Hi everyone, the free weekly Crypto is Macro Now is back!! I hope you’ve all been well while I’ve been out – the market hasn’t been doing too well, I see. Below I talk about more headwinds for short-term movements, and why longer-term adoption still looks robust.
I’ll be making some format changes to this email since I need to scale back for something else I’m working on. If you’re a premium subscriber, much of what I write about here you’ll have already seen in the daily emails, so feel free to skip. And if you’re NOT a premium subscriber, I hope you’ll consider becoming one to support my work and to get a frequent update on how crypto is influencing the macro landscape, and vice versa. You’ll get more in-depth and up-to-date market commentary, a daily big picture look at the broader trends influencing crypto adoption, links to interesting articles and podcasts, cute stick figures on charts (when time allows) and a shared enthusiasm for how the crypto industry is no longer a niche topic that appeals to a limited audience.
The market is tough, the industry has some issues but the understanding of its importance for global opportunity and individual freedom is growing, and that matters more than any barriers that may temporarily force it to rethink some processes.
MARKETS
Key market headwinds:
Low volumes. Spot volumes for BTC are at multi-year lows, according to data from The Block. This will make some institutional investors uneasy as it implies greater slippage (price movement on execution) with large orders and could constrain exit liquidity. It also signals a lack of market participation – many investors would probably rather wait for signs of an interest pick-up before entering, even if it means missing the beginning of a rally. Momentum begets momentum, and right now there isn’t any.
(chart via The Block Data)
Low volatility. BTC’s historical 30-day volatility is off its early January lows, but not by much. Implied volatility inferred from options pricing is also low. This would normally be a good thing but in the case of BTC, against a backdrop of low volumes, it suggests a lack of trader interest which could be read as a sign to stay away. It’s likely that volatility will pick up over the next few months, which makes BTC options relatively cheap right now, but the level of uncertainty in the market makes the timing of any pick-up unclear.
(chart via The Block Data)
Debt ceiling. On Thursday, I wrote about the possible impact on markets of a debt ceiling agreement – to summarize, it implies a withdrawal of market liquidity which is likely to hit risk assets including BTC. Despite public statements about how well the discussions were going, on Friday representatives of the Republican party walked out of the negotiations although it seems they have since resumed. A debt ceiling agreement needs to be reached at some stage, and dragging out the uncertainty is not good for markets.
Strong economy. Well, the economy is not exactly strong, but nor is it as weak as many expected at this stage. The consumer is proving more resilient than expected, the housing market is beginning to stabilize, and unemployment is still at multi-decade lows. Forecasts for US GDP growth in Q2 are ticking up, with the Atlanta Fed’s GDPNow tracker signalling much higher expectations than surveyed economists. This is good news for businesses and employees, but it does suggest that interest rates will be higher for longer as inflation proves sticky.
(chart via the Atlanta Fed)
But there are also some tailwinds
…only they don’t seem to have a lot of energy at the moment:
Interest rate peak. Confidence that the Fed would interrupt over a year of rate hikes with a pause at the next FOMC meeting in June went from a “sure thing” to a “we think so” over the past week, with the probability of another 25bp hike more than doubling on Thursday in light of resilient economic data. However, this turned on Friday as Chair Powell took the stage for a panel at a conference in Washington DC in which he explicitly said, in what looked like carefully crafted remarks, that rates may not need to go up much more due to credit stress.
(chart via CME FedWatch)
A weakening economy. While the US economy is showing some resilience, there are also signs of building weakness. Thursday’s release of the latest reading of The Conference Board’s Leading Economic Index, created to provide an early indication of significant turning points in the business cycle, showed the steepest year-on-year drop since 2020. This index has never before been this low without a surrounding recession.
(chart via The Conference Board)
China. The post-pandemic boom expected from the world’s second-largest economy seems to be fizzling – I wrote about this in more detail on Thursday. The potential crypto impact lies in the increasing likelihood that the PBoC lowers the official interest rate to support economic growth. This could boost interest in “risk assets” from Asia, already the largest region in terms of BTC spot volumes.
(based on data from The Block, and I am not great at charting)
Growing global adoption. Global markets are seeing signs of increased crypto asset purchases, especially in areas hit with sharp currency depreciation such as Turkey, Pakistan and Argentina. More on this below.
Stagflation. While a weak economy is unfortunately a good thing for risk assets in that it brings forward the likely drop in inflation and consequent rate cuts, what we are in now is stagflation: low growth with high inflation. This is the worst of all economic scenarios as inflation hurts everyone and this scenario is difficult to exit. Signs are that this will morph into a recession, however, but meanwhile, hard assets and commodities tend to outperform other asset groups in this type of environment. This will be BTC’s first stagflation so it remains to be seen if it fulfils the criteria, but in markets everything is relative, and BTC (like other hard assets such as gold) has no direct link to economic conditions.
In sum, the short-term outlook for BTC is not great, but this is likely to deliver some prime buying opportunities for investors with a longer-term investment horizon. The political and financial turmoil we’re seeing around the world highlights the utility inherent in an asset that is totally removed from fiat rails and centralized chokepoints. It’s not just about the potential for profits – for many around the world, it is a question of financial access, opportunity and even survival.
