There's a new macro fund looking to invest $500 M in Bitcoin. The U.S. Dollar - where its going and how it can affect Bitcoin. What to make of the breakdown in gold prices.
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The Bitcoin Economic Calendar:
Week of Monday November 30th to Sunday December 6th.
Market Commentary:
Bitcoin: We got off to a good start this week and after kissing $19,500 on Wednesday, a Tweet by Brian Armstrong sent Bitcoin down sharply to lows of around $16,250 on Thursday. His thread stated that the U.S. Treasury Department may rush to push new policy around crypto that would make exchanges have to KYC externally hosted client wallets. Later on Thursday, Coindesk published an internal Coinbase post that warned its employees of a negative press piece that would be published by the New York Times later in the week. The piece, "Tokenized" by Nathaniel Popper broke on Friday, but Bitcoin was able to hold its footing, and did not make a new low on Friday. The NYT piece talks about recent employees leaving Coinbase citing recent events. Then, on Saturday news broke that helped to almost erase the negativity of earlier in the week. The announcement was that none other than the Guggenheim fund - a group that manages more than $233 Billion in total assets, has filed to allow the allocation of 10% of its $5 Billion Opportunity fund to buy Bitcoin. While Microstrategy's purchase of $427 Million is worth much more than that now - the Guggenheim allocation would be the largest initial allocation announced to-date.
All of this added up to Bitcoin closing the week at $18,202, down 1.28% for the week. We'll talk about what we can expect this week in our "What's ahead" section today.
S&P 500: S&P had a good week on the back of continued progress in the U.S. presidential transition. Consistent with analyst expectations that we had shared in the last issue, the S&P 500 closed Thanksgiving week up 2.27%. As we had discussed, Thanksgiving usually marks the start of a seasonally positive period for the U.S. equity markets. The prospects of a weak dollar will likely keep pushing equities higher. However, it may not all be smooth sailing into the new year. A report last week by JP Morgan very smartly points out that the recent outperformance of equities relative to bonds, has caused the stocks/bond ratios in large "Balanced funds" to become distorted. Very large "Balanced funds" have a mandate to maintain a particular composition of bonds vs. equities (for example, 60 equities/40 bonds). Many of them are sitting on "too much" invested in equities going into the end of the year. This means that there may be approximately $160 Billion rotating out of equities and into bonds before the end of November - or worst-case before the new year. Something to keep our eyes on as we head into the last month of the year.
Gold & DeFi: Gold had a really rough week, down 4.43% for the week - even in the context of a falling dollar. Investors are taking notice with some market commentators describing it as "on free fall". For more perspective, this was an up week for both equities and even oil prices. A falling dollar - barring other catalysts, should translate to higher gold prices. We do have a bias for Bitcoin here but these are signs that Bitcoin's inflation hedge narrative can be starting to suck the air out of the room in investor's minds, and maybe their portfolios. Remember, even with the current run-up in prices, Gold is a market that is still 27X bigger than Bitcoin. IF Bitcoin can continue driving a narrative of "inflation hedge that is bullish on human ingenuity" - and a call option on a new reserve asset - the upside becomes very compelling for Macro investors.
Looking at the FTX DeFi index - an important development to cover here is that ETH 2.0 reached its staking threshold of 528,288 ETH staked (or roughly just over $300 M) this week to activate the next step of the protocol launch this coming December 1st. This caused ETH to rally and close the week higher by 2.63%. But even this wasn't enough to push DeFi higher - closing the week down 4.31%. Bringing us back to last week, we start seeing that the DeFi index is lagging ETH on the way down and doing worst on the way down. This is consistent with our previous analysis and signals that the sector is out of favour. It will likely continue to underperform ETH and BTC in the near term.
The U.S. Dollar Index - where it's going and how it affects Bitcoin.
In previous issues we have discussed what a Central Bank's role is and how it benchmarks its performance. Understanding how they set their goals and how they are "graded", can give us insights into their behaviour. In the example of the U.S. Central Bank, the Federal Reserve, we covered how they set their goals by setting target inflation rates, and target unemployment rates - which are monitored every month through national statistic departments. There is another very important target that a Central Bank sets: the target exchange rate of the domestic currency - relative to its international trading counterparts. This may be the most important anchor for a few reasons: for one, currencies trade 24/7 - and investors can reflect their opinions quickly and openly in the foreign exchange market. Second, the exchange rate has to strike the right balance between pricing local goods and assets "too cheap" or "too expensive" relative to the rest of the world markets. This can materially affect a domestic company's ability to compete internationally - and it conversely affects the competitiveness of foreign goods in the domestic economy. Let's take a look at the U.S. Central Bank's exchange rate benchmark to see where we may be headed, and how that can impact Bitcoin and markets in general.
