🌳 U.S. Economy Poised for Fiscal Boost; BlackRock Explores Ethereum ETF, Bolstering Crypto as Asset Class

GM Treehouser 🌳

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Our Daily View

What We Are Covering Today

• US economy eyes $70B fiscal boost; Fed balances inflation, growth challenges (More in Macro & TradFi)
• BlackRock embraces BTC and ETH ETFs; signalling strong institutional interest in cryptocurrencies (More in DeFi & CeFi)
• Bitcoin holders exhibit steadfast confidence; on-chain transactions and exchange flows significantly increase (More in On-Chain)
• IV for both BTC and ETH increased while term structure went into a backwardation state (More in Crypto Derivatives)
• BTC breaks key support, signaling a bearish trend; ETH sees mild retracement and consolidation (More in Crypto Technical Analysis)

Macro & TradFi

The US economy is set for an unexpected fiscal boost if lawmakers back a potential deal for $70B worth of tax breaks for businesses and families. Congressional negotiators are currently engaged in discussions regarding the renewal of lapsed business tax breaks and enhancing the child tax credit, with an equal allocation between the two. The success of this proposal hinges on navigating a deeply divided Congress, where conflicting views on the nation's fiscal path persist. Some Republican lawmakers advocate for substantial spending reductions as a prerequisite for preventing another government shutdown on both January 19 and February 2, coinciding with the expiration of temporary funding. Should the proposed tax breaks receive approval, they introduce a twofold challenge for an economy showing signs of a gradual deceleration. While the extra funds might energize consumer spending, they also carry the potential risk of reigniting inflationary pressures. Economists warn that this complexity could pose difficulties for the Federal Reserve in executing interest rate reductions over the year. Recent December data indicates a rise in inflation, primarily fueled by increasing service costs, while the earlier decline in goods prices stabilized. The consumer price index registered a 3.4% increase in the year through December, marking the highest figure in three months.

Elsewhere, in December 2023, U.S. producer prices unexpectedly decreased by 0.1%, marking the third consecutive month of decline, primarily due to lower costs in goods like diesel fuel and food. This trend indicates a potential ease in inflation, which could prompt the Federal Reserve to consider reducing interest rates within the year. Despite this decrease, the producer price index (PPI) still shows a 1.0% increase year-on-year, with core PPI, excluding food, energy, and trade services, rising by 0.2% in December and 2.5% over the year. This data contrasts with consumer prices, which saw a higher-than-expected increase in December, driven by rising shelter and healthcare costs. The stability in service prices and normalized supply chains post-COVID-19 disruptions highlight the central role of services in the ongoing battle against inflation. The Federal Reserve, having raised its policy rate by 525 basis points since March 2022, faces a complex scenario in balancing inflation control with economic growth.

Despite the proposed $70 billion in tax breaks for businesses and families, its impact on the broader U.S. economy is expected to be minimal, unlikely to significantly alter inflation forecasts or influence the Federal Reserve's decision on a potential rate cut in March. This assessment follows mixed results in U.S. equity markets last Friday, with marginal movements in major indices: the Nasdaq Composite Index rose by a mere 0.02%, and the S&P 500 increased slightly by 0.08%. In comparison, the Dow Jones Industrial Average experienced a 0.31% decline. This market behavior reflects investor reactions to the initial batch of Q4 earnings and the recent producer inflation data, which was cooler than anticipated. Notably, Delta Airlines' shares fell approximately 9% on Friday after the company lowered its 2024 earnings forecast to $6 to $7 per share, down from an earlier projection of over $7 per share. Investors are now anticipating the upcoming release of the U.S. Retail Sales data on Wednesday, 17 January. 

