Amber Group: Global Macro Tailwinds for Bitcoin
This is a contributing article from Amber Group.
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Born in the last financial crisis, Bitcoin’s maturation will accelerate this year as acceptance of its status as a quasi-currency like gold continues to grow. Bitcoin has already had a key shakeout this year, and despite the negative overhang from equity markets, we see a multitude of positive macroeconomic factors amidst which are worth highlighting.
Quantitative Easing and Negative Interest Rates
The US Federal Reserve Balance sheet now stands at $7 trillion, of which $3 trillion of expansion is from 2020 alone.
This is a saga we have seen before. Let us flashback to 1923. The Weimar Republic was unable to make WWI reparation payments, so France occupied the Ruhr Valley industrial zone and demanded repayment in goods if not in hard currency. The outraged German response was a general strike throughout the Ruhr throwing millions out of work. The Weimar Republic supported the strikers by printing money to cover the striker’s salaries. This was the trigger of Germany’s hyperinflation which from 1923 until 1924 destroyed the German currency.
Today, the US Treasury is printing trillions of dollars and the Federal Reserve is expanding its lending facilities by trillions more. Out of this $3 trillion in Fed balance sheet expansion in 2020, $1 trillion was printed in the last 30 days.
However, the US dollar continues to remain strong in relation to other currencies. 80% of all world trade is currently conducted in US dollars, and 85% of all non-domestic debt is denominated in dollars (roughly $100 trillion). As the current world recession is morphing into a global solvency event, US dollars continue to remain bid vs the rest of the world, which are racing to cut interest rates and devalue their native currencies against the USD.
Much attention recently has been given to negative central bank interest rates, which have already arrived in many parts of the developed world – particularly in Japan and Switzerland, with Europe and the Scandinavian countries (Sweden, Denmark, Norway) hovering at 0%.
It is worth noting that benchmark interest rates are one thing, but that market interest rates and market expectations of interest rates also matter.
In many of the major currencies, market expectations, as implied by interest rate futures are already expecting negative interest rates.
US Fed Fund futures are already implying negative interest rates. The price is simply the implied rate subtracted from 100. For example, if the average monthly Fed Funds rate for Month X is 1.20% the futures price would be 100 – 1.20 = 98.800.
Real yields, defined as nominal treasury yields minus TIPS (treasury inflation protected securities, where coupons reflect the rate of inflation), are already negative. The entire curve from 5 year out to 30 year is negative.
In the UK, 2year gilts (government bonds) have hit negative yields for the first time in several hundred years of history. In the latest BOE decision meeting, 2 of its 9 policy makers voted to immediately increase QE by 100bn GBP ($124bn).
Eight years ago, on 26 July 2012, in the midst of the Eurozone sovereign debt crisis, European Central Bank (ECB) President Mario Draghi promised to do“whatever it takes” to preserve the euro. Today, global central banks are committing to do “whatever it takes” to inflate their way out of the current economic downturn via rate cuts and balance sheet expansion.
Gold is Gaining Momentum
Zero and negative base rates are undoubtedly bullish for both gold and Bitcoin. The primary risks to derail the precious metal’s bull market are conditions prevalent during much of the past decade — rapidly advancing stocks, a strengthening dollar and rising real rates. Such conditions came on the aftermath of gold reaching an all-time high in 2011. Today, with base rates at zero or negative, and global central banks embarking on seemingly unlimited monetary stimulus akin to 2008, we continue to see gold strength, with institutional and retail investors alike shifting their portfolios.
Fund managers in Hong Kong have been encouraging retail investors to jump into gold. State Street Global Advisors, for example, has halved the lot size for its Hong Kong-listed SPDR Gold Shares, the world’s largest gold-backed exchange-traded fund, to five shares per lot since April 24, in response to client demand. That means ordinary investors can take out smaller blocks of shares, making participation easier.
On the institutional side, many of the world’s most famous hedge funds are doubling down on gold, and publicly. Among the best known are Paul Singer’s Elliott Management, Andrew Law’s Caxton Associates and Danny Yong of Dymon Asia Capital. Interest in Gold is a huge plus for Bitcoin. Traditional investors represent large pools of capital that will likely see Bitcoin as a digital alternative, and with gold and Bitcoin moving in tandem amidst the same macro narrative, this reinforces its position as a digital store of wealth.
Paul Tudor Jones, one of the world’s most legendary global macro managers has been the first to jump ship. In a recent investor letter he announced his macro flagship fund (of $22bn AUM) has allocated up to 2% to Bitcoin as a hedge against inflation. That represents at least >$200mio of Bitcoin that is being taken out of the markets (and can be seen via the growth in CME open interest). In the olden days, gold was thought to embody magical properties. As the global economy continues to unravel, and central bank printing continues, Bitcoin’s appeal will continue to grow with many of its magical properties (portability, fungibility, scarcity, censorship-resistance) coming to light.
One of the key levels to watch in Bitcoin has been the psychologically important $10k level, which coincides with the falling resistance line going back to 2018. A break above this level will act as confirmation of a bullish continuation, being one of the most watched technical levels on the big timeframe.
It is worthwhile noting that whilst BTC/USD continues to consolidate, there has been very bullish price action in Bitcoin vs emerging market currencies, with breakouts already happening. In particular against the likes of the Turkish Lira (TRY), the Brazilian Real (BRL), and Mexican Peso (MXN). This could be a foreshadowing of what is yet to come.
Fund Flows & Market Technicals
The grayscale investment trust (GBTC) AUM has reached new all-time highs, with the premium to NAV remaining elevated at around ~20%. CME futures open interest has ballooned this year as well. These are both factors indicative of continued inflows into Bitcoin from access-constrained market participants including traditional brokerages, funds and other investors.
More institutions continue to join the party, with Andreesen Horowitz (a16z) recently announcing their second crypto fund, with AUM of $515mm. On the retail side, Coinbase disclosed that there had been a record number of deposits of exactly $1,200 since the IRS began distributing stimulus checks. Creation of new Bitcoin active addresses also continue to skyrocket, which historically has preceded periods of strong price performance.
Source: Bloomberg Intelligence
Lastly, the number of USDT and stablecoins held on exchanges continue to hover at record levels, and new tether issuance has pushed USDT to become the #3 biggest cryptocurrency, ranked by market capitalization ($8.8bn). All this money will have to be put to work at some point.
On Amber’s flow desk, we have seen hedging interest from family offices, high-net worth individuals and hedge funds, buying downside protection as well as doing call overwriting. We read this as a positive signal with regards to market structure, being indicative of low levels of complacency in the market.
Given the global economic backdrop, Bitcoin remains the most interesting asset class within the macro universe,
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