The rising bond yield-led selloff in many assets was the dominant theme this week (ended Feb 26th). Investors don’t like when both safe treasuries and stocks sell off together, which is what we had experienced for much of the week. It was equally interesting that bitcoin was quite stable on Thursday when stocks markets had the biggest swoon, with the NASDAQ dropping 2.5% on the day. This illustrates bitcoin’s capacity to be uncorrelated from risk assets under certain conditions: Excess leverage in bitcoin had already unwound as the price dropped from $57-58K early in the week to ~ $49K on Thursday. Other news covered in this Dispatch:
- NY Attorney General ends lawsuit against the stable coin Tether. This lawsuit was viewed as a risk to bitcoin by many detractors, and the settlement should now ease those fears.
- The first Mutual Fund files with the SEC to invest in bitcoin. Fund manager Stone Ridge is seeking this change for the Diversified Alternatives Fund.
- Coinbase will IPO via a direct listing and is already valued at over $100bn in the secondary market. The S1 filing with the SEC reveals a jump in institutional activity.
- Is India really banning bitcoin and crypto currencies?
Rising US Treasury yield and it’s link to all asset valuation
The US 10yr treasury yield is the global risk-free rate that underpins discount rates to value all global assets. The negative impact of higher rates is most acute for assets with higher duration.
- A 30yr bond has higher duration than a 2yr bond and the duration of a stock is even greater than that of a 30yr bond.
- More here on duration https://www.investopedia.com/terms/d/duration.asp.
- Within stocks/companies, a fast-growing company with losses today but expectation of profits decades down the road has greater duration sensitivity than a company generating steady cashflows.
In addition, the yield curve (yield difference between the 2yr vs 10yr yield) is rising as Fed policy sets overnight rates near zero. As a result interest rates at the short end (under 2 years) remains anchored to low Fed Funds rate.
The chart below puts the 10yr yield in the context of the S&P 500 dividend yield
The chart below of the same data shows a longer term view, which illustrates that absolute rates are still very low by any historic measure. This leaves room for rates to rise much further if/as growth normalizes and/or inflation returns. The markets are signalling some combination of the above factors coming through in the coming quarters. The Fed can only jawbone the markets for so long. If rates continue higher, the most expensively valued stocks (today, it’s stocks with the longest duration) are most at risk.
The Fed could increase bond purchases (QE) to tamp down the rate rise in what’s call Yield Curve Control. If this happens – possible if 10yr yield moves above 2% – then we are likely to see scarce assets like precious metals and bitcoin do well.
Bitcoin proves resilient while stocks dropped on Thursday
The two charts below from the middle of Thursday’s trading session highlight how bitcoin was essentially unchanged on the day even though equities were deeply in the red. Yes, bitcoin did subsequently drop to the $46K level when Asian stock markets opened, and bitcoin liquidity is lower in the US overnight trading session. It’s just one day, but noteworthy, because we have seen rising correlation between bitcoin and stocks over the past year.
The chart below from Tradingview shows the bitcoin price from Monday morning to Thursday night.
This article from The Block provides more color on the bitcoin futures liquidation from earlier this week, which is shown graphically in the bar chart below from bybt.com.
Stablecoin Tether settles with NY Attorney General
Tether has settled with the NY Attorney General on a long-standing lawsuit. Tweets from both the AG and Tether put their respective spin on the agreement! This WSJ article provides a more balanced view on the issues/agreement. Tether has agreed to produce report of reserves backing the stable coin, which should significantly improve confidence in Tether. This settlement should END the debate around Tether’s US$ reserves and, therefore, the associated risk to bitcoin.
This anonymous Medium article on the tether risk hit the price of bitcoin in January 2021.
Here is Tether’s release and the AG’s office release. In addition to paying the fine, Tether will not service New York State residents.
Stone Ridge files with SEC to launch Bitcoin fund
Fund Management firm Stone Ridge files with the SEC to invest in bitcoin for its Diversified Alternatives Fund. This is a significant development as it is the first open ended Mutual Fund that is seeking permission to invest in bitcoin. The fund is only available to accredited investors, which is anyone with $1m of assets, not including a primary residence. More details in this article from Decrypto and the SEC filing here.
This tweet from Anthony Scaramucci of Skybridge Capital drives home the importance of the Stone Ridge filing.
Coinbase’s upcoming IPO required filing an S1 document with the SEC, which provides a trove of data on the high growth and profitability. I am cherry picking the tweet below to illustrate my theme for 2021 – growing institutional activity. The last cycle was mostly retail but in 4Q2020, retail activity dropped to 36%.
India to ban crypto currencies?
The story of India banning bitcoin/crypto is once again making the rounds. Yes, the country has said that it will pass a bill to stop crypto currency activity. This article speculates the ban will be similar to China’s limits on fiat currency to crypto conversion, which has not stopped crypto activity in China. Other countries like Russia issued high-profile bans but have been rather quiet since doing so as it is impossible to shut down a decentralized network like bitcoin.
Measures like the one planned by India highlight the importance a robust legal system and the constitutional protection of personal property rights. The USA offers protection on both fronts. A good example of this protection is the response to the Trump administration’s efforts to tighten reporting rules for bitcoin/crypto. This proposed ruling making was met with widespread pushback, and the Biden administration has extended the comment period. Many other developed countries like Singapore and Switzerland have already passed reported measures that are being opposed and debated in the US. More details about this issue are available in this LinkedIn article that I wrote some weeks ago.
As always, I am happy to discuss any issue in more detail. Stay safe, Asi
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