The FED paused interest rate hikes but implied that further hikes are expected, while BlackRock's registration for a BTC-backed ETF signals positivity to the markets amidst a USDT-USD depeg

What happened this week?

Another eventful week in crypto markets passed with various impactful news: Despite the decision to pause interest rate hikes, the FED signalled that the target rate has not yet been reached, indicating further rate hikes until end of year. Moreover, the world largest asset manager BlackRock has filed a registration form to the SEC to launch a spot BTC-backed ETF in the U.S., which is certainly a positive signal to the markets that also have been taken on the wrong foot given a roughly 40bps depeg from USDT vs the USD on Thursday.

• The remarkable resilience exhibited by crypto assets last week in the face of challenging announcements by the SEC proved to be short-lived, as the market experienced a significant drop over the past weekend. During Asia trading on Saturday, June 10, 2023, the crypto market cap plummeted by nearly 5% within a mere two hours. BTC and ETH remained comparatively stable, with BTC briefly dipping below the $26,000 support level before reclaiming it, and ETH quickly finding support at $1,740, only experiencing a loss of around 4%. However, assets specifically mentioned in the SEC's lawsuit suffered significant declines with no apparent end in sight. MATIC dropped by as much as 30%, MANA by around 23%, ADA by approximately 25%, and several lower market cap assets saw setbacks even greater than these figures.
• The Federal Reserve decided to keep the benchmark interest rate steady at 5-5.25%, marking the first break in a series of 10 consecutive rate increases that began 15 months ago. Fed Chair Jerome Powell explained the pause as an opportunity to assess additional information and its implications for monetary policy. Despite the pause, futures markets indicate a 72% chance of a rate increase at the Fed's July meeting. The Fed's Summary of Economic Projections (FOMC Dot Plot Chart) reveals that nine out of 18 members expect the benchmark rate to end the year between 5.5% and 5.75%, suggesting two more quarter-point increases. While only two members anticipate no change in rates, three predict rates to surpass 5.75%. The predictions caused a significant surge in treasury yields and intruded further selling pressure to risk assets.

• A federal judge overseeing the SEC's case against Binance and Binance.US has denied a temporary restraining order that would have frozen the assets of Binance.US. Judge Jackson, overseeing the case, has urged the SEC and Binance to engage in ongoing negotiations to establish operational limits, recognizing the potential consequences of a complete shutdown. Meanwhile, the SEC has asked for more time to respond to Coinbase's request for regulatory clarity on cryptocurrencies, stating that they have not yet made a decision. Coinbase has criticized the lack of commitment and stated that they are not planning to delist any of the assets mentioned by the SEC.
• Another factor causing some up roaring in the crypto markets was a temporary depeg of Tether (USDT) versus the dollar by roughly 40bps on Thursday. This short-lived depegging was arguably triggered by an imbalance in the stablecoin pool by Curve. Curve’s 3pool is widely known as the “savings account” in DeFi, as it holds massive amounts of stablecoin liquidity (DAI, USDC and USDT). Generally, the pool is more or less equally split between the 3 assets, however, due to some whale offloading of USDT in the pool, the weights shifted, causing USDT to reach up to 70% of the entire volume in the pool. The larger the share in the pool, the larger the selling pressure of that asset in said liquidity pool. At the time of writing, USDT trades at a discount of roughly 12bps versus the dollar, pretty much erasing the discount low of 40bps on Thursday around noon.
• On late Thursday night, BlackRock, the world’s largest asset manager with over $9.5 trillion AuM has officially filed the registration form of a spot-BTC ETF with the SEC. In the past, there have been a myriad of application for such Bitcoin spot-backed ETFs, however, all have been rejected due to concerns about spot market manipulations and hence investors’ protection reasoning. Those include applications by VanEck, Ark + 21Shares as well as Grayscale. A spot-based BTC ETF will allow investors to gain exposure to the crypto asset without actually holding it themselves, and therefore could mark yet another institutional push towards adoption out of the U.S. The custody as well as the Market Data needed for pricing the ETF will be undertaken by Coinbase.

Our Take

The temporary pause in rate hikes was widely appreciated by investors. However, the unexpected revelation that the pause may not be permanent and that the target rate has not been achieved yet caught some investors off guard. This surprise was evident in the sudden increase in treasury yields and the subsequent decline in crypto asset prices.

While stocks and crypto have experienced exceptionally high correlation during 2022, the correlation seems to decrease mainly due to crypto assets lagging behind. Reasons for that can be attributed to the regulatory scrutiny (particularly in the U.S.), as shown this week with the SEC allegations against Coinbase and Binance. With BlackRock announcing to partner up with Coinbase to launch a spot Bitcoin ETF is certainly a signal to the regulators that will be interesting to monitor in the coming weeks. The overall crypto markets tend to be dominated by the macroeconomic developments in addition to the more recent regulation-related attention from authorities.

The Week Ahead

• 21.06 - Wednesday: UK Inflation Rate YOY
• 22.06 - Thursday: BoE Interest Rate Decision, Fed Chair Powell Testimony
• 23.06 - Friday: JP Inflation Rate YOY

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