CeFi & DeFi

• BlackRock CEO Larry Fink Backs Ether ETF
• BlackRock acquisition of 11,500 BTC during a market dip
• Franklin Templeton’s Bitcoin ETF Now the Cheapest After 10 Basic Point Reduction
• Bitcoin price crumbles after spot ETF approval, but ICP, TIA, MNT, SEI, and altcoins rebound
• Wise Lending drained of $440K worth of crypto in apparent flash loan exploit
• Hedera network approves $408M of HBAR for ecosystem growth

BlackRock's CEO, Larry Fink, has endorsed the idea of an exchange-traded fund (ETF) for ETH a day after the eagerly awaited Bitcoin (BTC) ETF was launched. BlackRock’s iShares Bitcoin Trust (IBIT) was among several such products that made their trading debut in the U.S. on Thursday following the Securities and Exchange Commission's (SEC) approval of the funds on Wednesday. IBIT constituted approximately $1 billion of the total $4.6 billion in trading volume collectively observed by the ETFs. The colossal asset management firm is now exploring the possibility of listing a comparable product for the native token of the Ethereum blockchain as part of its continuous journey into tokenization. Fink also emphasized that he perceives cryptocurrency not as a currency but as an asset class.

BlackRock has also acquired a total of 11,500 BTC during a market dip, coinciding with the successful launch of its spot Bitcoin ETF, absorbing about 13 days' worth of Bitcoin production. This purchase shows the growing institutional interest in Bitcoin as an asset class, as echoed by BlackRock CEO Larry Fink's evolved stance on Bitcoin. Additionally, the substantial trading volume and inflows into new Bitcoin ETFs, totaling $1.4 billion in the first two trading sessions with net inflows of $819 million, signify a potential shift in the Bitcoin market. This activity, led by BlackRock's iShares Bitcoin Trust and closely followed by other ETFs like Fidelity Advantage Bitcoin ETF and Bitwise, points to the upcoming BTC Halving event, which leads to a new era of scarcity in the market. Despite outflows from pre-existing products like the Grayscale Bitcoin Trust, the overall trend indicates robust institutional and retail investor interest, setting the stage for significant impacts on Bitcoin’s availability and market dynamics.

On-Chain

According to Glassnode, there has been a persistent trend of BTC holders maintaining their investments regardless of significant price fluctuations. This behavior signals a strong market conviction where mature investors demand higher valuation thresholds before they consider liquidating their assets. Such steadfast holding patterns suggest that the market may require substantial price increases to trigger a more widespread distribution of Bitcoin from long-term holders to new market participants. This underlines a key market insight that price surges alone may not suffice to shake the confidence of seasoned investors, who seem to anchor their trading decisions from a long-term perspective.

Elsewhere, Glassnode showed that on-chain transaction volume is on an upward trajectory, with daily settlements exceeding $5.7B in economic transfers. This trend is mirrored in exchange flows, where daily inflows and outflows collectively reach $4.6 billion, underscoring a notable uptick in investor engagement to possibly capture the best opportunities in the market. This increase in on-chain settlements and exchange flows represents a reversal from the trend observed over the past year, where investor confidence and participation are manifesting in higher transaction volumes, both on-chain and through exchanges.

Crypto Derivatives

• Funding rates remained positive for BTC and ETH. 
• Deribit Implied Volatility Index (DVOL) for BTC and ETH stayed relatively flat at 56.78% and 64.52%, respectively.
• The 30-day 25-delta skew (C-P) for BTC dropped to -1.95%, while that of ETH dropped to -1.36%.
• The futures market witnessed $530.21M liquidations, with longs representing 74.81%.

Top 3 USDT Perpetual Funding Rate Arbitrage Opportunities

Over the weekend, both BTC and ETH saw an increase in ATM IV after days of continuous IV drops following the confirmation of ETH approval and as their prices continued to decline. The 7-day IV reacted more significantly, rising from 53.64 on Friday to 59.60, while the 30-day IV rose more modestly from 53.72 to 54.28. This suggests that traders are anticipating further short-term volatilities in the week ahead while holding slightly longer one-month expectations in line with previous forecasts.

In the meantime, the term structure for both BTC and ETH has reverted to a slight backwardation state after briefly returning to contango. Notably, contracts dated 18 days and below experienced a significant increase in ATM IVs, particularly for contracts expiring in 4 days. In the last 24 hours, the IV for these contracts surged from 51.44 to 60.48, indicating traders' expectations for increased volatilities in the week ahead.

