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What’s Next for Macro?

With fewer crypto-specific catalysts amid the summer slowdown, performance in the digital asset class seemed to take its cues this week from the stronger USD trend and corporate month end flows

July 28, 2023

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Key takeaways

  • The bi-partisan “Financial Innovation and Technology for the 21st Century Act” made some key advancements in the US House Financial Services and Agricultural Committees in Congress this week.
  • Bitcoin options open interest has been down sharply in July, coinciding with the faster pace of implied volatility deceleration over the last 4-6 weeks.

Written by

  • David Duong, CFA, Head of Institutional Research

Market View

Central banks: Speak loudly, say nothing?

The bi-partisan “Financial Innovation and Technology for the 21st Century Act” (HR 4763) made some key advancements in the US House Financial Services and Agricultural Committees in Congress this week, but we saw very little response to those developments from crypto markets.

In fact, with fewer crypto-specific catalysts amid the summer slowdown, performance in the asset class seemed to take its cues from the stronger USD trend and corporate month end flows. The multilateral USD index (DXY) bounced off its 12m low last week on the back of favorable dollar seasonals as well as the widening economic divergence between the US and the rest of the world, reflected in interest rate differentials.

This week, the Federal Reserve unanimously hiked rates by 25bps to 5.25-5.50%, which had been widely telegraphed. But in our view, the net amount of new information introduced at this meeting was far more limited than in any previous session over the last year. Ex-post real yields in the US are now higher than they were prior to the pandemic, but Fed Chair Jerome Powell made it clear that the board was a long way off from rate cuts.

We still believe that Powell has a dovish bias here, but he stated that the Fed’s next decision on September 20 will be data dependent, with two CPI prints and the Jackson Hole Summit to watch before then. That hawkish tone seems to reflect the lack of unanimity among the board, in our view. Meanwhile, the ECB followed the Fed with its own 25bps hike on July 27 taking the deposit facility rate to 3.75% (and the refinancing rate to 4.25%). Despite ECB President Christine Lagarde saying that there’s still “ground to cover” on inflation, she remained non-committal on any forward guidance and suggested data dependence for their September meeting as well.

The key differences between the central banks is that:

  • where the Fed upgraded their economic outlook to expanding at a “moderate” rather than “modest” pace, the ECB said that their near-term economic outlook has deteriorated and
  • where there has been a clear disinflationary trend in the US, prices have been far stickier in Europe.

Our impression is that the ECB’s nervousness about the region’s economic outlook will likely be the dominant factor in their decision making, putting them in a more dovish space than the Fed. Consequently, we think that that juxtaposition should contribute to a stronger USD for the time being, which makes it difficult for cryptocurrencies to break higher in the near term. At the moment, BTC/USD is performing in line with the EUR on a risk-adjusted basis but outperforming the JPY and EMFX, based on its standard deviation move over a three-month period.

Screenshot 2023-07-27 at 4.33.57 PM

On derivatives, bitcoin options open interest has been down sharply in July, currently around 370k BTC (US$11B). That has coincided with the faster pace of implied volatility deceleration over the last 4-6 weeks as the 1m ATM level currently sits near 34% versus a realized vol of 30%. Still, we have seen disproportionate demand for bitcoin call options with a max pain price of $29,000 for the maturing July 28 contract on Deribit. That demand has kept the skew curve inverted since late June, with the 25 delta 1-month skew pushing lower in the last week from -3.5% to -9.2%. We think it’s likely the curve also flattened due to possible profit taking on positions after bitcoin rejected the $31,000-$32,000 spot level.

Meanwhile, futures open interest for bitcoin has been stable near 472k BTC ($13.8B) after picking up at the end of June, with institutional players increasing their participation on CME.

Screenshot 2023-07-27 at 4.34.33 PM

Crypto & Traditional Overview

(as of 4pm EDT, Jul 27)

Asset

Price

Mkt Cap

24 hour change

7 day change

BTC correlation

BTC

$29,175

$566B

-1.11%

-2.24%

100%

GBTC

$18.39

$12.73B

-4.52%

-6.13%

92%

ETH

$1,860

$224B

-0.77%

-1.70%

82%

Gold (Spot)

$1,943

-

-1.43%

-1.31%

24%

S&P 500

4,537

-

-0.64%

+0.07%

34%

USDT

$1.00

$83.81B

$0.00B

+$0.05B

-

USDC

$1.00

$26.59B

-$0.05B

-$0.39B

-

Coinbase Exchange & CES Insights

Volumes have remained steady over the past week as volatility in the crypto space has declined. Global open interest has remained relatively stable in the perp markets while declining in the term futures markets. Implied volatility for both BTC and ETH softened across the curve, with the largest moves in the front end. With few catalysts on the horizon, traders aren’t paying up for convexity. Flows on the CES desk have been balanced with both buyers and sellers being price sensitive and trading passively.

Screenshot 2023-07-27 at 5.06.54 PM
Screenshot 2023-07-27 at 5.07.02 PM

Financing Rates

7/27/2023

TradFi

CeFi

DeFi

Overnight

5.10%

4.25% - 10.00%

2.63%

USD - 1m

5.25%

4.50% - 10.25%

USD - 6m

5.50%

5.00% - 11.00%

BTC

2.00% - 6.00%

ETH

3.50% - 7.50%

1.20%

Notable Crypto News

Institutional

  • Why big banks like JPMorgan and Citi want to put Wall Street on a blockchain (CNBC)
  • Bitcoin ETF creativity continues as SEC mulls spot products (Blockworks)

Regulation

  • SEC charges Quantstamp over $28 million ICO (The Block)
  • Singapore court declares crypto as property in case involving Bybit (The Block)

General

  • Sam Altman’s Worldcoin launches token with more than two million sign-ups (The Block)
  • Italy’s Central Bank Taps Polygon, Fireblocks DeFi Project to Help Institutions Dabble With Tokenized Assets (Coindesk)
  • Flashbots becomes unicorn after completing $60 million raise (The Block)

Coinbase

  • United States of Crypto: Blockchain Hardware Technology Built in CA (Coinbase Blog)

Views From Around the World

Asia

Myanmar’s shadow government, the National Unity Government, is set to start a neobank, with plans to offer users banking services like currency swaps, fixed deposits and prize-linked savings account services. Users will also be able to donate directly to revolutionary efforts via the Spring Development Bank. The bank will run on Polygon and do currency swaps via Uniswap v3 pools and USDT stablecoins. According to CoinTelegraph, the main goal of Myanmar’s first entirely crypto-based banking institution is to make both domestic and international payments faster and more efficient, as well as offer international access to a broad array of financial products. (CoinTelegraph)

Kuwait’s main financial regulator, the Capital Markets Authority, has issued a "circular on the supervision and issuance of virtual assets in the country," banning virtually all major use cases and operations involving cryptocurrencies, including payments, investments and mining. In addition, the circular stipulated that local regulators were barred from granting licenses to firms seeking to offer virtual asset services in a commercial capacity. (CoinTelegraph)

The Week Ahead

Jul 31

Aug 1

Aug 2

Aug 3

Aug 4

Notable Macro

Eurozone GDP

Eurozone CPI

US ISM Manufacturing

US Initial Jobless Claims

BoE Rate Decision

US Nonfarm Payrolls

Notable Earnings

Microstrategy Inc

Paypal Holdings

Apple Inc

Block Inc

Coinbase Global 

Crypto

HNT Halving 

LTC Halving 

Ethereum all core devs call

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