Macro News Dominates Crypto Markets

The last two+ weeks (sorry for missing last week) has seen a lot of price action, with Bitcoin first leading a move higher, after major news from BTC 2024, notably including the Trump speech. He promised to protect both self custody and Bitcoin mining as well as to establish a strategic Bitcoin stockpile, while also mapping out an end to "regulation by enforcement". The result was a rally that saw Bitcoin top out around $70,000 and settling into a range in the upper $60s.

After President Biden stepped aside from the 2024 election & Kamala Harris started to gain in the polls and prediction markets, Bitcoin started to drift downwards towards the low $60s. (presumably as the Trump news was devalued due to the dropping in his poll numbers)

Towards the end of last week, however, the selloff intensified. It started as tech and small cap stocks started to get hit, in the wake of the Bank of Japan raising interest rates. Fear started to grow that the $20 Trillion "Yen Carry Trade" was threatened and a wave of forced selling of financial assets would follow. The collapse accelerated over the weekend, and hit a crescendo after the Nikkei closed down over 12% on Monday and the U.S. market opened down around 5%. Ethereum was hit the worst, falling to under $2200 and Bitcoin bottomed around $49,000 or so.

As the global markets stabilized yesterday morning, however, Bitcoin bounced back towards the $56k level, while Ethereum recovered to just below $2500. Bitcoin is now back into the bottom of the trading range that has prevailed since March. It is trading at the same price it was on July 8th, but Ethereum is almost 20% lower than it traded a month ago. Solana, however, has recovered to about 5% above where it traded a month ago, so there is clearly some differentiation going on in the crypto market.

Despite the negative price action, there has been a wave of bullish news for Bitcoin & crypto markets but those stories have been swamped, for the time being, by a combination of the Yen rise, fears of recession and "old" coins being sold into a summertime market.

The key stories from the past couple of weeks worth discussing, in addition to the macro news, came from the BTC 2024 Conference, where President Trump called for a positive policy overhaul and both RFK Junior and Senator Cynthia Lummis called for the establishment of a special Bitcoin reserve. That news was followed by the announcement from Morgan Stanley that their saleforce will be allowed to solicit investments into the Bitcoin ETF.

All in all, the news cycle was extremely positive for the long term, but in the short term, liquidity is the most important determinant, which explains these prices at the time this was written.

Weekly Crypto Watch

• Bitcoin (BTC) $56,933 (down 10.44%)

• Ether (ETH) $2512 (down 26.14%)

• Solana (SOL) $147.25 (down 5.5%)

• BTC Funding Rate -0.0009%

• ETH Funding Rate -0.0076%

Macro Watch

• S&P 5307.45 (down 5.8%)

• Gold $2,435.8 (up $8.3)

• Oil $73.29 (down $8.63 )

• DXY 102.94 (down 1.26)

In The News

BTC 2024 Featured Major Announcements

At that conference a little over a week ago, there were multiple political announcements. Before describing them, it is important to note that these are only proposals, and are quite far from becoming law. It is, however, notable that the largest Bitcoin conference in the U.S. attracted so many significant politicians. At a minimum, it shows that the potential for acceptance of Bitcoin as a store of value is gaining significant momentum.

There was a lot of content at the conference, but the main, market moving news came from President Trump. Before Trump spoke, RFK strengthened his own call for Bitcoin to be a reserve currency of the U.S. and he burnished his Bitcoin bonafides by admitting he was a HODLer, with a significant amount of his net worth in the asset.

The Trump speech itself, was a fairly rambling affair, filled with rally style storytelling, but the pre-written content contained the following key points:

• Bitcoin mining and self custody will be protected and encouraged

• Regulation by enforcement will end and "Elizabeth Warren's goons" will be stopped (direct quote) and the largest cheer was for his statement he will fire Gary Gensler on day one.

• He will commission an Industry working group with his administration charged with creating a workable regulatory framework in the first 100 days.

