Middle East Tensions, Higher Rates for Longer & The Bitcoin Halving

What Happened This Week

Last Friday afternoon, rumors about an imminent Iranian attack against Israel started circulating on X (formerly Twitter), stating that a major attack was expected as soon as Friday, possibly including drones and missiles aimed at military targets in Israel, as stated by U.S. officials. These rumors started circulating in the afternoon, our time, hours before the U.S. stock market opened. The uncertainty in the Middle East was depicted in Friday’s trading session, as the S&P 500 opened lower and closed the day down -1.46% from Thursday's high. Gold hit a new all-time high on the war rumors last Friday evening, trading above $2’440 for the first time, but then crashed back down -4% ending last week at $2’360. Bitcoin traded alongside other risk assets like U.S. equities and traded to the downside on the war escalation rumors last Friday, losing more than 8% in a matter of hours.

The crypto markets then started to stabilize on Friday evening throughout Saturday, because the Israeli attack did not occur on Friday, as the rumors stated it. On Saturday evening this changed quickly as the news of an Iranian attack broke the markets at around 21:30 CEST, Bitcoin and the crypto market reacted promptly, and Bitcoin dropped more than 10% in a matter of minutes, as seen in the chart below.

While Bitcoin did correct roughly -16% in total over the two days, altcoins took a bigger hit, with most coins crashing down around 30% over a timespan of a couple of hours. The total liquidations on Friday and Saturday last week were over $1.5 billion, with this being one of the biggest liquidation events in recent history. The total crypto market capitalization lost around 18%, crashing down from $2.56 trillion on Friday morning to roughly $2.1 trillion on Saturday evening.

Last week, digital asset investment products saw net outflows of $126 million, with Ethereum suffering the most on a relative basis with a total of $29 million in outflows, marking its 5th consecutive week of outflows.

Bitcoin and Ethereum spot ETFs in Hong Kong

After the negative weekend, the market was hit with news from Hong Kong regarding the approval of Bitcoin and Ethereum spot ETFs by the Hong Kong Securities and Futures Commission. They approved several spot ETFs managed by China Asset Management, Harvest Global, Bosera and HashKey. According to Bloomberg, the spot ETFs will, however, likely not be available for Mainland Chinese Investors and are expected to start trading by April 30, 2024. While this news was interesting and the market interpreted it as positive news, it is important to put it into context with the already available spot ETFs in the U.S. According to K33, the two already available Bitcoin Futures ETFs in Hong Kong hold a BTC exposure of roughly 2’000 BTC; this represents about 2.8% of the exposure of similar U.S.-based Futures ETFs. This number could serve as a guideline for the expectations for the spot ETF flows in Hong Kong, which could likely only amount to a fraction of the flows from U.S.-based spot ETFs.

Bitcoin and the crypto markets traded to the upside on the news from Hong Kong on Monday morning, reaching a high of just below $67’000 around noon, but then lost ground again, ending the day around $63’000. U.S. equities started the week in the red, with the S&P 500 losing almost 2% on Monday, and the Nasdaq was also down -2.4% on the day.

Quiet day on Tuesday & Fed Chairman Powell’s Speech

Tuesday was a quiet day on the markets, with Bitcoin trading sideways around the $63’000 level for the whole day. U.S. equities also did not see a lot of price action. It seems like many market participants were waiting on a response from Israel regarding a retaliation attack on Iran, but no news came out on Tuesday. Additionally, the Federal Reserve Chairman was set to talk on Tuesday evening, and market participants were likely awaiting what he had to say about the current state of the markets.

The spot ETFs in the U.S. saw net outflows on Monday and Tuesday, with $36.7 million of outflows on Monday and $58 million of outflows on Tuesday. Interestingly, since the launch of the spot ETFs Grayscale’s Bitcoin holdings have dropped approximately 50% and GBTC’s market share by ETF Bitcoin holdings has fallen to 37% with IBIZ and FBTC taking up a lot of this market share.

When looking at the Bitcoin market dominance, one can observe that it has been increasing over the last few weeks, with an acceleration to the upside on Friday. As we mentioned above, Bitcoin dropped around 15% while altcoins saw declines of more than 30%. This surge in Bitcoin market dominance is likely attributed to the new spot ETFs.

On Tuesday evening our time Federal Reserve Chairman Powell stated that recent data shows a lack of further progress on inflation this year and that if higher inflation persists, the Fed can maintain current rate as long as needed and that the restrictive policy needs further time to work. The latest data seems to not have given the Fed greater confidence that inflation is heading in the right direction at the moment. Following Powell’s speech, the U.S. Dollar Index rose to 106.5, its highest level since November 2023, and U.S. equities started to trade to the downside.

A red day for U.S. equities and crypto on Wednesday

U.S. equities and the crypto markets traded to the downside on Wednesday, likely reacting to Powell’s speech on Tuesday evening. Bitcoin reached an intra-day low below $60’000, down more than 6% and the S&P 500 closed Wednesday with a loss of more than 1%. Shares of Bitcoin mining companies have also fallen recently, with Marathon, Riot and CleanSpark falling for three consecutive days and the Valkyrie Bitcoin Miner ETF down about 28% this month.

