• Bullish, Bearish, or Both? Macro Mayhem Leads to Bitcoin Volatility

• Bitcoin’s Institutional Embrace is Accelerating

• Beyond Borders and Banks: Stablecoins Proving their Market Viability

Macro Mayhem Leads to Bitcoin Volatility

Last week, Bitcoin navigated a wave of conflicting U.S. macroeconomic events. The FOMC press conference last Wednesday confirmed the Fed will sustain high interest rates at 5.25-5.5% as the challenge of achieving the inflation target persists. As shown in Figure 1, this initially triggered Bitcoin’s price to drop by 5.9% as investors sought the safety of fixed-income assets. Friday’s U.S. Jobs report reversed the negative sentiment from the FOMC meeting. The report revealed a disappointing labor market, with only 175,000 non-farm jobs added, as unemployment rose to 3.9%. This data fueled hopes for rate cuts, which bodes well for risk-on assets, which led to Bitcoin rebounding by 6.7% to ~$63,000 by week’s end.

Figure 1: Bitcoin 1 Week Price Performance (April 29, 2024 – May 6, 2024)

Source: TradingView

Looking ahead, several developments could provide tailwinds for Bitcoin. The upcoming Treasury buyback program, the first since 2002, is launching on May 29 and has several implications for the broader financial landscape. By conducting weekly bond buybacks of up to $2 billion, outstanding debt is reduced while liquidity is increased, which could allow capital to flow into riskier assets. The reduced bond supply also puts downward pressure on yields, potentially making Bitcoin more attractive.

The recent Treasury refinancing announcement also looks promising for Bitcoin. A lower target balance for the Treasury General Account (TGA) suggests the government needs to borrow less, which frees up capital. The impact could be compared to quantitative easing, instead of withdrawing liquidity from the market by selling new bonds, the Treasury effectively injects liquidity by not needing to borrow as much. This additional liquidity eventually reaches the banking system, potentially leading to easier access to credit and lower interest rates. As we have voiced throughout, this environment would benefit riskier assets like Bitcoin.

Despite the initial price drop triggered by the Fed’s hawkish stance on interest rates, Bitcoin’s resilience was evident in its subsequent rebound driven by a weakening labor market and the potential prospect of a dovish shift. As illustrated below, Bitcoin’s funding rate is now similar to when it was trading at around $29,000, which signals a healthy market adjustment, shedding excess leverage. Looking ahead, the upcoming Treasury actions will undoubtedly affect U.S. liquidity and interest rate levels, which are key to Bitcoin’s performance and will be closely monitored in the coming weeks.

Figure 2: Bitcoin’s Funding Rate

Source: Glassnode

Bitcoin’s Institutional Embrace is Accelerating

Fueled by the U.S. Bitcoin ETF launch, the institutional adoption of Bitcoin is accelerating. A staggering $175 billion is estimated to be held by ETFs, countries, and public and private companies, representing roughly 15% of the total Bitcoin supply. While miniscule compared to the U.S. launch, Hong Kong’s Bitcoin ETFs further exemplify this trend, accumulating 4.2K BTC, or nearly $270 million, within their first week of trading. This showcases the growing appetite for the asset, however the hunger for Bitcoin is not limited to Hong Kong. Ovata Capital Management’s $60 million allocation into the U.S. spot ETFs underscores this trend, which is set to continue as the May 15 deadline for 13F filings approaches, which may reveal previously undisclosed positions held by institutions.

Recent disclosures by BNY Mellon and BNP Paribas, along with Swiss funds Bellecapital International and Lugano Financial Advisors, provide further evidence of Bitcoin’s institutionalization. Moreover, according to BlackRock, the world’s largest sovereign wealth funds (SWFs), including Norway’s $1.6 trillion fund, Saudi Arabia’s Public Investment Fund, and Kuwait’s Investment Authority, are re-initiating discussions around Bitcoin. The SWF industry is valued at $11.6 trillion, therefore even a moderate allocation into the asset could see demand catapult to new levels, and provide a tipping point for broader adoption. Importantly, it is becoming more difficult to discount the asset – Bitcoin’s unique profile as both a risk-on and risk-off asset is becoming increasingly relevant given the complex macroeconomic landscape.

Further, Bitcoin’s adoption is transcending passive investment strategies. For instance, fintech giant Nubank, housing 80 million users, now offers crypto deposits and withdrawals, aiming to bridge the gap between traditional finance and crypto in Latin America. Lastly, Microstrategy, synonymous with their commitment to Bitcoin, are pushing the boundaries further by building an identity solution on the Ordinals network. This exemplifies the use of Bitcoin beyond a decentralized payment system, a notion we have echoed in the past weeks as Bitcoin continues to evolve beyond its original purpose.

