Market Commentary
Announcement
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Bitcoin
Markets have been running on a treadmill for the last few weeks. After dropping to the mid $17k, and rising north of $24k, it is back at the same place it was 4 months ago. The same is true for the S&P 500. This is consistent with the “sideways chop” thesis that we’ve been highlighting and it is also consistent with the institutional flow of funds we’ve been seeing for Bitcoin and crypto assets in general.
According to Coinshares, the flow of funds towards institutional crypto asset funds has been effectively flat for the last 5 weeks.
Diving deeper into the numbers, we see that flows into bitcoin funds were positive to the tune of $8.8 Million last week, however, inflows into the “Short Bitcoin” fund were almost equal, at $6.7 Million. These two transactions effectively cancel each other out, which aligns to the current market somewhat poetically.
What is also interesting to highlight from this chart is how popular the “Short Bitcoin” fund has been this year. The year-to-date inflows of the Short Bitcoin Fund are more than ⅓ the total inflows to long Bitcoin funds.
What is interesting about the current environment is that there seems to be an almost consensus bearish view among market participants. As an example, the Bitcoin Fear & Greed index has been at “Extreme Fear” for over a month.
While investors have every reason to be bearish given the Fed’s agenda, when everyone’s already sold or hedged their positions - where does the market go? Even retail investors have bought a record level of puts or protection in case of a crash.
More on this in our next section, but suffice to say that when everyone is expecting something to happen to profit from it, it rarely happens.
Another chart worthy of our attention is the U.S. dollar index. After a parabolic rise, it has reached an overbought condition. Moreover, it is at a historical resistance in terms of price.
If the U.S. dollar index rolls over, this could act as a catalyst for risk assets. Additionally, we have an upcoming U.S. election, which could trigger any sort of “program” or “policy” designed to help the economy and things could get choppy to the upside.
Keep in mind that macroeconomic conditions are still largely a headwind, so we could see a typical “bear market rally”, and lose steam after the midterm elections unless the Fed changes its tune.
S&P 500
It’s been a wild ride to nowhere in equities - the S&P 500 is currently trading at the same level where it opened the month, but it has had wild swings in the process.
The big focus this week will be the start of Q3 earnings season, with reports from heavy hitters like Bank of America, Goldman Sachs, Tesla and Netflix. Many of which could impact bitcoin prices.
As we mentioned last week, banks and financial institutions stand to benefit from the recent interest rate environment, and the earnings beat from Bank of America on Monday was in line with that expectation.
It will be interesting to see how the surging U.S. dollar has impacted U.S. corporate earnings. For context, around 40% of the revenue of S&P 500 companies comes from abroad. This could impact guidance going forward, but that could already be priced in. While U.S. companies will face challenges with a strong dollar, they face much more favorable conditions than their European or Japanese counterparts.
Looking at the macro backdrop, inflation remains elevated in the U.S. as per the last report, and bond yields have continued to soar. The yield on the 10-year bond is north of 4% for the first time in over a decade.
Meanwhile, the consumer balance sheet continues to deteriorate. Personal Savings Rate has plummeted to less than half the pre-pandemic average, and revolving credit has skyrocketed past pre-pandemic highs.
This, and soaring mortgage rates have retail investors bracing themselves for the worst and piling into put contracts at record levels.
The VIX, which measures “fear” in the stock market, is at historically high levels, reflecting investor sentiment.
Which brings us to the following thought - big market swings are mostly driven by price incentive buyers or sellers. This could typically be over-leveraged investors, short investors rushing to cover their positions, or investors that just “lose hope”. In the current environment, most leverage seems to have been washed out, and many investors have lost hope - which leaves an interesting group of potentially insensitive buyers left: shorts that could need to cover. And you can bet that there’s quite a few people short in this environment.
All this to say, while long-term trends are still down, the near term price risk could be more to the upside.
Gold
Gold continues to be range-bound for the month, although it has had similar price swings as bitcoin and equities. Inflation remains stubbornly high in the U.S., which should act as a tailwind for gold, however, this emboldens the Fed to raise interest rates even more, which ends up being a wash.
