Why Crypto Investors Should Watch for US Treasury's Refunding Announcement

Net issuance towards bills or some kind of good commentary out of the Treasury. Uh QT tapering and dubish commentary from the fed. We think as long as two of those three things happen, we could start to see the dollar roll over. Uh and perhaps some, some rallying bonds and and broadly better conditions for liquidity sensitive assets like Bitcoin. It's Tuesday, April 30th 2024 and this is Markets Daily a show where we get into the minds of some of the smartest and most experienced investors, traders, analysts, researchers CEO S and anyone with a hot or smart take on the crypto markets, I'm Jen Sani. Before we get into our discussion today, let's take a look at what's going on in those crypto markets. Bitcoin and Ether are nursing losses this morning after weak demand for Hong Kong ETF S. We've been talking about those all month on this show and so a little bit disappointing to see the numbers this morning, but we'll get into that in just a little bit. The six ETF S registered first day trading volume of just $11 million as of 8:45 a.m. Eastern time, Bitcoin was hovering around $61,000 and Ether was down more than 5% at around $3000. Hong Kong's Bitcoin ETF S accounted for $8.5 million while the Ether ETF s contributed to the rest. Like I said, a little bit of a disappointment. The market was expecting about $100 million of inflows. Market watchers are keeping their eye on a few different things as we head into May, the dwindling probability of fed rate cuts, reduced demand for us spot Bitcoin, ETF S and broad based risk aversion in financial markets as Bitcoin looks to break its seven month winning streak. All right, let's let's talk about this. Let's make sense of this head of Digital Asset Strategy at fundstrat Sean Farrell joins us now, Sean. Welcome to the show. AJ thanks for having me. Thanks for being here now, like I said, a lot going on in the markets this morning. Probably one of the biggest factors, the disappointing uh Hong Kong, ETF S. What do you make of this news? Yeah, I mean, it was certainly below anyone's expectations. You know, I do, I I don't think there were a lot of um uh you know, high, high expectations going into the launch ETF S in Hong Kong. It is a considerably uh smaller market size in terms of uh capital and the number of, you know, um Ria S that are able to invest in these products and you know, they've made it pretty clear these issuers that capital from mainland China is not yet able to access these ETF S, which makes sense given that crypto is banned in mainland China. But you know, I think people were pretty put off by the single digit million numbers of inflows that, that we saw last night. It's so interesting. You say that because we had guest guests on the show throughout the month of April who are very excited about the Hong Kong ETF S and there was some discrepancy whether it would be available to mainland Chinese investors. It seems that that's not the case. Um if it does become available to mainland Chinese investors, like other ETF products are that are available in Hong Kong, do you think that we'll see more demand? I think so. Uh mccann, I mean, we we've seen, you know, Shanghai, Shanghai gold premium spike over the past several quarters. Uh and this is largely due to a lot of the turbulence within the mainland Chinese economy. A lot of individuals, particularly wealthy ones have been looking for outlets to park their capital, um not in Chinese equities uh or, or you know, any Chinese assets for that matter. And gold has been a great outlet. You know, I think part of the spike in copper prices, you know, in addition to you know, increasing PM is in general solid growth. Uh you know, globally. Uh you know, I think a lot of Chinese investors have actually turned to, to copper and other commodities for, for parking their capital. So that is all to say that, um you know, eventually if there is a way to uh move capital into Bitcoin into these ETF S, uh it certainly will be a solid tailwind, but I'm not sure that's going to happen in the immediate term. Well, what are you looking forward to? Because we had the ETF S in the United States, we had the having now we have the Hong Kong, ETF S. It seems like there are some mixed signals in the markets. What are you looking to as the next catalyst? Yeah. So, I mean, the, the ETF S are this sync and this, this um outlet that opens up, uh it widens the aperture of possible investors in this asset class. Uh So whenever the market ebbs and flows, uh those movements just get a little more magnified. But ultimately, at the, at the end of the day, we are still at the whims of, you know, the underlying macro back drop. And I think right now we've had this perfect storm of uncertainty which has caused this buyer strike, so to speak over the past couple of weeks. Uh you know, we've had uh you know, bonds really sell off over the past uh X number of weeks, the dollar has rallied uh pretty hard frankly, year to date. We've had a repricing of um you know, so for features and you know, we, we priced out at the start of the year we had, I think seven or eight cuts. Now we priced in, in one by the end of this year. Uh in addition to that, you know, I think a lot of people are focused on this upcoming uh quarterly refunding announcement from the treasury. Uh you know, given the size of the projected fiscal deficit. And um let's say some of the waning interest in purchasing long data bonds at these levels. Uh You know, I think a lot of a lot of investors are, are a little cautious heading into this