Possibilities are infinite
29 Mar 2021
Digital asset market consolidates further after hitting ATH two weeks ago. Bitcoin tested 50dma and held; Ethereum’s momentum remains weak as price broke below 50dma (also confluence with 0.382 Fib retracement) — increasing number of DeFi projects expanding into other Layer 1 protocols/planning on roll-up solutions, and continued disagreement between developer and miner community have been weighing down on Ethereum prices. Notable outperformers were $THETA (+40%), $FIL (+59%), $SOL (28%), $KSM (30%), and $CAKE ($57%). DeFi complex mostly underperformed.
Traditional institutions continued to increase their involvement in digital asset space. Fidelity, one of the first mainstream investment firms to offer digital asset custodianship, announced plans to launch Bitcoin ETF, joining 4 other ETFs pending for approval in the US. Elon Musk also tweeted that Tesla would enable Bitcoin as a payment option, and outlined company’s financial policy on Bitcoin holdings — one salient point from the policy was that Bitcoin paid to Tesla would not be converted to fiat currency, hinting at Tesla’s perception of Bitcoin as a unit of account and medium of payment as opposed to just a store of value or an asset class. Musk’s twit came 2 days before Bitcoin’s $6.4bn record options expiry (Chart 1), raising suspicions that Musk was aware of the options expiry dynamics, and wanted to buoy Bitcoin price ahead of expiry.
Anyhow, Tesla’s policy does raise questions on the prevailing narrative of Bitcoin and digital assets ecosystem. As mentioned in previous week’s report, Bitcoin’s correlation with risk assets (as indicated by SPY, Chart 2) has been increasing,
while its correlations with gold, dollar and bonds (as indicated by GLD, Chart 3) have been decreasing.
While we continue to believe that digital assets would outperform traditional asset classes given supply dynamics and favourable narrative, it is worth noting such correlation and other barometers for systemic risks in broader macro world.
On the macro side, major indices largely ran in place. Investors continued to weigh reopening optimism and relative calm in benchmark 10-year Treasury yields against resurgence of COVID cases in both US and Europe as well as potential supply chain stress due to Suez Canal closure. Market also took a moment to reflect on the exceptional bull market since the 3/23/2020, as trifecta of unprecedented fiscal stimulus, monetary stimulus, and vaccine buoyed the market. One notable reading this week was the sizable decline in weekly jobless claims, falling by nearly 100k to 684k last week — the first report below 700k since the pandemic began. However, the reading is still punitively high, demonstrating how much dislocation remains in the labour market. As market heads into month- and quarter-end, all eyes are on whether Friday’s lasthour rally in stock market could sustain and on Biden’s $3tn infrastructure plan.
What is Happening?
Brazil’s Securities and Exchange Commission approved 2 separate digital assets ETF this week. The first ETF is based purely on Bitcoin, and would be launched by QR Asset Management by June. The other involves Bitcoin and five other digital assets (ETH, LTC, BCH, LINK, XLM), replicating the Nasdaq Crypto Index (“NCI”), which is rebalanced quarterly. The NCI-linked will be offered to customers of two major Brazilian banks. Market participants are hopeful that the approvals could speed the approval of a similar product in the US — there are currently four bitcoin ETFs applications (by WisdomTree, VanEck, NYDIG Asset Management, and Skybridge) pending review by the US SEC.
New Zealand Funds Management’s retirement fund allocates 5% of its fund to Bitcoin, citing the cryptocurrency’s similartieis to gold as one of the biggest reasons behind the trade. The CIO of the fund revealed the firm first bought BTC when it was at little over $10,000 back in October 2020. Narrative of Bitcoin as digital gold appears to be a given now, with even Jerome Powell reiterating last week that Bitcoin should be considered “a substitue for gold rather than the dollar”.
With poor March seasonality and record options expiry behind us, Bitcoin and the broader crypto market are poised to shoot higher. We are waiting, albeit patiently on the bid.