Crypto Index Tracker: Are Crypto Markets Underpricing the Fed?

The Federal Reserve (Fed) hiked 25bps on Wednesday, in line with market consensus and our own expectations. Crypto markets, having experienced an uptick after the news, appear to be pricing in the end of the tightening cycle. Equities were not as fortunate.

Perpetual futures have maintained positive funding rates (on average) throughout the week, which implies traders have paid a premium to remain long bitcoin.

US banking turmoil renewed confidence in Bitcoin. Crypto markets benefitted from news of more banks coming under pressure with the emergence of Pacific Western Bank and Western Alliance Bank as the next candidates for resolution. On Wednesday, their share prices plunged 60% and 38%, respectively. This comes just days after the resolution of First Republic Bank. Crypto (particularly bitcoin) appears to be one of the front runners for an alternative store of value amid collapsing regional banks in the US.

Markets continue to under-price the Fed. The Fed’s assessment of the economy was unchanged amid the banking turmoil, namely the labour market remains very tight, inflation is well above target, and ‘the process of getting inflation back down to 2 percent has a long way to go.’ During the presser, Powell did not rule out a further hike in June and based on current growth and inflation dynamics, we believe the market underestimates the risk of a hike in June (in absence of a debt ceiling crisis).

Performance of Our Indices

This week, all our indices are in the red, with our Bitcoin Index (-2.2% WoW) down the least and our Metaverse Index (-5.6% WoW) down the most (Chart 2).

Our Smart Contract Index remains most correlated to our Bitcoin Index (+85%). Meanwhile, our DeFi and Privacy indices are correlated +82% and +77% to our Bitcoin Index, respectively. Our Metaverse Index is correlated the least (+62%; Chart 3).

Correlation between our Bitcoin Index and all macro markets we track in this report remains positive (Chart 4). Our Bitcoin Index is now +45% correlated to the NASDAQ and +42% correlated to the S&P 500, from +50% and +38% last month.Meanwhile, its correlation to gold (+9%, last month: +35%) decreased, while its correlation to 10Y yields (+27%, last month: -7%) and oil (+20%, last month: -35%) flipped positive.

• Smart Contract Platform Index: Fantom (FTM) is the only token that is up while VeChain (VET) is down the most (-8% WoW). Ethereum is down (-1.7% WoW).
• DeFi Index: All tokens are down with Aave (AAVE) down the least (-0.9% WoW) and 1Inch (1INCH) down the most (-7.6% WoW).
• Metaverse Index: All tokens are down with The Virtua Kolect (TVK) down the least (-0.9% WoW) and RedFox Labs (RFOX) down the most (-12.4% WoW).

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.)