Surprisingly, despite the rapid price drops and the rise in IVs, the 25-delta call-put skews for BTC and ETH have largely remained in the neutral zones. Specifically, the BTC 30-day skew has only dropped slightly from -0.43% to -0.54% over the weekend. The 7-day skew, on the other hand, has seen a slightly more pronounced decline, moving from -0.14% to -1.85%. This trend suggests that while traders anticipate high volatilities in the week ahead, they are uncertain about the direction the market might take.

During the Asia/Europe Trading Session on Friday, @Paradigm recorded mixed flows as BTC dropped while ETH surged. For BTC, notable transactions included the selling of 500x 26-Jan-24 40/50K Call Spreads and 450x 26-Jan-24 49K Calls. Meanwhile, leading ETH strategies involved the selling of 6000x 26-Jan-24 2.65K Calls, complemented by the purchase of 5000x 29-Mar-24 4K Calls.

Crypto Technical Analysis

Shifting to technical analysis, we observe that over the weekend, BTC at the 4-hour chart has decisively breached its support at the $45K mark and exited an ascending channel pattern it had previously been adhering to. Currently, the price is fluctuating around $42K, indicating a potential shift in market sentiment. The breakdown from the channel's lower boundary signifies a negative reversal in the price trajectory. BTC is currently sitting on the next support level established at around $40K. Conversely, should the price recover, the resistance to watch would be at the $45K level, where the previous breakdown occurred. The Relative Strength Index (RSI) is trending downwards, at 29.89, which typically suggests an oversold condition and suggests a potential reversal of the trend.

Meanwhile, ETH is currently trading around $2.48K. After a notable ascent, the market is experiencing a mild retracement. This pullback follows a rally that peaked near the $2.7K level, suggesting a normal consolidation phase after a strong upward movement. Should the current support around $2.48K falter, the next significant support is at $2.4K. In contrast, the immediate resistance is poised at approximately $2.8K, which aligns with the recent peak. Looking at the RSI, it is presently just below the midline around 40, indicating a slight bearish momentum but not yet signaling oversold conditions. The RSI's downward trend aligns with the recent price correction, hinting at potential caution among market participants.

Access institutional-grade commentary on TradFi × Crypto markets

By Treehouse Research

Daily Readings

TradFi

• 'Taiwan is China's Taiwan': Beijing reacts to pivotal presidential election

• House Republicans say they will re-subpoena Hunter Biden in coming weeks

• Pro-Palestine protestors arrested for London Stock Exchange scheme

• Hertz makes 'agile' decision to shift strategy and sell EVs, Teslas

• The Iowa caucuses are on Monday — here's what you need to know

• Atlanta Fed boss warns US progress on inflation is likely to slow

• US producer prices unexpectedly fall; goods deflation seen persisting

• Price Wars Help Spark $157 Billion Rout in China Consumer Stocks

• South Korea Alleges Naked Short Selling by Two More Global Banks

• US Economy Set for Another Cash Boost If Congress Backs Tax Deal

• Hamas airs video of Israeli hostages, says it will disclose their fate

Crypto

• Bitcoin’s Wall Street Debut Ends in Tears for Futures Traders, Leads to $83M Liquidations

• Franklin Templeton's Bitcoin ETF Now the Cheapest After 10 Basis Point Reduction

• Bitcoin price crumbles after spot ETF approval, but ICP, TIA, MNT, SEI and altcoins rebound

• GameStop to shut down NFT marketplace due to regulatory limbo

• Hong Kong Virtual Asset Consortium removes XRP from global crypto index

• Hedera network approves $408M of HBAR for ecosystem growth

• Do Kwon requests to postpone SEC trial date, while in extradition custody

• Wise Lending drained of $440K worth of crypto in apparent flash loan exploit

• US senators call for investigation of SEC over ‘compromised’ Bitcoin ETF tweet

• Singapore bill would expand control over crypto financial products

• Solana MEV bot bags $1.7M, CFTC eyes DeFi risk mitigation: Finance Redefined

• BlackRock CEO Larry Fink Backs Ether ETF

• BlackRock scoops up 11,500 BTC during dip as ETF leads the pack

Deal Flow

• Taproot Wizards, Bitcoin Ordinals Project That Raised $7.5M, to Sell 'Quantum Cats' Collection

Yours sincerely,
Treehouse Research 🌳