Week of Monday October 18th to Sunday October 24th

Market Commentary 💬

Ledn Announcement 📣 

Before we dive into the weekly news, we’re excited to introduce something new at Ledn - there’s a fresh way for clients to earn a reward by referring family and friends to Ledn. 

From now on, when someone uses your referral link to create and fund a Ledn Savings Account, you and your friend will both earn 10 USDC, automatically deposited straight into your account.

Here are some of the benefits of our new Referral Program:

• Rewards are now linked to assets deposited into Ledn Savings Accounts - no loan required
• The minimum deposit requirement is only 75 USDC or 0.0015 BTC (150K satoshis), which must be remain in the account for 15 consecutive days
• There’s a new Referral Page that lets you track the status of your various referrals, all while maintaining client privacy.

Read the Referral Q&A and Terms and Conditions for more information. 

On to the news!

Bitcoin 🟠

Bitcoin had it’s highest weekly close ever, at $61,538 - up 12.47%. It was bitcoin’s third consecutive week of double-digit gains, capping a 42% rally in the period. 

From a technical standpoint, the only resistances left are $61,700 and the all-time high mark of $64,895. On another positive note, the volume traded was slightly higher than the previous week. That’s 3 weeks of price appreciation with increasing volume. This is typically a positive sign - although we may have some headwinds due to market structure going into the week. 

As we highlighted last week, the first Bitcoin futures ETF has been approved by the SEC and is scheduled to begin trading tomorrow.

The importance of this market event cannot be overstated - as it will make bitcoin available to a brand new class of investors. 

How is this ETF different from the Bitcoin ETFs in Canada, or the Grayscale bitcoin trust in the U.S.? The differences may appear to be “small”, but they are very meaningful from a market structure stand-point. 

First, let’s cover how it is different from the GBTC - which already trades in the United States. The GBTC is a close-ended fund, this means that the fund manager, Grayscale, can manage how many bitcoins the fund holds, and change the mechanism or timeline for investors to turn bitcoin into units of the trust, and vice versa. 

The Bitcoin Futures ETFs are different in that, as the ETF sees more demand, it creates more units and purchases the underlying futures contracts. Conversely, if the units are being redeemed, the fund can choose to sell the underlying futures contracts it holds. This means that the ETF can “adapt and adjust” to investor capacity faster. 

This detail is very important, as there are large investment funds that have strict mandates allowing them to invest “only” in ETF funds (like the new bitcoin ETF), and not in close-ended funds (like GBTC).

Furthermore, these guidelines many times state that “investable” ETFs must trade in a particular venue, such as the Nasdaq or the New York Stock exchange. This is the key difference between the new U.S. ETF and the Canadian ETFs. 

These are the primary drivers of demand for the new U.S. bitcoin ETF. Allowing the participation of investors that were previously “blocked” from participating given their investment mandates. 

Investors that were already able to purchase bitcoin directly, or the futures contracts, or the GBTC, or Canadian ETFs, will not find net new value in the bitcoin futures ETF, other than to potentially hedge or arbitrage between their existing positions. 

This is because most commodity ETFs that are based on futures contracts suffer from “contango bleed”.

We covered this briefly last week, but contango bleed is essentially the issue that arises when the fund purchases overpriced futures contracts (relative to spot price). Futures contracts always expire at “par” with the commodity that needs to be delivered on expiration date - bitcoin in this case. The continuous overpayment of the contracts and the fact that they expire at “par”, causes the fund to underperform the underlying spot asset.

A great example of this is the historical difference between the spot price of oil and the U.S. Oil ETF. The chart is courtesy of Lynn Alden.

In other words, futures-based ETFs are good at tracking short-term price moves of the underlying asset. However, their premium bleed means that they are not great instruments to invest with a long-term perspective. 

We’ll cover more implications in our What’s Ahead section.

S&P 500 📊

The Fed minutes released on Wednesday stated that it would not be starting the “tapering” process until after its next FOMC meeting in November. 

Many were expecting the Fed to start tapering before the next meeting. The news created a “short-squeeze” in treasury bond yields and helped the major U.S. equity indexes close higher.

The S&P 500 closed the week higher by +1.92% at 4,474. The Dow Jones finished  higher by +1.58% at 35,294, and the Nasdaq closed +2.20% higher.  

While the Fed minutes had the market cheering, inflation data from later in the week gave treasury yields a “reality check”. 

While equity indexes ended last week higher, increasing inflation, a tight U.S. labour market, and the Fed’s tapering plans will continue to put downside on U.S. equities.

Last week we saw inflation in the U.S. reach a 13-year high of 5.4% for the month of September. While the “rate of increase” is slowing down, the absolute inflation rate continues to grind higher. 

The U.S. producer price index, which is seen by many as a leading indicator of consumer prices, reached another record high of +8.6% last month. 

The chart below illustrates the relationship between producer price indexes and consumer price indexes very elegantly. 

These inflationary pressures are not limited to the U.S. - from China to Europe, nations are scrambling to deal with rising energy prices.

This is relevant for future inflation estimates, as energy prices affect every single supply chain and product. Producers will likely continue to pass these higher costs along to their consumers.

In China, rising energy prices present an additional issue, as the Chinese government fixes the prices that utilities can charge consumers for energy. This means that in one way or another, the state will have to “eat the losses”, or pass them on to the Chinese consumer. 

