Week of Tuesday November 2nd to Monday November 9th

Market Commentary 💬

One Bitcoin Giveaway! 📣

On Sunday, to celebrate the 13th birthday of the Bitcoin Whitepaper, Ledn announced that we’re giving away 1 bitcoin to a lucky client - and it could be you!

To qualify, you can:

• Ensure you have verified your account at Ledn.
• Refer a friend to Ledn with your referral link.
• Before November 30th, your friend must deposit a minimum of 75 USDC or 0.0015 BTC.

The more people you refer by November 30th, the greater your chances to win 1 BTC.

Share your referral link with your family and friends for your chance to win.

The winner will be announced on December 1st.

We’ll be inviting the winner to record an interview, which we’ll later share from our social channels.

Please read our Terms and Conditions for more information. Only residents of the following countries will qualify for the giveaway: Canada (excl. Quebec), Chile, Colombia, Mexico, Venezuela and Paraguay. No purchase necessary.

Bitcoin 🟠

Bitcoin closed a week of low volatility at the top. It finished last week up +0.74% on Sunday evening but gave it all back on Monday, finishing down -0.74% at $60,922. 

It has continued to consolidate within a narrow price range of $67,016 and a low of $56,425 - on increasing volume. From a technical standpoint, the pattern it is displaying is often referred to as a “bull flag” - which tends to have positive continuation. 

While this is not the first time that bitcoin has traded in the $60ks, the price-action has been less volatile this time around. 

In fact, bitcoin volatility spikes have been making “lower highs” since 2014.  

The volatility graph above is, theoretically, exactly what you would expect from a new asset undergoing price discovery over time. As the asset matures, it should become less volatile. It is trending in the right direction.

As we mentioned in our last issue, the bitcoin futures ETFs underwent their first futures contract expiration and roll-over last week. 

Both $BITO and $BTF had to sell their October expiration contracts and replace them with contracts expiring in either November or December. Here is the breakdown for $BITO courtesy of Athanasios Psarofagis from Bloomberg. 

As you can see, $BITO’s October contracts peaked on October 20th and started aggressively declining after October 25th. Parallel to that, the number of November contracts increased dramatically. By Psafogari’s calculations, the total rollover cost was 11%. 

While this highlights the relative underperformance of a futures-based ETF relative to spot prices, the range of possibilities for ETFs is quite broad. For example, there are 2X ETFs, like the SPUU. The “2X” fund uses leverage to amplify the returns of the underlying asset. As you can see, SPUU outperforms SPY both on the way up and down. 

And so, the case has already started building for a leveraged bitcoin futures ETF. The chart below is courtesy of Bloomberg and shows how a 1.25X and 2X Bitcoin ETF would perform relative to the spot price. 

The leverage amplification would certainly compensate for the rollover bleed problem that we have discussed at length. Valkyrie had been quick to introduce a 1.25 X ETF application, which it dubbed “leverage for ants”. 

However, it was quickly withdrawn, signalling that regulators were not keen on accepting  any variation to the plain vanilla approach just yet.

The new Bitcoin ETF has certainly elevated the implied premiums in the CME Bitcoin Futures contracts.

We saw the implied premiums on the 3-month contracts go from ~2% at the start of October, to a high of almost 16% on October 21st, and they are currently trading at ~7%. The high premiums generate demand to borrow dollars and stablecoins, which allows lenders to charge higher interest rates.

S&P 500 📊

Major U.S. indexes finished the week at all-time highs, largely on the back of strong corporate profits. 

The S&P 500 closed the week higher by +1.60% at 4,611 - and had some continuation into the trading session yesterday. The Dow Jones was higher last week by +0.40%, and the Nasdaq also reached a new all-time high, rising by a whopping +3.23%.

Typically, markets tend to trade sideways or drop heading into big Fed meetings, however, strong corporate earnings and animal spirits, coupled with the desire to shelter investments from inflation, have been too strong to overcome.  

The Fed has openly stated that it looks to start its tapering plans to reduce U.S. treasury bond purchases by mid-November, and the backdrop is pretty text-book for the Fed to move ahead. 

