Q9 Markets: The Price of $3 Trillion
12th November 2021
Q9 Capital: www.q9capital.com
- Crypto market cap blasts through $3tn
- 6.2% jump in inflation is fastest increase in 31 years
- Bitcoin hash rate surges as rigs come back online
Is $3 trillion worth 6% less than it was a year ago? The crypto market surged to a market cap of $3 trillion for the very first time this week with both Ehtereum and Bitcoin printing fresh all-time-highs along the way (again). BTC/USD rallied +5.7%, peaking at $69k and ETH/USD rose +4.3%, reaching a high of $4,878 on Wednesday. The move higher coincided with the US Labor Department’s CPI report showing inflation jumped 6.2%.
Bitcoin’s price reaction to the CPI report is perhaps another sign that investors are now firmly using Bitcoin as a hedge against rising prices. Gold, a traditional inflation hedge, also rallied +9.5% this week following the news.
The other crypto price action of the week saw a “dinosaur rotation” with many of the old timers such as Litecoin (+29%), Bitcoin Cash (+13%) and EOS (+8.6%) all outperforming BTC and ETH.
Still Transitory?
Fears about inflation continue to be major drivers of crypto’s latest rally. On Wednesday, the US consumer price index showed a 6.2 per cent gain in October from the previous year, its fastest increase since 1990 and a sharp increase from September’s levels of 5.4 per cent. Driving the surge was an uptick in costs for energy along with shelter, food, used cars and trucks and new vehicles. Energy prices are up 30% on a year ago, while food is up 5.3%.
In the near term, White House officials are trying to dampen price pressures by exploring ways of easing some of the factors that are raising costs. But the steps undertaken have had limited results, raising doubts about the White House’s ability to influence the factors driving inflation.
It looks like inflation is not going to disappear any time soon. Eric Winograd, senior economist for fixed income at AllianceBernstein has stated “Transitory is dead and buried. There is a good chance we will see core CPI close to 6 per cent over the next few months”.
Bridgewater also agree in this detailed research report. “While the headlines tend to focus on the micro elements of the supply shock (the LA port, coal in China, natural gas in Europe, semiconductors globally, truckers in the UK, etc.), this perspective largely misses the macro cause that is likely to persist and for which there is no idiosyncratic solution. This is mostly an MP3-driven upward demand shock. The mechanics of combined monetary and fiscal stimulus are inherently inflationary: MP3 creates demand without creating any supply.”
US Inflation at 31-year high
Persistently high inflation could pose a threat to the second plank of Biden’s legislative agenda — a $1.75tn social spending and climate bill — that Republicans and even some Democrats have warned could fuel higher prices.
The obvious answer is to raise interest rates but choking off demand and cooling the market would require central banks globally to move toward restrictive policies quickly. This looks unlikely. The Fed has said it is reluctant to raise interest rates until more people have returned to jobs after being sidelined during the pandemic, even if inflation runs above its formal 2% target “for some time”. Its unlikely other major economies will start to crank up rates without the lead of the Americans. There’s a now a growing recognition that the Fed is moving too slowly. Without the assistance from central banks there is no slam dunk lever that governments can pull to ease inflation, even if they wanted to.
For the past few months, Bitcoin seems to have benefited from two distinct ideas. One is that it will benefit when inflation is high (the basic hedge argument). The other is that Bitcoin will benefit when real yields are low (it’s a financial asset).
Bloomberg Intelligence, in the chart below, estimate that roughly half of Bitcoin’s recent returns can be explained by inflation fears, and half from market exuberance and momentum trading. (Interestingly, the importance of the “inflation hedge” driver has shot up dramatically just in the past few months. Back in 2017, for instance, it drove just 20% of price movements compared to half today).
The last couple of months have been a sweet spot for the combination of market exuberance, momentum and inflation fears as the Federal Reserve has allowed the economy to run hot and real yields have plumbed fresh lows. It hasn’t really mattered whether you’re betting on Bitcoin because you think it’s a true inflation hedge, or because you simply think it’s something that will benefit from a lot of flows into risk assets.