Finally, the coming weeks promise further clues on the US economic trajectory and Bitcoin institutional adoption. There are eight Fed speaker events this week, and while they don’t directly address crypto, they often offer valuable insights into the current economic conditions. This, coupled with the turbulence expected during Q1 earnings season, could create volatility in equity markets, which may spill over to crypto as investors react accordingly.

Beyond Borders and Banks: Stablecoins Proving their Market Viability

After a six-year hiatus, Stripe is re-entering the crypto industry by enabling customers to accept stablecoins for online payments. Stripe was among the pioneers in integrating Bitcoin back in 2014. However, they ceased support in 2018 due to Bitcoin’s prolonged processing times and high transaction costs, which didn’t present a significant improvement over its traditional counterpart. Since then, the industry has undergone a major transformation, with the emergence of numerous smart-contract platforms and scaling efforts, enhancing the potential of crypto’s infrastructure to offer a superior user experience.

For instance, Stripe’s co-founder showcased a $100 USDC payment using Solana at the company’s annual conference. The demo corroborated how the payment was processed in less than a second instead of days while incurring $0.0037 in network fees, a cost reduction of almost 800-fold compared to a credit card. This is a testament to the advancements achieved by the latest generation of platforms, such as Solana, which addressed some of the drawbacks, like high transaction costs and lengthy processing times, while demonstrating their efficacy for use cases requiring a high volume of interactions, such as payments.

To that end, Stripe will begin supporting USDC payments through Ethereum, Solana, and Polygon. This integration marks a significant milestone, given Stripe’s substantial 35% market share in the payments industry. However, it’s even more crucial as users can seamlessly leverage the efficiencies of crypto’s infrastructure, ensuring reduced transaction costs and notably swifter processing times while remaining unaware of the use of blockchain technology in the backend. This mirrors how users are often unaware of the payment infrastructure their preferred fintech apps utilize. At 21Shares, we firmly believe that this kind of seamless integration is imperative for the widespread adoption of crypto.

That said, while Tether leads by market capitalization with $110 billion compared to USDC’s $33 billion, USDC actually dominates in terms of usage when looking at transaction volume. According to Visa’s latest on-chain analytical dashboard aiming to dissect the growth of the stablecoin sector, USDC is now responsible for more than 70% of all stablecoin payments, as illustrated below. As we’ve emphasized for years, exemplified by our own work on Dune, on-chain analytics represents the future of capital markets. It offers unparalleled transparency and real-time data access, unlike traditional industries reliant on periodic disclosures of quarterly financials. Therefore, Visa’s active engagement in on-chain analytics marks a watershed moment, reaffirming our long-held belief that this is the path forward.

Figure 3: Stablecoins Monthly Transaction Volume

Source: Alluvium X Visa

Despite USDC’s widespread adoption, Tether has achieved remarkable financial success in Q1. The company raked in a staggering $4.52B in profits by strategically deploying user deposits into U.S. treasury and repurchase agreements. The exposure to debt, coupled with rising Bitcoin and Gold prices, has proven to be a lucrative formula. As a result, Tether’s net profit now eclipses that of financial giants like Citibank, Goldman Sachs, and Morgan Stanley, highlighting the burgeoning business potential of the fiat-backed stablecoin model.

Further, characterized by its disintermediated structure and emphasis on user experience, stablecoins have proven themselves as a viable alternative within the financial landscape. They are arguably one of crypto’s most compelling use cases right now. Its significance becomes even more apparent in regions facing economic instability, where users turn to stablecoins as a swift means to access the U.S. dollar, safeguarding themselves against currency devaluation. Turkey serves as a notable case study, stablecoin transactions account for a remarkable 4% of the nation’s GDP, the highest proportion globally, at a time when the Turkish Lira lost more than 75% of its value against the U.S. dollar over the last 5 years.

Finally, Tether is intensifying its efforts by launching USDT on the TON blockchain, which is closely linked to Telegram. Despite TON’s recent rise in popularity with approximately 1.74M users, it aims to tap into Telegram’s vast 900M user base through its deep integration. This move could significantly expand the market for stablecoins, currently serving around 25M users. Moreover, this integration is a pivotal step in simplifying crypto usage, concealing its complexities, and paving the way for mass adoption.

This Week’s Calendar

Source: Forex Factory, 21Shares

Research Newsletter

Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com

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The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.