• He promised to not sell a single Bitcoin and to transfer all confiscated coins to a strategic Bitcoin stockpile

The sum total of his speech is a clear path for all investors in the U.S. to be able to legally invest in a regulated crypto market, while Bitcoin itself would become an officially recognized asset. Both of these outcomes would be dramatically bullish and would resonate around the world. If he were elected, it would likely spur multiple countries and corporations to adopt Bitcoin as a reserve asset, to try and get in front of the trade. As for the rest of crypto, it would be a major boon to have regulatory clarity and the backing of the U.S. government for innovation.

Considering Mr. Trump currently has a roughly 50% chance of winning the election, according to Polymarket and leading polls, it is very clear none of this is priced into the market which continues to be dominated by short term liquidity. That, of course, is nothing new to financial markets, particularly in the summer period.

It is worth noting that 30k of the coins that Mr. Trump had promised to HODL were moved the next day from the DOJ wallets. I have not been able to source confirmation they were being sold, but the timing of the move was suspicious and the impact was to push the price of Bitcoin lower.

The Yen trades like a Meme Coin, Triggering Fears of Contagion

Last week the Bank of Japan, fearing the Yen would continue to fall against the U.S. dollar and exacerbate domestic inflation concerns raised rates. While it was only 25 basis points, it signalled the end of their zero interest rate policy and they also committed to defending the Yen. The result was a move from over 150 last week (and almost 160 last month) to a low of just over 142 yesterday.

To put this move in the Yen into context, one must understand that there was an estimated $20 Trillion in notional value of derivative contracts where the investor borrowed Yen and used the proceeds to buy higher yielding or speculative assets. If any substantive portion of those contracts were not hedged for currency rate risks, the result could have been substantial losses. (5% of $20 Trillion is a very large number) To be very clear, I have not seen any credible sources that can prove specific losses or systemic risks created from this trade. Markets, however, hate uncertainty, which is why the selloff in assets accelerated.

It is worth noting that the backdrop for this Yen move and selloff also included a bad Jobs report which was below expectations. That report, triggered a widely used indicator of recession called the Sahm rule and that led to the initial part of the risk asset selloff.

Interestingly, part of the reason that the Yen carry trade is concerning is because the Jobs report had increased odds of a 50 basis point September rate cut, but, such a move could actually help strengthen the Yen. That, as one commenter noted, would be like pouring water on an oil fire...

In any event, we will see what happens over the rest of August and the data in the beginning of September before the next Federal Reserve meeting. Personally, I would be extremely surprised to see action taken before then. The only reason would be that something serious is broken in the financial system and such an event is most assuredly not priced into the equity markets or risk assets broadly.

Other Bullish Bitcoin News

Morgan Stanley announcing their 15,000 or so sales people can solicit investments in the Bitcoin ETFs from Blackrock and Fidelity is very important. They are the first of the major "wirehouses" to allow it and will likely be the first of many (most). The implication is that there are Trillions of dollars of investable assets that are directed by Financial advisors that will be able to allocate to Bitcoin in the next few months. While nothing will happen precipitously, when people get back from their summer vacations in the Fall, it would be unsurprising to see inflows pick up again.

It is worth noting that, despite the large downward move in Bitcoin on Friday and Monday, , the ETFs did not have significant outflows. This is starkly different than the warnings of many Bitcoin bears who anticipated such a market reaction would be amplified by investors dumping the ETF en masse.

The other bullish news, is that Congressman Ro Khanna is set to hold a second roundtable with key Democrat leaders and crypto industry representatives. It may well end up being a political ploy, but, if it leads to a sincere dialogue with the Harris camp, it could lead to a significantly less risky environment for crypto entrepreneurs and investors. In the industry, we are all quite aware that the current regulatory policy is counterproductive. It hurts investors and makes it easier to commit fraud and manipulate markets. If the Democrats were to be persuaded to agree, that would be very positive news.