Empire Newsletter: Bitcoin wasn’t a hedge — this time

Where to, digital gold?

Halving week is off to a tumultuous start. 

Cryptocurrencies whipsawed over the weekend on growing geopolitical concerns after Iran’s Saturday drone attack on Israel. 

Bitcoin ( BTC ) crashed to below $62,000 on Saturday evening, further extending the sell-off that began Friday when BTC dipped from $70,000 to $66,000 in a matter of hours. By early this morning, though, things had relatively stabilized. 

Bitcoin is currently down more than 2% over the past 24 hours, sitting at $64,500 as of 11 am ET.

Ether ( ETH ) and Solana ( SOL ) had bounced harder. Earlier this morning, ETH had been up 7% on the day while SOL had gained 9%. Both have since retraced slightly.

It is, of course, worth noting that when the threat of a wider regional war looms over a weekend, traders are limited as stock markets are closed. 

The rush to traditional financial havens — gold, namely, which rallied 17% — started Friday. Oil prices hit their highest level since October last week. 

Read more: Financial trouble for bitcoin miners: A look back, and ahead as the halving looms

By this morning, oil prices were easing but gold was still rallying, with spot futures ticking up another 0.3%. 

Crypto-related stocks fell on Friday along with bitcoin. COIN shares closed last week almost 7% lower, but were trading 0.6% higher pre-market this morning. MicroStrategy similarly lost 5% Friday and was trending 0.6% lower before the open today. 

Looking ahead, aside from the halving , analysts have their eye on oil prices, which historically are a leading indicator for recession. The oil shocks of 1973, 1980 and 1990 all led to gas prices spiking +35%, and, in every case, the US economy also dipped into a recession.

“If oil prices spike enough to get US gasoline to $5.40/gallon this summer, a recession later in the year is a genuine possibility,” Nicholas Colas, co-founder of DataTrek Research, said. 

When oil and gas prices spiked during the second Gulf War in 2023, the jump was an exception to the recession rule, but at that point the Federal Reserve had already been in a rate-cut cycle for two years. Quite different from our current situation. 

Central bankers meet again in a little over two weeks, and expectations of a rate cut continue to dwindle. CME Group futures data shows only a 4.5% probability of a decrease. 

— Casey Wagner 

Data Center

• Tokenized hedge fund Ethena saw net daily outflows for the first time over the weekend, altogether losing $31.58 million.
• Net flows to layer-2s Arbitrum and Optimism hit $278 million over the past week. Ethereum outflows reached $289 million across the same period.
• Uniswap volumes haven’t slowed after the SEC’s Wells notice : still around $3 billion per day compared to around $1 billion in February.
• Bitcoin is firmly the number one blockchain for NFT volumes over the past month, week and day, currently more than double number-two Ethereum.
• Solana’s active addresses are down to 1 million after hitting 30-month highs of 2.4 million in mid-March.

Hedge status still pending

Crypto seems to have overreacted to Iran’s attack on Israel over the weekend, with large parts of the market dumping up to 20%.

Stock markets weren’t dumping before the bell on Monday. Still, anything could happen, but it seems whatever crypto investors were worried about, equities folk haven’t minded too much.

At times like this, it would be nice if bitcoin were truly uncorrelated with the stock market. One could buy bitcoin as the world teeters. A hedge against dystopia, as has long been the value prop for gold. 

But that’s not always the case — yet.

There have been instances where bitcoin was indeed a useful hedge. Times when it ran opposite to benchmarks amid high geopolitical tension and market uncertainty.

Bitcoin and ether rallied more than 50% as then-President Donald Trump ratcheted up his trade war with China in May 2019, with plans to boost tariffs on Chinese imported goods from 10% to 25%. The SP 500 fell more than 2.2% across that time.

Bitcoin spiked by 40% around the Jan. 6 Capitol riots in 2021, while the SP fell. Ether and the wider crypto market pushed even higher than bitcoin.

And while crypto initially sank alongside the SP as Silicon Valley Bank went belly-up last March, bitcoin and ether went onto pump more than 20% as the US government swooped in to make depositors whole. The SP meanwhile only really managed to pare back losses.

(Bank busts are apparently good for bitcoin)

Bitcoin even surged by more than a quarter in the immediate aftermath of the Oct. 7 Hamas’ attack on Israel. The SP 500 dipped about 5%. 

At other times of stress, however, crypto has traded opposite of hedgers’ hopes. Bitcoin, ether and the rest of the digital asset market crashed alongside the SP 500 when Jamal Khashoggi was assassinated in Saudi Arabia in October 2018. 

Bitcoin and ether tanked again, by almost 15%, as the Hong Kong protests ramped up in early June 2019, even as the SP 500 held strong, although crypto would sometimes rally as demonstrations waged on throughout the year.

