Crypto Index Tracker: Crypto Markets See Red After CPI Report

April CPI showed no incremental progress on disinflation. Here are some of our main takeaways:

• A large increase in used car prices offset slower inflation in other categories.
• The ongoing recovery in rental indices suggests that progress on shelter cost inflation may be transitory.
• April core goods inflation rose to 0.6% due to a 4.4% increase in used car prices, which is converging to Manheim used car auction results, indicating further upside.

Bitcoin initially jumped following the release of the April CPI report on Wednesday. However, that momentum was short lived as bitcoin collapsed below $27,000 later in the day. According to data from Coinglass, over $117mn worth of longs were liquidated on Wednesday compared to around $71mn worth of shorts.

Is crypto decoupling from equities? The moves lower in crypto markets this week disagree with traditional equity indices such as the tech-heavy NASDAQ. The NASDAQ is currently up +1% MTD compared to bitcoin and ethereum which are down -10% MTD and -6% MTD, respectively.

Markets continue to under-price the Fed. 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.’ Markets are currently assigning just a 5% chance of a 25bp June FOMC hike. In our view, markets are under-pricing the risk of a hike and if current inflation and growth dynamics continue, a 25bp hike in June is likely (barring a debt ceiling crisis), which would be bearish for crypto.

Performance of Our Indices

This week, all our indices are in the red, with our Bitcoin Index (-6.3% WoW) down the least and our Metaverse Index (-15.6% WoW) down the most (Chart 2).

Our Smart Contract Index remains most correlated to our Bitcoin Index (+87%). Meanwhile, our DeFi and Privacy indices are correlated +83% and +81% to our Bitcoin Index, respectively. Our Metaverse Index is correlated the least (+75%; Chart 3).

Correlation between our Bitcoin Index and all macro markets we track in this report remains positive (Chart 4). Our Bitcoin Index is +41% correlated to the NASDAQ and +44% correlated to the S&P 500, from +46% and +36% last month.Meanwhile, its correlation to gold (+7%, last month: +25%) decreased, while its correlation to 10Y yields (+34%, last month: +4%) increased. Lastly, its correlation to oil (+19%, last month: -33%) flipped positive.

All cryptocurrencies in each of our indices are down this week:

• Smart Contract Platform Index: Terra Luna Classic (LUNC) is down the most (-16.9% WoW) and Ethereum (ETH) is down the least (-4.2% WoW).
• DeFi Index: PancakeSwap (CAKE) is down the most (-26.4% WoW) and Uniswap (UNI) is down the least (-3.5% WoW).
• Metaverse Index: Ultra (UOS) is down the most (-21.4% WoW) and Axie Infinity (AXS) is down the least (-10.9% WoW).
• Privacy Index: Beam (BEAM) is down the most (-28.9% WoW) and Monero (XMR) is down the least (-1.9% WoW).
• Bitcoin Index: is down -6.3% 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.)