Crypto Long & Short: Bitcoin Hedging Potential

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Greetings. I am Glenn C. Williams Jr., and I am pleased to join me as a writer for this newsletter.

I come from traditional finance, where I covered the oil and gas sector as an analyst. My transition to digital assets was instructive and enjoyable. Because many readers here are sophisticated, I want to provide data that could lead to profitable cryptocurrency decisions.

Here are the pillars of my research and analysis process:

Macroeconomics

price action

On-chain analysis

Regulatory concerns

Dynamics of the asset itself (offer, use case, etc.).

I also want this conversation to be a two-way street, so please reach out to me with your comments and questions.

Glenn C. Williams Jr., CMT

Bitcoin failed as an inflation hedge. But it was still a hedge

You don’t have to search hard to find people who call bitcoin (BTC) an inflation hedge, something that is expected to rise in price if inflation is high. For years it was a common refrain, and it still is in some places. And yet, the past year suggests that is not true. Bitcoin has lost more than two-thirds of its value amid the highest inflation in four decades. A hedge.

But I think bitcoin was a hedge against something else: inept central bank policy. It’s the seed of an idea that Renzo Anfossi, a senior trader at Arca Funds, planted in my head during a conversation recently and I think it explains a lot.

Federal Reserve officials spent months in 2021 saying that searing inflation would prove transitory. President Jerome Powell did not change course until November of that year, when he refrained from calling it a passing phenomenon. Bitcoin soared until then as policymakers seemed to deny it.

The Federal Reserve injected money into the financial system to support it during the pandemic. M2, a measure of money supply, jumped dramatically from around $15.5 trillion in March 2020 to a high of $22 trillion last year. The Fed also lowered its main interest rate target to zero. Dumping all that money into the system and engaging in unconstrained monetary policy encouraged questionable risk-taking in the markets. Bitcoin’s rise was a clear barometer that something irresponsible was going on.

The story continues

Then bitcoin crashed. I would say it’s no surprise that it largely coincided with the Fed starting raising rates a year ago, i.e. becoming more responsible. Now, the end of Fed rate hikes to suppress inflation seems to be in sight. The central bank’s target rate is now 4.5%, and policymakers have suggested around 5% would mark the end of their campaign. M2 fell somewhat, slipping to nearly $21 trillion. The yield curve comparing two-year and 10-year Treasuries remains inverted at around minus 69 basis points, but this is an improvement from minus 84 basis points in early December, a sign of a move towards a more normal economy.

Bitcoin soared at the start of this year, rising above $23,000 after falling below $17,000 as recently as January 8. Is this a sign of greater central bank incompetence? Not in the United States, where inflation seems to be under control and the days of easy money seem to be long gone.

I think what is happening is that we are entering a period where bitcoin is trading on multiple accounts. In the United States, it is considered a tool of speculation and something valuable for the technology behind it.

Elsewhere in the world, incompetence could remain a driver for bitcoin investors. The Chainanalysis 2022 Geography of Cryptocurrency report highlights bitcoin adoption rates around the world. Unsurprisingly, a number of the countries that use bitcoin the most are grappling with many monetary policy-specific issues. Venezuela and Argentina, which have key rates above 60% and inflation close to or above 100%, stand out in particular.

The American-style speculative approach and central bank incompetence angle seen elsewhere can both be bullish for bitcoin. Things have been considerably bullish in crypto lately, and not just for bitcoin. Bitcoin is up 37% this year and Ether (ETH) is up 36%.

It remains to be seen how bitcoin ultimately behaves as an asset. He remains relatively young, and opinions vary according to the public. The aim of Crypto Long & Short will be to highlight these views, so that they can be implemented.

Glenn C. Williams Jr., CMT

Crypto diversification is back in 2023

Throughout 2022, cryptocurrencies and stocks, especially growth tech stocks, moved more in parallel than they did in 2020-21. This can be explained by similar and shared investor types and overlapping investment visions that required positioning toward future technology adoption despite the risk of uncertain and unpredictable future cash flows.

Either way, the dramatic rise in interest rates in 2022 has had a significant impact on growth-oriented portfolios. Investor time horizons have plummeted from more than five years to short-term. Today, investors are prioritizing current cash flow and earnings over potential growth prospects. Bull market buzzwords fear of missing something, moon bags, laser eyes, stones rising and financial independence, early retirement are out of fashion, replaced by mundane things like holding on , the average dollar cost, and the collective expectation of transitory inflation.

With this sudden shift in mindset gripping crypto investors unaccustomed to inflation or a persistent bear market, crypto began to trade interchangeably with other risky assets. (See the rolling correlations with major exchange-traded funds in Figure 1):

Figure 1: Data Source: CoinDesk Index Research, Yahoo Finance

Fortunately, crypto and other assets are going their own way in 2023, with the bitcoin/Nasdaq (QQQ) correlation up to levels last seen in 2021. Correlations with gold (as represented by the GLD ETF) and bonds (the TLT ETF) have returned to zero, meaning there is no real relationship. Diversification is back.

A useful analogy for how the correlation changes under market stress would be to imagine yourself in front of your house when it is on fire. In the midst of shock and disbelief, you lose any semblance of nuance or long-term perspective. The only thing that matters is who is inside the house and who is safe outside. Few people ever plan for these circumstances, and for those who do, as Mike Tyson said, everyone has a plan until they’re punched in the face.

Only when the flames die down can we begin to make calm and reasoned decisions. This is happening now as crypto prices rise. My inner maverick initially viewed this upward move as a short squeeze from the bear market, but futures positioning data from the Commodity Futures Trading Commission (see Figure 2) tells a different story. Over the past three weeks there has been an increase in open interest from the real money crowd (i.e. asset managers), while the fast money crowd (leveraged fund in CFTC parlance) does not seem to be overloaded and therefore vulnerable to a short squeeze. This suggests that the rally is sustainable.

Figure 2: Data Source: Merchant Engagement Report, CFTC

-Todd Groth, CFA; Head of Research at CoinDesk Indices

Take away food

Here are some news you should know:

APTOS ABILITY: The crypto rally is far from limited to the BTC and ETH of the cryptosphere. A great example of this is the huge jump in the APT token from Aptos, Solana’s notorious killer (which itself has been touted as an Ethereum killer), as well as the increased interest in the shiba inu token ( SHIB). Who knows if it’s sustainable, but the risk is sought in more distant corners of crypto.

YES, BUT WHEN ? : Pantera Capital, a crypto investment and venture capital firm with approximately $3.8 billion in assets under management, is looking to the future, writing recently that it sees the finance sector shifting to blockchain infrastructure. It’s an old idea at this point with, frankly, not much real progress, but Pantera isn’t the only player still convinced it will eventually happen. The hopes of traditional finance and crypto intersecting remain eternal.

NO MORE WAITING: Here’s another immortal idea: crypto regulation is coming. There is no doubt that the collapse of FTX adds urgency to a topic that has been talked about and talked about and talked about. Remember, though, that in-depth analysis by CoinDesk has shown that one in three US congressmen have received money from FTX officials like Sam Bankman-Fried, creating embarrassment amid any regulatory push.

JUST ANOTHER DAY: Crypto lender Genesis (brother of CoinDesks) recently fell into bankruptcy court. On-chain analysis, however, reveals that Genesis’ separate business division shows some semblance of normalcy. On the same day the crypto-lending arm began Chapter 11 proceedings, trading activity moved a lot of ETH. In fact, it was one of his busiest days.

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