Crypto Index Tracker: Crypto Markets Shake Off Rate Hikes

The Federal Reserve (Fed) hiked 25bps. On Wednesday, the Fed delivered a 25bp hike, in line with consensus. The end-2023 Fed funds rate (FFR) in the new Summary of Economic Projections (SEP) was unchanged at 5.1%. The statement released at the end of the meeting saw Fed officials express confidence in the health of the US banking system whilst also acknowledging that ‘the Committee remained highly attentive to inflation risks’. Bitcoin fell to lows of around $26,600 after the news of the rate hike.

Bitcoin shakes off Wednesday’s losses. Since bottoming out for the week on Wednesday, positive momentum has returned for Bitcoin, and it has regained most of the losses it incurred after the Fed rate hike decision. It’s currently stabilised at around $28,000.

The Fed is hoping for a goldilocks banking crisis.  Dominque noted that the Fed is hoping for banking volatility not so hot it would lead to a full crisis but still hot enough to reduce the need for Fed hikes. In practice, banking crises tend to be either full on or not happen at all, so the federal funds rate is likely to get cut much more than the market is pricing or hiked much more than the Fed is envisaging.

We think the probability of a full blown crisis is low – the latest Fed balance sheet data has shown some stabilisation in the banking system with overall lending to banks showing no increase last week.

Are 2023 rate cuts likely? Markets are pricing around 75bps of cuts between May and December. We believe the 2023 rate cuts prices in are unlikely, in part thanks to the well-capitalised nature of the US banking system making a full-scale banking crisis unlikely.

Performance of Our Indices

Bitcoin outperformed all other indices this week. All our crypto indices are in the green this week, led by Bitcoin (+13% WoW). All other indices are up between +3% and +10% each. Once rebased to the start of the year, our Metaverse index is up the most (+79% YTD) and our Privacy index is up the least (+33% YTD). Meanwhile, Bitcoin is up +72% YTD.

Our Smart Contract Index is most correlated to Bitcoin (+85%). Meanwhile, the remaining three indices have a correlation with Bitcoin of around +83% (Chart 3).

Bitcoin is negatively correlated to oil. On macro markets, Bitcoin’s correlation to oil has flipped negative (-42%, last month: +5%, Chart 4). Meanwhile, its correlation to the S&P 500 has increased to +23% (last month: -12%) while its correlation to the NASDAQ has increased to +32% (last month: +1%). Elsewhere, Bitcoin’s correlation to 10Y yields (+3%, last month: -24%) has moved into positive territory while its positive correlation to Gold (+29%, last month: +41%) has come down.

• Smart Contract Platform Index: All coins are up. Fantom (FTM) is up the most (+20% WoW) while Terra Luna Classic (LUNC) is up the least (+1% WoW). Ethereum (ETH) is up +8.6% WoW.
• DeFi Index: Loopring (LRC) is up the most (+15% WoW) while Maker (MKR) is down the most (-3% WoW).
• Metaverse Index: The Sandbox (SAND) is up the most (+12% WoW) while Phantasma (SOUL) is down the most (-6% WoW).
• Privacy Index: Dash (DASH) is up the most (+20% WoW) while Beam (BEAM) is down the most (-8% WoW).
• Bitcoin: is up 13% 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.)