Bitcoin & Crypto | Monetary Policy & Inflation | US
The main factors driving price action in crypto markets this week have been:
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- U.S dollar strength. The correlation between bitcoin and the U.S. dollar index (DXY) is typically negative, and the upward momentum of the DXY throughout the week has weighed on crypto markets.
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- Tight labour market conditions. The lower-than-expected initial jobless claims make it less probable for a pause to occur at the June FOMC meeting, given the FOMC’s repeated signals that looser labour markets are necessary for a reduction in interest rates.
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The main factors driving price action in crypto markets this week have been:
- U.S dollar strength. The correlation between bitcoin and the U.S. dollar index (DXY) is typically negative, and the upward momentum of the DXY throughout the week has weighed on crypto markets.
- Tight labour market conditions. The lower-than-expected initial jobless claims make it less probable for a pause to occur at the June FOMC meeting, given the FOMC’s repeated signals that looser labour markets are necessary for a reduction in interest rates.
- Hawkish Fed comments. Dallas Fed President Lorie Logan said ‘the data in coming weeks could yet show that it is appropriate to skip a meeting. As of today, though, we aren’t there yet.’ In short, the current data does not suggest a pause in rate hikes in June is justified.
- Debt-ceiling concerns. US stocks advanced Thursday, pulling crypto markets along with them, as debt ceiling talks made some progress.
Will the Fed hike in June? 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 adding to the probability of a 25bp hike in June with the latest 30-Day Fed Funds futures pricing implying a 43% chance of a hike in June. A continuation of the current labour market and inflation dynamics would justify a 25bp hike in June. But even if a hike is justified on economic grounds, a risk to this view is a debt-ceiling crisis, which would likely preclude the Fed from hiking in June and see risk assets sell off.
Performance of Our Indices
This week, all our indices are in the green, except for Bitcoin which is down -0.7% WoW. Our Privacy Index is up the most (+4.7% WoW) followed by our Metaverse Index (+4.5% WoW). All other indices are up between +1.5% WoW and 1.9% WoW each (Chart 2).
Our Smart Contract Index remains most correlated to our Bitcoin Index (+87%). Meanwhile, our DeFi and Metaverse indices are correlated +83% and +80% to our Bitcoin Index, respectively. Our Privacy Index is correlated the least (+72%; Chart 3).
Correlation between our Bitcoin Index and all macro markets we track in this report remains positive (Chart 4). Our Bitcoin Index is +38% correlated to the NASDAQ and +43% correlated to the S&P 500, from +52% and +41% last month.Meanwhile, its correlation to gold (+4%, last month: +28%) decreased, while its correlation to 10Y yields (+41%, last month: +2%) increased. Lastly, its correlation to oil (+19%, last month: -29%) flipped positive.
- Smart Contract Platform Index: Terra Luna Classic (LUNC) is up the most (+5.0% WoW) and Avalanche (AVAX) is down the most (-1.6% WoW). Ethereum (ETH) is flat WoW.
- DeFi Index: Aave (AAVE) is up the most (+5.1% WoW) and 1inch (1INCH) is down the most (-1.8% WoW).
- Metaverse Index: Decentraland (MANA) is up the most (+11.3% WoW) and RedFox Labs (RFOX) is down the most (-10.4% WoW).
- Privacy Index: Beam (BEAM) is up the most (+27.6% WoW) and Decred (DCR) is down the most (-7.3% WoW).
- Bitcoin Index: is down -0.7% 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).