This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Crypto markets have tracked lower this week as investors digested the potential of a US debt default as well as comments from the latest FOMC minutes. Meanwhile, around $2.3bn (bitcoin) and $1.2bn (ethereum) worth of options issued by Deribit expired this morning with both cryptocurrencies holding their ground (bitcoin: c.$26,400, ethereum: c.$1,800).
Hitting the X-date will not lead to a US default, if the US stays on its debt service payments. Historically, the Treasury planned prioritised debt service payments during previous debt ceiling standoffs, and it is likely to do so this time around.
FOMC minutes revealed the door remains open for future rate increases. Our main takeaways from the minutes are that there has been limited progress on disinflation, lower GDP and employment growth are needed, and more tightening could be needed to bring about the economic slowdown required to ease rates.
Will the Fed hike or pause in June? Strong growth and inflation dynamics since the last FOMC meeting warrant a June rate hike based on economic grounds, supported by a 44% probability according to the latest 30-Day Fed Funds futures pricing. However, FOMC members face the challenge of reconciling tightening credit conditions with weakening credit demand, compounded by uncertainty surrounding the macroeconomic impact of the banking crisis. The ongoing debt ceiling standoff further complicates the situation. Absent a debt-ceiling crisis, we anticipate a June hike, otherwise, we would expect the Fed to pause until the crisis is resolved, and hike thereafter.
Performance of Our Indices
This week, all our indices are in the red with our Bitcoin Index down the least (-1.4% WoW) and our DeFi Index down the most (-5.1% WoW).
Our Smart Contract Index remains most correlated to our Bitcoin Index (+81%). Meanwhile, our DeFi and Metaverse indices are correlated +78% and +73% to our Bitcoin Index, respectively. Our Privacy Index is correlated the least (+63%; Chart 3).
Equity correlations rise. Our Bitcoin Index is +52% correlated to the NASDAQ and +40% correlated to the S&P 500, from +49% and +36% last month.Meanwhile, its correlation to 10Y yields (+33%, last month: +3%) also increased. Elsewhere its correlation to gold (-7%, last month: +42%) flipped to negative, while its correlation to oil (+7%, last month: -24%) flipped to positive.
- Smart Contract Platform Index: Ethereum is the only coin to have made gains (+0.2% WoW) while Fantom (FTM) is down the most (-10.4% WoW).
- DeFi Index: All cryptocurrencies are down with Maker (MKR) down the least (-0.3% WoW) and PancakeSwap (CAKE) down the most (-15.8% WoW).
- Metaverse Index: Mixed performance with The Virtua Kolect (TVK) up the most (+13.7% WoW) and Decentraland (MANA) down the most (-7.5% WoW).
- Privacy Index: Verge (XVG) is up the most (+3% WoW) and Secret (SCRT) is down the most (-11.3% WoW).
- Bitcoin Index: is down -1.4% 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).