Bitcoin & Crypto | Monetary Policy & Inflation | US
Global attention has been drawn to US data, particularly inflation rates. January CPI (Tuesday; headline: +6.4%, core: +5.6%) came in a touch higher than expected, on a YoY basis, for both headline and core (which strips out food and energy)…
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Global attention has been drawn to US data, particularly inflation rates. January CPI (Tuesday; headline: +6.4%, core: +5.6%) came in a touch higher than expected, on a YoY basis, for both headline and core (which strips out food and energy), though the MoM changes in both (headline: +0.5% MoM, core: +0.4% MoM) were in line with expectations. However, crypto markets focused on the fact that the January prints came in lower than in December and started the week strong. Bitcoin rallied above $25,000 yesterday for the first time since August 2022.
On the flip side, initial jobless claims (Thursday) declined to 194,000 (last week: 195,000), comfortably below expectations of 200,000. Producer Price Index data, which measures the change over time in selling prices received by domestic producers of goods and services, was released on the same day – it rose +0.7% MoM in January against expectations of +0.4%. Stocks tumbled on the news, dragging crypto down, too. Bitcoin hit lows of $23,400 yesterday – down around 8% from the daily highs. The short-term volatility has since abated with bitcoin and ethereum currently exchanging hands at around $23,700 and $1,670, respectively.
Overall, we believe inflation data for January showed no sign of impending disinflation. Moreover, unemployment at 50-year lows suggests potentials for upsides to wage growth and services inflation. And, despite the recent increase in the terminal and December 2023 Federal funds rate (FFR), we believe the market continues to under-price the Federal Reserve (Fed). Looking at the big picture, a hawkish case for longer rate hikes spells potentially bad news for risk assets, such as cryptocurrencies. Looking forward, we will be paying close attention to the FOMC minutes, due next Wednesday.
Performance of Our Indices
Our crypto indices are all up this week, with our Privacy index up the most (+16% WoW). All other indices are up between 5% and 8% each (Charts 1 and 2). Rebasing all indices to the start of 2023 reveals that that our Metaverse index is up the most (+98% YTD) and Bitcoin is up the least (+43% YTD).
Our Smart Contract (+86%), Metaverse (+83%), and DeFi (+81%) indices are most correlated to bitcoin, while our Privacy (+76%) index is least correlated to bitcoin (Chart 3).
On macro markets, Bitcoin’s correlation to S&P 500 (-2%, last month: +26%, Chart 4) has flipped to slightly negative while its positive correlation to the NASDAQ (+15%, last month: +37%) has reduced significantly. It’s positive correlation to oil (+14%, last month: +34%) has also come down relative to last month while its positive correlation to gold (+42%, last month: +18%) has increased. Lastly, Bitcoin remains negatively correlated to US 10Y yields (-21%, last month: -39%).
- Smart Contract Platform Index: Fantom (FTM) is up the most (+19% WoW) while Eos (EOS) is the only coin that is down (-1% WoW). Ethereum (ETH) is up +7% WoW.
- DeFi Index: Loopring (LRC) is up the most (+30% WoW) while PancakeSwap (CAKE) is down the most (-3% WoW).
- Metaverse Index: while RedFox Labs (RFOX) is up the most (+31% WoW) while Ultra (UOS) is down the most (-6% WoW).
- Privacy Index: Dusk Network (DUSK) is up the most (+78% WoW) while Decred (DCR) is the only coin that is down (-2% WoW).
- Bitcoin: this is up +8% 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).