WEEKLY, Oct 22, 2022
Hello everyone! You’re reading the weekly Crypto is Macro Now newsletter, where I look at the crypto market and its growing overlap with the macro landscape. Since many of you are new here (welcome!), I’ll introduce myself again: I’m Noelle, and I’ve been writing crypto-focused newsletters for over six years now, first for CoinDesk and more recently for Genesis Trading. Now that I’m concentrating on independent research (the theme is in the title), it felt natural to continue. If you find this useful, please consider sharing with friends and colleagues.
If you’d like to receive a premium daily email with more detailed market and news commentary and are not already a subscriber, hit the signup button below. Some of the topics covered in the daily email this week:
BTC’s unusually low volatility
A likely catalyst for BTC’s volatility breakout
The market today vs the worst S&P 500 drop in history, exactly 35 years ago
What Silvergate’s Q3 earnings say about the crypto winter
What the MVRV Z-score on-chain metric is telling us
How crypto markets are starting to impact traditional capital markets
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MARKETS
This was an astonishing week, with yet another political earthquake in the UK, the US 10-year yield reaching 4.2% on no obvious catalyst, and the yen touching a 32-year low and then shooting up, presumably on intervention which is adding to the rates watchers’ worries.
The S&P 500 defied economic common sense by climbing over 4.7% from the previous week’s close, in spite of the bond market signals, looming mid-term election jitters and uncertainty as to Fed rate hikes going forward. A 75bp increase in Fed funds is a lock-in for the November 2nd FOMC meeting, but for December the picture is much murkier.
(chart via the CME FedWatch)
Crypto assets continued their sideways move, with BTC and ETH largely unchanged on the week. Volatility continues to drop (see more below), while bitcoin’s dominance continued the climb initiated in early September, a typical reaction to uncertain markets as investors rotate into “safety”.
(chart via TradingView)
Why Trading is Essential for Crypto Ideology
A disclosure: I have always thought that the price of crypto assets is their least interesting feature. By now any traders reading this are probably howling in disgust, and I don’t disagree with that reaction – my point is that the fundamental concept has little to do with “alpha”. Nevertheless, I acknowledge that trading is a key factor in the industry’s growth, and deserves more respect than my glib comments might imply.
This is worth unpacking a bit. First of all, what do I mean by “trading”? For the purposes of this discussion, “trading” involves the buying and selling of crypto assets and related derivatives on a short time horizon with a view to making a profit. I also have in mind individuals and institutions who are explicitly there to make a profit based on their decisions, rather than market makers who provide a necessary infrastructure function. This is obviously a simplification, but it helps to differentiate “trading” from longer-term “investing”.
Why? Because “investing” is what grows industries and wealth. Put idle money to work where it can help build businesses, ecosystems and entire economies. Get compensated for the longer-term risk. If the project fails, there is usually some residual value, and even if not, there’s the takeaway of experience and lessons learned.
“Trading”, on the other hand, is often compared to gambling in that fundamentals have less to do with the outcome. This is usually unfair since good traders can read market signals to build an informed opinion on price direction, and excellent traders are good at detecting changes in sentiment that can change momentum even without new information.
But signals and sentiment tend to have little to do with an asset’s fundamental outlook, and many traders do not care about the underlying characteristics. They don’t really need to. A friend – founder of a market infrastructure company – once told me: “I’m not here for crypto, I just see a market opportunity.” The implication was that he could just as well be setting up a desk to trade organic coffee beans. It wouldn’t matter to him or his investors, as long as there was money to be made.
Many individual traders are also here for the money. Crypto asset volatility is often cited as a reason for investors to stay away – for those who think highly of their trading prowess, volatility is a reason to dive in, especially when several platforms offer eye-watering leverage.
This is the main reason a large cohort of crypto “believers” – those that are here for the ideology and/or technology of decentralized finance – look down on traders. And not just crypto “believers”: my 20-year-old daughter explained to me recently that one of the main reasons her friends are put off crypto is the ubiquity of distasteful “bros” (and they’re usually guys, sorry) who think bragging about how much money they’ve made will get them some flattering attention.
And of course, there’s the damage done by certain hedge funds with dubious profit-maximization strategies, DeFi surges fueled by yield seekers, and those that use liquidity to manipulate prices in order to win big when others lose.
