The big event risk week delivered both outcomes the market expected, and in both cases more convincingly than expected. CLARITY failed 49 to 50 against the 60 votes needed, rejected by every Democrat plus four Republicans. The Fed hiked 25 basis points with hawkish projections, 16 of 18 participants expecting a second hike this year. Bitcoin dipped below 75,000 on the vote and was heavy on the Fed, but support held on a closing basis through both. The day after the Fed, ten year yields fell from 5.02 to 4.95 percent and the curve flattened, which is the market beginning to believe the Fed’s resolve and a relief at the market’s main stress point. On Friday Bitcoin rallied nearly 7 percent to just below 82,000 and did not retrace into the close. Jesse’s read is that Bitcoin is now largely ignoring bad news and reacting to good news, which is a sign of a nascent bull market, with 83,000 the level to clear.
CLARITY: Failed, and Not Close
The event risk week opened on Tuesday with the CLARITY Act vote, and it failed to pass as expected, probably more convincingly than expected. The vote was 49 in favour and 50 against, with 60 needed to pass. It was rejected by every single Democrat plus four Republicans, so in the end it was not even close.
Bitcoin knee jerked lower on the announcement and traded below 75,000, but then largely rebounded. That was because expectations going into the vote were already low, with prediction markets at around 18 percent. The Democrats then said they were still committed to working on a bipartisan bill, that they did not like the details of this one, particularly on ethics, and that there would be another vote on an improved bill in the weeks or months ahead. Jesse’s caution is that this could well be talk aimed at keeping the crypto vote on side.
| CLARITY vote | Detail |
|---|---|
| Result | 49 in favour, 50 against |
| Required to pass | 60 |
| Against | Every Democrat plus four Republicans |
| Odds going in | ~18% |
| Bitcoin reaction | Below 75,000, then largely rebounded |
| What next | Democrats say an improved bill will follow; may be talk |
The SEC and CFTC Step Into the Gap
The following day the SEC and the CFTC released an innovation exemption for software providers along with rules for tokenisation. It looks as though both agencies intend to step in in the absence of CLARITY and advance rule making on their own, and both are known to be very friendly towards crypto.
So the outcome is not a terrible one. The weakness is that agency rule making is not codified into law, which makes it easier for a future administration to undo. But there are two years until that horizon, by which time much of this should hopefully be ingrained into financial markets and considerably harder to reverse.
The Fed: 25 Basis Points, and More Hawkish Than Expected
The Fed then hiked 25 basis points as expected, but it was a more hawkish event than the market anticipated. The projections were hawkish, with 16 of 18 participants expecting a second hike this year. Warsh, as usual, did not submit a dot himself, but his press conference was hawkish, with the focus fully on inflation and on not testing the Fed’s resolve.
Stocks initially reacted very negatively, falling about 1.5 percent with the S&P down to 7,500. Bitcoin was heavy again, but not an outsized move.
The Long End Calms: Tens Back Below 5 Percent
The important move came the following day. Ten year yields had been trading above 5 percent, around 5.02 going into the event, and dropped to 4.95 percent, with the curve flattening. That is the market beginning to believe the Fed’s resolve in containing inflation. With long end Treasury yields having been the stress point in the market, seeing tens stop screaming higher was a significant relief. Stocks rebounded, and Bitcoin rebounded, trading volatile in a range between 75,000 and 77,300, where it stayed after the Fed.
| Around the Fed | Before | After |
|---|---|---|
| 10 year yield | 5.02% | 4.95% |
| Curve | – | Flattened |
| S&P 500 | – | 7,500 at the low (-1.5%), then rebounded |
| Bitcoin | – | Heavy, then a 75,000 to 77,300 range |
Retail Sales: Strong, and Lost in the Noise
Also on Wednesday, and somewhat lost in the noise, retail sales showed the economy is still strong. The print came in at 1.2 percent month on month against 0.8 percent expected and negative 0.5 percent last. The core print was also strong at 1.4 percent month on month.
| Indicator | Actual | Expected | Last |
|---|---|---|---|
| Retail sales (MoM) | 1.2% | 0.8% | -0.5% |
| Core retail sales (MoM) | 1.4% | – | – |
Friday: A 6 Percent Rally That Did Not Fade
With no data, the rest of the week looked like it would be quiet, and then Friday was very volatile. Stocks were marginally heavy, down around 20 basis points, ten year yields were not really moving and neither was oil. Bitcoin caught a strong bid, rising nearly 7 percent from around 76,200 to just below 82,000. The move seemed largely driven by liquidations and low liquidity Friday afternoon positioning.
What is interesting is that Bitcoin did not retrace at all into the close, which it generally does when moves have no catalyst and get faded. That points to a strong underlying bid. Bitcoin now seems to be largely ignoring bad news and reacting positively to good news, which Jesse reads as a sign of a nascent bull market. ETF flows for the week were flat, with outflows at the start of the week and then 433 million dollars of inflows on the Friday rally.
Interestingly, Bitcoin didn’t retrace at all into the close, which it generally does when moves have no catalyst and they’re faded. Bitcoin does now seem to be largely ignoring bad news and reacting positively to good news, which is a sign of a nascent bull market.
Technicals: 83,000 Is the Level, 75,000 Held Twice
Technically it is looking pretty strong. Bitcoin is testing around the 83,000 resistance, currently at 81,600, and 83,000 is the level to get through to keep pushing higher. There is a long term range top at 85,000, and through that there is really not much until the 95,000, 97,000 and 100,000 region.
Strong support now sits at 75,000, which held on a closing basis through both CLARITY and the Fed, and an upward sloping trend line comes in at the same level. Things look constructive for Bitcoin both technically and fundamentally now that the event risk is out of the way: outcomes came in as expected, and ten year yields, the weak point, are more or less under control.
| BTC level | Significance |
|---|---|
| 95,000 to 100,000 | Little in the way once 85,000 clears |
| 85,000 | Long term range top |
| 83,000 | Resistance being tested; must clear |
| 81,600 | Spot at the time of the call |
| 75,000 | Strong support, held on a closing basis through both events; trend line |
Oil and the Week Ahead: Geopolitics Is the Catalyst
Any positive headlines on the geopolitical side would help. Oil was testing 110 dollars at the highs and is now back to 102. If it keeps dropping, there looks to be the impetus to push Bitcoin through the range highs and see how far the move can go.
Data is limited this week: a few Fed speakers and durable goods on Friday. Otherwise it comes down to geopolitical headlines.
Options: A Symmetrical Smile, and Little Value in Selling
In the options space, five delta puts are at 46 percent volatility and five delta calls are similar at 47 percent, giving a very near symmetrical smile. Implied volatility, however, is trading 3 to 4 points under realised, and has been for over a week. That leaves very little value in selling options. The market is clearly pricing little in the way of a catalyst either way, which is how Bitcoin traded until Friday’s volatile move. Whether that continues depends on a push through the range highs.
| Volatility measure | Level | Note |
|---|---|---|
| 5 delta puts | 46% | – |
| 5 delta calls | 47% | Near symmetrical smile |
| Implied vs realised | 3 to 4 points under | For over a week; little value in selling |
Liquidity and DeFi: Mixed Signals, Range Bound
Hilbert’s global liquidity index is at 6.26, still in the moderate, range bound liquidity band. The signals remain mixed: the index is mainly held back by Treasury risk premium and Treasury volatility, while other indicators show more significant liquidity expansion. The six factor model Z score is negative 0.39, a one week change of negative 0.92. Both liquidity indicators remain in the range bound, low strength signal range.
USDe yields edged slightly lower this week to 4.7 percent.
