Bitcoin & Crypto | Monetary Policy & Inflation | US
This week, crypto markets sold off as markets refuelled expectations that the Bank of England (BoE) will hike 25bps in May and June, following a hotter-than-expected UK inflation print (headline: +10.1% YoY, core: +6.2%).
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This week, crypto markets sold off as markets refuelled expectations that the Bank of England (BoE) will hike 25bps in May and June, following a hotter-than-expected UK inflation print (headline: +10.1% YoY, core: +6.2%).
A long squeeze ensued as leveraged longs hit hard. Data from Coinglass revealed that over $262mn of long liquidations occurred on Wednesday, with over $95mn worth of longs liquidated on Binance alone.
Coinbase flirts with move outside the US due to regulatory pressures. Coinbase CEO, Brian Armstrong, recently noted at the Innovate Finance Global Summit this week that the ‘UK is our second-largest market in terms of revenue. We’re founded in the US, and I think the US has the potential to be an important market in crypto – but right now, we’re not seeing the regulatory clarity we need.’ Coinbase recently secured a licence to operate in Bermuda, too.
We do not agree with the Fed rate cuts priced in. March US CPI showed no incremental progress on disinflation (a smaller decrease in used car prices offset a slower increase in shelter costs), and so, the risks of higher-for-longer interest rates remain. We agree with markets pricing an 85% chance of a 25bp hike at the 3 May FOMC meeting but disagree with the c. 40bps of cuts priced in over the remainder of the year.
Performance of Our Indices
This week, all our crypto indices are in the red, with our Privacy Index (-8.0% WoW) down the most. All other indices are down between -3.8% and -7.5% (Chart 2).
Our Smart Contract Index is most correlated to our Bitcoin Index (+88%). Meanwhile, our DeFi and Privacy indices are correlated around +85% to our Bitcoin Index. Our Metaverse Index is correlated the least (+72%; Chart 3).
Equity correlations intensified. Our Bitcoin Index is now +52% correlated to the NASDAQ and +40% correlated to the S&P 500, from +33% and +22% last month (Chart 4). Meanwhile, its correlation to gold (+22%, last month: +37%) reduced relative to last month. Bitcoin’s correlation with 10Y yields (+4%, last month: -8%) flipped to marginally positive, while its negative correlation to oil (-28%, last month: -52%) reduced in magnitude, compared to last month.
- Smart Contract Platform Index: Chainlink (LINK) is the only coin up (+1% WoW), while Eos (EOS) is down the most (-14% WoW). Ethereum is down -3% WoW.
- DeFi Index: Loopring (LRC) is the only coin up (+0.1% WoW), while Aave (AAVE) is down the most (-11% WoW).
- Metaverse Index: Ultra (UOS) is up the most (+12% WoW), while Phantasma (SOUL) is down the most (-16% WoW).
- Privacy Index: All coins are down. Secret (SCRT) is down the least (-3% WoW), while Keep Network (KEEP) is down the most (-11% WoW).
- Bitcoin Index: is down -7% 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).