Crypto Index Tracker: Bitcoin Soars on Fed Balance Sheet Expansion

Bitcoin is leading the charge this week as investors digest inflation data, speculation around whether the Federal Reserve (Fed) will hike at the FOMC meeting next week, and growth of the Fed’s balance sheet.

Crypto markets rallied on inflation data. On Tuesday, inflation data revealed February headline CPI (+6% YoY) was in line with expectations, but core CPI (+5.5% YoY) rose +50bps MoM compared to expectations of +40bps. Crypto markets rallied in the moments after the release but gave back most of those gains throughout the course of the day.

CPI showed no incremental progress on disinflation. Dominique noted core inflation remained elevated (as in January) across the three major categories of shelter, non-shelter services, and goods. She also noted that the YoY median price CPI, which is a better measure of inflation trends than core when all prices are volatile, accelerated.

The Fed Balance sheet rose by $300bn. The Fed H.4.1 statistical release, published yesterday, revealed that the Fed’s balance sheet rose by $297bn for the week ended 15 March showing that US banks borrowed $152.9bn from the Fed’s discount window. Furthermore, the Fed lent $11.9bn to US banks under the newly created Bank Term Funding Programme (BTFP), which is designed to ‘help assure banks have the ability to meet the needs of all their depositors’. Essentially, it is an extra source of liquidity for banks to mitigate the risks of further bank runs.

Bitcoin breached $26,000. Crypto markets havestaged an impressive rally off the back of the revelations of the Fed balance sheet expansion. Indeed, there have been over $115mn worth of short liquidations over the past 24 hours as bitcoin soared past $26,000 and eyes up $27,000. As the stability of the banking sector remains under scrutiny, demand for bitcoin and cryptocurrencies appears to be on the rise.

Will the Fed hike next week? Dominique sees a subjective one third chance of a 25bp hike at next week’s FOMC meeting. Volatility has spilled over to banks outside the US (e.g., Credit Suisse), and Dominique believes its unlikely markets will have stabilised enough by the 22 March FOMC meeting. She expects the Fed to proceed more cautiously with rate hikes over the next quarter or so, which would be more bullish for cryptocurrencies, but she holds onto her longer-term view of a terminal federal funds rate (FFR) close to 8%.

Performance of Our Indices

Bitcoin outperformed all other indices this week. All our crypto indices are in the green this week, led by Bitcoin (+23% WoW). All other indices are up between +6% and +10% each. Our Metaverse index is up the most (+71% YTD) and our Privacy index is up the least (+26% YTD), once rebased to the start of this year. Meanwhile, Bitcoin is up +52% YTD.

Correlation between our Smart Contract index and Bitcoin dropped. Our Privacy (+84%), DeFi (+80%), and Metaverse (+80%) indices are most correlated to Bitcoin, while our Smart Contract index (+70%) is least correlated to Bitcoin (Chart 3).

Bitcoin turned negatively correlated to oil. On macro markets, Bitcoin’s correlation to oil has flipped negative (-62%, last month: +20%, Chart 4). Meanwhile, its correlation to the S&P 500 has increased to +10% (last month: +4%) while its correlation to the NASDAQ has increased to +21% (last month: +19%). Elsewhere, Bitcoin’s negative correlation to 10Y yields (-7%, last month: -24%) has reduced while its positive correlation to Gold (+27%, last month: +40%) has also come down.

• Smart Contract Platform Index: Fantom (FTM) is up the most (+22% WoW) while Terra Luna Classic (LUNC) is down the most (-2% WoW). Ethereum (ETH) is up +17% WoW.
• DeFi Index: Loopring (LRC) is up the most (+17% WoW) while Maker (MKR) is down the most (-13% WoW).
• Metaverse Index: Gala (GALA) is up the most (+24% WoW) while Aavegotchi (GHST) is down the most (-17% WoW).
• Privacy Index: Keep Network (KEEP) is up the most (+28% WoW) while Dash (DASH) is down the most (-2% WoW).
• Bitcoin: is up 23% 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.)