COLUMN
Currency turmoil drives adoption
With the US mired in political stasis while other regions build crypto frameworks, it’s worth looking at actual on-the-ground demand for crypto assets. This is getting more and more relevant given skyrocketing inflation, shaky currencies and autocratic control over financial access in many large countries with increasingly crypto-aware populations and an inherent lack of trust in centralized institutions.
Earlier this week, the government of Pakistan (the fifth largest country in the world in terms of population, with over 239 million inhabitants) was reported to have said that cryptocurrencies “will never be legalized” in Pakistan, in order to avoid FATF penalties.
This may sound on the surface like an overreaction to FATF’s crypto stance – on Thursday, the organization’s president published a letter titled “An end to the lawless crypto space” which urges crypto regulation rather than a total ban.
Then again, Pakistan has a somewhat tense relationship with the FATF, and just last October was taken off its “grey list” (which labels certain countries as having “deficiencies” in their AML controls, which in turn can lead to limited participation in global finance).
It’s also not hard to see the hand of the IMF. Pakistan is currently in talks with the organization regarding a bailout package, although negotiations seem stalled and concern about the country’s political and economic issues is starting to affect neighbouring nations. The IMF has not been shy about its unease with crypto markets, and a few months ago, reports surfaced that it had applied crypto-suppression conditions to negotiations with Argentina.
Yet crypto adoption in Pakistan is growing, as people are reportedly converting their salaries into stablecoins to prevent currency erosion – the rupee has dropped more than 20% against the US dollar year-to-date, more than 30% over the past year. It’s probably not a coincidence that a 2022 report from forensics company Chainalysis placed Pakistan 6th in terms of global crypto adoption.
There’s also Nigeria (the sixth largest country in the world, with over 218 million people), which is likely to devalue its currency once the new president is sworn in, in a bid to alleviate trade imbalances and dollar shortages. The sub-Saharan nation ranked 11th in Chainalysis’ global crypto adoption ranking, although signs point to a further climb since then.
Turkey is the 18th largest country in the world in terms of population, with more than 85 million inhabitants. This week its currency hit a new record low as markets brace for Erdogan’s re-election in the runoffs on May 28. A recent chart by crypto market data firm Kaiko shows the spike in crypto activity based in lira, now notably higher than euro-based activity. Turkey was 12th in Chainalysis’ 2022 crypto adoption ranking – currency woes and the pressing need to hedge and diversify are likely to push it up the list.
(chart via Kaiko Research)
An unexpected entry into my “watch the adoption” list is Japan – the 11th largest country with over 124 million people, and the third richest in terms of nominal GDP. James Butterfill, head of research at CoinShares, shared a chart that plotted growth in spot volumes on crypto exchanges. The leader? Japan, with the second highest average daily volume (after the US) and easily the highest percentage growth (approximately 55% year-to-date).
(via @jbutterfill)
This could be largely for speculation, since Japan has low inflation and its currency is relatively stable. Or, it could be a sign of investors bracing for higher inflation and currency instability. Higher inflation would most likely trigger rate hikes, however, which should strengthen the yen, so it’s not clear what bitcoin would be a hedge for in Japan.
There are many other examples of citizens around the world turning to crypto to hedge against local currency volatility and debasement – Ukraine, Argentina and Lebanon are just a few that come to mind. Many struggle with the absence of reliable onramps and with the difficulty of custody. But few are even remotely concerned about the US regulatory hostility.
All this serves as a reminder that the US may have the largest financial market in the world, but crypto’s purpose goes well beyond the speculation that financial markets serve. What’s more, many developing economies are accustomed to regulators overstepping their bounds in terms of limiting financial freedom, and thus find the decentralized nature of many crypto assets easier to understand and appreciate than do those in more open regimes. Throw in the increasing probability of significant currency turmoil ahead as emerging countries’ economies are stretched given inflationary pressures and a strong dollar, in turn likely to stoke political turmoil, and you can see how the “insurance” and “hedge” qualities of crypto assets such as BTC, ETH and stablecoins become even more compelling. Monetary liquidity headwinds may be significant, but they are not the whole crypto market story.
HAVE A GREAT WEEKEND!
If you have never seen the Eurovision Song Contest, you don’t know what you’re missing. It’s kitsch, over the top, often cringe-ly bad, but always entertaining and a welcome reminder of how creativity needs to push boundaries and make mistakes and sometimes outrageously win.
It also reinforces the universal language of music – no matter who you are or where you grew up or what your current environment is like, music affects us all. It moves us, unites us, makes us more human, and sometimes it can even bring nations together.
There is much about Eurovision that is difficult to explain (why is Australia a contestant? who thought decision by limited jury was a good idea? why wouldn’t they let Zelenskyy – president of the country that was supposed to be hosting it this year because they won in 2022 – address the audience?), but this is all the more reason to suspend expectations and wallow in the marvel of flame, rising platforms and tight outfits that pass for taste and cultural connection. It is also a reason to get ready to scream at the screen, argue with friends and family, and conclude that people are beautifully crazy.
You can watch the 4-hour spectacle, beamed this year from Liverpool (it should have been held in Kyiv but, well, circumstances), at the link below. If you make it through the whole thing, let me know your favourite. Spoiler alert: Sweden won, which I don’t understand, I thought her song was boring. The audience (and my kids) wanted Finland to win, their entry was certainly original but I wouldn’t put it on my playlist. Although neon is obviously back.
Me, I was rooting for Norway or Estonia. This year Eurovision belonged to the northern countries.