Worldcoin, the crypto project founded by OpenAI CEO Sam Altman, announced that it will launch World Chain later this summer.  The chain will be secured by Ethereum as an L2 and engineered for scalability with the Superchain ecosystem. It will be permissionless, open source, and intended to ultimately be independently governed by the community.

Crypto market recovery on Thursday

The crypto markets recovered some of their losses from Wednesday during Thursday’s trading session, while U.S. equities also started the day on a positive note, trading to the downside again and closing the day slightly down, right around the psychological level of 5’000 on the S&P 500.

Binance announced on Thursday that it has converted all Secure Asset Fund for Users to USDC to enhance stability. Currently, the SAFU address holds 1 billion USDC instead of BNB USDT and TUSD.

When looking at metrics for market sentiment in the crypto markets, it is interesting to note that the Crypto Fear and Greed Index reached 57 again yesterday, marking a move into the 50s zone again for the first time since January this year. It has since moved back to 66, still in Greed territory. The stock market Fear and Greed Index on the other hand, reached 34 – Fear, yesterday and moved down to 31 earlier today. According to the AAII Investment Survey, 38.3% of the members feel bullish for the stock market in the coming six months, 27.8% feel neutral, and 34% bearish. At the end of March, the figure for members who felt bullish was at 50%, reflecting the rise in uncertainty over the last few weeks.

Bitcoin is currently down 12% from its all-time high of $73’835, which was reached 36 days ago, the funding rates have come down further and the open interest is also at the lowest levels since the beginning of the month. As mentioned above, the Bitcoin market dominance has been increasing and reached the highest level since April 2021. Gold has reached a new all-time high last Friday; the U.S. Dollar Index is up almost 4% since early March and the S&P 500 is down -4.8% from its end of March high. On a more positive note, the S&P 500 is still up almost 6% year-to-date and Bitcoin is up more than 45% since the beginning of the year.

An interesting chart to keep track of is the IBIT chart, BlackRock’s Bitcoin spot ETF. As seen below, IBIT has retested its 5 March low on Wednesday and is currently down 13.7% from its all-time high. With increasing volume and flows, the spot ETFs will likely gain in importance and might therefore be interesting to observe.

Middle East conflict and the Bitcoin halving around the block

During the night to Friday, news of Israeli missile strikes hit the market. According to news reports, an Israeli missile has hit Iran, a strike that follows last weekend’s attacks against Israel, two U.S. officials confirm. At the time of writing, this story is still developing and there are posts on X circulating where a senior Iranian official is quoted saying that there is no plan for immediate retaliation, since there appears to be no clarification on who is behind the most recent incident. Bitcoin and the crypto markets have reacted to both headlines once again, during the night Bitcoin crashed 6% in a matter of minutes following the news of the Israeli attack, only to then bounce back almost 10% after the alleged statement from the Iranian officials, Bitcoin is, at the time of writing, trading at $64’480.

At the time of writing, there are 77 blocks left until the fourth Bitcoin halving. The current average block time is 9 minutes and 46 seconds, which would put the time of the halving at around 01:50 CEST on Saturday morning. The Bitcoin block subsidy will be halved to 3.125 Bitcoin during the fourth halving, an event happening every 210’000 blocks, which is roughly every 4 years. This cut in newly mined Bitcoin results in a decrease in new yearly supply from 328’500 BTC to 164’200 BTC per year. This essentially means that post-halving, there is roughly $10 billion less structural supply hitting the market (calculated based on BTC at $66’000).

We have published a series of articles covering the Bitcoin halving. You can read all the articles here. Happy Bitcoin halving!

Our Take

Traditional markets have completed or are close to completing a repricing for higher Fed rates for longer. Throughout the entirety of March, the base assumption was that the Fed would cut rates at least once by June, with one or two additional cuts until the end of the year. Within the first two weeks of April, these expectations have drastically changed, and we are now expecting a cut only by September with no additional cuts until January 2025. The heightened tensions between Iran and Israel have added to the uncertainty, in which, as is often the case, the most volatile assets are the first to be sold when trying to manage uncertainty. Bitcoin is trading at the same level it did a month ago, back when the repricing of fed rates was just starting. Considering recent events, it is unlikely that participants who have sold within the last month are looking to reenter before the tensions in the Middle East have calmed. That said, the Bitcoin Halving is upon us, and although the exact date of the halving has historically not been a catalyst for a massive rally, the reminder that the next halving cycle is about to kick off and Bitcoin issuance will decrease for the fourth time in its existence is a sweet pill of relief if nothing else.

The Week Ahead

Saturday, April 20, 2024

• Bitcoin Halving

Wednesday, April 24, 2024

• AUS – Inflation Figures

Thursday, April 25, 2024

• U.S. – GDP Figures

Friday, April 26, 2024

• JP – Interest Rate Decision
• U.S. – Core PCE Index Figures