Crypto Index Tracker: Bitcoin Rises on Fed Balance Sheet Expansion

Bitcoin is leading the charge this week as investors digest inflation data, speculation around whether the Federal Reserve (Fed) will increase at the FOMC meeting next week, and growth in the Fed’s balance sheet.

Crypto markets surged on inflation data. On Tuesday, inflation data revealed that February headline CPI (+6% YoY) was in line with expectations, but core CPI (+5.5% YoY) rose +50bps MoM compared to expectations of +40bps. Crypto markets rallied in the moments after the release, but gave back most of those gains during the day.

The CPI showed no incremental progress on disinflation. Dominique noted that core inflation remained high (as in January) across the three main categories of shelter, non-shelter services and goods. She also noted that the median price CPI year over year, which is a better measure of inflation trends than the core when all prices are volatile, accelerated.

The Fed balance sheet rose by $300 billion. The Fed H.4.1 statistical release, published yesterday, revealed that the Fed’s balance sheet rose by $297 billion for the week ended March 15, showing that US banks borrowed $152.9 billion from the Fed’s discount window. Furthermore, the Fed lent $11.9 billion to US banks under the newly created Bank Term Funding Program (BTFP), which is designed to “help ensure that banks have the ability to meet the needs of all their depositors.” Essentially, it is an additional source of liquidity for banks to reduce the risk of further bank runs.

Bitcoin breached $26,000. Crypto markets have staged an impressive rally on the back of the Fed balance sheet expansion revelations. In fact, there have been over $115 million in short liquidations in the past 24 hours as bitcoin surged above $26,000 and is eyeing $27,000. As the stability of the banking sector remains under scrutiny, demand for bitcoin and cryptocurrencies appears to be on the rise.

Will the Fed hike next week? Dominique sees a subjective one-third chance of a 25 bp hike at next week’s FOMC meeting. Volatility has spilled over to non-US banks (eg Credit Suisse) and Dominique believes that their unlikely markets will have stabilized enough by the March 22 FOMC meeting. She expects the Fed to be more cautious with rate hikes over the next quarter, which will be more bullish for cryptocurrencies, but she is sticking to her long-term view of a terminal federal funds rate (FFR) near 8%.

The result of our indices

Bitcoin outperformed all other indices this week. All of our crypto indices, except for our Smart Contract Index (-3% WoW), are in the green this week, led by Bitcoin (+23% WoW). All other indices are up between +6% and +9% each. Our Metaverse Index is up the most (+71% YTD) and our Privacy Index is up the least (+26% YTD), when rebased to the beginning of this year. Meanwhile, Bitcoin is up +52% YTD.

The correlation between our Smart Contract index and Bitcoin fell. Our Privacy (+84%), DeFi (+80%) and Metaverse (+80%) indices are most correlated to Bitcoin, while the Smart Contract index (+70%) is least correlated to Bitcoin (Figure 3).

Bitcoin was negatively correlated to oil. In macro markets, Bitcoin’s correlation to oil has turned negative (-62%, last month: +20%, Figure 4). Meanwhile, the correlation to the S&P 500 has increased to +10% (last month: +4%), while the correlation to the NASDAQ has increased to +21% (last month: +19%). Elsewhere, Bitcoin’s negative correlation to 10-year yields (-7%, last month: -24%) has narrowed, while its positive correlation to gold (+27%, last month: +40%) has also declined.

• Smart Contract Platform Index: Fantom (FTM) is up the most (+22% WoW) while Terra Luna Classic (LUNC) is down the most (-2% WoW). Ethereum (ETH) is up +8% WoW.
• DeFi Index: Loopring (LRC) is up the most (+17% WoW) while Maker (MKR) is down the most (-13% WoW).
• Metaverse Index: Gala (GALA) is up the most (+24% WoW) while Aavegotchi (GHST) is down the most (-17% WoW).
• Privacy Index: Keep Network (KEEP) is up the most (+28% WoW) while Dash (DASH) is down the most (-2% WoW).
• Bitcoin: is up 23% WoW.

What is in the four indices?

Here are the indices in more detail:

• Bitcoin: OG of crypto markets deserves its own category and is in many ways the true benchmark for any other crypto market.

• Smart contract platforms: after bitcoin, the big innovation was to have blockchains that were more programmable. These can host smart contracts or decentralized applications and have allowed the emergence of the metaverse and defi. Ethereum (ETH) is the most popular version of a smart contract platform. In addition to ethereum, we also include some important competitors. The constituents of this index are: Ethereum (ETH), Cardano (ADA), Avalanche (AVAX), Solana (SOL), Fantom (FTM), VeChain (VET), Terra (LUNA), EOS (EOS) and Chainlink ( LINK) . We also include Polkadot (DOT) which allows interoperability between blockchains and the use of smart contracts via parachains.

• Metaverse: coins related to the creation of a virtual space/digital world on the internet using a combination of augmented reality, virtual reality and social networks. The constituents of this index are Axie Infinity (AXS), The Sandbox (SAND), Decentraland (MANA), Enjin Coin (ENJ), Aavegotchi (GHST), Terra Virtua Kolect (TVK), Ultra (UOS), Phantasma (SOUL), RedFOX Labs (RFOX) and Gala (GALA).

• Decentralized Finance (DeFi): financial services built on top of blockchain networks without central intermediaries. This can be a broad category, so we limit this to platforms that focus on lending/borrowing, yield farming, automated market making and decentralized exchange tokens. The constituents of this index are: Aave (AAVE), Compound (COMP), Uniswap (UNI), Yearn.finance (YFI), Loopring (LRC), PancakeSwap (CAKE), Maker (MKR), 1inch (1INCH), Thorchain ( RUNE), and Terra (LUNA).

• Privacy Coins: coins that hide transactions on the blockchain to maintain the anonymity of users and their activity. The constituents of this index are Monero (XMR), Zcash (ZEC), Dash (DASH), Verge (XVG), Horizen (ZEN), Beam (BEAM), Secret (SCRT), Decred (DCR), Keep Network (KEEP) . ), and Dusk Network (DUSK).

Dalvir Mandara is a quantitative researcher at Macro Hive. Dalvir has a BSc Mathematics and Computer Science and an MSc Mathematical Finance both from the University of Birmingham. His areas of interest are the use of machine learning, deep learning and alternative data for predictive modeling of financial markets.

Image credit: depositphotos.com

(The commentary in the article above does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)

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