Inflation Hedge vs. Risk Asset
13 December 2021
Since the sharp sell-off on 12/4, crypto market continued to consolidate; bitcoin has been range-bound in the $47,000–52,000 range, while ether chopped between $3,800–4,500. Market structure is also reflecting the uncertain market participants — bitcoin futures open interest (Chart 1; $17.3bn) has picked up slightly, while funding rate (Chart 2) remains in the zero territory.
Although we turned constructive on risk following flushing out of liquidity and outperformance of ETHBTC and alts ($LUNA, $MATIC) last week, we remained light in our bags with then-upcoming inflation print on Friday, and FOMC meeting this Wednesday. As our readers might have already seen, the correlation between traditional assets and cryptocurrencies have been picking up, and it was best represented by bitcoin’s reaction to CPI print on Friday — following the prints which were in-line with expectations, bitcoin shot up 1 big figure to $50k. However, as market digested that this cements accelerated pace of Fed tapering, bitcoin sold off sharply to $47k. Since this sell-off, ETHBTC (which we perceive as good barometer of risk) retraced from 3-year high of 0.0888 to current level of 0.0816, pushing bitcoin dominance 50bp higher to 41.1%. We are still light on our bags and are waiting for further clarity from the FOMC statement and press conference this Wednesday, as well as price action.
On the adoption side, capital gravy train and blockchain adoption continue… On the adoption side, Facebook integrated Novi, its cryptowallet, on WhatsApp, allowing users to send/receive money via USDP (Pax Dollar); Kickstarter also unveiled a plan to build a decentralized crowdfunding protocol on the Celo blockchain. On the funding side, Paradigm, a crypto derivatives platform, raised $35mio (at $400mio valuation) in a fundraise led by Jump Capital and Alameda Research; Dan Tapiero’s 10T also filed to launch a $500mio growth equity fund for crypto and blockchain firms, following its $750mio fund just 3 months ago; lastly, M12 (Microsoft’s venture fund) led Palm NFT Studio’s Series B raise. On the purchase side, Michael Saylor did it again, buying 1,434 more bitcoin, bringing the total to ~122,478 bitcoin (at average price of $29,861/bitcoin).
On the macro side, risk traded better on the back of market climbing 2 key walls of worry: path of the Federal Reserve and the path of Omicron variant. On the former, Powell previously surprised the market with a somewhat hawkish pivot (‘transitory’ to be retired when discussing inflation), and November inflation print this week (6.8% YoY headline inflation, 4.9% YoY core CPI), which came in-line with expectations, may have sealed the deal. The Fed has dual mandate of labour and inflation, and with unemployment rate on continuously improving trajectory (Chart 3; initial jobless claims 184k vs. Est. 215k, lowest level since 1969), the Fed may be shifting its focus to battle inflationary pressures. All eyes are thus on the December FOMC meeting + press conference for detailed numbers on accelerated balance sheet tapering, as well as a new set of economic projections, including the dot plot.
Although the market initially had a more risk-off reactions to the Fed’s updated path, it has since regained its footing as equities traded firmly (ES +3.8%, best weekly gain since February; NQ +3.6%). Nonetheless, we expect more volatility in the months ahead, as liquidity gets removed from the system and rate hikes materailize. On the latter, following Dr. Fauci’s statement that the Omicron variant does not appear to be “a great deal of severity”, the head of CDC said that the US cases of the Omicron variant appeared to be mild, and Pfizer’s early studies showed that a bosster shot of their vaccine ‘neutralized’ the new variant. Nonetheless, the broader consensus is to wait for further data around the Omicron variant.
What is Happening?
Crypto executives attend U.S. House of Representatives Financial Services Committee hearing, marking the first time the industry’s leaders explained their businesses to US lawmakers amidst growing concerns crypto may pose systemic risks and hurt investors. The hearing mostly focused on stablecoins, Web3 adoption, and US positioning on crypto (vs. other countries) — for summary of the hearing, please refer to this great thread.
Fear is weakness leaving the market, and we have added some delta to our book on 12/3 sell-off. Since then, we’ve been sitting on our hands, welcoming further consolidation in the market. While we wait for opportune time to add to our positions, we’re happily harvesting yield on DeFi protocols (given compressed yields on centralized exchanges), and on the exposures-side, we are holding onto majors (BTC, ETH, etc.) as we think they offer better risk-reward (in case things blow up — in a bad way).