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This Week’s Setup
We pondered in last week’s Lookout whether the stock market gyrations would carry over into the world of crypto. The answer surprised us.
It seems that the earnings announcements from tech titans Netflix and Tesla had little effect on the market. According to commentators, the market getting beaten up was actually due to statements made by Fed Chair Powell late last week.
What’s even more confusing is that Powell didn’t say anything new. He just reiterated that a 50 basis point interest rate hike in May was “on the table” and that upcoming hikes should be made “more quickly.” But the market had already been pricing in a 50 basis point hike for the May meeting as well as a 50 or even 75 basis point hike for the June meeting. So what gives?
The more plausible answer is that the market had run up too much too fast and needed a breather. Bitcoin had rallied almost to $43K (on light volume) before markets started to drop - and that was hours before Powell gave his remarks. Surging Treasury yields likely also contributed to the sell-off as the bond market has been leading the equity market as of late.
That being said, crypto is still highly correlated to risk-on tech stocks. According to Arcane Research, the 30-day correlation between Bitcoin and Nasdaq is now at 0.70, the highest level since July 2020 as seen below.
Source: Trading View
Correlation between Bitcoin, Nasdaq, gold
And we have a plethora of tech giants reporting earnings this week with Microsoft and Alphabet reporting Tuesday after the closing bell and Facebook parent company Meta reporting Wednesday after market close. Then Apple and Amazon report Thursday after market close. This week looks like it’ll be a true test in terms of the crypto-tech stock correlation.
And the linkage to equities isn’t limited to just U.S. tech. As of this writing, Western markets including crypto are tanking following a Chinese market sell-off due to parts of the Beijing metro area now being locked down due to Covid-19 spread. Market risk is ever present.
Bitcoin (BTC) and Ethereum (ETH) should both get a small tailwind this week as the top two cryptocurrencies are getting spot ETFs in Australia. The three ETFs (two for BTC, one for ETH) are set to go live on the Cboe on Wednesday, April 27th.
Despite the ETFs, we still expect the top two cryptos to generally move according to the whims of the macro environment.
As of this post, BTC is trading at $39,400 while ETH is moving around $2,900.
NEAR Protocol should again be on investors’ radars as its algorithmic stablecoin, USN, finally launched today, April 25th, after weeks of anticipation.
The launch is being led by a DAO called Decentral Bank. USN can be minted by depositing NEAR tokens as collateral. The new stablecoin is expected to offer around a 10% APY from Decentral Bank, assuming the vote goes through. USN will be backed by an arbitrage system and a reserve fund - very similar to Terra’s UST arrangement.
USN’s 10% APY is a far cry from the 20% APY rumors from weeks prior, but maybe that’s not such a bad thing after all as Terra’s Anchor Protocol which offers around a 20% APY has been under a microscope over the past week due to questions about the sustainability of such a high rate.
NEAR is currently trading at $14.
Everyone seems to be copying Terra as Tron is also getting in on the algorithmic stablecoin game. Tron’s new stablecoin, USDD, is expected to begin circulating on May 5th, 2022 and will be available on the Ethereum and BNB chains.
Tron’s native currency, TRX, will be used to stabilize USDD in a similar fashion to Terra’s Luna while also being backed by $10B in crypto collateral. It's worth mentioning that Tron's DAO is expected to offer an APY of 30%!!!
This could certainly lead to capital rotation into the Tron ecosystem, but such a high rate should also raise some eyebrows. TRX is now trading at $0.06404.
Additionally, traders should keep an eye on Klever (KLV). The crypto wallet ecosystem experienced a sizable jump in positive social chatter as of this writing as measured by Crowdsense’s Social Sentiment Score - now at 7.8 out of 10.
The chatter looks to be related to Klever’s new staking contract offering a 100% APR - which goes into effect today, April 25th. We'll see how much capital decides to take advantage of the new contract since such high rates are starting to be viewed with more skepticism. KLV is currently trading around $0.036.
On the macro front, investors should be prepared for Friday’s U.S. PCE inflation figures, set to be released at 8:30am ET. The PCE, not the CPI, is actually the Fed’s preferred inflation gauge.
Furthermore, investors have the benefit of not having to worry this week about any Fed remarks knocking down the market as there is a media blackout until the FOMC meeting on May 4th.
Other factors to monitor that could drive markets are Chinese Yuan and Japanese Yen weakness.
Japan's central bank has been defending its Yield Curve Control policy at the expense of its currency which likely led China to weaken its own currency.
And which currency then gets stronger you may ask? The U.S. Dollar.
And as the graph earlier in this article showed, Bitcoin has a 30 day correlation of -0.53 to the U.S. Dollar. If the Yuan or Yen strengthen a bit this week vs the USD, Bitcoin and crypto could get a nice lift.
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Nothing contained in this post should be construed as investment advice. All investment strategies and investments involve risk of loss. Any reference to past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.