QR A uh to see how the treasury looks to fund itself over over the next couple of quarters. Well, let's talk about that. The quarterly refunding statement is happening on, well, the announcements happening on Wednesday, what are you looking to see here and how could it impact crypto assets? Yeah. So when you, when you're looking at what the treasury comes out with, um and just for some additional context, the QR A is, is the, the acronym for the quarterly funding announcement. Uh there's two parts to it. One, you know, the treasury comes out and announces its total buying needs for the rest of this quarter in the next uh and then two days later, uh which you know, this, this quarter will um uh serendipitous serendipitously fall on the same day as the FO MC meeting. Uh that's when the treasury puts out the composition of their uh issuance over the next, you know, couple of quarters and uh you know, high level what is better for risk assets ultimately is that if the treasury decides to fund itself towards the short end of the curve, because that is uh generally speaking, uh more liquidity neutral for the market and for banking reserves. Uh because there is still capital locked up in what is called the RP, uh which is a lot of money market fund capital that is looking to uh you know, um only invest in extremely short dated things. So either you know, the fed overnight rate or um you know, one month T bills. And so you have this exchange of liquidity between the RP and these T bills uh which, you know, the RP is not currently in the private banking sector. Uh And so you're not, you're not necessarily pulling capital out of that uh in the same way that if the treasury issues coupons, uh you have this exchange of banking reserves for these uh long data bonds that are issued by the treasury. And so that's net negative liquidity conditions from a very high level. And so one thing we'd like to see is a greater skew towards shorter data bills to fund things in the near term. But, you know, I think in addition to that, uh it, it's important to see what kind of commentary, the treasury puts out, uh you know, they've talked about instituting buybacks to ensure liquidity within the treasury market remains robust. I think something like that could really help to uh assuage fears about a major bond sell off or major risk off event in addition to that. You know, I think there's a very good probability that the fed again. You need to look at these two QR A and the FO MC, you have to look at them in tandem. You know, we think there's a pretty good pro probability that the fed comes out. And due to, as I mentioned before, the fact that this RP, which is to the fed, it's kind of this barometer for excess reserves in the banking system. The fact that that is being drawn down upon, they don't want to see that go towards zero or, um, you know, cause some kind of lock up in the short term interest rate market. And so, you know, our base cases of the fed comes down and actually announces a tapering of QT. And so I think if we have something and in, in addition to that, sorry, one last thing, you know, we despite the hot CP, I prints over the past few months, you know, it's still our view that the fed will maintain its stance, that the next move, uh timing aside will be a cut. Now, it might take a little while. But as long as they maintain that stance, that is still net dovish in our view. And so as long as two of the three things happen, you know, net issuance towards bills or some kind of good commentary out of the Treasury, uh QT tapering and dubish commentary from the Fed. We think as long as two of those three things happen, we could start to see the dollar roll over. Uh and perhaps some some rallying bonds and and broadly better conditions for liquidity sensitive assets like Bitcoin, you have this buy in May and go away mantra. Explain that a little bit for me. Yeah. Well, it's, it's, it ties into exactly the thesis I just outlined which uh you know, the QR A details uh that composition element of the QR A as well as the FO MC meeting that's gonna happen uh tomorrow with the first of May. And so of course, our base case is uh that that will go well for the rates market and for broader market liquidity. And um you know, there's, there's an old saying in markets that volume tends to dry up May through um you know, September and people really only trade October uh through April. And so like the saying is sell in May and go away because nothing really interesting happens. Uh So we kind of flip that on its head and say buy, buy in May and go away. Uh the go away part might be a bit high, you know, bit hyperbole. But, um, uh, you know, that's our base case right now. Of course, um, you know, we'd like to see what we'd be looking for is, uh, you know, after May 1st, we'd like to see the, the first couple of days of trading, the dollar starts to roll over, uh, bonds start to get bid. And that would give us more confidence in this, um, thesis around this pivot point. But, um you know, of course, we're, we're um we're, we're always cognizant of the fact that things might not go that way and we'll adjust accordingly. Sean Tom Lee who leads your firm said that Bitcoin could be heading to 100 and $50,000. Now, that was at the beginning of the year, a lot has changed since then. Some, some analysts are even saying that we are no longer in a bull market. But what's your price prediction for the end of the year? Do you think that 100 and $50,000 is still possible? Yeah, 100%. I think it's possible. You know, we put out a price target of one hun 125 K in January. That's