While interest rates for U.S. bonds have been on an absolute tear, they seem to have started to run into some liquidity issues (in other words, no one is showing up to buy treasury bonds because they know yields will keep rising).
The Treasury department apparently reached out to banks to ask for their opinion on whether the Treasury should get involved in the markets to ensure adequate liquidity. In other words, they can step in to be the buyers of last resort and prevent yields from soaring even higher. If this indeed materializes, it would be bearish for the U.S. dollar, and bullish for risk assets, and gold.
DeFi
It’s been pretty quiet in terms of price for both Ethereum and the DeFi index. Both have been pretty anemic over the last 4 weeks and, much like bitcoin and other assets, they are trading at the same levels as early summer.
Looking at Ethereum in bitcoin terms, the price is squarely in the middle of its historical range.
Perhaps the most noteworthy news that didn’t get the spotlight this week was Tether’s announcement that they had fully removed commercial paper from their reserves.
The group eliminated more than $30 billion in commercial paper, or unsecured loans to companies, and added more $10 billion in U.S. Treasury bonds.
Institutional investors and large corporations reinforce their appetite for Ethereum environment while recently disclosing their new investments as network's validators:
In other news, EDF - the state-owned french energy group, through its subsidiary Exaion - announced the expansion of its validators ambitions last week. Founded in 2020, Exaion is viewed as EDF’s Web3 arm, with a strong presence in other blockchains such as Cosmos, Avalanche and Polkadot.
In DeFi hack and exploit news, there were 2 big incidents over the last week. First, Mango Markets, a solana-based market, confirmed that $117 million had been drained from the platform after an exploit. The second incident involved Binance Chain - where another exploit caused a loss of approximately $100 million in its native token.
Mining
Last week’s Bitcoin mining difficulty was adjusted upwards significantly. The network saw a 13.55% increase in mining difficulty to 35.61 T, a new all-time high.
Now that Ethereum has officially switched to PoS, one could argue that relatively cheap power is being used for BTC mining, leading to more miners being used.
In fact, as reported by The Block, Bitcoin miner Hive Blockchain said that profitability from GPU mining has plunged since shifting to altcoins after The Merge. Its revenues from GPU mining went from $120,000-$150,000 to $20,000-$30,000 per day. That same energy capacity deployed on ASICs mining bitcoin could produce around $41,000 at current difficulty levels.
On the surface, it would appear like Bitcoin is once again the best coin to mine. However miner profitability continues to give a rough time to those that bought ASIC equipment close to their all-time high price.
It currently takes more than 2,800 days to make $10,000 back, with $3.50 per day of profit. No wonder some publicly-listed miners reported negative earnings.
Lastly, last week yet another “fund” aimed at Bitcoin miners was announced by Binance. The company reported they will be providing over $500-million in investments to support BTC mining and infrastructure providers.
What's ahead for the week
The week ahead will have quite a bit of activity - here’s what you need to keep track of:
- U.S. Q3 Corporate Earnings Reports - we’ll hear from Goldman Sachs, American Express, Netflix, Tesla, IBM & more.
- Bond markets in the U.S., the U.K., and Japan, where liquidity conditions continue to deteriorate. This may push governments to have to step in. Japan is already fully committed to buying its own government bonds, and it has bought so many already that the Japanese 10-year note has gone 3 full trading sessions without exchanging hands once. A sign of how many are owned by the government already.
- U.S. Federal Reserve member speeches. They may hint at future interest rate policy and/or potential intervention in the Treasury bond markets.
Below is a summary of the times and dates when you can expect the data:
Tuesday
02.00 PM EST - Fed Speech - Raphael Bostic, Atlanta Fed President
05.30 PM EST - Fed Speech - Neel Kashkari, Minneapolis Fed President
Q3 Corporate Earnings Reports: Netflix, IBM, Goldman Sachs
Wednesday
05.30 PM EST - Fed Speech - Charles Evans, Chicago Fed President
Q3 Corporate Earnings Reports: Tesla
Thursday
05.45 PM EST - Fed Speech - Lisa Cook, Fed Governor
Friday
Q3 Corporate Earnings Reports: American Express
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.
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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