Bitcoin
The U.S. dollar index soared by more than +1.33% last week, putting pressure on both bitcoin and equity markets. Bitcoin finished last week down -2.98% on very light volume.
From a technical standpoint, Bitcoin tried to overcome the 200-week moving average at $25,000 on 5 separate trading sessions from Feb 16th to the 21st and was rejected every single time.
From a momentum perspective, the data still looks positive for bitcoin. We are still not seeing any significant buildup in bitcoin short positions or open interest in bitcoin futures positions. The shape of the bitcoin futures curve also continues to show a healthy contango, with higher prices as the contract delivery dates go further into the future.
In terms of key technical support and resistance levels, we continue to monitor the 200-week moving average at ~$25,000 as potential resistance and the 200-day moving average at ~$20,000 as potential support.
Digital Asset Markets:
1. Not So De-Fi
Die-hard Decentralized Finance proponents have a popular meme: “code is law”. This saying became popular in Decentralized Finance over the last few years - alluding to the fact that no regulators or authorities could intervene in the Decentralized Finance world.
Well, last week these same proponents found out that “law is law”, and “code” is one more instance where the rule of law applies.
Some context. First, what happened?
Last year, a hacker found an exploit in the Wormhole bridge - a bridge is a fancy name for a “decentralized” exchange where users can exchange assets from one blockchain for assets of another one in a programmatic way. The hacker then used the exploit to drain over $308 Million dollars worth of assets. He then transferred the stolen funds to a non-custodial DeFi wallet developed by a group called Oasis (for clarity, Oasis was not involved in the hack).
But it turns out that the software developer of the “non-custodial” wallet had built a back-door for it - “in case the software got hacked and it had to intervene”.
Then, a group of white-hat hackers discovered the back-door and realized that it could be used to take the hacker’s funds away. The white hat hackers then alerted Oasis and a London court ordered that the back-door be used to transfer the assets from the hacker’s wallet to a wallet designated by the court.
What does this mean? On the “positive side”, this means that some legal systems could provide some levels of protection to DeFi investors. The “negative” is that it goes directly against the “Decentralized” nature of DeFi - and highlights how few projects are truly decentralized in nature.
2. Market Insights from the Coinbase Q4 earnings report
There are many insights that can be drawn from the Coinbase Q4 earnings reports. In today’s dispatch, we’ve highlighted 2 main data points that reflect investor activity for Q4 and potential learning lessons.
The first insight is that, despite its large institutional presence, Coinbase lives off of its retail clients.
Institutional trade volume represented 86% of their transaction volume at $125 Billion, but only generated $13.4 Million in revenue - or 4% of the total. This means that, on average, Coinbase charged its institutional clients around 0.01% in transaction fees.
Conversely, retail clients represented 14% of Coinbase’s transaction revenue at $20 Billion, but contributed 96% of the revenues at $308.8 Million. This means that, on average, Coinbase charged its retail clients more than 1.5% per transaction.
For comparison purposes, that’s equivalent to charging retail clients more than 100X more for the same transaction vs. institutional.
The second insight is that 64% of Coinbase’s transaction revenue came from Bitcoin and Ethereum trades. The remaining assets that it supports only brought in 36% of the revenue for Q4.
For context, Coinbase supports about 200 assets right now. This means that Bitcoin and Ethereum trades are driving 32% of the trades respectively. And that, on average, the remaining 198 coins that Coinbase supports generate about 0.20% of the revenue each. In other words, Bitcoin and Ethereum are more than 100X more popular than all other assets that Coinbase supports.
Macro
3. The Fed vs. Everybody
When the COVID pandemic brought the U.S. economy to a standstill the Federal Reserve jumped into action. It lowered interest rates to 0%, and injected all sorts of liquidity - directly and indirectly into the economy. At the time, other countries were not so prompt to loosen their monetary policy, and this resulted in the U.S. dollar weakening disproportionately relative to others. During the second half of 2020 everyone wanted to short the U.S. dollar.
But by November 2021, the U.S. economy was running so hot that the Fed announced it would start tightening economic conditions by rising interest rates in an effort to contain inflation. By this point, the rest of the global economy was still reeling from the effects of the pandemic, and was not in a position to tighten monetary policy as much or as fast as the Fed. This led to a massive rally in the U.S. dollar index after November 2021 until about October of 2022.
The chart below highlights the 2 trends that played out. The green/red line is the U.S. dollar index and the orange line is the overnight funding rate in the U.S. Notice the correlation.
To illustrate this further, the chart below shows the overnight lending rate in the U.S. (deep blue), Europe (orange), and Japan (light blue). Notice how the U.S. was able to cut rates by a wider margin than any other central bank, and is the only one in a position to raise rates as fast and furiously without “breaking” something in its economy. As examples, the Bank of Canada and the Bank of England, have both signalled that they will be “taking pauses” from further interest rate hikes - while the Fed is very clearly still on a path to raise further.
So, Where do we go from here?
As investors come to terms with “higher for longer” interest rates, this has sparked a rally in the U.S. dollar. For context, over the last 4 weeks, the Chinese Yuan has lost 3.3% of its purchasing power vs. the U.S. dollar. Over the same period, the Japanese Yen has lost more than 6% of its purchasing power. As central banks around the world “tap out” from raising rates further, and the Fed keeps going, this will likely keep strengthening the U.S. dollar until the Fed clearly signals it will stop raising rates.
This could deliver near-term pressure to asset prices, including bitcoin.
The Week Ahead
This week will be loaded with Fed speeches, economic data and corporate earnings relevant for bitcoin. On Wednesday we will get corporate earnings from bitcoin miner manufacturer Canaan. The biggest day for news and events this week will be Thursday. We will get inflation data for the Euro zone which is expected to come in north of 8%. We will also get a speech from Minneapolis Fed President Neel Kashkari, who often mentions stablecoins and bitcoin in his speeches.
As always, here’s a summary of the events and data that could move markets in the week ahead:
Notice for Canadian Residents: As of January 4, 2023, Canadian clients will no longer be able to take out new B2X loans. As of February 1, 2023, Canadian clients will no longer be able to open a new BTC or USDC Savings Account, deposit BTC or USDC to existing Savings Accounts or earn yield on any existing BTC or USDC Savings Account balances.
Notice for U.S. Residents: Effective March 1, 2023, U.S. clients will not earn interest on any BTC and/or USDC balance in their Savings Accounts and/or Legacy Savings Accounts. This article is intended for general information, educational and discussion purposes only, it is not an offer, inducement or solicitation of any kind, and is not to be relied upon as constituting legal, financial, investment, tax or other professional advice. This article is not directed to, and the information contained herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to law or regulation or prohibited by any reason whatsoever or that would subject Ledn and/or its affiliates to any registration or licensing requirement. This article is expressly not for distribution or dissemination in, and no Ledn product or service is being marketed or offered to residents of, the European Union, the United Kingdom, the United States of America or any jurisdiction in Canada, and such product or service may only be marketed or offered in such jurisdictions pursuant to applicable laws or reliance on regulatory exemptions. A professional advisor should be consulted regarding your specific situation. Digital assets are highly volatile and risky, are not legal tender, and are not backed by the government. 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. Any opinions or estimates expressed herein are subject to change without notice. This article may contain views or opinions of the author that do not necessarily reflect the opinions, standards or policies of Ledn. We expressly disclaim all liability and all warranties of accuracy, completeness, merchantability or fitness for a particular purpose with respect to this article/communication. Read our Disclaimers at https://ledn.io/legal/disclaimers
