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SwissBorg MacroScope - 29 April 2024

SwissBorg MacroScope - April 29th

Your hedge is your patience

Your hedge is your patience

While it seems that much has been going on in the market recently, the truth is that price-wise, Bitcoin has been ranging between the $60k to $73k level for over one and a half months. As discussed in length, a period of consolidation like this was expected and the base scenario is still a breakout to the upside. But this scenario can take time to materialise itself and in the meantime, the short term direction of the market will likely be influenced by the short term news of the week. 

Hong Kong - The ETF are here 

Hong Kong's spot Bitcoin and Ethereum ETF will begin trading on April 30th. This will be an important event to monitor, as various elements suggest it could act as a positive catalyst for the crypto market.

First, when we step back and examine the success of the Bitcoin spot ETF in the US, there is reason to believe that there is strong demand for a Bitcoin and Ethereum ETF in Hong Kong, especially considering that Asia represents a larger market than the US for crypto, as illustrated by this graph :

Number of crypto users in different regions
Source: Willy Woo

Another element to consider when analysing the impact of the new ETFs in Hong Kong is to look at the cumulative returns by geographic trading sessions for Bitcoin. Here, what we observe is a clear divergence, with APAC (Asia) leading strongly (27.46%) ahead of Europe (22.24%) and the US (16.1%).

Bitcoin cumulative returns by session
Source: Newhedge.io

This reinforces the idea that the potential impact of the ETFs in Hong Kong could be underestimated and that, in reality, it could have a larger-than-expected impact on the market, and led to a strong surge in demand for crypto assets.

Lower than expected GDP - What does that mean?

Last week, the US GDP (gross domestic product) data came in lower than expected. Real gross domestic product (GDP) increased at an annual rate of 1.6%, well below the 2.4% expectation. This is a net decrease from the previous quarter where real GDP increased 3.4% in Q4 2023 marking a slowdown in growth.

Real GDO: percent change from preceding quarter
Source: BEA

Analysing the components of GDP in more details , we note the following:

  • The biggest positive contributor to GDP  in the last quarter was “Personal Consumption Services.” This component of GDP has taken a larger and larger share of GDP over the years and is now much higher than the 2017-19 average.
  • The biggest negative contributors to GDP was net exports, mainly due to an increase of imports and a decrease in exports in the first quarter of 2024.
Decomposition of real GDP growth
Source: Ernietedeschi

The paradox here is that while GDP growth is slowing down, the decomposition of real GDP growth, mainly the growing share of personal consumption services and strong imports does not signal a weak economy. In fact, importing a lot of goods and spending money on services are more signals of a thriving and rich economy.

What’s the implication of this for markets?

In addition to the lower than expected growth in GDP, we also have persistent inflation in the US , as shown by the revival of the uptrend in US Core PCE data. 

US Core PCE inflation
Source: Ernietedeschi

The only pieces of data that are still strong are around the labour market and employment. Knowing that employment data is usually a lagger, a fair question to ask ourselves is: Are we slowly entering into a new era of stagflation? And what could be the implication for markets?

Stagflation is characterised by a stagnant economy, persistent inflation and high unemployment. Historically, this is the worst economic environment for markets. To reinforce this argument, this is the historical performance of different asset class in this economic regime:

Gold has been a clear winner in stagflationary environments
Source: Schroders

We note that in the past, gold and commodities (hard assets basically) were the best performers while US equities had a negative performance. Crypto, on the other hand, never went through this economic regime so there is no past data to analyse. However, it seems reasonable to think that Bitcoin, the hardest asset of all, should react like gold. But for the rest of the crypto market, things are less clear.

In any case, stagflation is not the end of the story and things are really different this cycle because of something that we’ve already talked about in length: Fiscal dominance and Quantitative Support (QS) that is impacting market dynamics and are pushing asset prices higher. For now, this should dominate over macro variables.

Our Long-Term in-House View

  • We are in a bull market and we expect to see BTC > $100k, ETH > $10k and SOL > $500 as new ATH in the next leg of the cycle.
  • A dovish stance is starting to appear on central banks' sides and global liquidity is in positive territory. But more importantly, the fiscal spending of the US is boosting asset prices. Those are all bullish elements for crypto.
  • The slow growth of GDP and persistent inflation is something to monitor on the macro side of the market.
  • We believe in ETH as the superior asset to Bitcoin for the next decade. Further, our view is that SOL has the biggest potential for consumer app adoption.
  • Our favourite altcoins thematics for the next upleg are Socialfi, Gamefi, DePIN, AIfi & Infrastructure for scalability.

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