As a last “canary in the coalmine” for future inflation, data from the U.S. labour market suggests that the month of August saw one of the largest waves of employees quitting seen in recent time.

If our assumptions are correct, this could mean that employees are flexing their muscles in a tight labour market to get better conditions and higher salaries. Both could lead to even more inflationary pressures in the future.

Gold 🥇

Gold was able to close the week +0.56% higher at $1,766/oz, on the back of lower treasury yields, a high inflation reading, and a weaker dollar index. 

As we covered above, yields on U.S. treasuries dropped as the Fed meeting minutes revealed that they will not start tapering until after their next meeting on November 4th. Many investors that were positioned for a taper before the next meeting had to “cover their shorts”, buying 10-year and 30-year bonds, making the implied yields drop. The yield on the 10-year note closed -1.68% lower at 1.57%, and the yield on the 30-year note dropped by a whopping -5.13%.

The U.S. dollar index also finished the week slightly lower by -0.16%, which acts as a tailwind for commodities. Oil also finished the week +3.73% higher, further accelerating the energy price inflation narrative. 

There was an article last week from Barron’s with an interesting subheading. It reads “Even though gold may have been replaced, at least temporarily, by Bitcoin as an inflation hedge”. I believe this is the first time that a mainstream media publication refers to the “replacement” as an event that is already happening, no longer an “if”. 

We should also add that the current macroeconomic backdrop is not favourable for gold. Gold prices are inversely related to the real return of U.S. treasury bonds (interest rate - inflation). As interest rates are set to rise, this will put continued pressure on gold at least until mid 2022.

DeFi 🔄

The DeFi index and ethereum continue to underperform bitcoin. The DeFi index finished the week up +7.23%, while ethereum finished the week higher by +12.36% at $3,844. 

Bitcoin leading the way may be attributed to the excitement around the ETF. However, DeFi tokens appear to still be dealing with the hangover of Compound’s $160 Million-bug event. 

While the bug was “patched” last week, the price of the Comp token finished the week just +2% higher at $310.

While the “total value locked” in DeFi is approaching it's all-time highs, the protocol tokens don’t seem to be anywhere near that. This could mean that the TVLs rising are mostly the bitcoin and eth collateral that is sitting in these protocols - while investors may be selling the “reward tokens”, and keeping the hard assets.  

Checking in on stablecoins, while headlines around potential regulation out of the U.S. has been circulating over the last few weeks, this has not stopped the astronomical growth of USDC. Circulating supply has grown from $27 Billion in September, to the current $33 Billion. That’s a growth of 22% in 6 weeks! 

Difficulty Commentary ⛏ 

Not much has changed on this front since last week. The next difficulty adjustment is scheduled for this evening and should bring difficulty higher by +0.97% to 20 THs. 

There was an interesting article over the weekend which highlights how the geographic location of miners has shifted since the China ban. 

As you can see from the graph, the United States has grown to become the largest contributor to global hashrate, at 35.4%. Second place goes to Kazakhstan, third place to Russia, and Canada holds the 4th spot. 

For context, China made up 75.53% of the global hashrate as of September 2019. The dimensions of this shift are unprecedented. 

No major changes in the mempool, with transaction costs and speeds well within their normal range. 

What's ahead for the week 📰 

While there’s been a lot of excitement around the ETF, it is important to remember the old wall street adage “buy the rumour, sell the news”. 

The Bitcoin ETF is a very important announcement for bitcoin, and rightfully, many will believe that this is a good omen for its long-term price appreciation potential. Once the fund starts trading next week, many will hear about bitcoin for the first time, and a new wave of retail and institutional money could enter the space. 

Some institutions may be banking on this. Institutions could have purchased bitcoin weeks or months ago in anticipation of this event. They may also be planning to “take some profits” once the event materializes. This should put downward pressure on prices. 

The chart above, courtesy of Frank Chaparro at The Block, highlights that exchange volume (mostly retail) was skewed to the sell side 2 weeks ago, whereas OTC volumes (mostly institutional) were skewed to the buy side. If institutions look to unload some of their positions, and retail doesn’t “show up” to buy, this could put pressure on bitcoin prices for the week ahead. If the wave of new demand overwhelms the sellers, then the market will move higher.

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

Thursday:

8.30 AM EST - Existing Home Sales in the U.S. Expectation is for 5.88 Million home sales. The key thing to watch here will be the magnitude and speed of the price appreciation. As a refresher, prices of U.S. real estate were up 18% year over year in August. 

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.

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This article is intended for general information and discussion purposes only, it is not an offer, inducement or solicitation of any kind, and is not to be relied upon as constituting legal, financial, investment, tax or other professional advice. This article is not directed to, and the information contained herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to law or regulation or prohibited by any reason whatsoever or that would subject Ledn and/or its affiliates to any registration or licensing requirement. This article is expressly not for distribution or dissemination in, and no services are being marketed or offered to residents of, the European Union, the United Kingdom or the United States of America. A professional advisor should be consulted regarding your specific situation. Digital assets are highly volatile and risky, are not legal tender, and are not backed by the government. The information contained in this publication has been obtained from sources that we believe to be reliable, however we do not represent or warrant that such information is accurate or complete. Past performance and forecasts are not a reliable indicator of future performance. Any opinions or estimates expressed herein are subject to change without notice. We expressly disclaim all liability and all warranties of accuracy, completeness, merchantability or fitness for a particular purpose with respect to this article/communication. For full legal terms and conditions visit https://ledn.io/legal
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