Wednesday, Jan 24, 2024

China to the rescue, Bitcoin dominance, Texas weather and bitcoin

“It's not what you look at that matters, it's what you see.” – Henry David Thoreau  ||  

Hi all! I’m making progress on the recording function - got the tech figured out, but am still not fast enough to avoid a significant send delay, so no audio today. Getting there, though!

You’re reading the daily premium Crypto is Macro Now newsletter, where I look at the growing overlap between the crypto and macro landscapes. There’s also usually some market commentary, but I don’t give trading ideas, and NOTHING I say is investment advice. For full disclosure, I have held the same long positions in BTC and ETH for years, and have no intention to either buy more or sell in the near future.

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Note 1: I forgot to tell you yesterday that I was invited on to the Real Vision Daily Show on Monday night! Here’s the link.

Note 2: I’m speaking at BlockWorks’ upcoming Digital Asset Summit conference in London on March 18-20. Normally I say no to conferences, but this is one of the very few worth travelling for. If you’re thinking of going, it’d be great to say hi, and here’s a discount code you can use: CIMN10.

IN THIS NEWSLETTER:

• It’s bitcoin’s market again

• The Chinese mirage gets a bit sharper

• Texas, snow and bitcoin

WHAT I’M WATCHING:

It’s bitcoin’s market again

After a few days of disappointing drops, the BTC price seems to be perking up a bit. I’ve argued elsewhere that the pain was not as much ETF outflow-inflicted as it was macro-reset inflicted – both drivers seem to be settling down for now with a potential bullish sign coming from China (more on this below).

(chart via TradingView)

An intriguing feature of the latest leg down is that media and commentary focus was on how badly BTC was performing and how it was dashing the expectations of ETF investors. I saw a few suggestions that the losses would keep mainstream investors away for some time.

But, especially in the latter stage of the slump, BTC outperformed other crypto assets, as we can see by the climb in its market dominance. In the chart below, you can see how ETF speculation pushed the BTC.D dominance index (the blue line) up, and then how closing out of positions and rotation into ETH (the next likely spot ETF) pulled it back down. For most of the post ETF-drop, however, bitcoin’s dominance has been steady or climbing.

(chart via TradingView)

This only makes sense if the market blues are not BTC-focused, if it’s not all about GBTC redemptions. In other words, there’s more going on here. Like I’ve said before, this slump is also about risk sentiment.

For now, it looks like the rates expectations correction is taking a breather, with the market-priced probability of a cut in March almost back to where it was a week ago.

(chart via CME FedWatch)

I still think there’s more adjustment ahead – a greater than 50% chance of a cut in two months makes no sense, unless unemployment is shooting up or the Treasury market breaks or banks start to wobble.

This latter possibility is not out of the question, as expectations are that the Fed will go ahead with the withdrawal of the BTFP facility introduced after last March’s banking crisis, which lets banks swap under-the-water bonds for a loan valued at par. This would kick yield curve issues right back onto bank balance sheets.

But, the market doesn’t seem too worried – the KRE regional bank ETF is roughly 40% above its May low.

(chart via TradingView)

And if the Fed has any concerns about the resilience of the sector it is entrusted with overseeing, it could just extend the BTFP, rather than bring forward rate cuts, see inflation pick up, and have to weather a massive reputational hit.

Commercial real estate loans are going to start biting harder unless rates come down. But I don’t see the Fed allowing a wave of banks to fail, and it has ways to help the sector without an emergency rate cut.

The Chinese mirage gets a bit sharper

Yet again, crypto watchers are scouring the horizon for signs of massive liquidity injections from China. The reasoning is that China is a massive crypto market, and liquidity injections will stir speculative froth and boost demand for crypto assets.

I was skeptical, up until this morning.

My doubts were based on the nature of the stock market support announced earlier this week. One of the measures involves the mobilization of 2 trillion yuan (~$278 billion) from offshore accounts of Chinese state-owned enterprises to buy shares onshore via Hong Kong. On top of this, roughly 300 billion yuan (~$42 billion) will invest in Chinese stocks via mainland venues.

Obviously, Chinese officials are worried about the stock market slump that has erased $6.3 trillion in value since the 2021 high, dragging the benchmark CSI 300 Index to a five-year low earlier this week.

(chart via Bloomberg)

But the spin being put on the measure is that it is a market structure problem – there are issues with how the capital markets in China function, which is why investors are selling and not reinvesting. Of course. Yesterday, the Global Times reported that the China Securities Regulatory Commission (CSRC) will focus on making market structure more stable:

“An official from the CSRC also said that the country's top stock market regulators will cultivate long-term and stable investment forces, enrich policy tools to cope with market volatility and guard against risks.”

Here’s another good quote:

“The commission will enrich policy tools to cope with market volatility, hedge against risks in a timely manner and firmly hold the bottom line in preventing risks.”

