Bitcoin has its second highest monthly close, ever. All eyes on the U.S. election. Central Banking in times of crisis: lessons from the former head of the Venezuelan Central Bank, Ruth Krivoy.

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The Bitcoin Economic Calendar:

Week of Monday November 2nd to Sunday November 8th.

Market Commentary:

Bitcoin:  As always we begin with Bitcoin, celebrating 12 years from the whitepaper this weekend with very significant price action. On Saturday we saw Bitcoin's second highest monthly close ever, at $13,804 - just shy of the monthly close on December 2017 at $13,863. While Bitcoin is in a clear uptrend, from a technical standpoint, the $13,900 level is Bitcoin's second-strongest all-time high resistance (with the final one being the $19,892 all-time high). Because of its significance, investors may be looking to reposition at around $13,900 which can turn it into a contested level. 

On the weekly candle, which is the one we follow here, we saw that Bitcoin had another really strong week up 5.57% at $13,771. As we've mentioned here in the last few episodes, there are significant tailwinds for Bitcoin - and it is likely that it outperforms equity markets and even gold on a relative basis for the short term. However, it is common for markets to take a breather heading into events with potential uncertainty - and there is a potential wildcard scenario for world markets: a contested U.S. election. More on this next.

S&P 500:  The S&P 500 closed down 5.57% last week as the people of the United States head to the polls tomorrow to elect a new president. This in the backdrop of increasing COVID cases all over the U.S., and the two candidates' have very different plans on how to deal with it if they are elected. While emotions will no doubt flare regardless of the outcome, the world will be fixated on the speed of the process, and whether the outcomes are accepted by the candidates. In reality - from a market context, the winning party itself can be somewhat irrelevant compared to the risk of not getting a decision at all - or the results not being accepted. As we discussed in the previous BEC, most market participants are hedged for short-term market volatility. Uncertainty can remain for longer than market participants are hedged for - and that is the wildcard.

Politics aside, over 1,000 U.S. companies report this week - many in the travel and energy sector. While a lot of the pain these sectors are going through may be priced in, we will keep an eye on any trends that may be spotted around their guidance.

Gold & DeFi: Gold had a pretty rough week down 1.22% heading into the U.S. election. One way to interpret this is that the market is taking a breather until it has more clear guidelines on U.S. stimulus and with rare chance of a contested U.S. election, some investors may be taking some off the table waiting to reposition once continuity is confirmed.  

Moving on to the FTX DeFi index, once again - we see that not surprisingly the index had another very rough week closing down 11.46% as investors continue heading to the door and very likely lured into Bitcoin's momentum. With the sector failing to rally around this week, it is very likely that it continues under pressure. 

Central Banking in times of crisis: lessons from the former head of the Venezuelan Central Bank, Ruth Krivoy
There was a fascinating podcast over the weekend from Bloomberg where they interviewed Ruth Krivoy, head of the Venezuelan Central Bank in the 1990s. In her interview Ms. Krivoy shed some light on the role CBs need to play in these situations, the issues that some emerging countries' Central Banks are experiencing today, and why those issues may be about to get worse. 

First - her comments on the role of a Central Bank. In her view a central bank "a Central Bank's role is to reign in excesses - or to avoid excesses, without hindering growth". Furthermore, she ads that Central Banks should not be politicized, and that although certain situations may require unconventional monetary policy, the CB's role is to have a plan to reign those policies back into normality. The performance of Central Banks can be anchored to a few pillars, such as inflation target anchors, foreign exchange rates anchors, and budget deficit targets. Their ability to implement policies without throwing these measurements out of their targeted amounts, is what can be thought of as the "fiscal room" that a country's Central Bank has. Lastly - in the time of a crisis, a CB's primary role is to maintain the confidence in the national financial system. 

In times of recession, companies need loans - and the Central Banks are called in for support. However, central banks have very little leeway to move towards stimulus. Any new unit of local currency pushed out into the system heads to the foreign exchange market looking to be exchanged for a dollar - which, in turn, pushes inflation higher. In emerging markets, where there is very little confidence in their Central Banks, people look for dollars. So, Central Banks cannot implement stimulus or relax monetary policy without pushing inflation higher (big sign of instability), or having to implement capital controls in parallel (also a big sign of instability). 

A great example where there is little room, is Venezuela. They need monetary stimulus to prevent the recession from getting worse. However, they know that doing so will inevitably end in more inflation. The regime, instead of moving towards reforms, is moving towards authoritarianism.

Which brings us to Iran - a country whose foreign reserves have been decimated but its rich fossil fuel reserves allow it to produce cheap energy. Its desperate Central Bank announced this week that it would be the sole buyer of any bitcoin mined by Iranian bitcoin miners in order to fund its imports. Desperate times call for desperate measures - and the recent move from Iran means that Bitcoin has officially entered a Central Bank's balance sheet. This move has a plethora of implications - which we will cover at length in our next issue.

Difficulty Commentary

Lots to talk about on the difficulty front this week. We've actually seen hashrate drop dramatically over this period with the next difficulty adjustment having been delayed - it's projected for tonight. The drop will be significant, estimated at a whopping -13.74% to 17.25 TH. This has caused some congestion on the network and is allegedly due to miners in China, which control a high amount of hashrate, are repositioning their equipment due to the end of wet season. While this creates temporary congestion on the network, the next difficulty adjustment later tonight should get transaction speeds back to normal. It will also make the remaining miners more profitable - creating an incentive for them to make the network even more secure. Bitcoin's incentive structure is a thing of beauty. 

What’s ahead for the week:
As we mentioned previously, the big event this week will be the U.S. election. The main thing to lookout for is the result itself, and how quickly a binding decision is reached. Outside of politics we have a lot of earnings out of the U.S. and they will likely highlight the need for renewed stimulus conversations. Bitcoin will likely continue to outperform on a relative basis but it is important to watch out for the wildcard scenario of a contested U.S. election, which could through all markets for a loop. We do hope that is not the case and wish our friends in the U.S. the best of luck as they celebrate democracy. As always, we will share any relevant information throughout the week through our twitter account @hodlwithLedn. And make sure to check us out this Friday at the Blockchain LatAm summit panel of CeFi vs. DeFi where we'll be sitting down with our friends from MakerDao.

Last Week’s Content:
[Last Week’s Issue] Last Week’s Economic Calendar - Click here

Market-Moving Stats:
Bitcoin Hashrate and Network Difficulty:
Current Difficulty: 19.97 TH
Estimated Next Adjustment: 17.25 TH -1.83%
Time to next Difficulty Update: 0 days (Monday November 2nd, 2020)
Difficulty All-time-high: 19.97 TH

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