our, our crypto team, you know, Tom and I, we directionally agree. It's just more of a timing and uh details thing. Uh I think if uh Bitcoin landed somewhere between 125 and 150 neither of us, you know, would be disappointed in that Um but um yeah, I think structurally longer term, uh you know, we are still bullish over the next, you know, 1218 months, you know, we still have the medium to longer term tailwinds of, you know, Q two UQT eventually coming to an end, we have fiscal deficits which are both, you know, stimulus to uh um uh the economy and to financial assets and uh you know, will eventually require some kind of engineering at the long end to maintain real rates, kind of where they are. Um you know, and then, you know, we also have central banks around the world starting to ease. We've seen easing out of the, you know, obviously down to the BOJ and the PB OC. Um and then we have, you know, industry specific tailwinds like the ETF which I mentioned is not necessarily a catalyst, so to speak, but it's um you know, it, it widens the profile of investor that can touch this asset class and, and increases the potential flows. Um you know, and obviously, we just have the fact the having which um you know, it is not in our view like a tradable event, but certainly as more people learn about it and get educated on the Bitcoin's monetary policy, you know, that can spark some additional demand and obviously it helps on the supply side of things. And so, you know, there's still more things working in Bitcoin and the wider crypto markets favor at this point of the longer term. Uh, a lot of the risks that, that we're discussing right now are more of a, a 2 to 2 to 3 months, uh, type time frame situation. All right. We've talked macro, we've talked a little bit about the ETF S and Bitcoin, but I want to talk about meme coins because I know that you're watching them and I want to know what's giving them staying power in this market. How do you expect to see meme coins perform over the rest of the year? Yeah. So I mean, the way that I, I think Bitcoins are a hot topic, right? Because they rub a lot of different people the, the wrong way. You see a lot of crypto native individuals who perhaps take themselves too seriously. The memes are supposed to be fun. You can't look for good reason. You know, there are serious things being built in this industry and we want to highlight those. We don't want to see the only articles that Bloomberg runs to be on dog with hat. Um But, you know, I guess from a portfolio construction perspective, I look at these as out of the money call options on speculative capital coming back into the fold. And I think, you know, traders have just kind of gotten, um, you know, we've had a pretty good sample size at this point of every cycle there being, I mean, going around towards the end and frankly, I think what just happened is that we had these exogenous flows from the ETF that kind of pulled a lot of that risk taking forward. And the fact that we've already had this proof of concept, it's possible that this type of, you know, Barbell strategy where you're very concentrated in the majors, be it Bitcoin Salana and then try to, you know, really reduce your returns with, um you know, a small part of your portfolio in uh meme coins that, that may, that may persist. And we think we think it likely likely will um you know, outside of that, you know, I think there, there's a big um there actually is a fundamental takeaway from this meme coin cycle because you had a lot of them launched um a lot of them easily traded on Solana. And while again, a lot of them are silly and you know, not uh not, not based on anything fundamental. It, it does show how easy capital formation and you know, the the trading and exchange of digital assets on uh these platforms specifically Salla Solana is. And so if you really think about it, it is um there there actually is a fundamental takeaway, but from a portfolio construction perspective, we think the good way to look at it is just kind of a um you know, a call option on on frivolous speculation. All right, John, and if you're looking at uh portfolio allocation this morning, what are you, what are you doing? Yeah. So, I mean, uh few weeks ago, we, you know, we put out um uh allocation strategies in our research to guide both institutional and retail investors uh and kind of navigating the market. And um uh you know, we also offer opinions on, on crypto linked equities and uh we raised a little cash by selling some malts in, in that, in that, you know, sample portfolio a few weeks ago due to some of the headwinds that, you know, we just discussed. Um I think right now it's, it's probably smart to be concentrated in the major, specifically Bitcoin. Um You know, we've seen a lot of uh a lot of the alt specifically ones that have come to market with is highly diluted values uh and low float really get wiped out uh on any kind of um any kind, any kind of drag, any kind of um sell off. And, you know, I think it's, it's uh it's probably a good thing. It means the market is, is getting more efficient and uh people are kind of um you know, understanding supply dynamics a little better. And so I think moving forward, it's just gonna be smart to um be more selective with, with als, right? And so I just said, just to come back to your question, I think right now in the media term, be pretty heavily weighted toward the majors, basically Bitcoin have some cash on hand and then uh reassess post May 1st Sean. It's always a pleasure having you on. Thanks for joining Markets Daily. Yeah. Thanks for having me, Joe.