Week of Tuesday December 7th to Monday December 13th
Market Commentary 💬
Bitcoin 🟠
It was a volatile week for bitcoin, with prices dropping nearly $10,000 in just one hour during the early hours of Saturday. Prices recovered from Saturday’s lows of nearly $41,000 to close on Sunday at $49,463, down -13.73% for the week.
The move cleared away about $10 Billion in open interest from the bitcoin futures markets - which are typically used by investors to access leverage.
This deleveraging is often seen as a healthy sign for markets. Although it is important to note that bitcoin futures open interest remains relatively high at ~$16 Billion.
Prices have remained under pressure since the weekend, however, funding rates for perpetual futures swaps have now normalized after going deeply into the negative. Again, this is typically a healthy sign to start the week.
Outside of price action, U.S. regulators also provided additional colour around bitcoin ETFs in some of their remarks.
Noticeably, Gary Gensler from the SEC reiterated his concern with spot bitcoin ETFs, noting that although these had been approved by other regulators outside the U.S., this should not influence the U.S. decision.
The news made the GBTC discount to spot broaden to 18% after being close to single-digits earlier in November.
Another interesting development is the fact that “Institutions”, as a segment, have grown to become the largest net holders of Bitcoin Futures on the Chicago Mercantile Exchange.
These are the same contracts that are held by the Bitcoin Futures ETFs. Interestingly, they seem to have increased their long exposure as the price has dropped.
A few closing thoughts on price action as we head into the holiday season: Even though last week’s move was very large - the spot volume was less than half of what was traded the week of May 17th.
As we move closer to the holiday season, the depth in the order book will dwindle as traders move away from their desks to spend time with family. This tends to have an amplifying effect on any directional move, and adds volatility.
S&P 500 📊
The S&P 500 has had a very volatile few weeks, with prices moving by more than 1% for the last 7 trading sessions. Last week the index looked poised to recover from the previous week’s losses, but things took a turn for the worse when Jerome Powell announced that the Fed may have to accelerate its tapering plans last Tuesday.
A week after being reappointed as Chairman of the Federal Reserve for a second term, Powell was quick to point out that the board of governors would be discussing an accelerated tapering to their bond-buying program during their December meeting next week.
Mr. Powell also got grilled last week in front of Congress, essentially having to retire the word “transitory” - as it is no longer appropriate to describe the current run of inflation.
The U.S. Consumer Price Inflation jumped +0.9% month-over-month in October, with the same rate up +6.2% from last October. The November rate comes out this week, and it's expected to be a +0.7% month-over-month gain, and a +6.7% increase from last November. The Fed’s goal was 2%...
Unsurprisingly, home prices continue to soar.
The headline above states “Home price gains slow down” - while technically correct, it is very misleading. The year-over-year increase in home prices for September was 19.5%, in August it was 19.8%. A drop of 0.30%, in practical terms, means things are just as bad.
The S&P Case-Shiller index home price is up almost 46% from it’s 2006 peak. This means U.S. homes are almost 50% more expensive on average, than 14 years ago.
All of this has resulted in a very real fear that the Fed will have to raise rates to prevent the economy from overheating further. This has fueled a rally in the U.S. dollar, and equally has introduced headwinds in equities. Markets could stay rocky and volatile with thin liquidity until the new year.
Gold 🥇
Gold closed its third consecutive week of losses last week, finishing down -0.49% at $1,783/oz.
Again, while gold is typically seen as a hedge against inflation, it has been stuck in a downtrend since August of 2020.
There are several reasons for this - one of them is the fact that bitcoin continues to take mindshare and market share away from gold as a much more exciting hedge for inflation with a call option on a new monetary system.
The other is the fact that as we move into the “deceleration” phase of economic stimulus, the Fed is looking to let interest rates rise. This creates a better real return for the U.S. dollar, and has been a big driver in the recent rally we have seen in the dollar.
The dollar rally has not only put pressure on gold, but commodities and equity markets in general. This trend looks poised to continue until the Fed reverses course.
DeFi 🔄
It was another wild week in the world of DeFi with fascinating price action and meaningful headlines.
Price-wise, Ethereum continued to be among the strongest performers given that ETH Microfutures were scheduled to start trading on the Chicago Mercantile Exchange today.
Keep in mind that Bitcoin MicroFutures on the CME began trading just months before the first Bitcoin Futures ETF was approved. This may be driving some of the excitement around Ethereum.
Separately, a $120 Million hack was reported on the BadgerDao protocol last week.
The exploit seems to be the largest in DeFi history, and sent the value of the Badger token down 21%.
They say “markets learn” - and that’s what comes to mind when I look at the following chart:
The chart depicts just how much Ethereum has outperformed the protocol tokens since March. What this shows is that investors are starting to understand that most project tokens just hold “temporary value”, as their supply gets inflated away and the hype passes. Therefore, investors are not holding on to them as they do Layer 1 protocol tokens.
In other words, they use the project tokens to claim their rewards (or farm their free incentives). Once the incentives are received, they are immediately sold for Ethereum or Bitcoin. This trend may continue as the market continues to “learn”.
Difficulty Commentary ⛏
The next difficulty adjustment is expected to occur in 4 days, which would increase by +2.95% the network’s difficulty, taking it to 22.99 THs.
This could mean that the upwards trend in the network’s hashrate is resuming. However, it is still too early to tell, since it would still be the first positive adjustment after the first negative adjustment since July.
As we’ve previously discussed, regarding the network’s hashrate, adding additional capacity may take more time, but all signs point to continued healthy growth in the hashrate.
Transaction processing times and cost remain at optimal levels.
What's ahead for the week 📰
The Federal reserve starting it’s tapering process during its November meeting has set markets on a rocky path.
Investors are trying to balance the fact that the Fed needs to raise rates in the short term, to prevent the economy from overheating - with the fact that it cannot hold rates high for too long. The reason it can’t raise rates for too long is because it severely impacts the American economy - everyone’s mortgage payment goes up, and every company’s cost of debt goes up as well.
The Fed is cornered by rising inflation on one end, and the markets on the other. If it raises rates, it can fix inflation, but it will bring down the markets. If it maintains its accommodative monetary policy, markets will rise but inflation will overheat.
It is likely that the Fed will need to see more pain in the markets before it makes any decisions to alter the course of the tapering. If inflation continues to stay the course, it may corner the Fed into an accelerated tapering effort - and it may be willing to pay the price of a dip in markets to tame inflation.
As always, we wrap up with a summary of the upcoming economic data and earnings reports for the week:
Friday:
8.30 AM EST - U.S. Consumer Price Index for November.
2 PM EST - U.S. Federal Budget.
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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