IN TODAY'S ISSUE: We take a look at what has been driving both crypto and traditional markets Turmoil in Kazakhstan highlights the importance of political stability for miners Survey reveals the top concern of institutional investors for digital assets
Crypto Markets (And Traditional Markets) Fall on a Hawkish Fed On Wednesday at 2 PM, the Federal Reserve released the minutes from its December FOMC meeting. In the minutes, there appeared an alarming consensus that the Fed should begin raising rates and shrinking the balance sheet as soon as possible once its taper is completed as anticipated in March 2022. This degree of hawkishness had already been communicated by the Fed in several forms, and so it is perhaps surprising that investors had a strong reaction to the news. Fed dot plots from that December meeting, released immediately after the meeting, showed an anticipated three rate hikes in 2022. Fed Governor Christopher Waller said in a speech soon after the December meeting that balance sheet reduction could start in 2022. But if the information was not entirely new, investors were perhaps caught off guard by the forcefulness and level of consensus shown in the minutes. What's for certain is that investors quickly reacted, sending many traditional financial markets, as well as crypto, down.
There did not appear to be any fundamental news in the crypto space and liquidations, while elevated, were not notable. We have written extensively in recent months about the increasing relationship between crypto and traditional markets, and so we will be keeping a close eye on the actions of the Federal Reserve going forward. The next FOMC meeting is January 25th - 26th and the next CPI reading is January 12th.
Hash Rates Fall Amid Kazakhstan Internet Shutdown In recent days, Kazakhstan has faced significant protests, sparked by the government’s decision to lift price caps on fuel amid energy shortages, leading to significant price increases. Attempting to tame the protests, the government shut down the internet. In the wake of China’s ban on mining, a number of Chinese miners crossed the border into Kazakhstan. Prior to the protests, the nation controlled nearly 20% of the world’s hash rate. Since bitcoin mining requires internet access to download blocks and transactions and propagate new blocks, this effectively shut down mining in the country. With the internet still down, this provides a boon to miners outside of the country who are now more likely to win blocks and collect rewards.
Despite bitcoin being a supranational currency, operations that support the network still occur within national boundaries. Miners need energy, internet, and government approval to operate, and the continued provision of these interrelated needs can be suddenly stopped in nations that lack stability. When miners left China, we believe that this improved the stability of the long-term Bitcoin network (as well as its environmental profile). If miners were to leave Kazakhstan to freer and steadier nations following the latest conflagration, it would likely have a similar impact. The episode also reinforced how vital it is that network hash rate is globally distributed rather than concentrated and exposed to the whims of a few governments.
Custody is Still the Top Institutional Investor Concern This week, a survey from crypto asset manager Nickel Digital Asset Management highlighted the chief concern of institutional investors in the space, asset custody. The survey, reported in the media, said that 79% of respondents representing $108.4B in assets under management cited secure storage of digital assets as the key consideration whether to invest in the space. Our conversations with investors new to the industry echo similar concerns, which stem from the core nature of Bitcoin itself. Bitcoin is technology that removes trust from a central entity and places it in the hands of the network participants: miners, node operators, and those that own bitcoin. Bitcoin has been called a “digital bearer instrument”, which to us means that whoever possesses the private key, the password that allows one to move bitcoins, has the right to the asset itself. Given this technological innovation, it should come as no surprise that institutional investors are concerned with the safeguarding of their private keys. While counterparty risks exist in the traditional markets, something that was on full display during the Global Financial Crisis, losing your securities or having them stolen is not a threat historically borne by traditional market investors. We understand the concern and therefore encourage those entering the space to perform adequate due diligence on service providers. It is just as important as the investment analysis itself.
Market Update market data.jpg Bitcoin fell -8.4%, with much of the losses occurring on the back of the hawkish FOMC meeting minutes. Equities also fell on the week, with the S&P 500 down -1.6% and the Nasdaq Composite down -4.2%. Gold fell -0.9%. Bonds decreased on the week, with Investment Grade Corporate Bonds falling -1.8%, High Yield Corporate Bonds depreciating -1.1%, and Long-Term U.S. Treasuries decreasing -3.1%. Real yields increased and inflation expectations modestly decreased.
Important News This Week Investing: Bitcoin Can Reach $100K, Goldman Sachs Says – CoinDesk Bitcoin Falls as Fed Minutes Appear Hawkish – Federal Open Market Committee Crypto Security Is Biggest Concern for Institutional Investors – Bloomberg Regulation and Taxation: Mining Pool Hashrates Fall amid Kazakhstan Internet Shutdown – The Block Congress Preparing Hearing on Mining's Environmental Impact – The Block London Travel Network Cracks Down on Crypto Ads – The Block Former CFTC Chair Proposes Means for Unifying Crypto Regulation – The Block Estonia Regulator Says No Plans to Ban Crypto – CoinDesk NYDFS Hires Deputy Superintendent For Crypto – LinkedIn Companies: CSI and NYDIG to Provide Financial Institutions Access to Bitcoin – NYDIG, CSI BTCS to Offer a Dividend Payable in Bitcoin – BTCS
Upcoming Events Jan 12th – U.S. CPI data release Jan 25-26th – FOMC meeting Jan 28th – Bitcoin futures and options expiry on CME
No comments:
Post a Comment