Crypto Corner - Summary of the Week 07/12

data taken at 9:32am 11/12/2020

Written by: Yves, Head of Trading at Wirex

The BTC/USD price fell this week below the lower range of a technical strong bull channel that started in the beginning of October. This would suggest that the Bitcoin price could again drop below the $16,000 level as volatility is particularly high. BTC/USD dropped by more than 5% on Tuesday as whales and recent buyers are taking profit. However, this week is showing again that if a technical drop around the 16,000 levels happens, it should be a small break in the Bitcoin journey towards new heights.

The derivatives market confirms that the open interest is bearish in the short term, with the open interest on Deribit standing near 40,000 put contracts for maturities expiring this year, against 15,400 open call options of similar maturities. The imbalance is particularly high for the Dec20 maturity. The high volatility observed these last few weeks knocked out or discouraged many call option buyers as prudence is called for after the events of November, when most long positions were liquidated within 24 hours.

From a long-term perspective, this year’s price rally revived the coders/developers interest in crypto projects. Electric Capital reports that “the number of new developers is growing for the first time since 2017, by 15% in 2020”. In particular, the decentralized finance (DeFi) economy had a “67% increase in monthly active developers since January 2020”. The growth is led by both the Ethereum project, and Polkadot, a project around blockchain interoperability that we mentioned in a previous weekly review. This year’s new projects and developments are expected to mature in two to four years. Developments are driving the long-term adoption growth of cryptocurrencies. They are part of the “crypto price-innovation cycle” described by a16z.

In the meantime, from a medium-term perspective, institutional investors are showing further interest in cryptocurrencies. Yesterday, MassMutual announced that it purchased “$100 million in Bitcoin for its general investment account”. More than a simple purchase, the life insurance company is taking a strategic step in the crypto-economy as it acquired a minority stake in NYDIG, a B2B technology provider in the space. MassMutual points out the growing demand for Bitcoin in the insurance sector, and naturally intends to participate in serving the institutional need through their “white-label business segment”.

The maturities of financial instruments that a life insurance company typically seeks to hedge its life insurance policies stand above six to ten years. Hedging these policies with traditional long-term fixed income instruments has been particularly challenging, nearly impossible in the current low (or negative) rates context. FitchRatings reported two days ago that the sector is experiencing increased difficulties to maintain margins and capital adequacy. “low interest rates raise concern that life insurers will overreach for yield in ways that will increase vulnerability to a large market shock”. There is no doubt that cryptocurrencies are in the “extremely volatile” category of the investment spectrum. The move however must be put into perspective. MassMutual has $567 billion of assets under management as of the end of last year, therefore the Bitcoin investment represents less than 2bps of their AUMs. Even though the Bitcoin price did not bounce on the announcement, MassMutual’s $100 million investment in Bitcoin justifies this year’s bull trend even further. This investment, like most institutional investments, is organic, strategic, and long-term. It reduces the already low speculative component of this year’s trend.

The macroeconomic context is still unchanged with the US dollar index (DXY Index) heading below the 90.0 level, and gold (XAU Index) sustaining a positive trend that started in March this year, and financial institutions are increasingly showing an open mind. Citibank’s downgrade of the Microstrategy stock (MSTR) merely reflects the leverage that the firm is looking to add to their balance sheet to buy more Bitcoin. This is a concern over Microstrategy’s financial risk considering Bitcoin’s volatility and considering the actual price of the stock. It is not a challenge on Bitcoin itself. Microstrategy mentioned Wednesday that it intends to offer $400 million in debt to buy more BTCs.

Regardless of the progress, the investment banks’ Bitcoin bubble obsession is still there, like a repressed feeling of regret, or the urge to tell the world: “I told you so!”. To play the devil’s advocate, a bold hacker, or the long-awaited quantum computing revolution may eventually “burst the bubble”. China claimed this week to have “the fastest quantum computer in the world” … However bets on the end of Bitcoin may not account for the rapid evolution of cryptocurrencies or research and development around quantum-resistant blockchains.

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The above is an opinion piece and therefore should not be taken as financial advice. Please do your own research thoroughly when looking at Cryptocurrency.
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