It’s been a turbulent week for asset prices, with Bitcoin dropping -11.20% last week, and down another 11% in yesterday’s trading session - reaching a new 52-week low under $21,000.

As many of our loan clients know, the recent drop in bitcoin prices has triggered requests for additional collateral to maintain a healthy LTV. As a result of the move, about 6% of our outstanding retail loan book has been closed - this includes both loans that were voluntarily closed by clients, and loans that were automatically closed as the price dropped and no additional collateral was received. 

The moves in asset prices and equities could be attributed in part to a series of market conditions and events.

1. U.S. Inflation reached a 40-year high of 8.6% in the month of May

3. The Federal Reserve is meeting this week to most likely announce a further increase in interest rates. This is happening as economic conditions in the U.S. are quickly worsening

4. Celsius, a lending company that once had over $11 Billion in assets on platform, and was deeply involved in listing alternative assets and using Decentralized Finance protocols to generate interest, has paused withdrawals from its platform.

These types of events are painful evidence that not all interest products are created equal. There are real differences in the risk that companies undertake to generate the interest rates that they offer clients - and these differences have very serious implications.

We spent some time yesterday in a Twitter Spaces giving our clients an update on our business and explaining what makes Ledn a very different kind of lender - and thought we’d provide a brief summary for those who could not join us. 

We have a very simple business model working only 2 high-quality, very liquid assets: bitcoin and USDC. 

We were the first lender to introduce proof-of-reserves, performing attestations that our clients can verify through a Certified Public Accountant every 6 months. 

We do not expose our client assets to Decentralized Finance Protocols to generate interest. We generate our yield by lending to a select group of well-established institutions such as Genesis Capital.

We did not raise funds through an Initial Coin Offering (ICO), and we do not have a token. 

In short, at Ledn, it is business as usual. 

Going back to the markets, the futures curves are showing all sorts of wonky shapes, with premiums throughout the different months trading a wide difference. Implied volatility in the bitcoin option contracts has also ballooned. This may be a symptom of low liquidity - and depending on what the Fed announces tomorrow, it could lead to even further selling pressure. 

If it is any consolation, according to Arthur Hayes, founder and ex-CEO of BitMEX, “looking on-chain, it appears that liquidations have mostly happened” - he might be referring to DeFi, but since DeFi tokens will be the last ones to catch a bid, it could be a good indicator of an eventual change in trends in overall sentiment towards digital assets. Let’s just hope that people learn their lesson this time in that all assets, and all interest offerings, are not created equal. 

Don’t trust, verify.

A bear market is defined as a 20% drop from the peak. Yesterday, the S&P 500 officially entered into a “bear market” as the Federal Reserve is anticipated to raise rates yet again this week. 

Now that we are in a bear market, the questions become: how much lower can markets go - and when will the markets bounce back?

Interest rates on U.S. bonds reacted aggressively to last Friday’s record-setting inflation reading. At the time of writing, the interest rate on a 10-year bond is 3.45%, and the interest rate on a 30-year bond is 3.42%. This is not the norm. Under “normal market conditions”, a 30-year note should pay a higher interest rate than a 10-year note. 

The U.S. dollar has been soaring on the back of the higher bond yields. The U.S. dollar index has risen by almost 3% in the last 3 trading days. This has added downward pressure on U.S.-denominated assets.

As mentioned above, markets seem to have priced in a 0.75% rate increase by the Fed. They will probably cheer if the increase is lower - and assets will likely remain under pressure if the Fed indeed pulls the trigger by 0.75%.

Gold is down more than 3% in the last 2 trading sessions. It has reacted negatively to the inflation reading. It’s not because gold is a bad inflation hedge. The reason the price is dropping is because the inflation rate has increased by a little bit (from 8.4% to 8.6%) - but U.S. interest rates are about to increase by a lot (either 0.50% or 0.75% increase). This makes the real return of the U.S. dollar (bond interest minus inflation) much higher. Which, in turn, increases the demand to hold dollars and get the “risk free rate” of the U.S. government. 

Look for this trend to continue until the Fed decides to turn a corner and stop hiking rates. At the current pace, the Fed is raising interest rates much faster than inflation is rising in the economy. This will continue putting downward pressure on gold.

Decentralized finance protocols have come under a lot of pressure recently as users withdraw their funds and sell their tokens. 

The large moves have triggered liquidations across the board as investors scramble to sell collateral and move it to different protocols in time. 

As liquidity continues to drain from the sector, it will likely remain fragile and prices could remain volatile.

Despite the drop in price last week, Bitcoin mining difficulty increased by 1.29%. 

The mempool has remained relatively stable throughout the market volatility and transaction times and costs remain within a normal historical range relative to the last 6 months.

The main event for the week will be the Federal Reserve’s Federal Open Market Committee meeting scheduled for Tuesday and Wednesday. The interest rate decision announcement will be issued on Wednesday at 3 PM. 

As we covered above, the most recent inflation reading from May has increased the probability of the Fed increasing the interest rate by 0.75% - taking it to 1.50%. A 0.75% increase in the interest rate would be the largest increase since 1994.

Given the market reaction to last week’s inflation reading, it looks as though investors are pricing a very high probability of a 0.75% interest rate. If the Fed decides to raise rates by only 0.50%, the market may celebrate and rally higher. If it does pull the trigger and raises interest rates by 0.75%, the market, and asset prices in general, will likely continue to be under pressure until one of 2 things happens: 

• Inflation in the U.S. stops increasing and starts coming down, or
• The war in Ukraine comes to an end, normalising oil prices and other commodities.

We hope you enjoyed reading and as always, we wrap up with a summary of the upcoming economic data and earnings reports for the week:

Tuesday:

2.00 PM EST - Federal Reserve Open Market Committee Meeting starts

Wednesday:

2.00 PM EST - Federal Reserve Press Conference on Interest Rate decision

It's a big week coming up, and as always, we'll keep you posted on any relevant news throughout the week right here and from our Twitter account.