NYDIG Research Weekly: Bitcoin Gains as Inflation Hits Highest Level Since 1982
by Greg?Cipolaro, Global Head of Research?and Ethan Kochav, Research Analyst
A weekly digest of Bitcoin news and insights.
IN TODAY'S ISSUE:
Bitcoin Bounces as Inflation Rages, but Trader Positioning is Mixed
After beginning the year with weak price action, bitcoin recovered from some of its losses during the week. The driver appeared to be the CPI inflation print on Wednesday, which despite matching expectations, showed the highest inflation rate seen in forty years. Given bitcoin’s correction leading into the event, it seems as if investors were pricing in the most bearish possible outcome. The result was a relief rally. Despite the bump in price, though, short-term positioning by traders in the market remains mixed. Perpetual funding rates, an indicator of whether traders are using leverage to go long or short bitcoin, recently turned negative for the first time since the early December sell-off, indicating a defensive posture. However, option skew levels, which indicate whether options activity is tilted towards hedging rather than buying upside, have abated in the past week, indicating a moderation in downside protection. Events that may come into play over the next few weeks are the FOMC meeting that begins on January 25th?and CME futures and options expiry on January 28th.
Taproot Adoption Growing but Still Small
After two months, Taproot, the biggest protocol upgrade since Segregated Witness (SegWit) back in 2017, is seeing growing adoption. The number of “Pay to Taproot” (P2TR) outputs now numbers 1.3k per day in January, up from 650 in 2021. However, adoption is still limited, with Taproot transactions only comprising about 0.1% of total transactions. Lack of universal acceptance is one major driver as many exchanges, ATMs, hardware wallets, custodians, and software libraries built on top of the Bitcoin protocol are still unable to handle Taproot. Without this support, Taproot payments can only be effectuated by individual users working directly with Bitcoin Core. The adoption of the last major technical upgrade, SegWit, was tied to adoption by service providers. For example, SegWit usage relative to the network increased by about 30% immediately following Blockchain.com’s release of a wallet that supported SegWit last year. We should expect to see similar behavior with Taproot.
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Stablecoins Continue to be of High Interest, Despite Regulatory Overhang
This week we saw more private companies and organizations explore launching stablecoins with Visa, PayPal, and the USDF Consortium making announcements. Visa is working with Ethereum development studio ConsenSys and consulting with central banks on digital currencies, PayPal is said to be exploring the creation of a stablecoin, and USDF, a consortium of FDIC-insured banks, is launching a stablecoin. In particular, the USDF case highlights the regulatory uncertainty under which stablecoins continue to operate. Even though USDF banks are FDIC-insured, and stablecoins may look like a deposit, the FDIC is still unsure as to whether it will insure them (according to media reports). This interest in private stablecoins comes despite the report late last year from the President's Working Group on Financial Markets, which suggested Congress enact legislation to regulate stablecoins.
Meanwhile, it is still unclear whether the Federal Reserve will issue a central bank digital currency (CBDC), which could supersede much of the functionality of private stablecoins. At her nomination hearing, Federal Reserve Vice Chair Nominee Lael Brainard, a long-time supporter of CBDCs, stated that she believed that the Fed should wait on Congress before proceeding with implementing a digital currency. However, CBDCs do not have unanimous support in Congress. Just this week, Congressman Tom Emmer (R-MN) introduced a bill to prohibit the Federal Reserve from issuing a CBDC directly to individuals — so it is not clear how or when such guidance will be forthcoming. In the absence of a CBDC, we might expect private stablecoins to continue to proliferate if the regulatory environment does not significantly change.
Market Update
Bitcoin?fell -1.0%. Equities also fell on the week, with the?S&P 500?down -0.8% and the?Nasdaq?Composite?down -1.8%.?Gold?increased by 1.8%. Bonds also generally increased on the week, with?Investment Grade Corporate Bonds flat,?High Yield Corporate Bonds?up 0.1%, and?Long-Term U.S. Treasuries increasing by 0.7%.?Real yields?and?inflation expectations?modestly decreased.
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