Crypto Index Tracker: Crypto markets shake off interest rate hikes

The Federal Reserve (Fed) increased 25 bps. On Wednesday, the Fed delivered a 25 bp increase, in line with consensus. The Fed funds rate (FFR) at the end of 2023 in the new Summary of Economic Projections (SEP) was unchanged at 5.1%. The statement released at the end of the meeting saw Fed officials expressing confidence in the health of the US banking system, while acknowledging that “the committee remained very mindful of inflation risks”. Bitcoin fell to a low of around $26,600 after news of the interest rate hike.

Bitcoin is shaking off Wednesday’s losses. Since the low for the week on Wednesday, positive momentum has returned to Bitcoin, recovering most of the losses it incurred following the Fed rate hike decision. It is currently stabilized at around $28,000.

The Fed is hoping for a goldilocks banking crisis. Dominque noted that the Fed is hopeful that bank volatility will not be so high as to lead to a full-blown crisis, but still warm enough to reduce the need for Fed hikes. In practice, banking crises tend to either be full-blown or not happen at all, so the federal funds rate is likely to be cut much more than the market prices or raised much more than the Fed envisions.

We think the probability of a full crisis is low – the latest Fed balance sheet data has shown some stabilization in the banking system, with overall lending to banks showing no increase last week.

Are interest rate cuts in 2023 likely? The markets are pricing in around 75 bps of cuts between May and December. We think rates cut in 2023 are unlikely, thanks in part to the well-capitalized nature of the US banking system, which makes a full-scale banking crisis unlikely.

The result of our indices

Bitcoin outperformed all other indices this week. All our crypto indices are in the green this week, led by Bitcoin (+13% WoW). All other indices are up between +3% and +10% each. When rebased to the beginning of the year, our Metaverse Index is up the most (+79% YTD) and our Privacy Index is the least (+33% YTD). Meanwhile, Bitcoin is up +72% YTD.

Our Smart Contract Index is most correlated to Bitcoin (+85%). Meanwhile, the remaining three indices have a correlation with Bitcoin of around +83% (Figure 3).

Bitcoin is negatively correlated to oil. In macro markets, Bitcoin’s correlation to oil has turned negative (-42%, last month: +5%, Figure 4). Meanwhile, the correlation to the S&P 500 has increased to +23% (last month: -12%), while the correlation to the NASDAQ has increased to +32% (last month: +1%). Elsewhere, Bitcoin’s correlation to 10-year returns (+3%, last month: -24%) has moved into positive territory, while its positive correlation to gold (+29%, last month: +41%) has declined .

• Smart Contract Platform Index: All coins are up. Fantom (FTM) is up the most (+20% WoW) while Terra Luna Classic (LUNC) is up the least (+1% WoW). Ethereum (ETH) is up +8.6% WoW.
• DeFi Index: Loopring (LRC) is up the most (+15% WoW) while Maker (MKR) is down the most (-3% WoW).
• Metaverse Index: Sandbox (SAND) is up the most (+12% WoW) while Phantasma (SOUL) is down the most (-6% WoW).
• Privacy Index: Dash (DASH) is up the most (+20% WoW) while Beam (BEAM) is down the most (-8% WoW).
• Bitcoin: is up 13% 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.)

Enter your email address to read this Macro Hive Exclusive

OR

START 30-DAY FREE TRIAL

Already have a Macro Hive Prime account? Sign in