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The institutionalization of the crypto space has been well underway for the past few years. This first became evident when the CME launched Bitcoin futures contracts in December 2017. Fast forward two and a half years and the CME Bitcoin futures product is close to eclipsing $1bn in open interest as leading funds and managers such as Paul Tudor Jones and Renaissance Technologies’ Medallion Funds recently made public statements about their intents to gain long exposure (PTJ) and speculate (RenTech) on the price of Bitcoin via the CME products. The CME futures are cash-settled, meaning that settlement of the contract is in USD, not Bitcoin. Historical data from the fallout of past Quantitative Easing actions such as in the U.S. during the financial crisis of ‘08 and Japan in the ’70s and ’80s showed that deflation was the greatest risk, not inflation. Will things be different this time or will the inflation risk theory fail to materialize in a significant fashion once again? Regardless, the Bitcoin futures products are valuable instruments that can be incorporated in countless different strategies.
BTC/USD – W (BNC: BLX)
Points of Discussion
- Sentiment: Bullish
- Key Levels: S = $7,250, $6,400 / R = $9,900, $10,300
Highlights:1) The Bitcoin network reward is halving today. 2) Market structure bullish above $7,250. 3) New bull market with a weekly close above $10,550. 4) Miners are affected most by the halving and monitoring network health is critical.
This is the week we’ve all been waiting for – the third bitcoin halving has arrived. In tumultuous weekend trade just days ahead of the momentous occasion, the BTC market dumped 14% in less than fifteen minutes, wiping out over $200mn USD worth of open interest on BitMEX. The market proved once again that there are no free rides in crypto.
Market structure will remain bullish as long as there are no closes below $6,500. For momentum to continue in this recent upswing to $10,000, bulls will need to hold $7,250 which was the spring point for last week’s surge. If Bitcoin can close a weekly print above $10,550 it would signify the first higher high since the $20,000 run in late-2017. This would give an early signal of a long-term trend flip.
Following the halving, we will be keeping a close eye on network data to see how mining operations fare after the block rewards are slashed 50%. Bitcoin network hash rate will be in focus to see how many older machines are taken offline and gauge the addition of newer, more efficient mining hardware. While further consolidation and growth in the mining space is expected, the BTC price will dictate the business decisions of many of the small/medium operations who are more sensitive to price fluctuations, depending on their level of capitalization.
ETH/USD – W (Gemini: ETHUSD)
Points of Discussion
- Sentiment: Bullish
- Key Levels: S = $178, $164 / R = $224, $255
This week we saw a decoupling in the major ALT/USD markets, as Bitcoin led the pack, while other coins fell back into the red. Ethereum has been stuck in a contracting range between $224 and $194 for close to two weeks, but given the arrival of the Bitcoin halving, we can expect volatility this week with Bitcoin likely leading the market. Prior to this flip, Ethereum had been leading the market and consistently outperforming Bitcoin. We will be keeping a close eye on ETH as it also tends to lead other alt pairs.
From a market structure perspective, Ethereum remains bullish above $164, but will need to close a daily candle above the former highs at $288 in order to break free from the long-term bearish cycle of the last two years. Open interest remained flat for the majority of the week until markets dropped over 10% suddenly this weekend. This sharp move took over 22% of the OI off the books.
Volatility has been trending up since late December, with the recent daily realized volatility print making a fresh seven-month high at 5.7% on a 30-day average. Given the increased media attention, growth in DeFi, and ETH 2.0 set to launch later this summer, it’s very likely volatility will continue to be elevated in the short term.
Data Center
Key Points:
- The data refutes the commonly held belief that significant expansionary monetary policy by global central banks will lead to rapid inflation.
- Japan taught central banks that QE does not always equal inflation as Japan has struggled with deflation rather than inflation.
- Data suggests a greater risk of deflation than inflation in the U.S. economy, directly refuting the prevailing narrative that runaway inflation is on the horizon.
Following the social media streams of armchair economists everywhere, the consensus opinion seems to be that excessive quantitative easing (QE) by global central banks will lead to runaway inflation. This, in turn, would lead to higher costs of goods and services and civil unrest. Despite these popular narratives that could lead to elevated fear, the historical data paints a completely different picture.
In Japan, this expansionary monetary policy experiment started in the late ’70s and utilizes a lot of Keynesian tactics: printing fiat, keeping interest rates low, and sending the government deficits soaring. The policies used by the Bank of Japan were an attempt to stimulate growth and moderate inflation, but the results were less than desired, as Japan continued to suffer the opposite for close to thirty years. The results of this experiment gave the U.S. Fed confidence in ’08 that its own QE measures would not risk rapid inflation, and they were right.
Fast forward twelve years from the ’08 crisis and the Fed is taking the exact same actions as used previously. Sure enough, the 5-year inflation expectations have hit 15-year lows, printing a low of 1.2% in March. There have been plenty of sources touting Bitcoin as a hedge against this supposed inflationary risk to the U.S. economy, but the data doesn’t support the narrative – yet. Bitcoin has certainly served as a valuable hedge vs inflation when paired against emerging market currencies and those in countries that have experienced hyperinflation such as Venezuela. The point remains to be proven with respect to USD, the global reserve sovereign currency.
DeFi Checkup
Key Points:
- Competition in the lending markets has been a net positive for users, as borrowing rates have been trending down for the past year.
- Loans outstanding through centralized lenders (CeFi) such as Genesis Capital maintain market dominance over DeFi platforms offering similar services.
- The data suggests a healthy, bullish growth trend: higher demand for these products, increased competition, and new products continuing to drive innovation.
Lending products within the DeFi space have been one of the primary sources of growth in terms of value being locked in Defi platforms, with 2019 being a huge year for the space. Growing DeFi platform dYdX reported more than $1bn in loans issued, and currently accounts for 3% of all value locked in DeFi. As demand for these products increases, many other companies are developing their own lending services. This growth in competition, which also bolsters overall liquidity, serves as a primary factor in the decrease in the borrowing and lending rates available in these products. The network effects of growth in DeFi should have positive effects on product offerings.
In contrast, traditional, centralized lending (CeFi) has also seen a meteoric rise in loan issuance as Genesis Capital reported more than $2bn in new loans being issued in Q1 2020 alone, dwarfing the volume seen across the DeFi platforms. This is to be expected, as there are much greater risks associated with the new DeFi technologies and practices. DeFi’s growing pains have been sharp at times, with numerous smart contract exploits, hacks and massive liquidations accompanying every sharp market drop in Ethereum.
Assuming current trends continue, and smart contracts can live up to their name, it’s likely that we will see continued rapid growth in DeFi, with rates becoming more efficient, and demand increasing as the risks and growing pains associated with DeFi lending decrease over time.