21Shares Research Newsletter - Issue 63

Market Outlook

Last week we discussed how Bitcoin is currently going through its least volatile period in recent memory and how that’s unlikely to continue — it would not be surprising if Bitcoin were to return to much higher levels of volatility in the coming months. Following on from that analysis, it’s interesting to compare Bitcoin’s performance since the start of the year to that of the main five “Big Tech” stocks. Big Tech has been some of the best performers in the stock market whilst maintaining similar volatility to Bitcoin.

Since the start of the year Bitcoin (BTC) has returned 32.96% compared to 63.54% for Amazon (AMZN), 27.8% for Apple (AAPL), 29.63% for Microsoft (MSFT), 10.53% for Google (GOOG), and 13.93% for Facebook (FB). Over longer time frames, such as since 2017, Bitcoin has drastically outperformed Big Tech stocks but an influx of U.S. Federal Reserve asset purchases this has been the driver behind a noticeable appreciation in the value of all U.S. equities and Big Tech especially. Bitcoin has not been directly affected positively by such policies. Despite this fact, Bitcoin’s performance is still superior to all of the Big Tech stocks aside from AMZN which has also benefited from a large surge in e-commerce demand due to global lockdowns.

While for some investors Big Tech stocks may still be considered hallmark risk-on assets, they are a staple in many active and passive portfolios despite their volatility. Given that Bitcoin’s volatility is currently at a similar level this may either suggest one of two things: (1) that Bitcoin has undergone a paradigm shift towards reduced volatility; or (2) similar Bitcoin-Big Tech volatility levels will be short-lived and volatility will either decrease in Big Tech or increase for Bitcoin.

The crypto asset market was flat-to-negative over the last week with the exception of XRP which saw an early-week 10% rise: BTC (-0.17%), ETH (0.13%), XRP (7.37%), BCH (-2.49%), and BSV (-2.25%).

News - Annual Economic Report | Bank for International Settlements

What Happened?

The Bank for International Settlements (BIS) published its bi-annual economic report, diving into the global economic consequences of the COVID-19 pandemic. One of the unconventional patterns discovered by BIS is how the current health crisis has strengthened the US dollar hegemony. This isn’t a new trend, for example, according to the Bank for International Settlements, US dollar liabilities of non-US financial institutions grew from about $3.5 trillion in 2000 to around $10.3 trillion by the end of 2019.‍

Why Does It Matter?

The Federal Reserve has had to act in its time-honored role of lender of last resort by supplying needed liquidity in offshore US dollar borrowing, notably via FX swaps, to ease dollar funding shortages. In fact, many non-US financial institutions and firms outside the United States cannot raise USD-denominated funds directly in US money markets, as such, they have relied on FX swaps.

Additionally, the Fed reactivated many currency swap lines that had expired since the Great Financial Crisis, for 14 central banks from both advanced and emerging economies, utilized in particular by the Bank of Japan and the European Central Bank. This allowed central banks to borrow US dollars directly from the Fed using their holdings of US Treasuries as collateral. It is safe to say, so far, this health crisis has amplified the dominance of the US dollar as the world’s dominant currency.

While inflation has always been a concern when it comes to quantitative easing measures implemented by central banks, it is important to recognize the reliance of USD-denominated assets by financial institutions outside of the United States. As such the FX swaps metric is a quintessential indicator for USD demand from non-US banks. This pattern is important to note as consequences of containment measures such as reductions in consumer demand will likely make the path to inflation unlikely in the near term. Nonetheless asset price inflation is undeniably reflected in financial markets with the current market rally amid surging new coronavirus cases, especially in some US states.

Learn more here.

News - Virus Boosts Digital Payments in India Where Cash Ban Failed | Bloomberg

What Happened?

The value of transactions on the Unified Payments Interface (UPI), a platform created by National Payments Corporation of India — allowing inter-bank transfers, reached an all-time high last month as people increasingly fear handling banknotes amid the pandemic. It can be argued that the COVID-19 pandemic has done more in terms of promoting the adoption of mobile-first payment methods than the banknote demonetisation seen in India over the last four years.

Why Does It Matter?

In times of crisis, the need for a sense of urgency has historically led to a fundamental change in people’s behaviour. As public concerns about viral transmission from cash have risen, this health crisis has accelerated the trend towards the use of digital payments such as contactless payments. Companies in the private sector such as CashApp played an important role in facilitating direct transfers to households and firms as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.

In a similar vein, a quite different picture is starting to emerge as investors seek a digital version of gold, especially in light of the biggest gold-counterfeiting scandal in modern history. According to a recent survey conducted by Fidelity, 6 out of 10 investors believe digital assets such as Bitcoin have a place in portfolios, while 91% of the surveyed institutional investors plan to make allocations to Bitcoin within five years.

Learn more here.