. 

This means that people are becoming “less leveraged” to the downside and the market positioning is becoming more neutral. In other words, investors seem to be getting “less bearish”. 

The last time that we had a weeks-long period of negative funding rates was from August 31st to October 19th, 2020. This was the consolidation period from $10k-$13k that preceded the drive  to $20k. 

There are a few futures curves still showing very slight backwardation - with most in contango. 

The takeaway from market positioning going into this week is that investors don’t seem to expect a large negative move, but they are not bullish just yet. More sideways movement  could be in the cards.

S&P 500:  It was a trifecta of all-time highs across market indices. The S&P 500 finished the week higher by +0.52% at 4,372. The Nasdaq was higher by +0.67% and the Dow Jones by +0.24%. Interestingly, the Russell 2000 - which tracks small companies within U.S. equities, is being left out of the all-time high party. 

The all-time highs come ahead of the start of Q2 earnings which start this week. 

With rock-bottom interest rates and a stable dollar, equities could be poised to rally higher if earnings impress. 

Treasury yields had another big drop last week, which helped push equities higher. Investors seem to be telling the Fed that it will not be able to raise rates anytime soon. The upcoming Consumer Price Inflation reading for June - which comes out on Wednesday, has the potential  to significantly move  bond yields, and therefore the markets. 

With this week’s drop, the yield on the 10-year note is now down 23% in the last 99 days. This trend will likely continue if we  get soft inflation readings. 

Gold: Gold caught a big bid last week and closed higher by +1.15% at $1,807/oz.

From a technical standpoint this week’s move was very positive and gold seems well-positioned to extend its run. 

Remember, gold prices inversely track the real return of the 10-year bond, meaning that as bond yields compress and inflation rises, gold should do very well. Conversely, when bond yields rise faster than inflation, gold prices suffer.

DeFi: The DeFi index was among the lone winners in crypto last week, finishing up +2.17%. Ethereum finished the week down -7.98% at $2,138. 

There were a few key developments in DeFi and ethereum last week. A developer created a smart contract to help miners re-organize blocks in order to claim higher rewards. While the practicality of the smart contract has not yet been proven in the wild, the theoretical proposal has started a heated conversation.

Elsewhere in DeFi world, the ChainSwap protocol suffered an attack as a result of an exploit and investors lost USD $8 M. 

There will likely be continued conversation around miner behaviour in ethereum as the network prepares to pivot from proof of work to proof of stake. The move will make ethereum miners - who have been protecting the network for years, obsolete overnight. It will be interesting to see how the community manages throughout this period.

Difficulty Commentary: Last week’s difficulty adjustment worked like a charm. Network fees have remained quite low throughout the weekend.

Hashrate has continued dropping from the network and the next difficulty adjustment is currently signalling for another -9% drop. 

What's ahead for the week:

There’s a lot of talk about the “GBTC unlocks” and what it could do to the price of bitcoin. 

Let’s break down what the unlock means and go over the trade mechanics.

GBTC is an investment vehicle that owns bitcoin and lets investors own units of the fund - by owning a unit of the fund you have a claim to the proportionate share of bitcoin the fund owns. If the fund has 10 BTC and there are 10 units of the fund, each unit should trade at the equivalent market price of 1 BTC.

Because of market dynamics, the price of the units traded at premium price to the underlying bitcoin that it held proportionately. This created an opportunity for investors to “mint” new units of the fund by contributing bitcoin and getting units of the fund. They could then sell the units of the fund at a premium, buy back the bitcoin they contributed, and keep the difference. There is only one catch - when you send the bitcoin you have to wait 6 months to get the units of the fund (which you need to sell to close the trade).

Throughout the month of January 2021, the amount of Bitcoin that GBTC held under management went from 607,000 BTC to 648,000 BTC according to data from skew. This means, in theory, that there could be as many as 41,000 units being “unlocked” to investors throughout July.

As the chart above suggests, most of the contributions - or potential bitcoin coming “unlocked” would happen in the latter half of January. 

Because GBTC is now trading at a discount to its net asset value, investors selling their units of the fund would be locking in a loss - meaning that once they sell their new units of the fund, they would not be able to buy back the same amount of bitcoin as they contributed in the first place.

If they did, they would have to not only sell the units of the fund, but also re-purchase bitcoin in the spot market to close the trade. This would put downward pressure on unit prices and upward pressure on spot bitcoin prices, which should narrow the discount between the 2. 

Now that we’ve gone over bitcoin fundamentals, let’s review the relevant earnings and economic indicators ahead this week:

Tuesday:

8.30 AM EST: Consumer Price Inflation for June. 

Expectations are for a 0.5% month-over-month read and a 5% year-over-year read. 

Look for markets to cheer any numbers below that and sell off with numbers above expectations. 

JP Morgan and Goldman Sachs both report earnings before the bell.

2.00 PM EST: Federal Budget in the U.S. 

Wednesday: 

8.30 AM EST: Producer Price Index for June

Expectations are for an increase of 0.8% month-over-month. Similar to the Consumer Price Index, look for markets to cheer a number below expectations.

Bank of America, Wells Fargo, Blackrock and Citi report before the bell.

12:00 PM EST: Jerome Powell starts Semiannual Monetary Policy Report to the Congress.

Thursday:

Morgan Stanley reports before the bell.

Friday:

8.30 AM EST: U.S. Retail Sales for June

8.30 AM EST: U.S. Consumer Sentiment for June 

10:00 AM EST: Business Inventories for June

Business inventories will be interesting to watch as a number above the expected 0.5% increase would signal potential future deflationary pressures from inventory buildups. 

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%
Source: https://www.bankofcanada.ca/rates/ 

U.S. Central Banking Updates:
Current Fed Interest Target Rate: 0.00 - 0.25%
Current Effective Federal Funds Rate: 0.09%
Source: https://apps.newyorkfed.org/markets/autorates/fed%20funds 

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