Macro factors like interest rates move crypto markets — CoinDesk

Over the past nine months, general macro conditions have taken a back seat to the idiosyncratic failures (FTX, Terra’s LUNA/UST, BlockFi, CoinDesk sister company Genesis) and success stories (the Ethereum merger, various Layer 2 launches) that drove most of the price action. But macro has regained its position behind the wheel in recent weeks. The banking crisis and the subsequent political reaction have taken center stage – only this time it positively affects digital assets at the expense of other asset classes. A quick look at the bitcoin (BTC) price versus the regional bank exchange-traded fund (KRE) tells you all you need to know about the winners and losers since the first week of March.

Jeff Dorman, CFA, is the chief investment officer and co-founder of Arca.

As digital assets surge, macro investors are diving back into the recession playbook:

The American central bank has lost credibility. The two-year Treasury yield has fallen from an intra-month high of 5.08% to the current yield of 3.75%, which is a startling enough move as it is. It’s even more dramatic when you factor in the Federal Reserve’s decision to raise its benchmark interest rate by 25 basis points (bps) to 5% at the same time.

It’s the market’s way of telling you it’s calling the Fed’s bluff. The fed funds rate started the month below two-year rates, and is currently 125 bps higher. This spread is now the largest between the Fed Funds rate and the two-year Treasury rate since 2007, and has historically led to rapid and aggressive rate cuts.

Furthermore, the “Fed put” is back in play as assets on the central bank’s balance sheet increased by $392 billion over the past two weeks, wiping out 60% of the value of the quantitative easing done since last April.

Not to be outdone, the Ministry of Finance has also lost credibility. After joining the Fed and the Federal Deposit Insurance Corporation in their explicit defense of depositors from a select few failed regional banks, Treasury Secretary Janet Yellen can’t decide whether to offer full support explicitly or instead avoid moral hazard. Over the past three days, Yellen has flip-flopped several times on her position regarding an increase in the level of deposit insurance. Yellen’s past comments about the state of the economy have not aged well. In 2017, she confidently stated that she did not think we would see another financial crisis “in our lifetime”.

And lest we forget Credit Suisse – a forced marriage with UBS left shareholders and many CoCo bondholders dead or nearly dead, but the Swiss bank has been a problem child for at least 15 years. As Bloomberg reported:

“Credit Suisse’s failures have included a criminal conviction for allowing drug traffickers to launder money in Bulgaria, entanglements in a corruption case in Mozambique, a spying scandal involving a former employee and a manager and a massive leak of client data to the media. The association with disgraced financier Lex Greensill and the failed New York-based investment firm Archegos Capital Management reinforced the sense of an institution that did not have a firm grip on its affairs. Many satisfied customers have voted with their feet, leading to unprecedented customer flow at the end of 2022.”

With this backdrop – a Fed out of control, an out-of-touch Treasury Secretary and an accelerating global banking crisis – it’s perhaps not surprising that crypto app downloads jumped 15% last week, while banking app downloads have fallen around 5%. The market is showing its lack of trust in our government and financial systems via a renewed interest in a potential alternative – which is funny when you consider that this surge in crypto adoption is happening at the same time as the Security and Exchange Commission’s war on digital assets.

The SEC recently issued an investor alert urging caution when investing in digital assets, which in isolation sounds fine and accurate – you should be careful when investing in digital assets. But the timing of this statement, amid a slew of other enforcement actions for the year to date, seems disingenuous given all the other, much larger problems in global financial markets. Meanwhile, the SEC too sent Coinbase a Wells alertsets the scene for an epic court battle between two tenacious giants.

Try as the SEC, Treasury, White House and Fed might, there’s just no way to put the duck back in the bottle at this point. The crypto bull box is on full display as the banks close and their depositors and investors hit the trigger. Admittedly, this will cause the operation and flow of capital to become even more cumbersome for participants in digital assets as well. We are already beginning to see the effects as liquidity is sucked out of the spot market for digital assets.

However, the real battle is not between digital asset investors and regulators, but between banks and stablecoin issuers. Stablecoin issuers still rely on banks to hold their reserves, and banks have been very resistant to helping a sector that is trying to put them out of business – which of course makes sense.

Arthur Hayes wrote a great piece in late 2022 about the friction between banks and stablecoins before any of the bank failures began. The very heart of the problem is that rising interest rates are good for stablecoin issuers because they keep all the interest income themselves and pass none of it on to token holders, while rising interest rates cause a real problem for banks who lose depositors when they do so. t send along the interest rates, and also be under water on their long-term loans. Here is what he said:

“… [D]o do you understand why the banks HATE these monstrosities? Stablecoins make banking better than banks since they operate with almost 100% profit margins. Every time you read FUD about this or that stablecoin, just remember: the banks are just jealous.”

And ditching current iterations of stablecoins in favor of a central bank digital currency (CBDC) isn’t much better. In a 2022 report, McKinsey estimated that globally, banks will lose $2.1 trillion in annual revenue if a successful retail CBDC is introduced.

The reality is that even though we are trying to build a digital infrastructure that runs parallel to the existing financial system, the ecosystem is still very much intertwined with the traditional banking system. So ironically, trying to kill crypto while saving the banks ends up saving crypto too. It’s a win-win right now for blockchain enthusiasts.

Disclaimer: This commentary is provided as general information only and is in no way intended as investment advice, investment analysis, legal advice, tax advice, a research report or a recommendation.