The past weeks have felt like the good old times have returned. 2020/21 Flashbacks come in strong with BTC and ETH up double digit percentages since September. On the back of this rally, other Crypto majors like Solana have risen even stronger. Are we back yet?
Among the most recent price drivers have been positive news regarding the approval of Crypto ETFs. As the pathway is clear for a now inevitable Bitcoin ETF, the implications of such an approval are deeming on market participants. Yesterday the big surprise for the market was Blackrock’s application to file an ETH ETF which resulted in price fireworks.
With markets celebrating ETF Season, it’s important to remember that, unlike with a Futures ETF that already exists for certain crypto assets, a Spot ETF would be backed by actual market-bought BTC/ETH assets. This will create inevitable buy pressure from some of the biggest institutional players in the world. It sure feels like crypto is ‘growing up’.
This is happening against an interesting macro setup. With ever growing deficits, US Treasury Yields on long-end treasury debt (maturities >10-years) are rising faster than short-end yields (maturities <2-years). That is bad news for the Treasury as well as the Federal Reserve. It signals dropping interest in long-term US Sovereign Debt and rising inflation expectations. Without buyers for long-dated bonds, the Treasury struggles to issue more debt. Rising inflation expectations undermine what the Fed has been fighting over the past year with rate rises. The problem becomes particularly relevant as we are entering an election year during which the powers-that-be would rather not see a major recession.
Meanwhile, the trend of rising yields on long-dated bonds is also bad news for banks who hold a significant amount of these bonds on their balance sheet. When yields go up, bond prices go down. Bond price drops in turn hurt your solvency as Silicon Valley Bank found out the hard way. To prevent this from escalating further, the Fed is for now pausing interest rate hikes whilst issuing more short-dated bonds. Some consider this to be a liquidity injection into markets which would drive up asset prices including our favourite magic internet money.
What does the crystal ball say will happen next? Some of the current rally feels somewhat frothy. As a rule of thumb in crypto markets, Alts run up after BTC and ETH had their moment. Also, crypto prices tend to suffer from seasonalities. These are just some considerations traders should be making.
The more important question however is if we are at the end of an echo bubble or already at the beginning of the full-on bull market. Many will remember the 2019 rally that was followed by a COVID-induced major drop across the board in March 2020. What followed was DeFi Summer that led directly into the bull market of 2021. It was a final challenge before ‘Up Only’ began. Will history repeat?