Market View
The correlation between daily bitcoin and US equity (proxied by the S&P 500) returns continued to decline sharply over the last week with the coefficient dropping from 0.20 the previous week to 0.08 based on a 40-day rolling window. This is down significantly from an average of 0.58 observed in the second half of 2022. Moreover, the distribution of daily bitcoin returns was negatively skewed in the last four months of 2022 with a high kurtosis and longer left tail, which may have reflected the selloff during the FTX bankruptcy. Comparatively, this distribution has since become more symmetrical over the last four months with a longer right tail. This period has of course coincided with the US regional banking turmoil that we believe drove a bid on BTC due to financial stability concerns. The rolling 1m volatility of bitcoin returns has also fallen from an average of 45% over that period last year to an average of around 40% year-to-date (currently around 34%).
While these developments burnish bitcoin’s credentials from a portfolio allocation perspective, it’s not clear to us that returns are now entirely divorced from the macro environment. We see two key drivers to watch during the next few months: the US rates trajectory and liquidity conditions.
First, the US Federal Reserve decision on May 3 remains an important event risk – not because a 25bps hike at the upcoming meeting is unexpected, but because it’s not clear whether the Fed will remain committed to a hawkish bias. Evidence reported by Bloomberg indicates that positioning by quant funds is heavily extended long risk, which could suggest selling pressure is possible if there’s a negative catalyst. Higher rate expectations, for example, could lead to a repricing in equity earnings projections. In that event, crypto performance may be less sensitive to a sell off in equities but we do not think it would be immune.
Second, there is considerable uncertainty surrounding the “X date” of the US debt ceiling, particularly given the low incoming tax receipts from the recent tax season. The US Treasury General Account (TGA) balance has increased from US$86.5B on April 12 to $315.9B as of April 25, offering only a limited additional cash buffer. A prolonged stalemate could create a disorderly situation for all assets, though we’re also concerned about how a resolution here could impact liquidity. We have previously commented that the government’s use of the TGA balance to meet expenditures has indirectly increased market liquidity, and replenishing that (when the government can once again borrow more) could draw liquidity from the market.
ETH update
The supply-demand technicals for ETH seem healthy as the ratio of potential validators in Ethereum’s entry queue to departing validators in the exit queue is getting more balanced. One source (beaconcha.in) is actually reporting a higher number of incoming validators (14,755) compared to outbound validators (12,140) as of April 27. That said, Nansen is reporting 19,491 validators waiting for a full withdrawal, while BeaconScan is reporting 17,243 pending new validators. Regarding processed withdrawals, around 1.7M ETH has so far been withdrawn as of April 27 of which 45% represent full exits, while newly deposited ETH now covers over 76% of withdrawn ETH. It bears remembering, however, that Lido (currently 23.5% of validators) has not yet opened its liquid staked stETH token for redemptions, which may begin in early May.
