Insights, news and analysis for the professional investor | | | Bitcoin (BTC) - $28,880.09 | | | | Prices as of 5/27/22 @ 8:06 p.m. UTC Was this newsletter forwarded to you? Sign up here. | Welcome to Crypto Long & Short For U.S.-based readers, I hope you are lucky enough to have a long holiday weekend to enjoy. If you do, remember you are given this day off because military personnel gave their lives. I'm personally taking this long weekend to see one of my closest friends get married. So this week's newsletter will be short, sweet and a bit off-the-wall (and mostly statistically insignificant). When I asked one of my other closest friends how I would convince y'all to read something like this he gave me some great advice. So, please. Let me write about the Decoupling. Indulge me. – George Kaloudis | | | Buy bitcoin and 100+ cryptocurrencies with 20+ fiat currencies. New users can enjoy 0% credit/debit card fees on all crypto purchases made in their first 30 days. Download the Crypto.com App now. | | | The Decoupling. The latest iteration of "hopium" for bitcoiners and crypto natives. When it finally inevitably happens, it'll be up only for Big Crypto and down only for Big Fiat. But what it actually means is a bit funny. The Decoupling is the moment when bitcoin's price diverges from equities and starts going up when equities go down (and vice versa). The Decoupling is the moment when bitcoin (BTC) and equities become negatively correlated to each other. Bitcoin will go to $1 million a coin and equities will spiral to zero.
It's a bit funny because bitcoin was uncorrelated to almost all macro assets (gold, S&P 500, bonds, U.S. dollar) not too long ago. We wrote about this in our 2021 research report (page 9). Here is the chart we shared in that report with the accompanying text.
| | | 90-day Trailing Correlation to Bitcoin in 2021 (CoinDesk Research, St. Louis Fed, Yahoo Finance) "In general, macro assets remained within an uncorrelated band (-0.2 to 0.2) in 2021. This is contrasted to 2H 2020, where gold and equities were somewhat positively correlated to BTC, and the U.S. dollar (USD) was somewhat negatively correlated to BTC. Bitcoin is a unique macro asset like no other." – CoinDesk Research For the record, correlation simply means how much two measures vary together, divided by how much they usually vary individually (thank you, Noelle Acheson). We care so that we can describe the relationship between the returns of bitcoin and other assets. The correlation coefficient, the number or the "r", referenced relates to the strength of the relationship. In the context of asset returns a correlation coefficient of: - +1.0 means when Asset A gained x%, Asset B gained x%.
- 0.0 means when Asset A gained x%, Asset B gained y% with an absence of a linear relationship between x and y (more below).
- -1.0 means when Asset A gained x%, Asset B lost x%.
A 0.0 correlation coefficient signifies uncorrelatedness, and it's either rather easy or rather difficult to imagine (unless you have a chaotic mind). Either all the numbers in the data sets are exactly the same, a constant, which is mathematically defined as undefined correlation, or the data set looks like utter chaos. Actually creating an arbitrary dataset with zero correlation is not easy (except for the boring orthogonal case), so I included the boring data set and an illustration of the chaotic case to drive this point home. | Boring case of uncorrelatedness (CoinDesk Research) | Chaotic case of uncorrelatedness (https://www.statology.org/no-correlation-examples/) Being uncorrelated is awesome, but wouldn't it be fascinating if bitcoin was negatively correlated to stocks? And then, when that happened, stocks all went on a hell-train path to zero and bitcoin went up and up forever? That's the Decoupling. The Decoupling would force traditional financiers to start thinking about bitcoin as a risk-off asset. Yes – less risky than stocks. The volatile digital cash that mainly acts as a vehicle for speculation now will become less risky than stocks following the Decoupling. So, when Decoupling? The Decoupling is also supposed to be aggressive; "Gradually, then suddenly" is one of its calling cards. Unfortunately, 2022 has smashed the dreams of an aggressive decoupling. Here are the 90-day trailing correlations in 2022 between bitcoin and the S&P 500 and the Nasdaq Composite Index: | 90-day Trailing Correlation to Bitcoin in 2022 (CoinDesk Research, TradingView) This clearly isn't the Decoupling, but it does look interesting. In 2022, these stock indexes moved from a weak positive correlation to bitcoin into the positive strongly correlated band (>0.7). While not as potentially impressive as a strong negative correlation would imply, bitcoin's return profile still resembles a macro asset we haven't quite seen before. Just a year ago the S&P 500 and bitcoin's correlation coefficient was negative and close to zero. Correlation moving from near-zero to strong in a year is remarkable. On top of that, this correlation was strongly negative back in 2019. So yes, bitcoin is unique. And thus, it bears repeating: Bitcoin is unlike any other macro asset we have seen. This all reads like a whole lot of nothing, aside from bitcoin's uniqueness (which we already knew). But there was something quite remarkable (and statistically insignificant) I saw last Wednesday when flipping through some charts. I saw this: | There it is, all the way to the left on this chart. The first signs of the Decoupling. When Decoupling? Maybe soon (but probably not). | Off-exchange settlement in a trustless trading environment means unleashing maximum capital efficiency and more aggressive investment strategies. ClearLoop brings Copper's custody and leading digital asset exchanges into one secure trading loop where funds are delegated, not moved. Balances are immediately available for trading and settlement is instant, with capital ready to be redeployed in milliseconds. ClearLoop is the institutional investor's unfair advantage, offering greater control during high volatility while mitigating counterparty risk. Book your demo today. | | | Binance will advise Kazakhstan in developing the country's digital asset regulation. - TAKEAWAY: The move between world's largest crypto exchange and Kazakhstan, one of the world's biggest mining powerhouses, is intended to grow the country's crypto industry beyond bitcoin mining by pursuing opportunities to integrate banking infrastructure within the crypto market. Read more here.
Stripe's merchant customers will be allowed to instantly convert their incoming payments to bitcoin following the launch of the new OpenNode app. - TAKEAWAY: Fintech firm Stripe and BTC payments infrastructure platform OpenNode are collaborating to "give businesses a simple and secure way to convert incoming payments to bitcoin in real time, automatically or on demand," said OpenNode's head of strategy Josh Held on May 24. The news follows OpenNode closing a $20 million Series A funding round in February. Read more here.
Tether launched MXNT, a Mexican peso-pegged stablecoin. - TAKEAWAY: As Tether's first foray into Latin America, MXNT is currently supported on the Ethereum, Tron and Polygon blockchains. Tether said Mexico is "a prime location for the next Latin American crypto hub," with Chief Technology Officer Paolo Ardoino adding, "We have seen a rise in cryptocurrency usage in Latin America over the last year that has made it apparent that we need to expand our offerings." Mexico was the third-largest recipient of remittances globally in 2021. Read more here.
Circle argues the U.S. Federal Reserve should pass on introducing a digital currency. - TAKEAWAY: In a comment letter to the central bank, the USDC stablecoin issuer argues that the launch of a digital dollar could strangle private-sector efforts to manage their own dollar-based tokens. On the other side, U.S. Federal Reserve Vice Chair Lael Brainard indicated on May 26 that a central bank digital currency could exist alongside stablecoins and provide a measure of safety. Read more here.
Andreessen Horowitz established a $4.5 billion crypto fund. - TAKEAWAY: The new fund is the firm's fourth to target cryptocurrency and Web 3 companies. $1.5 billion will be dedicated for seed investments, and the remaining $3 billion will be devoted to venture investments. Despite BTC being down 56% from its November peak, the company is still "excited" about the development within Web 3, and said on May 25, "We think we are now entering the golden era of Web 3." Read more here.
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When Decoupling? Maybe soon (but probably not).