The Bitcoin Economic Calendar - Week of December 28th 2020

How high can Bitcoin go? What the options markets are saying. U.S. Banks don't have to hold a single dollar of your deposits since March - what does this mean? What can we expect for Bitcoin in 2021? 

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The Bitcoin Economic Calendar:

Week of Monday December 28th to Sunday January 3rd.

Market Commentary:

Bitcoin: Happy new all-time high everyone. Bitcoin saw yet another memorable week for Bitcoin's history, closing at $26,258 up 11.85%, after briefly breaching the $28,000 level on Sunday evening. This price action came on the back of strong institutional purchases and interest. The CME Bitcoin Futures were halted halted at "limit up" at the time of this writing on Sunday evening. This is an impressive but not-necessarily-good thing, as market makers and others rely on the futures market to offload risk. Bitcoin has broken from its highs and is squarely on price discovery mode. While nobody really knows how far it can run, looking at the options markets can provide some insights as to what investor expectations are. Looking at the Deribit platform, we see that the June 2021 options have significant open interest in the $32k and $40,000 levels, and about equally light OI in the $52k - $60k range and at $72k. 

Screen Shot 2020-12-27 at 8.43.00 PM

Looking at the September contracts, we see action again in the $32k and $40 levels, with some interesting levels in the $56k and $72k - but what stands out the most in this chart is the fact that there is comparable or higher open interest in the $80k and $100k contracts for September.

Screen Shot 2020-12-27 at 8.43.21 PM

Separately, on Monday last week, the CEO of Ripple said that it was expecting to receive a lawsuit from the SEC. The very next day, the SEC charged Ripple and 2 executives with the sale of USD $1,200,000,000 unregistered securities. This sent Ripple and altcoins in general tumbling - although Bitcoin's Santa Rally was enough to have some speculators FOMO into alts negating much of the downturn in price. With Bitcoin soaring through the holidays, there is a good chance that market speculators try to relive "alt season" - only to have the SEC damper the party in the coming months with enforcement announcements.   

We'll cover what we can expect in the coming week in our What's Ahead section later today.

S&P 500:  The S&P 500 closed the week moderately lower at -0.17% on the background of back and forward posturing about the most recent stimulus bill. On the one hand, President Trump vocally said it would veto the bill until important changes were made, namely increasing the size of the stimulus check to $2,000 and reducing the amounts that were allocated to some international efforts as well as some being critical of allocations to other domestic programs. There is also some concern over growing infections worldwide and a new strain out of Britain that is allegedly more contagious. The new strain has already caused travel restrictions in Japan and other countries - and it is expected that more will be announced this week. This will likely be a headwind for the markets over the next week. Although this morning we got the news that president Trump is set to sign the proposed bill, which would move it forward. With this, and an aggressive Fed - investors will likely see this as a buying opportunity. 

Gold: Gold closed a muted week on decent volume for a shortened trading week - interestingly, this reflects a strong shuffle in and out that nets to neutral for the week. Given the backdrop, it's rather unusual to see gold not moving higher - perhaps some gold investors are taking profits to look for more upside in... Bitcoin? 

DeFi: As it was somewhat to be expected, not much can get in the way of speculators when Bitcoin rallies long and high enough. After taking a beating from the Ripple news, Bitcoin's Santa Rally had the anti-gravity effect on alts that it often does. The index saw a "hail Mary" rally on Sunday evening to close out the week down only -1.34%. Again, severely underperforming the protocol level assets, consistent with our analysis over the last few weeks (ETH up 7.01% & BTC up 11.85%). Fairly or unfairly, a rising tide floats all boats - and an inevitable a slew of "I want to buy the new bitcoin" investors, as well as "Bitcoin is too expensive" crowd will continue to move in, and bid up - well... pretty much everything. It is very likely that the index continues to underperform the protocol level assets to the upside. If and when this changes, it can be a good sign that we are approaching a local top for the markets.  

What is the Money Multiplier  - and why did the Federal Reserve break it?

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Central Banks create fiat money. And in a fractional reserve banking system, private banks multiply the money supply. A quick example. Let's say that the Central Bank for "Country A" has created $100. Once deployed, they get deposited into Local Bank A. Then, Local Bank A makes a loan to a different client for $50. Subsequently, this new client deposits the $50 in Bank B. As you can see, there are now $150 in deposits in the system, and this can go on and on. This is known as the Money Multiplier Effect. In theory, banks would lend all or most of their client deposits to maximize profits - so most Central Banks mandate Reserve Requirements for banks. In other words, the Central Bank asks Private Banks to hold a minimum threshold of client deposits in liquid accounts within the Central Bank. This reserve requirement is a key piece when calculating the Money Multiplier.
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A brief recap of Reserve Requirements in the U.S. 
Until not too long ago, the Federal Reserve mandated a Reserve Requirement from U.S. banks of 10%. This meant that, theoretically speaking, the Money Multiplier in the U.S. should have been 10 (m = 1/10%). This, of course, is affected by many factors - namely, banks can choose to electively hold higher levels of reserves, and companies can pay vendors overseas, which would not deposit the dollars in the U.S. system.
 
