Inflation of +0.80% rocks equity markets. Bitcoin Futures open interest down 33% since April peak. Understanding the Fed’s “Transient Inflation” view.
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The Bitcoin Economic Calendar:
Week of Monday May 17th to Sunday May 23rd.
Market Commentary:
Bitcoin: It was a rough week for bitcoin, and markets in general. On Wednesday, Elon Musk tweeted that Tesla would no longer accept bitcoin for vehicle purchases. It also mentioned that they are actively exploring other cryptocurrencies that consume “less than 1% of the energy that bitcoin consumes”.
The news handed bitcoin its second worst daily close in 2021, closing Wednesday’s session -13%.
On Thursday Microstrategy announced that it had purchased another USD $15 Million worth of bitcoin. The purchase brings their total holdings to 91,850 BTC at an average price of $24,403.
The Elon rollercoaster continued on Sunday. At 2:48 PM EST, Mr. Musk published a cryptic tweet implying that Tesla either had sold or was considering the sale of its bitcoin reserves. The time of the tweet coincided with the low for the week of $43,769. Bitcoin’s weekly candle closed later that night, -20.34% at $46,444. It was bitcoin’s third worst weekly price drop since 2019.
Why is Elon doing this? We don’t know. Elon, if you are reading this, please stop.
One (hopefully incorrect) hypothesis is that this could be part of a broader plan. For what it's worth, Dogecoin:
- Has a very small market capitalization relative to bitcoin (easier to move price)
- Doesn’t have it’s own ASIC miners (it is merge-mined with Litecoin).
And consider also that Tesla has a history of quirky and controversial product lines. They have produced red short shorts, toy cars, and a tequila line. An “environmentally friendly doge miner” is not out of the question.
Looking ahead, we are starting to see bitcoin markets continue to deleverage.
Bitcoin futures aggregate open interest has come down 33% to $18.4 Billion from their peak of 27.4 Billion on April 13th. As futures are markets that traditionally use a lot of leverage, this is a good sign for price volatility.
Similarly, we are seeing a flattening of the futures curve and even some slight backwardation in some venues. Meaning that the price of bitcoin for May 28 delivery is trading close-to or below the current spot price.
Option markets are pricing in a less than 40% chance for bitcoin price to be above $50k for the June 25th expiration.
S&P 500: The S&P 500 had a tumultuous week, finishing down only -1.30% after being down -4.70% intra week. The selloff started on Monday morning, as the market continued to digest the inflationary implications of the most recent payroll report. On Wednesday, when the consumer price index reading hit, the market sold off by -2.14%. On Thursday and Friday, but could not make up the losses stock market indexes recovered part of the territory they had lost during Wednesday’s session.
The consumer price index reading reaching +0.80% on Wednesday rocked capital markets as it means the Fed is making progress towards meeting its targets. Analysts were expecting an increase of +.20%, the actual number was 4X higher.
As soon as targets are met, the low interest rate environment could end - putting pressure on corporate earnings and equity prices.
The yield on the 10-year note rose +3.68% for the week, and markets will continue to monitor this trend. The dollar rose considerably intra-week, but gave up most of its gains on Friday.
Bloomberg also reported that U.S. Money Markets are now pricing in a 100% probability of a 25 BPS rate increase by the U.S. Federal Reserve by December 2022 vs. an 88% probability before the CPI reading.
In terms of relevant corporate earnings for bitcoin in the coming week, Canaan, the publicly-listed bitcoin ASIC manufacturer, reports earnings before the bell this Thursday.
Gold: Gold saw its highest weekly close in almost 6 months, +0.60% at $1,842/oz.
The rally came despite the U.S. Dollar index rising by +0.08% during the week and the yield on the 10-year treasury note up +3.68%.
From a technical standpoint, gold is showing continuation after breaking out from the multi-month downtrend that we highlighted last week. This should continue given the current technical and macro backdrops.
DeFi: The FTX DeFi index continues to show relative strength vs. bitcoin and ethereum. The index finished down only -2.41% vs. bitcoin’s -20.34% and ethereum’s -8.72% respective weekly declines.
Investor appetite in the space continues to heat up, with headlines last week reporting that three very prominent hedge funds, including Steve Cohen’s Point72, are setting up DeFi funds. For context, Point72 was one of the main hedge funds that were short GameStop into the short squeeze saga.
There was a piece of news on Thursday that went somewhat unnoticed in crypto media. Facebook’s Diem is partnering with Silvergate Bank in the U.S. to issue its Dien stablecoin. Silvergate was up +16% after the announcement.
Notice how DeFi is leading the way higher and dropping less than bitcoin and ethereum on the way down. These are signs of latent demand in the sector.
Difficulty Commentary: Difficulty reached a new all-time high on Thursday after the most recent adjustment brought difficulty north of 25 TH. The increase of +21.5% was the largest difficulty increase in 7 years!
Similarly, the mempool has come down to normal levels and transaction costs are at 6 sats/vbyte for next-block confirmation.
As an update on the Taproot upgrade signalling - presently, almost 20% of miners are signalling for the upgrade.
What's ahead for the week:
This week we have a Fed vice-chair speech on Monday (today), and the Federal Open Market Committee meeting minutes this Wednesday. The market will be “reading the tea leaves” in the minutes for clues on when the Fed may be looking to raise rates.
Understanding the Fed’s Transient inflation view.
There is a heated debate around inflation in the U.S.
Some proponents believe that once inflation heats up, it's tough to “put the genie back in the bottle” - and the Fed can have a hard time reigning it back. This is not to say that the Fed does not have the tools to do so, rather that it cannot reign back inflation without inflicting huge damage to capital markets and the economy in general, thereby slowing down the recovery.
The Fed’s view is that, at a high level, the current inflation numbers are a result of:
- “Low basis” effect by comparing current numbers to mid-pandemic numbers last year.
- Pent up demand from the lock-down (supply/demand imbalances).
- Supply-chain dislocations because of manufacturing and logistical disruptions.
Furthermore, the Fed views that some of the proposed uses of the fiscal stimulus, such as the infrastructure bill, are intended to have long-term deflationary effects. More business incentives create more businesses, more highways enable more businesses to compete, these combine to create deflationary pressures due to increased competition.
In short, once supply-chains are back in check, and businesses go through a couple of more inventory cycles, prices will level off and inflationary pressures will subside.
The reason the markets are so jittery is because, until now, this conversation was hypothetical. The Fed and the U.S. Government had been spending to no end, and holding interest rates at rock bottom, without a glimpse of inflation.
Last Wednesday’s Consumer Price Index for All Items increase of +4.2% was the highest month-over-month increase since January 2008. It means the Fed is starting to deliver on its inflation goals - and it makes this conversation very real.
There’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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This article is intended for general information and discussion purposes only, it is not an offer or solicitation of any kind, and is not to be relied upon as constituting legal, financial, investment, tax or other professional advice. A professional advisor should be consulted regarding your specific situation. 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.