Market Update Cryptocurrency Market Update: Analysis and Insights – April 3, 2024

Markets are in the red this week. The Bitcoin price lost nearly 6%. Ether and Ripple’s XRP are down by more than 7%. Cardano’s ADA, AVAX, SHIB, and MATIC printed negative double-digit returns.

The market rally hasn’t recovered since the latest US CPI figures. As a reminder, the year-over-year (YoY) CPI for the month of February came out at 3.2%, which is 0.1% above expectations and above the January figure. In general, the Fed’s officials are quite optimistic. Members of the FOMC committee have been speaking this week. Four of them spoke yesterday, and three more are scheduled to speak today, including Jerome Powell. They seem to consider the latest uptick of the CPI as a bump in the road toward 2% inflation.

However, even though officials from the Federal Reserve reiterated this week that it is reasonable to consider three rate cuts this year, there are growing doubts among investors. As I explained two weeks ago, there seems to be no urgency at all to cut rates. Inflation is still far from the 2% target, and quarter-over-quarter (QoQ) GDP came out better than expected on Thursday at 3.4%, against the expected 3.2%. The unemployment rate for the month of February came out a bit worse than expected at 3.9%, but anything below 5% is considered low. We'll have the unemployment rate for the month of March coming out on Friday this week.

So, the US macroeconomic outlook is reassuring, but the Fed’s ability to bring down inflation to 2% is not assured. If we look at the historical CPI data, it almost appears that current inflation is structural; it seems sticky. There are several signs that could support this, including labor shortages, global supply frictions, demographic changes, and expanding debt with expanding deficits. All these factors contribute to inflation, and it is possible that the Fed’s monetary policy might not be able to overcome their impact.

We’re not going to delve into more details here, but whatever the reasons, the Fed is navigating by sight, probably still hoping that an increased unemployment rate would eventually contribute to a drop in inflation.

The last FOMC statement mentioned and I quote: ‘The Committee does not expect it will be appropriate to reduce the target [rate] range until it has gained greater confidence that inflation is moving sustainably toward 2 percent’

Meanwhile, both the Nasdaq index price and the Bitcoin price have essentially been stagnating since the latest CPI figures on March 12th.

Looking at the 30-day Pearson correlation, crypto and equity markets are currently highly correlated, with a metric close to 1.

Crypto markets are, of course, highly volatile.

This next graph shows the 30-day implied volatility of the S&P 500 index, which is the main US Equity index. It is graphed against the implied volatility of Bitcoin.

The implied volatility here is derived from derivative option markets on Deribit and OKEx, and reported by Volmex.

The Bitcoin volatility is currently five times higher than the S&P 500 volatility.

Looking at the history of this ratio, the ratio of Bitcoin implied volatility over the S&P 500 implied volatility, we can see that it reached the highest level recorded since September 2022 (the index creation)  this week. The Bitcoin 30-day implied volatility was more than six times the volatility observed on the S&P 500.

On the ETF side, the last 5 days were very quiet due, of course, to the public holidays. $12 billion US dollars have been injected since mid-January. BlackRock’s IBIT fund grabbed an additional $316 million US dollars in the past 2 days. Flows exceed $14 billion US dollars on IBIT, which prompted Larry Fink, the CEO of BlackRock, to point out in an interview with FOX News (11:10) that it is 'the fastest-growing ETF in the history of ETFs'. As a joke, he mentioned this after confirming that he is not taking the 'miracle' drug Ozempic. So we can likely be assured that what Larry Fink is saying is perfectly sound. It’s not exactly the ETF growth measured in percentage, but the absolute amounts of US dollars injected into the ETF that are record incremental amounts.

During this interview, Larry Fink also expressed confidence that ETFs on Ether will eventually be launched, whether the SEC classifies it as a security or not. The SEC has been distributing subpoenas to firms related to the Ethereum Foundation, according to an article published by Fortune magazine two weeks ago. The deadline to approve or reject the current ETF applications on Ether is still in May, and so far, there seems to be no intense discussions going on between the SEC and applicants. Speculators tend to be a bit pessimistic, expecting rejections and delays.

Looking at the market dynamics: The Bitcoin price lost nearly $6,800 in the span of 2 days, nearly 10%. The move coincides, to some extent, with an increase of 20 basis points in the 5-year US government yield, reflecting a potential delay for the rate cuts.

But this is probably not the main reason for the mini-crash.

An analyst at CryptoSlate noted that the percentage of Bitcoin supply in profit moved above 96%. It’s not unusual during major Bitcoin market rallies.

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