Tightening Tensions

As we step into the riveting theatre of this week’s markets, we find ourselves in a world where contrasts paint the canvas. Equity markets have been on a downward slide since Friday, while in contrast, cryptocurrency markets have seized the spotlight and made a remarkable upward shift with Bitcoin at the forefront. 

The surge seems to be fueled by renewed hope for the approval of a spot Bitcoin Exchange-Traded Fund (ETF), especially after BlackRock, the world’s leading asset management firm, submitted a proposal for a Bitcoin ETF. This initiative provides investors with an avenue to gain exposure to the cryptocurrency without directly owning it, with Coinbase anticipated to manage the custodial aspects. However, the underlying ETF would still hold the actual Spot BTC. The news was met with optimism by cryptocurrency enthusiasts, prompting a 2% rise in Bitcoin’s price on the day following the announcement. There is also a noticeable positive sentiment reflected in the narrowing of GBTC’s discount to NAV by approximately 10% since BlackRock’s filing. It’s significant to note that if a Bitcoin ETF is approved, GBTC’s discount is likely to move towards zero due to the ETF’s capability to redeem at NAV. The diminishing discount is interpreted as the market adjusting to the increased likelihood of approval in recent days. However, it is important to highlight that the U.S. Securities and Exchange Commission (SEC) has consistently rejected all applications for spot Bitcoin ETFs thus far, including those from notable companies such as Fidelity, Greyscale, and NYDIG.

During the much-anticipated Federal Open Market Committee (FOMC) meeting last Wednesday, the Fed remained steadfast and chose to hit the pause button, keeping interest rates firmly anchored – a move that aligned with market expectations. However, the tone and projections of the meeting, embodied in the updated dot plot, were decidedly more hawkish than most had anticipated. The prospect of further rate hikes during the course of the year was underscored by these developments. According to the revised dot plot, the average Fed member now foresees a need for two more hikes in 2023, pushing the interest rate to 5.6%—a noticeable increase from the 5.1% forecast back in March. Additionally, there was a striking coherence among member forecasts for year-end expectations, indicating a shared view that the hiking cycle will persist. As such, the market landscape is now rife with the prospect of the monetary tightening noose being drawn incrementally firmer as the year unfurls.

Meanwhile, the Bank of England made a contrasting move by hiking rates by 0.5% to 5%, fuelled by a higher-than-anticipated inflation print. Similarly, the European Central Bank also raised rates by 25 basis points to 4% since last Wednesday’s Fed meeting. However, markets appear to be resilient in the face of the hawkish narrative as U.S 2Y yields have returned to similar pre-meeting levels at around 4.68%.

From a technical perspective, the window preceding the (FOMC) meeting was characterised by restrained price fluctuations and low volatility which is conveyed by the tight spread between the Bollinger Bands on the Bitcoin chart. However, as the bands display, the landscape swiftly changed with the commencement of the meeting as volatility surged dramatically. Bitcoin initially plummeted by -4.65% in a span of two hours, only to bounce back with an 8% rally. This scenario of amplified volatility concurrent with FOMC meetings can serve as an opportune moment for scalpers or traders seeking to speculate on the meeting’s outcome. Additionally, it is worth highlighting that the RSI is now significantly overbought. This occurrence could signal an impending shift in Bitcoin’s bullish momentum observed over the recent days.

Reflecting on the past two weeks, both traditional and digital markets have shown significant resilience. Amidst turbulence caused by the FOMC meeting’s unexpectedly hawkish stance, the crypto markets have demonstrated agility, with Bitcoin swiftly recovering post-BlackRock’s ETF announcement. This week’s events underscore the vital need for investor vigilance amidst increasing market volatility and regulatory scrutiny. The evolving financial landscape marked by heightened regulatory compliance and interconnected global market dynamics serves as a clear reminder to investors and traders to stay abreast of these fast-paced developments.