Bitcoin & Crypto | Monetary Policy & Inflation | US
Federal Reserve (Fed) minutes released on Wednesday provided limited incremental information with inflation still ‘unacceptably high’. Bitcoin fell from weekly highs of c. $25,250 to lows of c. $23,500 prior to the release of the minutes but has since stabilised at around $23,800.
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Fed minutes released on Wednesday provided limited incremental information, with inflation still ‘unacceptably high’. Bitcoin fell from weekly highs of c.$25,250 to lows of c.$23,500 before the release of the minutes but has since stabilised at around $23,900.
The labour market ‘remained tight’, according to most participants, ‘contributing to upward pressure on wages and prices’.
Fed views align with ours. That is, unemployment at 50-year lows suggests potential for upsides to wage growth and services inflation. Indeed, the labour market remains resilient – weekly initial jobless claims (Thursday) fell 3,000 to 192,000 against 197,000 expected.
Inflation data shows no signs of impending disinflation. FOMC participants have repeatedly announced disinflation has started, but Dominique thinks it has been limited to core goods and driven by falling used car prices. That could change.
Rising used car prices could be a problem. New cars are becoming increasingly unaffordable, and the ratio of used to new car prices is stabilising well above pandemic levels. Dominique sees potential upside for used car prices within the next few months, which would end core disinflation.
An end to disinflation risks a higher peak in interest rates. The terminal federal funds rate (FFR) could go beyond the recent increases in market pricing, and the March FOMC bring a 50bp hike. Ultimately, risks of bolstering the hawkish case at the FOMC would be bearish for cryptocurrencies.
Elsewhere, we find cause for volatility. Almost $2bn worth of bitcoin options expire today, the put/call ratio sits at around 0.80, and we expect liquidations to drive some short-term volatility.
Performance of Our Indices
Our crypto indices mostly remain in the green this week, with our Metaverse index up the most (+9% WoW). Meanwhile, our Bitcoin, Smart Contract, and DeFi indices are up between 1% and 6% (Charts 1 and 2). Our Privacy index is flat. Rebasing all indices to the start of 2023 reveals that that our Metaverse index is up the most (+116% YTD) and Bitcoin is up the least (+45% YTD).
Our Smart Contract (+86%), Privacy (+83%), and Metaverse (+82%) indices are most correlated to bitcoin, while our DeFi (+79%) index is least correlated to bitcoin (Chart 3).
On macro markets, Bitcoin’s correlation to S&P 500 (-10%, last month: +26%, Chart 4) has flipped negative while its correlation to the NASDAQ (+3%, last month: +37%) is now neutral. Its positive correlation to oil (+6%, last month: +31%) continues to reduce in magnitude while that of gold (+45%, last month: +12%) has increased. Lastly, Bitcoin remains negatively correlated to US 10Y yields (-26%, last month: -35%).
- Smart Contract Platform Index: VeChain (VET) is up the most (+21% WoW) while Fantom (FTM) is down the most (-7% WoW). Ethereum (ETH) is flat WoW.
- DeFi Index: Yearn Finance (YFI) is up the most (+32% WoW) while Loopring (LRC) is down the most (-7% WoW).
- Metaverse Index: Aavegotchi (GHST) is up the most (+50% WoW) while Phantasma (SOUL) is down the most (-5% WoW).
- Privacy Index: Decred (DCR) is up the most (+11% WoW) while Dusk Network (DUSK) is down the most (-15% WoW).
- Bitcoin: this is up +1% 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.)
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