The Federal Reserve used to keep track of the M1 Money Multiplier - as can be witnessed below. With a little bit of work, we can still calculate the current multiplier with their data - and you can graph them side by side. As can be seen below, the multiplier is at a mere 1.18. 
 
The Fed really wants this to change - as it does not see banks hoarding cash as positive for the economy. In a move that went relatively unnoticed as part of the larger initiative, the Fed eliminated reserve requirements for private banks on Mach 15th this year. You're reading that right - it is zero percent (0%). Banks in the U.S. are being told that they do not have to hold a single dollar of your deposits. This was done "help to support lending to households and businesses". 
 
Screen Shot 2020-12-26 at 9.39.59 PM
 
By setting the reserve requirement rate to zero, the Federal Reserve has effectively broken the Money Multiple formula. 
 
m (multiple) = 1/RR (Reserve Requirement)
 
if RR = 0,  then = ∞ 
 
The Fed has so much conviction on this new policy shift, that it even issued a proposal last Thursday to replace references to an "interest on required reserves" ("IORR") rate and to an "interest on excess reserves" ("IOER") rate with "interest on reserve balances" ("IORB") rate instead.
 
Even with an aggressive stance by the Fed, we can see from the multiplier that the response from private banks has been somewhat muted. Looking at the reserve levels for private banks that the Fed tracks, we can see that they are nearing all-time highs at over 3 Trillion dollars. 
 
Screen Shot 2020-12-26 at 10.07.38 PM
 
Summary:
The Federal Reserve really wants private banks to put their reserves to work. It has completely eliminated reserve requirements in an effort to get banks to lend to businesses and households. It is also providing strong signals that this is part of a broader policy shift. Perhaps in light of the Fed understanding that it is, in a way, the Central Bank for the world economy. That could explain why the Money Multiple was so subdued in the first place. In a global economy, the funds lent to companies in the U.S. gets spent and finds its way back to the world through global supply chains. For now, it desperately wants private banks to put that 3 Trillion dollar "honeypot" to work in the local economy - and they are trying to encourage that in any way they can.
 

Difficulty Commentary

We had a new difficulty adjustment kick in last night which kept us relatively intact at 18.59 TH from 18.67 - for a small change of -0.38%. Things have been somewhat quiet on the hashrate front despite the price rally which may reflect some delays due to supply chain (virus) and the holidays. With the current price action we do expect to see some pent-up hashrate supply come into the network in the first quarter of the year. Bull runs are famous for driving up prices for mining equipment and the corresponding supply shortages.

Thoughts on 2021:

As we close out a great (but very volatile) year for Bitcoin, let's reflect on the trends that played out this year - and which ones are likely to continue into 2021. 2020 was the year that bitcoin was put through the ultimate test - and emerged being formally recognized as a reserve asset. Not just by a niche technologist community - but by the world's top macro investors.

In the words of the New York Times, 2020 was also “the year the Fed changed forever” - the two, in our view, are very much related. As we have covered extensively in this publication, the Fed has completely shifted its policy stance and is aggressively pursuing a weaker U.S. dollar. This will very much continue into 2021 - likely pushing bitcoin further into the limelight as a reserve asset.

With MicroStrategy kick-starting the trend with its treasury purchase, other corporations, insurance companies, and even governments, that are considering purchasing Bitcoin will likely make announcements in Q1 - Q2 of 2021. With Bitcoin formally being recognized as a reserve asset driving client demand, there will be a flurry of investment activity to incorporate Bitcoin infrastructure in fintech companies and then traditional banks.

The Coinbase IPO will be the event to watch as a catalyst. If, or rather, when it is successful, it will create a precedent for others to follow. Expect to see mergers and acquisitions in the space, and maybe even a go-public event through a SPAC.

With a potential Bitcoin supercycle, there will undoubtedly be a push for regulation. Bad actor regimes will also try to benefit from Bitcoin, which will cause concern in developed markets.

As an industry, we are likely to see a renaissance in proof of reserves, which will be a great tool to show regulators operational robustness. There will also be a focus on KYC from regulators, which will likely fuel the bifurcation in KYC vs. non-KYC product offerings that we are already starting to see. This push can very well translate to pressure from governments on stablecoin issuers and privacy services such as mixers, as well as privacy coins. The recent events from the SEC towards Ripple have made it very clear that U.S. regulators will enforce the rules in their turf - and we are likely to see a lot more of that in 2021.

On the Macro side, the overarching theme will continue to be dollar weakness. We will see inflation in the U.S. dollar - which may push investors to exploring other asset classes and geographies, taking their “low cost” dollars to invest in markets that have more attractive risk-returns. As Michael Saylor notes, we are already seeing hyperinflation in “desirable assets” in USD terms. This is key and we will be breaking this down in our next BEC.

As always, we'll keep you posted on any relevant news throughout the new year right here and from our Twitter account @hodlwithLedn

Market-Moving Stats:
Bitcoin Hashrate and Network Difficulty:
Current Difficulty: 18.59 TH
Estimated Next Adjustment: 18.68 TH +0.05%
Time to next Difficulty Update: 14 days 
Difficulty All-time-high: 19.97 TH

Corporate Earnings

No relevant earnings for Bitcoin this week.

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