Guarding against risk sounds like a priority, which is why I assumed the authorities would ensure that any market support would not find its way into speculative assets. The mentioned funds, since they belong to state-owned companies, would be strategically allocated, and crypto investors would barely get a whiff.

What’s more, the Chinese stock market barely reacted to the news, signalling that investors were not that impressed.

Today’s news adds a new layer, however.

This morning, China announced that it will cut the bank reserve requirement ratio by 50 basis points on February 5 to provide 1 trillion yuan (~$140 billion) in long-term liquidity to the market. It will also cut the relending and rediscount rate for bank loans designated for small firms and agricultural businesses by 25 basis points as of tomorrow.

The way this news was released was unusual. Normally, the State Council drops hints that an adjustment is coming, and then China’s central bank (PBOC) announces a move on its website. This time, the PBOC Governor Pan Gongsheng delivered the news directly to reporters at a briefing.

Also, the size of the cut is unusual. Previous adjustments have been of a more careful 25 basis points.

Taken together, the measures suggest that Chinese authorities are perhaps more worried than they have been letting on. The stock market support felt a bit wishy washy, and very unlikely to move crypto markets. The RRR cut and interest rate adjustments are a bigger deal, suggest even more liquidity urgency, and have a potentially broader application which could end up boosting some speculative investment.

Premier Xi Jinping has often hinted that he is concerned about speculation creeping back into the Chinese investor mindset – but I’m betting that, round about now, he’d welcome some froth of any flavour.

Texas, snow and bitcoin

It’s cold in Texas. True, it’s really cold in much of the US (I hope you’re all doing ok!), but Texas is known for its open spaces and sunshine, so it’s startling for us non-natives to see the state under blankets of snow and ice.

It happens, though, and it can be fatal – you probably remember the tragic winter of 2021, in which hundreds died because the electricity grid failed during a particularly brutal cold snap.

(image by Julio Cortez for AP, via wbbjtv.com)

While the culprit was the weather and the lack of grid preparedness, bitcoin mining did not emerge unscathed. The New York Times reported that during the crisis, bitcoin miners were paid to shut off their machines, which triggered loud outrage and finger pointing – surely the grid problems were because of the power-hungry miners?

Fast forward a couple of years, and the narrative has shifted. After the winter storm of 2021, Texas passed a law requiring power generation and transmission facilities to weatherize, which they did. And since then, even more bitcoin miners have moved into the state, impacting the demand for and supply of electricity and helping to stabilize the grid while encouraging even more renewable energy.

Texas generates more energy from wind and solar than any other US state. While this is good for the environment and the consumer, it does lead to a more volatile energy supply – a few years ago, electricity prices on the Texas grid would often go negative due to surges in supply that were not matched by demand. That’s no way to run a stable service provider.

Enter Bitcoin miners that can consume the excess energy, keeping prices stable. Bitcoin miners don’t care where they are, they can even locate right next to renewable production, mopping up any surplus while reducing transmission waste. Even more significant, Bitcoin miners can turn on and off with relative ease. So, when demand increases, such as during heat waves or freezes, Bitcoin miners can power down, releasing electricity for more urgent consumer, services and industrial consumption. This keeps prices from jumping. It’s good for everyone.

Some critics still insist that bitcoin mining uses so much energy that it pushes up prices for all consumers. Yet interim ERCOT CEO Brad Jones clarified at a recent event that the demand boost from bitcoin miners actually brings electricity prices down by encouraging the buildout of more supply, from both fossil fuel and renewable sources.

This ends up being a win-win: electricity generators have an established customer with industrial demand that can help to stabilize flows and economically justify the construction of new capacity. Texas gets an expanded energy grid. And Bitcoin miners enjoy a relatively low-cost supply with long-term contracts. It’s not that Bitcoin miners consume energy that would otherwise go to homes or hospitals – Bitcoin miners consume energy that would otherwise either not exist or be wasted.

Looking at the industry’s hash rate, a gauge of total power consumption by Bitcoin miners, we can see that over the past week, Texas machines have been turning off to free up energy for heating.

(chart via Blockchain.com)

Usually, miners are compensated for doing so – this is known as Demand Response, and is not unique to the crypto industry. Texas power has similar agreements with other industrial consumers, but few are as flexible as Bitcoin mining.

The key takeaway is the support this type of contract offers for renewable energy producers, which tend to have more volatile supply profiles. Despite three consecutive unofficial record surges in demand over the past couple of weeks, during the state’s second-longest winter storm in the past 15 years, the grid did not collapse. Networks around the world that are looking to diversify their energy mix by adding more solar and wind will hopefully start to notice the improvement to Texas’ stability and design similar incentives – this not only benefits grids, it brings economic activity to often remote locations. And it contributes to the continued diversification of Bitcoin mining, adding even more resilience to the network. A win on many levels.

ALSO:

• Winter can be scary and uncomfortable – it can also be gorgeous, as this Reuters gallery of winter photographs shows.

HAVE A GOOD WEDNESDAY!