Dispatch #18 -2021
June 4th, 2021
The Dispatch starts this week by evaluating Fed tapering QE, which will slow the pace of money creation. Markets have been anticipating Fed taper, but the announcement this week may be too small to be picked up broadly. Nevertheless, it is an important inflection point and a trend reversal that could lead to higher interest rates in the coming year. This remains the #1 macro focus of the Dispatch as we attempt to navigate client portfolios long-term. In Bitcoin-land, price was range bound between $31K- $40K this week, despite another Musk tweet. We cover a diverse array of bitcoin-leaning stories this week. Next week, we’ll be covering the brewing storm clouds from Ransomware attacks.
- Fed tapering: Covid corporate bond buying program ends
- Musk tweets again on Bitcoin
- Indian Central Bank okays crypto
- Mainstream investment firms participate in crypto fund raising
- Global banks on Bitcoin: Standard Chartered, HSBC & JP Morgan
- Stablecoin market showed maturity during selloff
- Who benefited from the post Covid asset price boom?
- BITCOIN SCHOOL – May coin movement show “minnows” declined
First signs of Fed tapering QE
The Federal Reserve announced on June 3rd that it will start selling off corporate bonds purchased under the SMCCF program implemented in March 2020. The impact of this event is miniscule, as the program only has US$13.8bn of bonds and bond ETFs according to this WSJ article. In contrast, the Fed is currently purchasing US$120bn of Treasuries and mortgaged backed securities every month, adding to the Fed’s US$7.3 trillion pile of assets on its balance sheet.
The Fed is caught between a rock and a hard place. The banking system no longer wants the liquidity provided by the Fed via its QE operations. When the Fed buys bonds from the market, this adds liquidity to the banks. However, the banking system is taking that liquidity and giving it right back to the Fed via overnight reverse repo operations, as the chart below illustrates.
Source: Credit Suisse
However, without the Fed adding liquidity by purchasing government bonds, the Biden administration’s deficit spending plans will be challenged. If the Fed slows bond purchases, then interest rates could rise, raising the cost to a heavily indebted US Government. These tensions are likely to come to a head in the next 6-12 months and notably impact all asset prices based on interest rate direction. The Dispatch will remain cautious until it sees clear direction.
The latest tweets from the “world’s smartest man”
Musk’s latest tweets on Bitcoin, shown below, led to a modest price decline. The Dispatch will turn bullish when Bitcoin stops reacting to comments from a single individual. Until then enjoy the silliness!
Indian central bank removes crypto restrictions
The Reserve Bank of India issued this clarification as the Indian Supreme Court struck down a prior restrictive guidance to banks. This Bloomberg article has more details. This should end the long-running saga of India banning crypto currencies, which was discussed in Dispatch #6 in early March.
Mainstream investment firms participating in crypto deals
Traditional institutional investors Fidelity Investments and hedge fund Marshall Wace participated in the $440m fund raising by Circle, the USDC stablecoin issuer. This was the largest ever funding raising by a crypto company.. The traditional investment firms joined other venture capital and crypto firms as shareholders, as this Coindesk article explains. The entry of traditional investment firms is further evidence of digital assets gradually becoming mainstream investments.
Stablecoins market maturing?
This Coinmetrics article looks at how stablecoins performed during the recent market retracement and concludes that the US$ peg held up much better than during the Covid crash in March 2020. The charts below highlight the improved performance staying pegged to the US$. Note that stablecoins are design so that one stable coins is pegged at one US$..
However, The Dispatch is more focused on the peg breaking to the downside. This is because stablecoins offer attractive high-yield solutions and the risk to an investor holding stablecoins for yield is that that the peg breaks to the downside. The Fed bailed out money market funds in 2008 and 2020 by injecting large amounts of US$ liquidity into the market, but there is no lender of last resort in stablecoins, which makes the risk greater. The downside risk has not been stress-tested by the most recent crypto selloff, in the Dispatches view. The Dispatch would only own regulated stablecoins and steer clear of any unregulated ones
|Stablecoin deposit solutions provide 7% – 11% yield, which is attractive vs the less than 0.5% banks offer on US$. The risk profile is different as there is NO FDIC insurance on stablecoins, but the credit risk associated with stablecoin yield generation could be compared to high yield credit. The largest junk bond ETF (ticker JNK) offers 3.84% SEC yield, well below the yield available on stablecoins. Stablecoin lenders’ credit risk is linked to crypto market liquidity and price, whereas junk bond credit risks are more directly linked to the economic cycle and interest rates.|
Standard Chartered & HSBC go in opposite directions on Bitcoin.
Standard Chartered is setting up a unit to trade Bitcoin, but larger peer HSBC said they want nothing to do with Bitcoin and cyrpto. This Bloomberg article provides details of Standard Chartered’s trading push and this Reuters story lays out HSBC’s ambivalence.
JP Morgan (JPM) says institutions are not buying the Bitcoin dip
The bank says institutional investors are not buying the dip, according to this CNBN story. The Dispatch struggles to see how JPM, which only decided crypto/Bitcoin was an investible asset recently, has enhanced access into institutional Bitcoin flows. Wall Street loves to make predictions, even when they do not have an information edge.
Who’s benefited from the post-Covid asset boom?
As the Biden administration looks for revenue to fund multiple government programs, it’s worth considering some data that may drive their revenue generation plans.
“A picture is worth a thousand words” is apt for the above chart: 1% got 35% of gains & 50% got 1% of the gains. Don’t be surprised if you – many of the US tax-resident readers of the Dispatch – have to pay more of your gains in the future. This is simply where the revenue opportunity lies. The Dispatch firmly believes that Federal Reserve monetary policy supercharged asset returns in 2020. It’s a case of government giveth (ok, the Fed is supposed to be independent!) and taketh (IRS) away.
BITCOIN SCHOOL – May 2021 Bitcoin distribution analysis
Notable reduction in small wallet addresses
It should come as no surprise that, post the Musk tweet, small investors have been notable sellers, as seen in the declining address count. This reverses the large growth in “Minnow” addresses seen in March and April. However, these “minnow” addresses accounted for a small 6.6% of the overall Bitcoin sold in May, with the largest sales coming from the “Orca” category. See “Coin Distribution” table. The four table below are from @DavidPBitcoin, who’s a prolific analyst.
This is a sharp contrast to the large “Minnow” wallet gains in April and…..
However, the large Minnow wallet gains in March and April did nothing for the price, which goes to show that over the short term, smaller investors aren’t the marginal price setter.
Minnows lack clout because each Minnow wallet holds a low value, which can be seen in the table below showing coin distribution in May. The dominant selling was by “Orcas”, who own between 1,000 -10,000 coins.
If these large sellers were mostly over-leveraged traders, then we could see a quick price recovery in the coming months. If, on the other hand, they were sellers due to some combination of ESG, China risk and US regulatory action, then the coming months may be cloudier.
With the price weakness and drop in Minnow wallets, the number of active wallets has also dropped.
The Dispatch’s takeaway is that, while “Minnows” matter for long term network effect, large investors drive prices over the short-term.
Stay safe and do reach out if you have any questions or comments about the material in this Dispatch.