Market Commentary

Here are the 3 things to look out for this week with Bitcoin.

Bitcoin

Bitcoin and equities are coming off 2 strong weeks as we head into the Fed’s interest rate decision this Wednesday. As we mentioned last week, Central Banks and governments have been active trying to appease markets - and they have been keeping at it. Japan is perhaps the best example:

We also saw the Bank of Canada surprisingly rise rates by 50 basis points, less than the expected 75 basis points, and said that they are “getting closer” to the end of increases: 

As we head into this week’s Fed Decision, the CME FedWatch tool shows an 88% probability of a 75 basis point increase. Investors seem to already be pricing in a 75 basis point rise for Tuesday - but the odds for the December meeting are evenly split between 50 and 75 basis points. 

If the Fed signals that it is looking to stay aggressive, markets could sell off. However, if the Fed signals it will be more “data dependent” going into December, markets could interpret that as a higher probability of a smaller hike in December, which could lead to markets getting bid higher.

Here’s a cheat-sheet for this Wednesday’s meeting:

Now, keep in mind that interest rates going up by any amount, is not actually good for stocks or asset prices. Financial conditions are still getting tighter - just more slowly. Markets are reacting positively because they are coming from an oversold condition after dropping by more than 25% in most cases, and because they are forward-looking. But many investors, retail and institutional alike, hold the view that there’s more downside to come. 

This is consistent with the volumes registered in short or inverse ETFs. These are instruments that are used to speculate on the market going down - and they are trading volumes not seen since 2009. Many retail investors are short the market. And, as we mentioned in our last dispatch - when everyone is expecting something to happen to profit from it, it rarely happens.

A good example of this dynamic is what happened in bitcoin prices over the last week. As we mentioned on our last dispatch, “Where do we go when everyone’s bearish” - the most likely group that could trigger a market move were exposed shorts. Bitcoin’s move higher last week coincided with a record number of short liquidations on FTX.

There’s still a lot of investors out there who are short, and that’s why the near-term setup is quite volatile. If markets move higher, the move will be amplified by those having to cover - but when the covering ends, the market will be staring at very tight financial conditions, and could rollover unless something materially changes.

This would be consistent with the observed seasonality of the S&P 500 on election years as per the chart below.

Historically, markets have seen a rally into the first half of November and sold off for the remainder of the year. History doesn’t repeat itself, but it often rhymes.

S&P 500

Earnings have made headlines on both sides of the isle, with ExxonMobile posting record profits and Meta Platforms (Facebook) posting disappointing results. But overall, earnings have been in line with analyst expectations - and bitcoin has held up remarkably well in light of tech earnings. 

This week we get another slew of big names, and an interest rate decision mid-week. Among the names reporting that could impact bitcoin prices are: Microstrategy, SoFi Bank, AirBnb, RobinHood, Coinbase, PayPal, MercadoLibre. We include the details of the reports in our Whats Ahead section.

Now, given where interest rates are - and the direction they are heading in, it’s natural for investors to be long-term bearish despite the recent short-term optimism. With that in mind, let’s take a look at some data that could suggest how much longer this bear market could take to unravel: 

As the chart above shows, from March 2020 to August 2021, U.S. consumers put away an aggregate $2.2 Trillion in excess savings. From September 2021 until September 2022, this has been depleted by -$0.7 Trillion. At the current pace, it could take another year or more to unravel. 

Notice how the pre-pandemic “norm” was for the Personal Savings Rate to hover in the positive from 5-10%. The Fed will likely need to ease interest rates to bring these savings rates back to positive once the “cushion” goes away. 

In other words, the Fed wants consumers to deplete their savings to maintain their now-more-expensive lifestyle (inflation, higher mortgage/rent cost). This prevents them from using the savings cushion for overspending and driving prices higher. Eventually the cushion will be depleted, consumers will start spending less, suppliers will have to compete by lowering or keeping prices steady, profits will drop, and the Fed will have to lower rates to boost the strength of the consumer again. The circle of (credit) life.

Gold

Gold finished last week down -1.07% and below $1,700/oz as the U.S. dollar index held steady. While gold typically benefits from a weaker U.S. dollar, it remains under pressure as high real interest on U.S. government bonds keep drawing investors in.

In the same way that gold is a great hedge when interest rates are below the rate of inflation, it underperforms when interest rates are above the perceived future inflation - which is what is happening now. Investors that are looking for a safe-haven investment, not too concerned about the upside, prefer to face the U.S. government and earn a positive return, than to sit on gold.

