March 29, 2023

Insights and analysis for the professional investor

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Welcome to Crypto Long & Short!

This week, Glenn Williams Jr. discusses the confounding first quarter, which delivered massive gains to crypto investors even as the industry's prospects appeared to worsen.

Then, Ric Edelman, founder of the Digital Assets Council of Financial Professionals, talks about a key reason why crypto's future looks bleaker: an apparent effort to cut it off from U.S. banks.

– Nick Baker

From the Analyst

Cryptos Gained in Q1 Despite Weakened Asset Class Perceptions

It's been an eventful start to 2023, with what feels like a full year of news crammed into just three months. Year-to-date cryptocurrency returns, similarly, have been much bigger than is typical for a single quarter:

Layer 1s

Bitcoin: 71%
Ether: 51%
Avalanche: 58%
Cardano: 57%
Solana: 112%
Algorand: 34%

Traditional finance (TradFi) stock indexes

S&P 500: 3.2%
Nasdaq Composite: 11%
Dow Jones Industrial Average: -2.1%

Crypto stocks

Coinbase (COIN): 71%
MicroStrategy (MSTR): 64%
Marathon Digital (MARA): 99%

Bottom line: Digital assets have roundly beaten TradFi assets this quarter.

Those two worlds, in other words, have decoupled. This quarter, the correlation between bitcoin (BTC) and the S&P 500 declined from 0.91 to 0.59, and got as low as 0.01 on March 22. In other words, digital assets have behaved as the diversifying, uncorrelated asset that many investors crave.

What is amazing about that, though, is these gigantic returns have coincided with a dramatic worsening of perceptions about cryptocurrencies as the U.S. government cracks down on the industry.

If you want some insight into the prevailing government/regulatory view of crypto assets, I would invite you to read Chapter 8 of the most recent "Economic Report of the President." On one hand, the dedication of an entire 36-page chapter to cryptocurrencies highlights digital assets' rapid ascent. On the other, the tone of the report shows the regulatory hurdles that may be ahead.

While acknowledging the innovation of blockchain technology, the report largely labeled cryptocurrencies as holding no fundamental value, offering no alternative to fiat currencies and existing for the purpose of speculation only. I would offer that this is an extremely U.S.-centric point of view for a global asset.

Residents of countries with sky-high inflation and less-credible central banks arguably place significant value on obtaining an asset with a fixed supply. And an asset with global value likely has value within the U.S. as well.

The main macroeconomic issue for investors (in crypto or otherwise) remains inflation, and that is likely to continue for the immediate future. M2 money supply (a preferred inflation gauge of mine) is down 1.7% from a year ago. It's good to see it falling, but it remains 38% higher than pre-coronavirus pandemic levels. The Federal Open Market Committee has responded by raising interest rates at the most rapid rate in history in an attempt to quell the increase in prices.

A recent issue that caught my eye was the federal government balance sheet has actually increased by 2.6% this quarter – including a 5% rise over the last week – as the U.S. helps rescue banks. This runs in stark contrast to the Federal Reserve's previously announced effort to shrink the size of the balance sheet. Fed Chair Jerome Powell indicated the recent increase is temporary lending to banks and not intended to alter the stance of monetary policy.

This past quarter also saw BTC hit a few notable technical signals. It warrants taking a look at how they ultimately panned out.

"Golden Cross" (Feb. 18): The fabled "golden cross" occurs when the 50-period moving average of an asset crosses above its 200-day moving average, and is often interpreted as bullish. We've seen this occur seven times since 2015, with its most recent occurrence on Feb 18. Entering a long position on the cross has paid off for investors who have done so, as prices are up 17% since this most-recent occurrence.
10/100 moving average crossover (Jan. 14): Similar in every aspect to the "golden cross" but with lower time frames, the 10/100 cross is one I look at for two reasons. The first being that there are 16 occurrences since 2015 versus seven for the golden cross. The second being that if the signal is viable, it should help identify bullish moves faster. Historically, the results have been unexciting, with just a 3% average return after 30 days. Those numbers will improve after the Jan. 14 occurrence, though, as BTC is 36% higher since that date.
RSI below 30 (March 10): Another popular signal is when the relative strength index (RSI) of an asset falls below 30, indicating that it is "oversold." This has occurred 108 times for BTC since 2015, with two of the occurrences taking place on March 9 and March 10. The subsequent average 30-day return over all instances has been a 7% increase. Bitcoin is up 40% since March 10.

All in all, it's been a good quarter for digital assets – in terms of performance, anyway. Those who bought and held in January are richer. It will be interesting to see what this next quarter brings, and if the underperformance in perception takes a turn for the better.

– Glenn C. Williams Jr., CMT

Cboe Digital is a U.S. regulated exchange and clearinghouse bringing trust and transparency to the crypto spot and derivatives markets. Cboe Digital honors a separation of duties and includes intermediaries as a key tenet in managing risk and avoiding conflicts of interest. Our unified spot and derivatives markets are underpinned by responsible innovation and enable collateral efficiency. www.cboedigital.com.

Institutional Outlook

The Short-Sightedness of Run-Amok Regulators

Are regulators trying to kill crypto by forbidding banks from doing business with crypto companies? Sure looks that way.

