Bitcoin & Crypto | Monetary Policy & Inflation | US
Hawkish central bank sentiment continued to build in the US and Eurozone this week, helping drive renewed selling across assets, broken only by a risk-led rally following strong US data points.
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Hawkish central bank sentiment continued to build in the US and Eurozone this week, helping drive renewed selling across assets, broken only by a risk-led rally following strong US data points. US rates were flat through the early week, with selling dominating on Wednesday following a strong positive surprise in the ISM ‘prices paid’ reading. The US 10Y traded above 4% before finding support there. Peak Fed rate is now trading above 5.5%. For much of the early week, US equities trended lower, while elsewhere they were flat. Thursday saw them break higher following strong labour market data.
Until Thursday evening, Bitcoin largely traded in line with broad US equities, but the price snapped on news around the troubles at crypto-focused bank Silvergate. The bank announced it would be unable to file annual report on time with SEC due to weakening capital position. The news saw Bitcoin drop around 4.5% to trade just south of $22,400, where it is relatively stable.
Macro data right now continues to support our belief that the US economy remains robust and that US disinflation remains some way off. Friday’s final services PMIs added further to this with a beat versus expectation and a big positive jump in the employment component. In this environment there is further room for the market to price a more hawkish Fed, which could see further weakness across assets (risk assets in particular). On that basis, if the Fed does end up choosing to hike by 50bp at its next meeting it could be particularly bearish for crypto currencies.
Performance of Our Indices
All of our crypto indices fell back this week, led by our Metaverse index (-8% WoW), followed by Smart Contracts (-6%). Defi was the relative outperformer down just over 1% on the week. (Charts 1 and 2).
Our Smart Contract (+87%), Privacy (+81%), and Metaverse (+81%) indices are most correlated to bitcoin, while our DeFi (+78%) index is least correlated to bitcoin (Chart 3).
On macro markets, Bitcoin has become less correlated to all markets save for Brent in the last week (where it shifted from neutral to -32% correlation). Correlations with S&P 500 (-8%, NASDAQ (+3%) and 10Y UST (-2%) are all now roughly neutral, while the correlation with gold collapsed midweek (from +40% to +16%; Chart 4).
- Smart Contract Platform Index: eos is up the most (+5% WoW) while avalanche-2 is down the most (-12% WoW).
- DeFi Index: Maker is up the most (+19% WoW) while Loopring (LRC) is once again down the most (-11% WoW).
- Metaverse Index: Phantasm is down the least (-2% WoW) while Enjincoin is down the most (-15% WoW).
- Privacy Index: Keep-network is up the most (+7% WoW) while Zencash is down the most (-10% WoW).
- Bitcoin: is -7% this week.
What Are in the Four Indices?
Here are the indices in more detail:
- Bitcoin: the OG of crypto markets deserves its own category and is in many ways the true benchmark for any other crypto market.
- Smart contract platforms: after bitcoin, the big innovation was to have blockchains that were more programmable. These could host smart contracts or decentralised applications and have allowed the emergence of the metaverse and defi. Ethereum (ETH) is the most popular version of a smart contract platform. As well as ethereum, we also include some key competitors. The constituents of this index are: Ethereum (ETH), Cardano (ADA), Avalanche (AVAX), Solana (SOL), Fantom (FTM), VeChain (VET), Terra (LUNA), EOS (EOS), and Chainlink (LINK). We also include Polkadot (DOT) which allows interoperability between blockchains and the use of smart contracts via parachains.
- Metaverse: coins associated with the creation of a virtual space/digital world on the internet using a combination of augmented reality, virtual reality, and social networks. The constituents of this index are Axie Infinity (AXS), The Sandbox (SAND), Decentraland (MANA), Enjin Coin (ENJ), Aavegotchi (GHST), Terra Virtua Kolect (TVK), Ultra (UOS), Phantasma (SOUL), RedFOX Labs (RFOX), and Gala (GALA).
- Decentralised Finance (DeFi): financial services built on top of blockchain networks with no central intermediaries. This can be a broad category, so we narrow this down to platforms that focus on lending/borrowing, yield farming, automated market making and decentralised exchange tokens. The constituents of this index are: Aave (AAVE), Compound (COMP), Uniswap (UNI), Yearn.finance (YFI), Loopring (LRC), PancakeSwap (CAKE), Maker (MKR), 1inch (1INCH), Thorchain (RUNE), and Terra (LUNA).
- Privacy Coins: coins that obscure transactions on the blockchain to maintain the anonymity of its users and their activity. The constituents of this index are Monero (XMR), Zcash (ZEC), Dash (DASH), Verge (XVG), Horizen (ZEN), Beam (BEAM), Secret (SCRT), Decred (DCR), Keep Network (KEEP), and Dusk Network (DUSK).
Dalvir Mandara is a Quantitative Researcher at Macro Hive. Dalvir has a BSc Mathematics and Computer Science and an MSc Mathematical Finance both from the University of Birmingham. His areas of interest are in the applications of machine learning, deep learning and alternative data for predictive modelling of financial markets.
Photo Credit: depositphotos.com
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
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