As a refresher, the Fed's target inflation rate for the near future is 2.25%. Current inflation (as of October) is 1.2% - meaning the Fed has an inflation "fiscal room" of 1.05% - it needs more inflation. Additionally, the Fed has a target unemployment rate of 4.37%, and the current unemployment rate reading came in at 6.9%, meaning they have an unemployment "fiscal room" of 2.53% - it needs to create more jobs. One of the main drivers of both inflation and domestic economic activity is the value of the U.S. dollar vis-a-vis its the currencies of its trading partners. The U.S. Government monitors this very closely, tracking it through the "Trade-weighted dollar index". In addition, the U.S. Treasury has a Foreign Exchange Stabilization fund that it manages alongside the Federal Reserve bank of to execute open market activities to "counter disorderly market conditions" - or when it sees foreign exchange rates dislocate from economic fundamentals. As of February 2020, the Exchange Stabilization Fund had $93.7 Billion in assets made up of $50 Billion USD equivalents, $22.6 Billion USD of U.S. Government Securities, $11.9 Billion in Euros, and $8.6 Billion in Japanese Yen. VERY INTERESTINGLY, the U.S. Treasury Department pledged USD $50 Billion in assets from the ESF to the FED for the emergency COVID lending programs. So this fund is actually backstopping some of the relief programs that are currently active.
Measuring the performance of the U.S. Dollar
To asses how the U.S. dollar is doing, the Federal Reserve creates a dollar index, made up of the "trade-weighted" average of the major U.S. trading partners currencies - mainly Europe and Japan. The U.S. Dollar index being used by the Fed today was started in 2006, and was indexed to start at a value of 100 for that year. The index, pictured below, is currently trading at 113.79.
As we can see from the graph, the index has ranged from lows of 85.53 in May 2011 and reached highs of up to 125.25 on March of this year. If we zoom out to the historical index, dating back to 1968, we can notice a few patterns:
Pattern 1: Historically, the index's highest point has been 131.55, coincidentally, in March 1985. The lowest point was reached in 77.78 in August 2011. Comparing that to the recent March 2020 levels of 125.25, we see that the current levels are close to the highest historical values for the Dollar index. And we also see that each time the index has previously approached the 120 levels, it reverts back very sharply. This tells us the U.S. Central Bank is very focused in not letting the dollar reach these levels.
Pattern 2: The shaded area in both graphs are U.S. economic recession periods. These tend to align with global economic shocks. As we can see, every time there is a shaded area, there is an initial "knee-jerk" reaction that drives the dollar sharply higher. These are commonly referred to as "flight to safety" by investors choosing to sell other assets to hold U.S. dollars in times of uncertainty. This strengthens the U.S. dollar, and can make a U.S. economic recovery harder by pricing their goods more expensive in the international markets, and suppressing inflation pressures domestically, which can affect/delay purchasing decisions.
What does this mean for Bitcoin and markets in general?
From the data above, and the statements that have been put out by the Federal Reserve, it is safe to assume that they will use every tool at their disposal to bring down the dollar index to levels closer to the 100 range - they may even want it to go below 100 for some time to drive domestic inflation higher and reduce unemployment. This means maintaining interest rates closer to zero to foster economic activity for the foreseeable future - and it likely means much more aggressive lending to banks and businesses. It means a weaker dollar is coming - and the Federal Reserve will make sure that is the case. This is Bitcoin rocket fuel - and the Fed has very little choice. This macro backdrop is likely a big reason why so many macro investors are hedging their dollars from inflation through Bitcoin. A weaker dollar will also bode well for U.S. companies competing internationally - and will likely lift equity market higher into 2021.
Difficulty Commentary
We had a difficulty adjustment kick in last night which came in higher than anticipated at 19.16TH - very close to our all-time highs of 19.97 reached in October. In a very short order, we already have enough hashrate in the network for a new all time high in the next difficulty adjustment (2 weeks from now). This is a great sign of strength for the network. And it can certainly be a comforting sign for institutional investors to see mining investment continue to show healthy growth. Keep hashing!
What’s ahead for the week:
If Brian's tweets are correct, the potential regulation that's coming out of the U.S. Treasury may significantly affect how end users in the U.S. interact with Bitcoin. This has the potential of hurting adoption - although Bitcoin will continue to be able to help those who need it most. If this law is passed - it will be up to us, the Bitcoin and Crypto community, to make things right again. Having said all that, the macro inflation hedge narrative is picking up a lot of steam around the investment community - and these guys have much deeper pockets than anyone already in Bitcoin. If current trends continue, this may push Bitcoin higher regardless of end-user adoption hiccups. While many of us would not want it to go down this way - it is always wise to hope for the best, but prepare for the worst. As always, we'll keep you posted on any relevant news throughout the week from our Twitter account @hodlwithLedn.
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: 19.17 TH
Estimated Next Adjustment: 20.61 TH + 7.58%
Time to next Difficulty Update: 6 days (Sunday December 13th, 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