Bitcoin
After reaching a high of almost $45k a week ago, Bitcoin has dropped nearly ~15% on low spot trading volumes. The recent selling pressure has not been limited to bitcoin - risk assets across the board have been selling off. Let’s dive into why volatility could stay with us in the short term, and why network outlook for bitcoin remains very strong in the long term.
First, let’s discuss some of the reasons for the recent volatility.
For context, Cathie Wood’s ARK Innovation Fund ETF has dropped by almost 10% this week alone, and reached a new 52-week low during yesterday’s session.
The market is facing a lot of uncertainty on macroeconomic and geopolitical fronts.
On the macroeconomic front, markets were already having to deal with the U.S. Federal Reserve tightening their monetary policy and planning to raise interest rates as early as March 15th. Risk assets, broadly speaking, have been under pressure since the Fed announced their plans to gradually taper their bond purchases and eventually raise interest rates during their November FOMC meeting. More on this in our next section.
On the geopolitical front, news about escalating tensions between Russia and Ukraine have dominated headlines and are impacting investor behaviour.
The recent price action in bitcoin indicates that investors may be exercising caution into the current environment - with the U.S. Fed meeting again on March 15th.
As we covered last week, there continue to be rumours of a possible executive order from the White House to task Federal Regulators with overseeing the crypto industry.
Perpetual futures funding rates remain negative. Interestingly, the implied interest rate of the 3-month futures has dropped from 12% in November to around 3% currently.
Many investors used to take advantage of the “carry trade” by purchasing bitcoin at the spot price, and selling the future contract for delivery in 3-months. By doing so and delivering the bitcoin at maturity, they would earn the difference between the purchase price and the selling price of the future contract. This is how the implied yield is calculated.
Over the last week, we have seen over $2 Billion in bitcoin futures contracts get closed out. If we assume that some of these investors were participating in the carry trade, then unwinding their positions would entail buying back their futures contract (closing the open interest), and selling their spot bitcoin. This adds dynamic adds to the selling pressure in the spot markets.
With the total open interest for bitcoin futures still high relative to historic levels, this trend could continue as more investors deleverage.
Noticeably, short interest in bitcoin on the Bitfinex platform has not made a new high since November 2021, even though the price is currently trading lower.
Now let’s switch gears and take a look at bitcoin’s long-term network model.
The chart below is courtesy of Jurrien Timmer at Fidelity. It compares Bitcoin’s demand model to that of mobile phone users and internet users.
As you can see from the chart, the patch for bitcoin’s network effect remains intact and on-trend to be similar to that of mobile phones and the internet. While it is easy to get caught up in the short-term volatility, it is helpful to zoom out and look at bitcoin as a multi-decade technological and monetary phenomenon.
S&P 500
Equity markets continue under pressure given the current geopolitical and macroeconomic backdrop.
The Federal Reserve is trying to wrestle with soaring inflation in the U.S.. JP Morgan analysts expect up to 9 interest rate hikes - each at 25 basis points, until March 2023.
There are several Fed speeches this week, with most investors expecting the first interest rate hike to come during their March FOMC meeting.
If we play out JP Morgan’s scenario, they expect the overnight interest rate to reach 2.25% between now and March 2023. For context, the current yield on the 30-year U.S. treasury bond is 2.25%.
This typically means that the yield on the 30-year bond will have to rise much higher than 2.25% - otherwise the yield curve will be essentially flat.
Rising rates have a negative impact on the economy. For one, it significantly slows down the rate of growth in real estate asset prices.
Second, a higher “risk-free rate” affects most corporate valuation models, by discounting future cash flows at a higher rate, therefore reducing the present-value of the future cash flows. A fancy way of saying company stock prices go down.
This creates a very complex issue for the U.S. economy. With real estate and the stock market being the two largest sources of wealth in the U.S., depressing the prices of both will dampen economic activity and growth.
Essentially, the Fed is trying to engineer a slow-down of the economy without causing a recession. As Zoltan Pozsar from Credit Suisse wrote last week, it has never accomplished this before.
There is no longer debate about whether the Fed will raise rates on March 15th - the debate is now “how much will rates rise”.
Even if there is a de-escalation of the Russia-Ukraine tensions, the stock market relief could be short-lived, as the pressure from the Fed might be hard to overcome.
Gold
Gold had a phenomenal week last week, soaring past $1,900 for the first time since May of last year. It has now rallied more than +6.5% in the last 28 days.
Price action has been on the back of geopolitical tensions, high inflation, and steady U.S. bond yields over the last 2 weeks.
The U.S. dollar has remained flat throughout the recent geopolitical tensions. This is not usually the case, as the dollar index tends to rally in the face of geopolitical tensions.
A potential de-escalation of the current situation could result in the dollar index dropping. This could act as a further tailwind for asset prices.
DeFi
The DeFi index and Ethereum were both under pressure last week, finishing lower by -6.50% and -8.77% respectively.
A very big report broke this morning when Laura Shin, a Forbes reporter, revealed new research suggesting that she has uncovered the identity of the Ethereum DAO hack in 2016.
For context, the hacked assets would be worth approximately $11 Billion at today’s prices.
The suspect hacker has been identified as Toby Hoenishch. The article states that he “grew up in Austria and was living in Singapore at the time of the hack. Until now, he has been best known for his role as a cofounder and CEO of TenX, which raised $80 million in a 2017 initial coin offering to build a crypto debit card—an effort that failed.”
The report will likely trigger a widespread investigation into the hack. Another interesting note from the article was the fact that Shin disclosed that Chainalysis now has technology that can “unmix” bitcoin coinjoin processes like Wassabi Wallet. We will cover this at length in our next issue.
NFTs once again made headlines last week when some OpenSea users reported that some of their NFTs had been stolen from their accounts.
Reports mentioned that some OpenSea users received phishing emails in several weeks ago which took advantage of an exploit to make users “pre-approve” the transfer of their NFTs to the attacker at a cost of 0 ETH.
The attacker executed the plan over the weekend and OpenSea clients started reporting the attack while the OpenSea CTO was on stage giving a speech at ETH Denver.
NFT prices reacted negatively to the news, with the Bitwise Blue-Chip NFT indexes both dropping by more than -10% since last week.
Both indexes had a positive year-to-date performance as of last week - that is no longer the case.
Mining
Bitcoin's hashrate made an all-time-high of 213 EH/s., It is now up ˜141% since the China-mining-ban bottom of last year.
Last week's difficulty adjustment brought up difficulty by +4.78%. The next one should kick in next week, and it is expected to slightly decrease between -3.24% and -1.87% in this next epoch.
The mempool has shown some activity spikes, however, transactions are getting absorbed quite quickly. Transaction costs and speeds remain optimal.
What's Ahead
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About the author
Mauricio Di Bartolomeo
Mauricio is the co-founder and Chief Strategy Officer of Ledn.io. He grew up in Venezuela where he and his family learned about Bitcoin. Now based in Canada, Mauricio holds HBA and MBA degrees from the Richard Ivey School of Business in London, Ontario in Canada.
