Crypto markets have experienced a downward trend following recent comments from Federal Reserve Chairman Jerome Powell, suggesting a continued cautious approach toward rate cuts, according to a report by David Han, an analyst at Coinbase Research, published by Coinbase Institutional as its latest Weekly Market Commentary on April 5, 2024. The uncertainty in market direction is not unique to crypto, as equities and other risk assets have also plateaued in the past week, as per the Coinbase report.
Concerns over reflation have also contributed to the implied magnitude of rate cuts by year-end becoming slightly more hawkish than the Fed for the first time in 2024, according to Coinbase. As of April 4, the market is pricing a year-end rate of 4.631, well above the 3.825 predicted at the start of January and above the median Fed dot plot target of 4.625, as reported by Coinbase.
In this environment, gold has been the largest winner, reaching new highs amidst increased central bank buying, heightened geopolitical risks, and reflation concerns, according to the Coinbase report. Gold’s appreciation has generally been associated with both Fed rate cuts and higher inflation, signaling an overweighting on inflation relative to Fed rate changes and an overall belief that certain inflation bumps could materialize more problematically than anticipated, as per the Coinbase analysis.
Coinbase Research analyst David Han believes that Bitcoin’s increased acceptance as a form of “digital gold” could enable demand from a new subset of investors in this market regime. As a result, he believes dips are likely to be more aggressively bought compared to previous cycles, even as volatility persists during price discovery. Han also claims that the broader access to capital as a result of the launch of US spot Bitcoin ETFs could also contribute to dampened volatility relative to previous cycles, as per Coinbase.
The impact of these ETFs and the larger inflow of institutional demand can be seen in the open interest of Bitcoin futures per the Coinbase report. The CME Bitcoin futures open interest at US$9.9B has surpassed that of any single centralized exchange (CEX) and accounts for more than one-third of the total Bitcoin futures market, as reported by Coinbase. These capital unlocks, coupled with the upcoming Bitcoin halving and other positive catalysts, make Coinbase largely constructive in their view throughout Q2.
Coinbase also mentions that Maker has been a notable outperformer throughout the past several weeks following its Endgame announcement on March 13. The announcement detailed a number of changes across four major phases, including rebranding of the DAI and MKR tokens, updating governance protocol incentives, building out new bridges, launching the Spark subDAO, and plans to move Maker to an independent chain several years into the future.
Coinbase went on to say that while there has been a focus on Maker’s Endgame rollout, more recent governance changes have stirred some controversy in the DeFi community. Maker has apparently been rapidly passing changes, including integrations with Morpho and USDe, and is considering scaling up those operations meaningfully with higher collateral limits. While these changes are set to greatly increase Maker’s revenue, some feel that the pace of changes greatly elevates risk levels, leading to discussions within the Aave community about removing DAI’s ability to be used as collateral.
The Coinbase analyst believes this conflict could foreshadow shifts in the decentralized stablecoin marketplace. While the number and market capitalization of decentralized stablecoins continue to increase, their growth is outpaced by that of centralized stablecoins, with USDC and USDT increasing their share of stablecoins to 90% of the market. With the advantage of native stablecoin issuances across chains and improved bridging experiences, decentralized stablecoin adoption could continue to face adoption challenges relative to their centralized counterparts.
The report also said that the market has quieted down in the past week, with BTC trading in a tight $2000 range and US spot Bitcoin ETF inflows slowing. Overall, crypto volumes have also continued to slow as the market tries to find the next narrative to power it higher, as reported by Coinbase. While bullish traders are encouraged that long positioning no longer looks stretched, the upcoming BTC halving will have to contend with what is typically a weak time of year for crypto markets and other risk assets, according to the Coinbase analysis.
Featured Image via Coinbase
