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SwissBorg MacroScope - January 29th

SwissBorg MacroScope - January 29th

Don’t fight against the wind - New players are coming and liquidity is returning

Don’t fight against the wind - New players are coming and liquidity is returning

Will the ETF mania finally start?

The Bitcoin ETF launch was the biggest in history. However, it becomes apparent that in the short term, it triggered a “sell the news” event. Much of this reaction can be attributed to the significant outflow from GBTC, totaling over $4.5 billion. Several factors can explain this phenomenon. Firstly, a substantial portion of the outflow, over $1 billion, can be traced back to FTX forced selling to meet its obligations. Additionally, there was considerable profit-taking from the GBTC discount trade where there was a 50% discount from GBTC to NAV (Net Asset value). As this gap narrowed, arbitrageurs closed their positions. Furthermore, many investors flee to cheaper products that do not carry a 1.5% annual fee, further contributing to the outflow.

While the GBT outflow was significant, it has primarily been absorbed by new inflow in other ETFs with lower fees. Blackrock and Fidelity have been leading the pack with around $2 billion in net inflows each.

Total product flow

At the time of writing, FTX has unloaded the majority of its GBTC holding, and the arbitrage trade closed off. Therefore, it could be argued that the worst of the outflow is behind us. Although GBTC outflows are expected to persist over time, they should normalise, exerting less and less selling pressure.

Bitcoin Spot ETF cumulative flow

As net inflows continue their upward trajectory and established financial institutions continue to actively promote Bitcoin as part of an institutional portfolio, Bitcoin credibility will continue to increase by a significant order of magnitude. In the long term, this represents an enormous demand potential. This is bullish.

Source: BitMEX Research

Source: Capriole Fund Update

Key Macro events - FOMC Meeting

The first FOMC meeting is set to occur this week. As a brief reminder, the Federal Open Market Committee (FOMC) is a key component of the Fed. It is responsible for making decisions regarding monetary policy, specifically with regard to short term interest rates and the money supply so that the Fed's dual mandate of price stability (inflation at 2%) and economic growth is respected. Given that we are near a key inflection point in the Fed Fund rates, this event will be an important one to monitor.

Currently, the market prices a 97% probability that the Fed remains on hold at this meeting, and a 46% chance that they cut at March’s meeting. Therefore, any deviation from this outcome, such as a rate cut next week, or a shift in the expected Powell during his speech, could have a substantial impact on the market. Will Powell subtly confirm the view of the market? Or will he surprise us?

While we await the outcome, there a couple of noteworthy things to keep in mind:


The Fed favourite inflation gauge, the YoY Core PCE (Personal Consumption Expenditures) index eased to 2.9% last month, its lowest level since 2021. The 6-month core PCE is also at 1.86%. This is significant, as it indicates that inflation is now really close to the Fed’s target. Consequently, it becomes harder and harder to justify rates as restrictive as they are now for the next few months.

Core PCE inflation

US Treasury

In 2023, the Treasury added $2.6 trillion to the national debt. While this figure alone is concerning, further analysis reveals something even more concerning. $2 trillion of this debt, or 77%, was financed entirely with short-term Treasury Bills maturing in less than a year. Compounding this issue further is that the record level of debt rollover anticipated this year, with nearly $2.9 trillion impending.

Annual US debt rollover

Despite the current scenario of 6 rate cuts this year and a return to 3.5% by early 2025, the trajectory of interest expense is scary. Current projection estimates that the Treasury will owe over $900b in interest in 2025. 

Annualised interest by product vs official interest expense

This puts the US in a challenging situation as annualised interest expenditures are ballooning and a lot of debt needs refinancing. This suggests that a debt spiral can become a reality. Consequently, it seems that the most viable option for the Fed is for QT to stop and for rates to come down fast.

Reverse Repo

The Reverse Repo is an overnight lending market where banks buy US Treasuries from the Fed when they have too much cash. The main objective of this market is to provide consistent liquidity to financial players on a daily basis. In 2022, the Reverse Repo balance peaked at around $2.5 trillion as cash was abundant and banks were trying to park their excess reserves somewhere. However, since then, it has been in a downtrend and currently stands at less than $600 billion.

Reverse Repo balance

So far, this withdrawal of excess liquidity to money markets has boosted liquidity and offset the effect of QT (Quantitative tightening). However, as the reverse repo approaches zero, this era of surplus liquidity is coming to an end. This will exert downward pressure on the bank's excess reserves. Given the already precarious situation that they are facing, this can signal significant challenges to their future stability.

The Fed is totally aware of these dynamics and they will make sure to safeguard accommodative financial conditions at any point in time. This further reinforces that QT is nearly over, with rate cuts appearing likely at the upcoming March FOMC meeting and QE to restart.

Source: ZeroHedge

Source: Twitter - tedtalkmacro

Source: ING Think

Chart of the week

This chart suggests that we are entering the early stages of a new four-year cycle in terms of global liquidity. Traditionally, crypto assets exhibit a strong correlation to liquidity; when liquidity expands, crypto prices tend to rise. In the past, multi-year buying opportunities often emerged following a new wave of global liquidity.

As the saying goes, “history doesn’t always repeat but it rhymes” and current economic indicators suggest that QT is nearing its end with a new wave of liquidity ready to hit the market. This could act as a strong catalyst for crypto.

Global liquidity index

Our In-House View

SHORT TERM VIEW: What might happen in the next 2 weeks?

  • In retrospect, the ETFs approval has been a short term “sell the news” event leading to approximately a 20% dip on Bitcoin. Many have attributed this to the strong GBTC outflow which has been putting selling pressure.
  • Such corrections are healthy and expected in a bull market, particularly when facing key long term resistance following a robust uptrend.
  • Even if Bitcoin continues its dip another 10%, the bullish scenario remains intact in the long term.
  • $32-36k would likely represent a great buying opportunity to get long. Alternatively, a strong close above $44k will likely signal a continuation of the strong uptrend towards the all time high (ATH) levels.

LONG TERM VIEW: Where are we in the cycle?

  • We are still in the beginning of the 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. The only key event left is the so-called “Fed pivot” which will be an important one to monitor.
  • 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 in the next decade.
  • Our favourite altcoins thematics for the next upleg are Socialfi, Gamefi, AIfi & Infrastructure for scalability.

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