Factors Contributing to BTC Returns
Bitcoin may not be your only option in crypto for hedging inflation. Investing in Ethereum might be a better bet for a future rise in interest rates which we will eventually see with persistent inflation. JPMorgan has said that Ethereum may be a better bet than Bitcoin when interest rates rise, due to the boom in DeFi and NFTs. JPM analysts, led by market strategist Nikolaos Panigirtzoglou, said in a recent report that rising interest rates could pose a problem for Bitcoin, just as they traditionally do for gold.
Bitcoin has boomed in a world of ultra-low interest rates and massive bond-buying. “The rise in bond yields and the eventual normalisation of monetary policy is putting downward pressure on Bitcoin as a form of digital gold, the same way higher real yields have been putting downward pressure on traditional gold,” Panigirtzoglou wrote. “With Ethereum deriving its value from its applications, ranging from DeFi to gaming to NFTs and stablecoins, it appears less susceptible than bitcoin to higher real yields.”
Hedging inflation in the digital world
Now that we have our first major print of inflation in years it will be interesting to follow if crypto continues to perform and, in particular, perform when investors fear inflation. The market often looks far ahead and it’s not clear if Bitcoin will perform if the market feels that the Fed will actually act. We shall see. Traditional traders will be following bond yields and those who know the crypto sphere may start eyeing BTC vs ETH or perhaps another narrative. What is clear is that crypto continues to be favored when the market doesn’t love fiat. Having to think about which coin to choose when looking at the inflation cycle is one more a sign of nuance and the continued maturity of crypto.
Hash Key
Another key metric for the Bitcoin price, the hashrate, is also witnessing a heightened upsurge and is now close to an all-time-high. The effect of the China miners’ exit has worn off and Bitcoin miners now largely based in the US seem to be switched on and leading the new wave. The price of the crypto asset has historically followed the hash rate.
Total Hash Rate (TH/s)
Insto’s Going with the Flow
The running tally of digital asset inflows among crypto asset managers reached $8.9 billion following 12 straight weeks of growth according to a new report. That’s already $2.2 billion more than the total invested in 2020.
Weekly Crypto Asset Flows (US$m)
Digital Asset ETP & Mutual fund Net New Assets US$m
A Sea of Change
NFT platform OpenSea crossed $10 billion in total transaction volume, cementing its place as the largest NFT marketplace. Statistics show that 639,121 traders contributed to the $10 billion in sales and the average sale price since the NFT market’s launch is $872 per NFT.
In the News…
- Apple CEO Tim Cook says he owns cryptocurrency and he’s been ‘interested in it for a while’
- Twitter is building a crypto team
- Coinbase shares knocked as user numbers and trading volume decline
- Mastercard to launch crypto-linked payment cards in Asia Pacific
- The City of Miami will soon give out a “bitcoin yield” from the staking of its cryptocurrency to its citizens, Miami Mayor Francis Suarez announced
- More firms embracing the Metaverse and gaming stocks have already benefited, Morgan Stanley Says
- Video: How NFTs have become a gateway into the Metaverse
- NFT artist Beeple sells his latest work for $29 million at an auction at Christie’s
Legacy Markets
Oil futures rallied +2% and the SPX saw a pull-back of -0.7% on inflationary fears. 10-year US treasury yields gained 5bps and the US Dollar index rose +0.9%. The Gold & Silver index rallied +9.5%.
Crypto Markets
- BTC/USD rallied +5.7% and ETH/USD rose +4.3%. The total market cap of crypto breached 3tln and Bitcoin’s dominance hovered around 43%
- LTC/USD and BCH/USD surged +29.6% and +13.5% higher. BAT had another good week posting +15.3% gains
- Annualised volatility rose modestly to 60% for BTC, while it dropped to 45% for ETH
Flows
- Volumes picked up on our client pad with a two-way flow slightly skewed towards buying (1.3x buyers vs sellers)
- Buyers in LINK and sellers in SUSHI were the major flow drivers
- Two-way flow on BTC and net buying on ETH in modest volumes
Q9 Capital: www.q9capital.com
