15 May Bitfinex Alpha | Inflation Abating, but Debt Crisis Looms amid Bitcoin Consolidation

The fight against inflation is not over, according to New York Federal Reserve President John Williams. On an absolute basis, it is still too high and way above the Fed’s two percent target. But progress is being made.

Consumer Price Index (CPI) inflation for April revealed a 0.4 percent month-on-month increase, driven primarily by gasoline and energy commodities, but on a year-on-year basis, showed a slight decline to 4.9 percent,  from five percent in the previous month. This is a trend that we see continuing.

There are risks, though. The US is facing an increasingly fraught debt ceiling crisis, and if Congress fails to raise the debt limit, the US government could default by June, according to Treasury Secretary Janet Yellen. Any weakening in market confidence could lead to even higher interest rates, and we analyse three key indicators that suggest that not only urgent attention is required to address the situation but that there are potentially only seven days to do so.

To add to the ongoing political standoff on the country’s debt ceiling is also evidence that banks are making it more difficult for borrowers to receive credit. The Federal Reserve’s Senior Loan Officer Opinion Survey shows that credit conditions for both businesses and households in the US are continuing to tighten and that this, combined with reduced credit demand, could prolong restrictions on overall credit availability.

Historically, a credit-constrained environment negatively affects the employment rate. While the jobs market is relatively robust today, if there are difficulties for companies who want to borrow to fuel growth, then this will lower hiring and gradually slow economic activity.

Against this backdrop, Bitcoin prices have been slipping, despite the fact that network activity continues to be elevated. Fuelled by BRC-20-related activity (see our BRC-20 special edition here), transaction fees remain high. Indeed, in what is potentially a new chapter for Bitcoin, the last week saw the advent for the first time of Bitcoin-based smart contracts. A newly formed Bitcoin-based decentralised exchange, dubbed Trustless Market, enables users to swap Smart BRC-20 tokens, provide liquidity, earn a two percent transaction fee, and issue new Smart BRC-20 tokens!

This uptick in transaction activity and the higher transaction fees are, however, exerting strain on other network activity indicators. Active and new addresses interacting with the network are approaching historical lows, indicating that higher transaction fees might be dissuading other Bitcoin network users.

Bitcoin miners, on the other hand, should be delighted. The Bitcoin Fee Ratio Multiple (FRM), the ratio of miner income from new Bitcoin issuance to that from transaction fees, has witnessed a dramatic descent. This is also good for the health of the Bitcoin network and increases security as well as indicating a shift in miner revenue sources from Bitcoin issuance to transaction fees.

Long-term Bitcoin metrics suggest we could be on the cusp of an early bull market. Glassnode’s “Recovering from a Bitcoin Bear” dashboard displays all eight indicators flashing green, historically a potent bullish signal for the Bitcoin market. Despite some short-term metrics suggesting a retracement, Bitcoin is trading comfortably above key pricing models, and the Bitcoin Realised HODL Multiple has been on an upward trajectory.

Market and on-chain movements indicate that investors have primarily been exchanging into stablecoins and Ether derivatives over the week. We expect that this could provide a signal for a short-term pullback, but we note that long-term on-chain indicators remain bullish and resemble the early stages of previous bull markets.

Such fascinating market dynamics take place against an equally eventful news agenda last week.

The highlight was the remarkable net profit announced by Tether, the world’s largest stablecoin, of $1.48 billion for Q1 2023, more than twice its profit in Q4 2022. The company also reinforced its commitment to transparency and compliance, registering with FinCEN, submitting Suspicious Activity Reports, and collaborating with the FBI and DOJ.

Liechtenstein’s government also announced it intends to accept Bitcoin as a payment method for state services and expressed interest in investing state reserves in crypto assets in the future.

PayPal disclosed in a 10-Q filing that it holds nearly $1 billion in cryptocurrencies as of end-March 2023, a significant increase in customer crypto assets, while Xapo Bank, a Gibraltar-based institution, said it would allow customers to deposit and withdraw Tether by end-May, following its recent successful introduction of USD Coin deposits and withdrawals.

Less positive was also news that the Bittrex exchange filed for Chapter 11 bankruptcy protection after regulatory scrutiny forced it to cease US operations.

A judge also handed down a two-year prison sentence to Ishan Wahi, a former Coinbase manager, after he was found guilty of insider trading, enabling his brother and a friend to earn $1.5 million by sharing confidential information about new token listings.

Jane Street Group and Jump Crypto, two major market-making firms, also scaled back their digital assets trading in the US due to regulatory uncertainty and a recent crackdown on the crypto industry.

And finally, Su Zhu, co-founder of the notorious Three Arrows Capital, has obtained a Singapore court restraining order against Arthur Hayes, co-founder of BitMEX, who demanded $6 million from Zhu and his partner via Twitter.

It is never boring in crypto. Happy Trading!