And if they are, the nation's federal and state regulators are doing a huge disservice to investors, hindering American innovation and inflicting long-term damage on the U.S economy. Anyone who thinks this is mere conspiracy theory should take a closer look at what regulators have been doing lately.

In January, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) issued a joint statement discouraging banks from accepting deposits from crypto companies – taking action without the legally required public input.

When banks continued to do business with crypto companies, the regulators made their point by shutting down Silvergate Bank, Signature Bank and Silicon Valley Bank (SVB). And in case the message wasn't clear, when the FDIC turned over Signature Bank's $38.4 billion of deposits to Flagstar Bank, Signature's $4 billion of deposits held in their digital assets businesses were excluded.

A company that can't open a bank account can't be in business. But regulators are foolish to think they can kill crypto by preventing crypto companies from operating. No matter what U.S. regulators do, these companies will indeed operate – simply by moving their operations to other countries.

That's what bitcoin miners did after China banned crypto. Instead of crushing the mining operations, China had the mere effect of chasing the miners elsewhere – mostly to the U.S., where a dozen states have welcomed them. Crypto creates high-paying, skilled jobs and that's precisely what forward-thinking governors want.

Crypto company relocation would harm American innovation, our economy and U.S. investors. Trying to take the freedom to choose from American customers will simply chase them to what Rep. Tom Emmer (R-Minn.), the third-highest-ranking member of the Republican majority in the U.S. House of Representatives, warns are "offshore, unregulated, opaque and unsafe markets."

Indeed, banks around the world are licking their chops at the prospect of winning big new bank accounts from crypto companies seeking a home. Digital Currency Group (the parent company of CoinDesk) says lots of banks overseas are still happy to do business with crypto companies.

The most ironic element of this entire situation is the message regulators are sending is that regional banks aren't safe. Move your money to the national too-big-to-fail banks. Well, since 2000, the nation's top 25 banks have paid a combined $350 billion in fines – for violations including mortgage abuses, toxic securities abuses, investor protection violations, banking violations, consumer protection violations and anti-money laundering deficiencies.

The regulators can't shut down all these banks because there wouldn't be any more U.S. banking system. There's $20 trillion in deposits at U.S. banks, and half of that money is held by the top 25 banks. So the regulators have been shutting down regional banks like Silvergate, SVB and Signature, and chasing people into those big banks – the very place depositors are most likely to get scammed by abusive sales practices, high fees, poor disclosures and lousy service.

The short-sightedness of our nation's banking regulators is astonishing. No wonder so many bank customers and investors have been buying bitcoin (BTC) since Silvergate was shut down. BTC is up 60% this year, while the S&P 500 is close to unchanged. Bank depositors now realize they might awake to discover their accounts are gone, with no notice. That won't happen to a bitcoin decentralized finance (DeFi) wallet. With a bank, you have to wait for the branch to open – if it opens – on Monday. With crypto, your money is available to you 24/7.

Have the Fed, FDIC and OCC actually made bitcoin safer than banks? It's hard to say that with a straight face, but admit it: You're actually debating that question in your head. It's shocking that the question has even come up.

– Ric Edelman, founder of the Digital Assets Council of Financial Professionals

Takeaways

From CoinDesk's Nick Baker, here's some recent news worth reading:

NOW BINANCE: One by one, major crypto figures have run into trouble in the past few months. Now, it's the biggest exchange's turn. Binance got sued by the U.S. Commodity Futures Trading Commission for allegedly letting Americans trade on its offshore exchange – which people in the U.S. aren't supposed to be able to do. The CFTC specifically called out how Binance abetted trading by U.S.-based trading firms. These are the kinds of computer-driven liquidity providers that any exchange – in crypto, stocks, derivatives, whatever – needs to thrive. The trading firms (which weren't identified by name) had set up offshore entities, but the CFTC alleges those were empty shells and the trading was intrinsically American. A higher barrier to liquidity providers is a serious threat to crypto.
AMAZON NFTS: Cognitive dissonance is rampant in crypto. As Glenn Williams discussed above, crypto returns were huge this quarter even as crypto regulation ramped up. Here's more: Even as the industry faces a scary future, Amazon appears to be continuing its march toward offering non-fungible tokens (NFT). A hint along those lines came in the form of a receipt emailed to one of CoinDesk's journalists.
FRESH START: Before FTX collapsed, the collapse of Three Arrows Capital (3AC) was in the running to be named biggest crypto blowup of 2022. Investors lost billions of dollars. Industry distress followed. The founders of 3AC are trying to make a comeback by capitalizing on the distress. Kyle Davies, in an interview with CoinDesk, discussed their plans for a new exchange where bankruptcy claims can be used as collateral. "If you think about why people are angry, it has nothing to do with me actually," Davies said. "People are angry because the market went down. In terms of us, we have no regulatory action [against us] anywhere, no lawsuits at all. There's just nothing."
YIELD CURVE: Although bitcoin has generated big returns in 2023, the inverted U.S. Treasury yield curve is getting closer to un-inverting (aka long-term yields are approaching their more normal position of being higher than short-term yields). This CoinDesk analysis talks about how that is reason for caution for investors.

To hear more analysis, click here for CoinDesk's "Markets Daily Crypto Roundup" podcast.

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