Market Commentary

Bitcoin

Last week was, by far, the wildest week in the history of the crypto asset industry. Just days ago, FTX was one of the largest crypto exchanges in the world. Today, it is bankrupt.

FTX had over 1 million registered users from all around the world, and held over $14 Billion of their assets. From Argentina to Zimbabwe, average people were impacted and now have no access to their assets. This will be a significant blow to retail crypto participants, and it will certainly jolt regulators into action.

To make matters worse, all evidence points to the fact that FTX was using client assets to lend to its affiliate companies, who later sustained significant losses, and could not pay FTX back. As assets were being funnelled out of the platform, FTX and its affiliates masked the fraudulent operations by misrepresenting their financial statements. It was, quite literally, a crypto-ponzi. 

How was Sam Bankman-Fried able to fool the world? The answer is a combination of duping big-name investors, donating to the democratic party, sitting in front of congress, hugging ex-presidents, meeting with regulators, paying for celebrity endorsements, having very connected lawyer parents from Stanford, stadium sponsorships, and importantly - a false promise of “effective altruism”.

While it will still take time to understand the full ramifications of the collapse, the industry will survive, and learn from its mistakes.

During the collapse, bitcoin traded its highest weekly volume ever, as it dropped by more than 22% - from north of $20k to the mid $15k range. 

Not surprisingly, investors have taken a cautious approach towards the crypto, as they should. And the blowout will likely continue putting downward pressure on bitcoin and crypto asset prices in the foreseeable future.

S&P 500

Equity markets soared last week on the back of a light inflation report. There is a big contrast currently between equities and crypto assets - with the S&P higher by +5% in the same time period that bitcoin has dropped by ~20%.

Investors are displaying optimism that the Federal Reserve will move to a slower pace of rate increases for its upcoming meetings. The yield on the 10-year bond is down by more than -10% since the inflation report came out.

However, Fed officials have been quick to point out that, while the Fed may cut the size of its increases, they remain committed to fight inflation at all costs.

As a refresher, the current rally in equities is consistent with historical performance during midterm election years. As mentioned in our previous dispatches, markets tend to rally after election results are announced, however - during bear markets like the one we are currently in, markets have historically rallied until approximately mid-november and given back most of the gains towards the end of the year. 

While there is certainly excitement in the investor community about inflation starting to cool down, the reality is that interest rates remain very high relative to the last 2 years, and they will continue to put pressure on economic activity and markets in general. 

Investors should expect quite a bit of volatility in asset prices between now and the end of the year.

Gold

Gold prices have soared over the past 2 weeks on the back of a weaker U.S. dollar. The U.S. dollar index has broken to the downside after its parabolic advance. 

The gain in gold prices, of about 5%, almost mirrors the drop in the U.S. dollar index during the same period (-4.1%). 

Additionally, gold has benefited from Central Banks around the world purchasing gold for their reserves in the current monetary environment. 

While this initial knee-jerk reaction to slower inflation has lifted gold prices higher, it’s important to keep in mind that the Federal Reserve still plans to continue increasing interest rates. This will continue strengthening the U.S. dollar and should resume downside pressure on gold prices in the near future.

DeFi

In bitcoin terms, ethereum prices continue to be stuck within their historical price range since the merge. 

While it still looks poised for another run to the 0.08 BTC historical resistance mark, the recent events in crypto markets should continue putting pressure on most crypto assets.

Another interesting phenomenon that has become apparent in this cycle, is the fact that investors are finding refuge for the potential crypto-winter in stablecoins. 

The total supply of USDC stablecoin on Ethereum has actually grown by more than $2 Billion over the past 2 weeks. This shows that the number of investors going from crypto assets to stablecoins outnumbers the amount of investors converting their USDC back to cash. This should bode well for crypto assets, since stablecoins are often seen as “dry powder” on the sidelines that could quickly fuel a bull run once the market turns. 

Mining

Bitcoin miners are continuing to get squeezed left, right and center. Although difficulty dropped just slightly (-0.20%) in the last epoch, difficulty is still near record highs. The drop in bitcoin prices has drastically reduced their U.S. dollar revenues, causing many publicly traded miners to miss analyst estimates during their recent earnings reports. 

The most recent publicly traded miner to signal trouble was Iris Energy. They announced that they would be facing default on $103 M worth of equipment loans. 

Iris Energy has now joined Core Scientific and Argo Blockchain as the most prominent listed miners to be facing trouble. 

While this bear market will squeeze some operators out of business, it provides an opportunity for more prudent and well capitalized miners to take market share. It would not be surprising to see consolidation in the bitcoin mining space in the weeks and months to come. 

What's ahead for the week

With U.S. midterm elections now behind us, investor focus will likely shift back to inflation and the Federal Reserve’s plan for interest rates. Although the latest inflation report for October showed a healthy drop in core inflation (from 0.6% in September to 0.3% in October), Fed officials have been quick to warn investors not to extrapolate a single report. 

The fight against inflation could take a long time, and Fed officials are not mincing words when discussing what the potential impact of high interest rates could be. 

With earnings season now behind us, investor focus will gravitate toward December FOMC meeting, where the Fed will once again decide how much to increase rates by. 

There are 7 Fed speeches between today and Sunday, and they could likely move markets. 

Below is a summary of the market moving data and events that you can expect for the week ahead.

Thursday

07:30 AM EST - Fed Speech - Atlanta Fed President, Raphael Bostic

08:00 AM EST - Fed Speech - St. Louis Fed President, James Bullard

09.15 AM EST - Fed Speech - Fed Governor, Michelle Bowman

10.40 AM EST - Fed Speech -  Fed Governor, Phillip Jefferson

Friday

08.40 AM EST - Fed Speech - Boston Fed President, Susan Collins 

Saturday

01:45 PM EST - Fed Speech - Atlanta Fed President, Raphael Bostic

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.

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Notice for U.S. Residents: Effective April 4, 2022, U.S. clients will no longer be able to earn interest on any newly deposited funds in their BTC and/or USDC Savings Accounts, where available; however, they will continue to earn interest on their pre-existing balances in their BTC and/or USDC Legacy Savings Accounts.

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