Equity markets seem to be in good shape, with the Russell 2000 index, tracking small cap stocks, finally joining the large-cap rally and trading just at it’s previous all-time high from March of this year. 

Inflation is also cornering the Fed. What seemed to be contained to a few supply chains has made its way everywhere. Even the Fed’s beloved Personal Consumption Expenditure Index, was up 0.3% month-over-month, or 3.6% annualized.  

This, along with a tight labour market, sets the perfect stage for the Fed. As per the graph below, initial claims for unemployment insurance seem to have plateaued. 

While tapering is always a shock to markets, this time they seem to be surprisingly prepared for it. This may be the Fed’s window to act.

The sustainability of the current corporate earnings, and for how long the Fed can actually keep rates high deserves an entire additional issue!

Gold 🥇

Last week, the price of  gold dropped by -0.53% to $1,782, although it has since recovered and closed Monday at $1,791.

Last week’s move from gold was partially influenced by a rising dollar index (+0.56%), which as we know can be a headwind for commodities.

Checking in on oil’s rally - last week actually handed WTI oil it’s first down week since August 23rd. It finished down a moderate -1.03% and, like gold, it made it all back on Monday - currently trading at over $84/barrel.  

The week ahead will be all about U.S. treasury bond yields. These could soar pending the Fed’s announcement. If they do, this will put pressure on gold prices. As we know, gold prices have an inverse relationship to the real return of U.S. treasury bonds.

DeFi 🔄

The DeFi index had a good week last week, up +2.63% - and is off to a great start so far this week, closing up by +4.83% on Monday. 

Ethereum had an excellent week last week, reaching a new all-time high of $4,460 and closing higher by +5.06% at $4,288. 

The DeFi index, which is largely made up of the protocol tokens, has clearly underperformed the layer 1 protocols like Bitcoin and Ethereum recently.

This could be in part attributed to the market continuing to digest the Compound $160 million bug, or the continued high-stakes hacks to young DeFi protocols. 

We expect this trend to continue unless the current speculative interest in dog-coins takes a detour.

Difficulty Commentary ⛏ 

The most recent difficulty adjustment poetically landed on Bitcoin’s whitepaper anniversary on Sunday. It brought difficulty higher by +7.85% to 21.66 TH. We continue to inch closer to the all-time high in hashrate of 25 TH. 

The mempool continues to be quiet - transaction times and costs remain optimal. 

What's ahead for the week 📰 

This week will be all about the Fed. As we mentioned above, the environment is ripe for the Fed to act. Even if it cannot keep rates high for too long (for reasons we’ll discuss shortly), it will send the market a signal that it is not prepared to let inflation run away. 

Inflation is not an “if” anymore in the mainstream conversation. It has quickly shifted to a conversation about “how high will it go?”, and “for how long?”. The Fed can put a symbolic end to that conversation by letting rates rise a bit and see how markets evolve. 

While markets seem strong at all time highs, the Q3 GDP numbers out of the U.S. were a disappointment. And there’s a lot of “accounting” in the current corporate profits. Namely, many companies rely on “first-in, first-out” accounting, which means they are booking today’s sales with yesterday’s inventory costs. This can only go on for so long, as they will soon have to mark  those sales to market with current inventory restocking prices, compressing their margins. 

All this to say that, even if the Fed does raise interest rates, it may not be able to do so for too long.

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

Wednesday:

2 PM EST - Federal Reserve Statement

2.30 PM EST - Fed Chair Jerome Powell press conference.

Friday:

8.30 AM EST - Non-farm payrolls in the U.S. 

8.30 AM EST - Unemployment rate in the U.S. 

8.30 AM EST - Average Hourly Earnings

Expectation is for an increase of 450,000 jobs. Last month’s report was dismal, adding only 194,000 new jobs. Most are expecting a big comeback, and so the risk is to the upside as a miss would likely be considered good news by the markets. 

The unemployment rate currently stands at 4.7% and is expected to rise to 4.8% in this report. The labour market has been showing signs of exhaustion with the pace of gains tapering recently. More signs point at the fact that the U.S. is reaching its new natural rate of unemployment.

On the plus side for U.S. workers, average hourly earnings are projected to have risen by +0.6% month over month in October, or +7.2% annualized.  

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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