Expect this trend to continue until the Fed signals that it has reached its “terminal interest rate” - in other words, until it’s done raising interest rates.

DeFi

In Bitcoin terms, Ethereum price soared over 10% last week. Price is once again bumping up against the historical 0.08 BTC/ETH resistance, and the momentum is definitely in ETH’s favour at the moment.

There are a few reasons why this momentum has been building, and why it may continue to build:

• Staking Yield

Since the merge, staking Ethereum on a Proof of Stake validator has been yielding north of 4%. That has set the standard as the opportunity cost of Ethereum the asset. The “native-risk” rate for the protocol asset, if you would. Crypto investors love yield, and they have been piling into ETH staking - over 12% of the entire ETH supply is currently staked. This trend is likely to continue in the near term.

• Disinflationary asset narrative

Since the merge, ethereum supply has been flat. Essentially, it is burning roughly an equal amount of ETH as it is paying out in staking rewards - resulting in the supply of ETH being lower than when it was under Proof of Work. 

• More activity returning to ETH from other PoS blockchains since merge

The “Total Value Locked” in layer 2 blockchains for Ethereum like Arbitrum and Optimism, is now higher than the TVL in Solana. The trend in them is also very clear. Here’s what the Optimism TVL chart looks like:

And here’s what the Solana one looks like:

This is not surprising and it was, in fact, one of our predictions going into the merge. 

Expect for all of these trends to continue, and therefore providing a tailwind to Ethereum relative to other crypto assets in the near term. 

Mining

The recent squeeze has dealt a lot of miners a literal death blow. 

Core Scientific was one of the publicly traded miner that expressed it would be halting debt payments going forward as it looks to restructure and is facing insolvency:

As a reminder, Ledn does not lend to any miners and is not exposed to the sector. 

Core Scientific wasn’t the only one to signal that there’s trouble ahead. Argo Blockchain attempted to raise fresh cash by selling shares, and had to call off the fundraise as its share price plummeted.

Given market conditions: record high mining difficulty, soaring energy prices, high cost of raising debt, and unfavorable conditions to sell equity, this won’t be the last we hear from miners in trouble. 

What's ahead for the week

It’s a busy week ahead with earnings reports throughout the week, an interest rate decision from the U.S. on Wednesday and the U.K. on Thursday and the U.S. midterm elections next week. 

On the political front, leftist Lula Da Silva won the Brazilian election over the weekend with a razor thin 50.9% majority, defeating incumbent rightwing Jair Bolsonaro. Lula is not a new name in Brazil, those of us who remember Chavez and Dilma know the name well. Transparently, and speaking as an outside observer, both candidates were fairly polarizing in their views. While 50%+ of the country is enjoying their victory, the 49%+ that lost are concerned about the future of Brazil. From an economic perspective, the losing half is the one that controls a large share of the Brazilian private sector and wealth. So far, the Brazilian real has been holding up since the election vs. the U.S. dollar - a sign of investor confidence. We’ll see if this holds in the coming months. 

Lastly, in a sea of bears, Lloyd Blankfein, ex-CEO of Goldman Sachs, offered some contrarian views over the weekend. 

In a tweet, he mentioned that “seems EVERYONE negative on the market with sticky inflation, more rate hikes, bad stuff ahead. Yet.. inconceivable for all pundits to be right. Positives may be lurking”

His potential positive catalysts, which are important to keep in mind, are: a possible end to the China COVID lockdown rules, a truce in Ukraine, and a signalled slowdown from the Fed. 

With so much negativity, it’s not bad to have a few positives to look forward to.

Here’s a summary of the economic data and earnings reports for the week ahead:

Tuesday

Q3 Corporate Earnings Reports: MicroStrategy, SoFi, AirBnB,

Wednesday

02.00 PM EST - Federal Reserve Open Market Committee Interest Rate Decision

02.30 PM EST - Fed Speech - Jerome Powell on the Fed’s interest rate decision (estimate is for 0.75% increase)

Q3 Corporate Earnings Reports: RobinHood, Etsy

Thursday

08.00 AM EST - Bank of England Interest Rate Decision (estimate is for 0.75% increase)

Q3 Corporate Earnings Reports: Block, Coinbase, PayPal, MercadoLibre

Friday

08.30 AM EST - Non-farm Payrolls in the U.S. for October

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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