Insights from the Bitcoin Options markets. Indicators that show Treasury Yields could go higher. How potential regulation could be impacting DeFi.
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The Bitcoin Economic Calendar:
Week of Monday March 15th to Sunday March 21st.
Market Commentary:
Bitcoin: Stimulus cheques started hitting bank accounts this weekend, helping bitcoin soar to a new all-time-high. It closed the week at $59,457, up 16%. As we highlighted last week, a meaningful amount of that stimulus money could be potentially coming into Bitcoin and crypto markets. The cheques will continue to roll in throughout the week - by our estimates from last week, the aggregate amount could potentially represent up to $1.5 Billion in buying pressure.
Interestingly, Bitcoin has very much "led the pack" this week as far as relative performance vs. other crypto assets - such as Ethereum and the DeFi index, which failed to make new highs in the same period. We're going to dive into this dynamic in our DeFi section today.
Looking at macro indicators, Bitcoin has resumed its correlation with the yield on the 10-year treasury note, which we highlighted here 3 weeks ago. There are many other macro indicators which point towards continued upward pressure on Treasury yields, particularly in the shorter-dated maturities. The bond-yield phenomenon is not limited to the U.S. with Europe already experiencing some of the same woes. The combination growing inflation expectations, and a "cash-rich" U.S. consumer, could bode well for all markets with exposure to the U.S. consumer - particularly for Bitcoin in the weeks to come.
As always, we'll dive into what the Bitcoin Options and Futures markets are showing as well as the funding rates for perpetual swaps across the main crypto assets.
S&P 500: The expectation of stimulus hitting the street over the weekend was able to push the S&P 500 and the Dow Jones Industrial indexes to new all-time highs. As discussed in the previous section, there was also a sharp rally in Treasury yields which impacted tech stocks negatively - the Nasdaq was the only major index left out of the all-time high party last week, though probably not for long.
Rising Treasury yields are typically bullish for the underlying currency, however, this week had a sharp increase in the Treasury yields and a down week for the U.S. dollar. Following up from last week, the Fed has shown no further guidance on current exemption that allows banks to accumulate Treasuries and cash deposits at the Federal Reserve without them counting towards their Supplemental Leverage Ratios.
Everything the Fed does, and doesn't do, is by design. Market participants are taking cue that the Fed is letting Treasury bond yields go higher. As we discussed in the previous issue, U.S. banks are no longer showing up for Treasury bond auctions, and moreover, have been net sellers of Treasuries since the beginning of February.
All of this points towards continued pressure on Treasury yields. With JP Morgan's Jamie Dimon being vocal about not buying Treasuries, and even floating the idea of having to turn away deposits. We'll go deeper into the implications of this for Bitcoin and markets in general in our What's Ahead section later today.
Gold: Gold prices appear to have caught some footing - shaking off a rising dollar and closing last week +1.6% higher at $1,726. We see how the level of $1,725 that we highlighted 3 weeks ago continues to be an important level for Gold. While inflation expectations are through the roof, so are the prospects of growth in the U.S. economy. Gold is a great hedge in a high-inflation and no real-growth environment. But with so many markets poised to do well in the coming year, it would not be surprising for this to be a "relief rally" in Gold, getting ready to continue its way lower.
DeFi: Over the past few weeks we had been highlighting that the DeFi index was showing relative strength in relation to Bitcoin. As we can see from the chart below, DeFi had been leading the way higher since January 30th, 2 weeks after the new Biden administration announced that they would be extending the consultation period for the proposed regulation.
As a refresher, the proposed law would make all services have to KYC its users and report/track large value transactions, much like money service businesses do today. As drafted, it would deal a huge blow to DeFi - most of which is done without KYC. 
Investors, particularly the larger ones, are seemingly starting to act cautiously as the commentary period for the new law is set to expire on March 31st. The market seems to be signalling that the proposed law would be more damaging to DeFi than to Bitcoin. Which makes sense and is consistent with our analysis. The bulk of the activity currently driving Bitcoin prices higher is KYC friendly (institutions buying and clients buying through established exchanges). By contrast, the vast majority of economic activity in the DeFi world is carried out without KYC - and many of its end users are American. We'll continue to monitor regulatory updates closely and discuss its potential implications in the market.
Difficulty Commentary: Not much has changed on the difficulty front with our next adjustment scheduled to come in on Friday. The mempool has slightly grown in size from last week so transaction times should continue to be similar.
What's ahead for the week:
Two major forces continue to drive markets this week. On one hand, we have stimulus cheques hitting American citizens in earnest this week. On the other, we have the Fed and U.S. banks staring at each other as Treasury yields continue to balloon. In a way, the Fed letting these yields rise could be interpreted as them "tapering" by not acting in an attempt to lower them or keep them in check. Although this is very much a global phenomenon, the U.S. is in a very peculiar spot - being the economy that has received the most stimulus and poised to outgrow even China in the year to come.
With growing expectation of a strong recovery in the U.S. and globally, Treasury market drama continues to unfold as no further guidance on the Treasury SLR exemption has been issued by the Fed. What banks, and many investors are seeing, is that if market indicators are correct, there will be an impending rise in yields - meaning bond prices will go down. What this means is that nobody wants to buy government bonds right now.
This is particularly troublesome for banks - which not only hold treasury notes, but are typically large buyers of them. There is a way to not "take the hit" on bond prices, and that is to hold them from when you buy them until maturity. This makes demand for the shorter-dated bond maturities naturally higher than for the longer-dated bond maturities. This happens for 2 reasons primarily: 1. Shorter-dated bonds are easier to hold until maturity. 2. Banks are in a tricky spot because the cash deposits they are getting as part of stimulus might be "transitory" - they could be spent quickly. Because of this banks will have to have the cash available - so it needs very liquid securities to back it. The graph below shows the yield on the 10-year note vs. the yield on the 30-year note. Notice how the 30-year yield is rising faster.
To leave you with a telling macro graph, take a look at the correlation between the prices of copper and the yield on the 30-year treasury, which have been closely correlated for many years.
As we can see, there are many macro signs that point to a continuation of rising yields unless the Fed steps in. We are already seeing Europe having to talk its rising bond yields down with the ECB's Laggard ringing the alarms last week and announcing more bond purchases. All eyes will be on the Fed as yields face upward pressure. That affects Bitcoin as we've noted a current correlation between Bitcoin price and U.S. Treasury bond yields.
The Bitcoin Futures markets are showing a healthy contango with the December 2021 contract trading at ~$67k. In the Options markets we see the most open interest on the call options is in the $70k and $72k contracts. The $100k and $120k call option contracts are also showing some meaningful open interest. Also of interest, we are seeing huge open interest in put contract positions for the $54k and $42k - making the put:call ratio for the March expiration roughly 2:1. The implied volatility in the Put contracts is also higher - meaning that people are paying up for downside protection. Bitcoin's perpetual swap futures funding rates are significantly higher than their 30-day averages. These are signs that there could be downside volatility int he week to come.
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