As Macro Factors And Geo-political Tensions Take Center Stage, Crypto Assets Continue To Consolidate Ahead of Halvening
It has been a busy week for financial markets with the release of CPI data on Wednesday and PPI data on Thursday garnering the attention of investors trying to assess whether or not the Federal Reserve aims to lower interest rates this year. While the data came in mixed, with CPI coming in slightly hotter than expected and the PPI coming in slightly cooler than expected, there have been some very notable moves in major tradfi markets. We will quickly cover some of these major moves and then consider how these could impact crypto assets in the coming months.
Figure 1. US 10 year yields have risen sharply this week.
The yield on the US 10-year government bond rose sharply this week to approximately 4.58 % after investors reacted to the mixed inflation data and a notable weak auction of 30-year bonds was met with poor demand. The growing concern around the fiscal health of not only the US government, but many sovereigns around the world, has become a recurring theme over the past year. This may account for the impressive rally we have witnessed in gold, which is up 15% this year (Figure 2) and may also be contributing to the consistent bid for Bitcoin.
Figure 2. Gold has broken out and has delivered one of its best performances in years.
Another major macro development this week is the weakening of the Japanese Yen vs the dollar, with the USD/JPY breaking through 152, a level not seen since the early 1990s.
Figure 3. The Japanese Yen has weakened to a level unseen since the early 1990s.
A strong US dollar, rising yields and the recent uptick in oil prices, which are up approximately 10% over the last 30 days (up 20% YTD), should spell trouble for risk assets overall. Despite this, the Nasdaq index is up nearly 9% year-to-date and is lingering around its all-time highs. Needless to say, investors could be excused for being confused by this price action, given the current macro backdrop. The fact that 2024 is an election year could be one explanation for this price action. Another is that investors may have sniffed out that larger for longer budget deficits will mean that over-extended sovereigns may eventually employ inflation, currency debasement and even capital controls/confiscation to deal with these issues.
We haven't even mentioned the rising tensions in the Middle East, where US officials are warning of an imminent Iranian strike on Israel, and the South China Sea, where China’s faceoff with the Philippines may be reaching a tipping point.
Figure 5. Meanwhile, Bitcoin has been resting just beneath its all-time-highs set a few weeks ago.
In bizarre and chaotic markets such as these, it is no wonder that alternative stores of value, such as Bitcoin, are getting a lot of attention. Amidst all of this turmoil, Bitcoin is solidly above $70K, as of this writing, as we rapidly approach the halvening event. While the halvening event is well known and likely fully priced in, the fact that this event has traditionally been viewed as the starting gun for past crypto cycles looms large amongst crypto asset investors. While there may be some “sell-the-news” reaction in the coming weeks, and there is a chance that some of these macro risks could derail the crypto market to some extent, we do consider many of these macro factors and uncertainties as conducive to further crypto adoption.
Latest Crypto Developments
In this section, we highlight the latest developments that may be significant in either the price action or the trajectory of the crypto space overall.
BlackRock Adds Wall Street Giants as Authorized Participants for Bitcoin ETF
BlackRock has expanded its roster of Wall Street firms authorized to buy bitcoin for its iShares Bitcoin Trust ETF, adding Citi, Goldman Sachs, UBS, and Citadel Securities alongside JP Morgan and Jane Street. This move could indicate a shift in sentiment among financial incumbents who have largely dismissed the asset due to the stigma attached to the crypto sector. The addition of these firms as authorized participants comes amid a surge in bitcoin’s price and a notable increase in institutional interest in spot bitcoin ETFs.
JPMorgan Anticipates Potential Litigation for Spot Ethereum ETF
JPMorgan has indicated that if the SEC does not approve a spot Ethereum ETF by May, litigation is expected to follow, potentially mirroring the outcome of previous legal battles with Grayscale, which led to the approval of the Bitcoin ETF. Despite current rumours of SEC investigations into the Ethereum Foundation and concerns over ether being classified as a security, JPMorgan remains optimistic about Ethereum's future classification and the eventual approval of spot Ethereum ETFs, although not as soon as May.
Coinbase Secures Canadian Registration
Coinbase has achieved registration as a restricted dealer in Canada eight months after launching in the country, marking it as the first international and the largest crypto asset exchange to be registered there. This milestone is part of Coinbase's strategy to expand its global presence and navigate regulatory landscapes outside the U.S. The registration aligns with Coinbase’s efforts to collaborate with Canadian financial institutions and aligns with a broader interest in regulated crypto services among Canadian consumers.
Solana Network Faces Congestion Challenges
The Solana network has encountered congestion issues due to an influx of spam transactions and a high volume of transactions associated with new memecoins. The network's architecture, which processes transactions directly to block leaders without a mempool, has been overwhelmed, leading to many transactions being dropped. The Solana development team is actively working on software patches and updates to address these issues, with bug fixes expected to roll out in the coming weeks.
Bipartisan Call for Crypto Regulation in Senate Hearing
During a Senate Banking Committee hearing on illicit finance and terrorism, both Republican and Democrat senators expressed the need for regulatory changes to address the misuse of digital assets for illicit activities. Concerns were raised about the use of crypto by bad actors, including North Korea, Russia, and terrorist groups. Lawmakers and the Treasury Deputy Secretary discussed the necessity for a modernized approach to crypto regulation that ensures compliance without stifling innovation in the digital asset space.
Hong Kong regulators could approve Bitcoin ETF by May
Harvest Global Investments Ltd., part of China's Harvest Fund Management Co., is on the verge of securing approval from Hong Kong regulators to launch a spot Bitcoin ETF, aligning with the city's ambition to become a digital-asset hub. This follows the Securities & Futures Commission's recent authorization for the firm to manage virtual-asset funds, a move that reflects Hong Kong's strategic efforts to enhance its financial sector's modernity. The introduction of spot Bitcoin ETFs in Hong Kong, amid Bitcoin's significant price rally and the global success of similar funds in the US, signals a major step forward in positioning the city as a competitive center for crypto assets alongside Singapore and Dubai.
Market Returns
That's Some Good Content!
Recommended articles, podcasts, and other content from this week:
On the Margin podcast - The U.S Debt End Game (Part 1/2) | Lyn Alden & Luke Gromen
Forward Guidance podcast - The Anatomy Of Bubbles | Jonathan Treussard on Private Credit, Nvidia, and Dangers of “Engineered Yield”
On the Brink podcast - Quinn Thompson (Lekker Capital) on why the Macro matters for Crypto
The Breakdown podcast - The Bitcoin Halving Through History
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