Breaking down reflationary trades (stimulus inflation vs. vaccine-induced inflation). What drives our Savings Accounts interest rates? Potential future institutional catalysts for Bitcoin.
Not yet a Ledn client? Start earning 11.7% APY on your USDC and 6.5% APY on your Bitcoin today - click here to open your Ledn account!
Follow us in social media:
The Bitcoin Economic Calendar:
Week of Monday December 21st to Sunday December 27th.
Rate Update: We've announced our Savings Accounts interest rates effective as of January 1st, 2021: 12.25% APY for USDC and 6.25% for Bitcoin. We will be digging into the market dynamics that drive our rates, how they are set, and why they change in today's Market Trends section.
Market Commentary:
Bitcoin: Happy all-time high everyone. In movie-like fashion, this week saw even more institutional bullish activity than before - and we finally got the rumoured regulation out of the U.S., which as presented, does not pose the impending doom of self-hosted wallets that many thought could be coming. First, let's start with Guggenheims $400,000/BTC price prediction. On Thursday Scott Minerd, Chief Investment Officer at Guggenheim investments said "“Our fundamental work shows that Bitcoin should be worth about $400,000,” on Bloomberg. The price prediction caused Bloomberg's production team to pause a transition to a press conference by the Fed's Jerome Powell. I don't think Bitcoin has ever seen such a bullish call from Bitcoin Twitter anons - let alone one from the world's greatest institutional investors. The decision to stay with Minerd and not transition to the Fed's press conference was a very strong signal - a Bitcoin price prediction was more important than an update from the Federal Reserve in the middle of a crisis.
Later on Thursday, the news broke that Coinbase is officially planning to go public and has taken the first step in that process by filing an S-1 registration with the Securities and Exchange Commission. This will most likely act as a catalyst for the entire industry as investor appetite seems to be heating up, not just for protocol assets, but equity in companies building the new financial system.
Lastly, last Monday we mentioned that it was widely anticipated that the new legislation would be released during the week - and it finally came out on Friday. In a very unusual fashion, the Department of Treasury published the proposed law and is allowing for only 15 days for comments in the middle of the Christmas holiday and in the context of an administration with days left in its mandate. Under the advanced notice of proposed rulemaking, users who want to send cryptocurrencies from centralized exchanges to a private wallet would need to provide personal information about the owner of that wallet to the exchanges, if the amount sent is greater than $10,000 in one day. The exchanges would also need to submit and store records involving such transactions with a total value over $10,000 in a given reporting period, or just maintain records for transactions over $3,000. The rule does not outlaw privately holding Bitcoin for U.S. citizens - but it could severely affect user's abilities to interact with smart contracts or P2P platforms that do not collect information.
All of this added up to closing one of Bitcoin's most important weeks in history. Up 20.93% to a new all time high weekly close of USD $23,733/BTC. 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 _also_ closed the week at a new all-time high of 3,722.48, up 1.25%. This was on the back of a very dovish Federal Reserve press conference and the forming narrative that the Federal Reserve is now switching policy gears from Stabilization policies to Accommodative Policies. What does this mean? It means that the consensus view is shifting from a stimulus-led recovery, to a vaccine-driven economic activity recovery. While both trades are reflationary, the groups that stand to benefit vary widely. These views have been expressed in the markets and we can see it by comparing the performance of the "Stay-at-home" trade, let's use Amazon and Facebook for proxies - versus the "economic activity" trade. We'll use Disney (parks), Tesla (renewed vehicle demand), U.S. Steel (manufacturing), and Macys (consumer spending) - we can see that all of these stocks have broken considerably higher since July and with the "Stay-at-home" trade holding ground, that has led the overall markets to all-time highs. We can expect this to continue as the Fed has said it will not try to damper the recovery. This is creating other very interseting dynamics in emerging markets that we will cover int he next issue.
With the last-minute deal in the senate for $600 stimulus checks, look for the "stay-at-home" trade to look for a new leg up which will likely keep sending markets higher in the coming week.
Gold: We saw signs of life back in gold this week with it closing up 2.28% at $1,880/oz. This was likely on the back of the better than expected economic data coming out of the U.S., the vaccine in the horizon, and the Monetary Supply and Monetary Velocity dynamic that we covered in the last BEC. It would be rare to see Gold come down from these levels given the current backdrop and the seemingly very low risk of a strengthening dollar.
DeFi: Looking at the FTX DeFi index we see that once again, as we highlighted in the previous BEC, it underperformed the protocol level assets to the upsize. The index closed the week up 5.61%, well below BTC's 20.93% and ETH's 8.12% respective increases. The regulation out of the U.S., as proposed, could pose significant headwinds to the usability of smart contracts and decentralized exchanges in the U.S.. While some market participants may have already been "pricing this in" - now that the news is out in the public, this may lead to more decisions to divert away from the space until the scope and impact is assessed.
Interest Rate Dynamics
Difficulty Commentary
Not much has changed on the difficulty front, we are still holding strong at 18.67 THs. The next difficulty adjustment is looking to come in relatively flat - currently showing an increase of only 0.45% projected for next Sunday.
What’s ahead for the week:
Vaccines are rolling out and the prospects of an economic rebound in 2021 are looking increasingly more likely. The narrative will likely continue to build - with the underlying narrative being dollar weakness. With the Fed switching from a Stabilizing stance to an Accommodative stance, they won't be looking to front-run inflation, even it if it starts to creep in. This means a continued prolonged period of low rates. Couple that with a new $600 stimulus check for Americans and you have yourself an inflationary cocktail - which will likely continue to lift dollar-denominated markets higher.
On the Bitcoin front - the narrative seems to be quickly switching from "bitcoin as a novelty asset" to "you don't have bitcoin in your managed portfolio?". As we get to the end of the year, we may see more money chasing it - and it may be a reason why we have not seen a significant dip, even after rocketing through all-time highs. The following weeks will be big tests for Bitcoin. However, there is a bit of a perfect storm at the moment with buying pressure only growing - they are likely hunting for a dip.
To cap it off - we will likely learn more details about Coinbase as it prepares for its IPO, which may act as catalysts for the market. It has to create hype around its offering - and will act as PR for cryptoassets in the investment community. We will keep an eye for these announcements as well as more institutions and corporates jumping in.
Finally, while a lot of attention recently is on price, we'd like to share out thoughts on the proposed law out of the U.S. treasury: While we understand that regulators are looking to protect consumers, allowing for only 15 days of consultation, in the middle of the holidays, does not quite seem like the appropriate consideration for such a meaningful law. While we are not a U.S. entity, we will support our peers in their commentary and participation for this proposal. Our legal council is doing a full review, but as per our current understanding, this would not materially impact how Ledn interacts with its U.S. clients, other than some additional reporting requirements for withdrawals above values to be determined.
As always, we'll keep you posted on any relevant news throughout the week from our Twitter account @hodlwithLedn
Market-Moving Stats:
Bitcoin Hashrate and Network Difficulty:
Current Difficulty: 18.67 TH
Estimated Next Adjustment: 18.68 TH +0.05%
Time to next Difficulty Update: 7 days (Sunday December 27th, 2020)
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