Traders have a bad rap, especially when they win and flaunt their winnings. And when they lose, they tend to get scant pity.
But here’s the thing: without traders, we wouldn’t have liquid markets. And without liquid markets, we would not have institutional interest. And without institutional interest, our industry would still be insignificant, poorly funded, less innovative, and more vulnerable to regulatory interference.
Our industry needs traders. They provide liquidity which, in theory, leads to less volatile markets. They keep markets honest by acting on price irregularities, ferreting out overlooked information and facilitating the expression of opinion. Traders enable prices to respond to information fast. They encourage innovation in exchange technology and asset sophistication, which makes the market more robust. They act on information that is not valuable to a longer-term investor but which adds greater depth to the messaging inherent in prices.
And the more traders that pile in because crypto is the “Wild West”, the more regulatory attention the market attracts and the less of a Wild West it becomes.
As for their motivations, who cares*? No two people are involved in this space for exactly the same reasons and with exactly the same skill set. That diversity of thought and background is one of the ecosystem’s most prominent strengths. Plus, there’s nothing wrong with wanting to make money – the profit motive underpins the modern economy, and the freedom to pursue it legally is one of the great advantages of our society.
Just like entrepreneurs, managers, artists and CFOs who put their experience and skill set to work building out innovative web3 ideas, traders contribute a particularly valuable function toward making this industry viable.
What’s more, it works out: traders who are just here out of self-interest inadvertently support the crypto ethos by making the market more decentralized. They may not care about the promise of individual empowerment and censorship resistance, but their presence makes that a feature of crypto markets by mitigating the opportunity for the wealthy to exert undue control, and by ensuring the dissemination of relevant information in the form of unencumbered pricing.
Perhaps even more importantly, the liquidity they provide fosters trust in crypto pricing which in turn encourages more investment. This strengthens so many potential crypto use cases by providing resources to compensate the necessary work as well as the incentive to build products the market will value.
Bitcoin may have gotten its start at the grass-roots level, with no marketing whatsoever, based on the appeal of an idea. But without the potential for profit, it would have remained just that.
In an industry built on a new concept of trust, traders counterintuitively make the industry more trustworthy. The short-term outlook enables longer-term investors to have more confidence in the market which in turn encourages more longer-term investment.
So, to all who think traders are short-term opportunists who give our industry a bad name, just imagine what it would look like without them. A truly decentralized system is open to all. And traders, whatever their motives, help to reinforce that decentralization.
(*Except for the guys thinking my daughter will like them because they are clever traders, I mean really, wise up.)
KEEP AN EYE ON:
(Three main themes from the week, explored in more detail in the daily emails.)
Institutional blue-chip affirmation.
It feels like every week is a validation of growing institutional interest, but this week was particularly intense with blue-chip names making expected but nevertheless notable moves.
Barely a month after launching an ETH index fund, Fidelity Digital Assets is opening up ETH trading to its institutional clients next week.
In BNY Mellon’s earnings call on Monday, CEO Robin Vince revealed the interesting detail that 75% of the bank’s clients are either currently investing or actively considering investing in digital assets, with 90% expecting to hold tokenized assets within the next few years.
Mastercard announced its Crypto Source program in partnership with Paxos to help institutions that want to offer crypto trading to follow all the compliance rules.
Users of Berlin-based online bank N26 will be able to trade up to 100 different crypto assets via a partnership with Bitpanda, starting in Austria but apparently rolling out across Europe within the next few months.
And the crypto division of Société Générale (France’s third largest bank, founded in 1864) has received authorization from France’s financial regulator for crypto trading and custody.
We definitely did not see this level of institutional commitment and investment in the last bear market.
Volatility is, well, not volatile. BTC and ETH continue to confound us all with narrow moves and languishing volatility (this is not what crypto assets are supposed to do). 1-week volatility is at an annualized 34% – not its lowest level this month, that was just over a week ago when it absurdly dipped below 20% – but certainly lower than is comfortable for a narrative-driven asset. Looking back at similar lulls since 2016, we can see that of the 10 times that 1-week BTC volatility headed down to these levels, eight (blue lines on the chart) were followed by a strong rally.