Sometimes, crypto even trades just like everything else. When the US dramatically pulled out of Afghanistan in September 2021, bitcoin and ether shed more than 10% as the SP slipped 6%.

And then there’s bitcoin’s monstrous 50% collapse around the Covid-19 crashes in Q1 2020, which happened in unison with global markets. Despite all this, perhaps we’re headed for a time where bitcoin and crypto really do act like a safe-haven asset. 

Although, judging by the weekend action, we’re still a long way from that kind of certainty.

— David Canellis

That’s a big one

Hong Kong may have just joined the European and American ranks, as it potentially allows some firms to launch spot bitcoin ETFs . The Securities and Futures Commission, Hong Kong’s regulator, also seemed to beat out the SEC in simultaneously approving some issuers to launch spot ether ETFs.

Read more: Ether ETFs coming in May? Here’s why many are bearish

In a statement, China Asset Management said it was partnering with OSL Digital Securities and BOCI Prudential. The asset manager “plans to issue ETF products that can invest in spot bitcoin and spot Ethereum,” a translated version of the company’s statement said .

OSL, in a separate statement, confirmed the “approval in principle and launch of its inaugural spot bitcoin/ethereum ETFs in Hong Kong.”

HashKey said it also received approval alongside Bosera International. The two plan to team up to “jointly promote the issuance of spot ETFs for Bitcoin and Ethereum, providing investors with a secure, compliant and convenient way to directly participate in these markets.”

The news Monday, which was expected thanks to reports late last week, was enough to buoy both bitcoin and ether after a volatile weekend. Ether gained roughly 7%.

This is Hong Kong ’s moment to solidify itself as a major player in the crypto space. The Special Administrative Region has been plotting new regulations and attracting crypto firms for the past year. Outside of that, this could open a door for institutional demand in Asia. 

In the US, the launch of the spot bitcoin ETFs led to bitcoin hitting new all-time highs , and a slew of institutions and retail buying into the new ETFs as firms look to gain exposure for themselves and their clients. Specifically, the launch of the ether ETFs — if executed in Hong Kong before the US — could give the overall market an idea of what to expect if, or when depending on who you ask about the ETFs, are launched in the States.

— Katherine Ross

The Works

• Germany’s top federal bank, Landesbank Baden-Württemberg, has teamed up with the Bitpanda exchange to offer custody service, Bloomberg writes . 
• Guy Ficco, the criminal investigation chief at the IRS, warned that his agency is prepared for an increase in tax evasion and fraud cases involving crypto.
• English football team Real Bedford has scored a cryptocurrency denominated investment from Cameron and Tyler Winklevoss. The team was bought by bitcoin podcaster Peter McCormack in 2021, as the BBC notes. 
• Crypto partnerships are back: STEPN announced that it teamed up with Adidas to launch 1,000 sneaker NFTs on Solana.
• Former Trump official Steve Mnuchin’s quixotic bid to buy TikTok now includes a plan to hire an AI firm to help rebuild its algorithm, according to the New York Post.

The Morning Riff

Could a crypto-backed candidate kick Senator Elizabeth Warren , D-Mass., out of office? An array of crypto execs are betting that attorney John Deaton could, according to Politico . 

Publicly available polling on Warren’s chances is scarce. A survey in March 2023 showed Warren with some vulnerabilities among Massachusetts’ famously prickly electorate — just 41% of survey-takers held a positive view, compared to 36% unfavorable. Another poll a couple of months later had Warren narrowly beating former Lt. Gov. Karyn Polito in a hypothetical matchup, plus a huge percentage — 30% — undecided on their votes.

Read more: Pro-XRP lawyer John Deaton launches bid against Elizabeth Warren

I live two hours west of Boston. If weekend talk radio and the cat food aisle at Big Y is to be believed, there’s a constituency here ready to boot Democrats, both state and national, off their perch. Look at Republican Charlie Baker’s run as governor, and Mitt Romney’s too, the argument goes. Plus, Scott Brown proved in 2010 that a Republican can win a Senate race here — right?

Call me skeptical. Warren was viewed as a weak candidate heading into the 2018 race, and she won by a hair over 60%. Brown won against a terrible candidate in 2010, and then lost to Warren a few years later. Plus, Massachusetts has a thing about GOP governors who prove willing to tack to the center. 

Deaton is an intriguing candidate. But as Politico notes, Deaton isn’t well-known here, and the fact that he just moved to Massachusetts will definitely be used against him. If Deaton wants to beat Warren, he’ll need to focus on what’s really got people here grumbling — housing unaffordability, infrastructure and the cost of food. Hammering on about XRP won’t cut it. 

— Michael McSweeney

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