Q9 Markets: Don’t Fight the Fed
7th January 2021
Q9 Capital: www.q9capital.com
- Global and crypto markets down after Fed’s hawkish signal
- $800mn digital assets liquidated on Thursday
- Khazakhstan internet shutdown hits crypto miners
What a year this week has been. Global markets spiraled as the Fed meeting revealed it was planning on raising interest rates sooner and faster than expected. Crypto was not spared the downturn. The sell-off was then exacerbated following violence and an internet shut down in Kazakhstan, the world’s second biggest crypto mining hub.
Most major tokens are down at least 6%, with Solana and Polkadot dropping around 13% over the week. Bitcoin (which became a teenager this week) dropped -8.5% after trading sideways for the past week, while ETH has 8% within the same time period. Most tokens hit their lowest point around 6am HKT on Thursday and stabilised throughout the day.
More than $800mn in crypto was liquidated on Thursday when the market dropped. $800mn is quite a bit higher than normal, but as a factor of total market cap these spikes are smaller than they used to be. It’s notable that despite the liquidations that BTC is down just 8.5% rather than double digit falls which were common in its infancy. Bizarrely, half of this ($400mn) was in Shiba Inu coin (SHIB), and almost entirely from one exchange BitMex.
New Year, Old Problems
2022 starts with global Covid cases at more than twice their previous peak. Omicron appears to be less severe in its effects than its predecessors, but restrictions and staff absences that have come in its wake will weigh on growth. Meanwhile supply bottlenecks, labour shortages and rising commodity have pushed inflation to uncomfortably high levels. Lingering doubts remain over China Evergrande’s ability to meet debt repayments and possible contagion.
The threats are real, but plenty of things are going right for the global economy. Vaccines are helping society and the economy to live with Covid. Despite the Fed’s hawkish comments this week, we remain in a world of cheap money, high consumer savings and surprisingly low unemployment.
Fed Up
The ‘don’t fight the Fed’ mantra seems to be pressuring the broad crypto market. Central bank liquidity has helped underpin digital asset markets during the Covid tumult and this now looks to be tightening. Investors have been preparing for the Fed to start hiking interest rates. They also know the central bank is cutting the amount of bonds it buys each month. They figured the tapering would lead to a reduction in the nearly $9tn in assets the Fed is holding. What they didn’t expect were all three things happening at the same time. When there is less money around or it is more expensive, asset prices face a headwind. Downward pressure on the price of BTC is expected to continue until the market fully prices in the tighter-than-expected future monetary policy.
A Miner Issues
Kazakhstan was plunged into chaos this week, and an internet shutdown hit the world’s second-biggest Bitcoin mining hub, in a blow to miners searching for a permanent home after the China ban. Kazakhstan is just behind the US in terms of its share of global Bitcoin mining, with 18.1% market share. Kazakhstan declared a state of emergency after demonstrators stormed and torched public buildings, the worst unrest for more than a decade in the tightly controlled country. The Cabinet resigned, but that failed to quell the anger of the demonstrators.
Two significant facts arise about the state of the BTC mining industry:
- The BTC network is resilient to the point that it doesn’t skip a beat, even when a substantial portion of miners are unexpectedly taken offline.
- The US will likely see a rush of crypto miner expats looking to avoid future disruptions.
The US has become a mecca for crypto mining as it has some of the cheapest sources of energy on the planet, many of which tend to be renewable. The question now is whether the US has the room to take in any more miners. Political instability and bans just underscore why miners are increasingly locating themselves in the US and western locations. However, will being centralised in a single country make the Bitcoin network more resilient? Sure, it will make disruption less frequent, but the industry will be less decentralised and once again be at the whims of a single government — as it was when China had the lions share.
Bitcoin Mining Map
In the News…
- Ray Dalio: Allocating up to 2% of your portfolio to Bitcoin is reasonable
- Salvadoran President Bukele expects Bitcoin to reach $100K this year
- Tencent adds digital yuan support to WeChat Pay Wallet
- Crypto crime hit record $14 billion in 2021
- Airbnb explores crypto payments — CEO sees ‘a revolution happening in crypto’
- NFT marketplace OpenSea valued at $13.3bn in $300mn funding round
- Samsung enters the metaverse, opening its flagship 837 store in Decentraland
- Crypto browser Brave passes 50mn monthly active users
- Wharton Professor: Bitcoin Is the new gold for millennials
- Ethereum’s Buterin doubles down on proof-of-stake; calls ‘BCH mostly a failure’
- NFT trading volume surpassed $13 billion in 2021
- Quentin Tarantino to release ‘Pulp Fiction’ NFTs, flouting Miramax lawsuit
Legacy Markets
Oil futures rose +4.1% while the SPX fell -1.7% following a rotation from tech heavy growth stocks to cyclicals after the Fed’s hawkish comments. 10-year US treasury yields rose 21bps. The US Dollar index gained +0.20% while the Gold and Silver index dropped -6.3%.
Crypto Markets
- BTC/USD and ETH/USD dropped -8.5% and -8% respectively. The total market cap of crypto is just north of the $2tln mark, while BTC’s dominance dropped below 40%
- SOL/USD and LTC/USD dropped -12.9% and -7.9%. LINK/USD outperformed large cap DeFi coins with a +27.1% standout rally
- Realised volatility (annualized) continued to stay low: 61% for BTC and 73% for ETH
Our Pad
- Skewed towards selling (3.4x sellers vs buyers) on modest volumes
- Flow dominated by sellers in LINK
- Mild buying activity in BTC, ETH and SOL