(chart via glassnode)
What’s more, BTC’s volatility lull occurs at a time when stock market volatility is climbing. Earlier this week, Jim Bianco shared a chart that shows that BTC 30-day volatility dipped below that of the S&P 500. This has only happened on four other occasions in bitcoin’s history, each time near a significant local bottom. Obviously, patterns don’t always repeat, but it is worth noting.
(chart via @biancoresearch on Twitter)
Global cryptocurrency adoption. Anyone who has been following my writing for a while will know that I tend to hone in on signs of growing crypto adoption in jurisdictions other than North America and Europe, so it won’t be a surprise to you that I get excited when Chainalysis publishes its annual Global Crypto Adoption Index report. It’s extensive and hard to summarize, and the whole thing is worth a read for its interesting stories and beautiful charts, but some of the key details include:
Half of the top 20 countries in the adoption index are lower income countries, with Vietnam, Philippines, Ukraine and India occupying the top four positions in the ranking. Countries in this bracket tend to use cryptocurrencies for remittances and savings more than wealthier countries.
The US moved up to fifth in the rankings, from eighth last year, and would be higher still were it not for its low P2P score (which is largely because it has a robust centralized crypto market infrastructure).
North America, the Middle East and Africa have the highest percentage of large institution-sized transactions in their cryptocurrency volumes – the first two could be expected, but the data from sub-Saharan Africa is surprising.
DeFi services accounted for the highest percentage of transaction volume in North America, with centralized exchanges predominant in Eastern Europe, Eastern Asia and the Middle East/North Africa.
In spite of the crypto mining and transaction ban, China is still the fourth largest crypto economy and ranks tenth for grassroots adoption. South Korea has more CeFi activity, but China more than makes up the difference with DeFi.
A YEAR AGO:
(This section looks back at what was going on this time last year, so we can see how far we’ve come and how far we haven’t.)
Institutions again, but with a different focus. Above I pointed out the strong march of institutions deeper into the crypto industry. A year ago, the rhythm was even more intense, which is not surprising given the (then) recent surge in BTC’s price. However, note that these days the news is largely about market infrastructure building – a year ago, it was mainly about crypto investment, which is unfortunate given the presumed losses and possible reluctance to re-enter.
The Texas firefighter pension fund, with more than $4 billion AUM, reportedly allocated $25 million to BTC and ETH
The Chief Investment Officer of Pimco, one of the world’s largest asset managers, said that the firm had some crypto asset positions and planned to invest further.
The Houston Firefighters’ Relief and Retirement Fund, which at the time managed $5.5 billion of assets, said it had invested $25 million in BTC and ETH.
In an unexpected tradfi-crypto crossover, The Economist magazine announced plans to auction off the front cover of its September 18 edition as an NFT. The auction took place on October 25, raising $420,000 for charity.
And for a dose of crypto culture, a year ago FTX raised $420 million from 69 investors, which is… cool I guess?
GOOD READS/LISTENS:
Matt Levine applies his usual poetic treatment to DeFi profiteering that exploits bugs or loopholes in the code – how can it be illegal if the code allows it? “Just because rules are dumb and you are smart, that doesn't always mean that you get to take advantage of them.”
Unchained podcast: Laura Shin, one of the most prolific and longest-standing journalists in crypto, delivered a tough but balanced interview with Terra founder Do Kwon as well as a rebuttal interview with critic Fat Man Terra – both are compelling and informative.
Odd Lots podcast: I never thought I’d find myself agreeing with Nouriel Roubini, but here we are – another excellent Odd Lots episode (I still think he could do a much better job of explaining his antipathy toward bitcoin).
Goodfellows podcast: With insightful and sometimes jaw-dropping comments on the UK (before Liz Truss resigned, but still relevant, especially on how a large part of the problem with the ruling class stems from the education system) as well as on Iran and China from Niall Ferguson, HR Macmaster and John Cochrane.
Have a Good Weekend!
What’s your favorite Bond song? C´mon, you know you have one. This week I watched a Netflix documentary on the music of the James Bond films, which turned out to be surprisingly nostalgic with tinges of drama. I confess I never fully appreciated just how much the music was part of the franchises’ success. My favorites are “Another Way to Die” (Alicia Keys + Jack Black) and “No Time to Die” (Billie Eilish), but for some reason I’ve been humming “Diamonds are Forever” (Shirley Bassey) and “Nobody Does it Better” (Carly Simon) all week.