Sebastian Sinclair


<p>A shift away from quantitative tightening and a fresh expansion of the US Federal Reserve’s balance sheet has industry majors bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) and ether (<a href="https://blockworks.co/price/eth">ETH</a>) riding high.</p>



<p>Both assets are now up 69% and 49.5% on a year-to-date basis to around $28,000 and $1,800&nbsp; respectively, <a href="https://www.blockworksresearch.com/assets">Blockworks Research data</a> shows. In just the past couple weeks, they have rallied some 35% and 26% on the back of Silicon Valley Bank’s <a href="https://blockworks.co/news/bitcoin-momentum-store-of-value-banking-turmoil" target="_blank" rel="noreferrer noopener">historic failure</a>.</p>



<p>The crypto market performance is now vastly outstripping tech and growth stocks listed on the Nasdaq exchange by more than five times over the same period.</p>



<p>“Crypto, at a macro level, trades on the perceived fundamentals of the money supply outlook more so even than pure market beta,” Rich Falk-Wallace, CEO of data analytics firm Arcana told Blockworks. “As the money supply picture has changed overnight, so have crypto sector asset prices.”</p>



<p>Last year’s regime of quantitative tightening was a more significant factor affecting prices than the demise of many centralized crypto firms, digital asset trading firm Cumberland said via <a href="https://twitter.com/CumberlandSays/status/1638202345346531330?s=20" target="_blank" rel="noreferrer noopener">social media</a> on Tuesday.</p>



<p><a href="https://blockworks.co/tag/ethereum-merge">Ethereum’s Merge</a> and Russia’s war in <a href="https://blockworks.co/tag/ukraine">Ukraine</a> were of lesser consequence for price, the firm said.</p>



<h2>Bank liquidity driving bitcoin adoption</h2>



<p>Now, as the Fed has taken swift action to prop up the US banking sector through its newly created Bank Term Funding Program in a step designed to “safeguard deposits,” investors are seeking out alternatives.</p>



<p>The central bank is weighing whether to hike rates further as it attempts to wrestle with inflation, though, amid the backdrop of liquidity provisions for banks, that is proving somewhat difficult.</p>



<p>Markets are now pricing in a 25 basis point jump instead of the previously conceived 50, to be decided at the next upcoming FOMC meeting on Wednesday, according to CME Group’s <a href="https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html" target="_blank" rel="noreferrer noopener">FedWatch tool</a>.&nbsp;</p>



<p>The easing of further rate hikes would be the first time the Fed has made such a move since it began its aggressive campaign in March of last year.</p>



<p>Sunday also saw the <a href="https://www.bbc.com/news/business-65010255" target="_blank" rel="noreferrer noopener">announcement</a> from central banks around the world to bolster liquidity provisions in US dollars as they sought to soothe the crisis of confidence in the global financial system.</p>



<p>“None of this is exactly quantitative easing the way we’re used to it, but it’s clear that quantitative tightening is not just ending but headed in the other direction,” Cumberland <a href="https://twitter.com/CumberlandSays/status/1638202348936871940?s=20" target="_blank" rel="noreferrer noopener">tweeted</a>.</p>



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe class="wp-embedded-content" sandbox="allow-scripts" security="restricted" title="Interactive or visual content" src="https://flo.uri.sh/visualisation/13155519/embed#?secret=kF71i4J3O8" data-secret="kF71i4J3O8" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div><figcaption class="wp-element-caption"><em>Bitcoin and ether are easily outperforming major indexes so far this year</em></figcaption></figure>



<p>Whatever you term it, the actions are translating to further upside for digital assets, Glassnode said in its weekly <a href="https://www.youtube.com/watch?v=5tH_66pz0Us&amp;ab_channel=glassnode" target="_blank" rel="noreferrer noopener">video report</a>, Tuesday.</p>



<p>Exploring the underlying strength of the trend, Glassnode pointed to several on-chain activity metrics in an attempt to analyze the fundamentals backing the rally.</p>



<p>Looking at the transaction counts, new addresses and new entities for bitcoin over a monthly basis versus its yearly average performance, Glassnode said the data was showing a “very healthy uptick.”</p>



<p>“Bitcoin has seen one of the most explosive weekly rallies in history,” Glassnode wrote in a slide at the end of its presentation. While there were some signs of profit-taking at play, it remains “relatively light” with respect to older coins, hinting at a strong conviction to the upside, it said.</p>



<p>Cumberland agrees: “The flow we are seeing on the OTC desk is reflecting the new reality. It has been extremely focused in BTC and ETH, and we’re seeing very little profit-taking, despite the fact that BTC is up 70% on the year; our flow ratio right now shows roughly twice as many buyers as sellers.”</p>



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Bitcoin Price Rally Aligns With ‘Healthy Uptick’ in On-chain Metrics

Macauley Peterson

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        <ul>
                <li>The Bank of England raised interest rate by 15 basis points to 0.25%, in a near unanimous vote</li>
                <li>The European Central Bank leaves rates unchanged, but will taper its government bond purchases</li>
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<p>The Bank of England’s monetary policy committee (MPC), decided on Thursday to raise its Bank Rate to 0.25%, according to <a href="https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2021/december-2021" target="_blank" rel="noreferrer noopener">the committee’s minutes</a>, in a bid to dampen inflation. The 12-month CPI rate jumped from 5.1% in November, up from 3.1% in September, and the highest level since September 2011. The Committee voted by an eight to one margin in favor of the rate hike.</p>



<p>The move comes a day after the US Federal Reserve’s analogous group left rates unchanged but also <a href="https://cms.blockworks.co/fed-gets-hawkish-doubles-taper-signals-three-rate-hikes-in-2022/" target="_blank" rel="noreferrer noopener">moved to tighten monetary policy</a> by decelerating its asset purchase program more quickly than earlier planned.</p>



<p>Like the Fed, the Bank of England (BoE) policymakers expect that upward pressure on CPI inflation is driven primarily by supply disruption and should dissipate over time, returning closer to the committee’s long-term 2% target rate.</p>



<p>The MPC notes that the Omicron Covid-19 variant is spreading rapidly in the UK, but it’s medium-term economic effects remain unclear, while inflation has risen faster than anticipated.&nbsp;</p>



<p>The International Monetary Fund (IMF) UK staff weighed in with <a href="https://www.imf.org/en/News/Articles/2021/12/14/united-kingdom-staff-concluding-statement-of-the-2021-article-iv-mission" target="_blank" rel="noreferrer noopener">a policy statement</a>, Tuesday, targeted squarely at the BoE, warning against “inaction bias, in view of costs associated with containing second-round impacts.”</p>



<p>Unemployment in the UK is expected to be 4% in November, down 0.5%, indicating the labor market remains tight.</p>



<h3><strong>ECB calls for “flexibility”</strong></h3>



<p>In the Eurozone, inflation surged to 4.9% in November, the highest level ever recorded, <a href="https://ec.europa.eu/eurostat/documents/2995521/11563387/2-30112021-AP-EN.pdf" target="_blank" rel="noreferrer noopener">according to Eurostat</a>.</p>



<p>At Thursday’s <a href="https://www.ecb.europa.eu/press/pressconf/2021/html/ecb.is211216~9abaace28e.en.html" target="_blank" rel="noreferrer noopener">European Central Bank (ECB) policy meeting</a> in Frankfurt, Germany, ECB President Christine Lagarde announced a scaling back of asset purchases under the pandemic emergency purchase program (PEPP), and its full discontinuance in March 2022.</p>



<blockquote class="wp-block-quote"><p><strong>“We judge that the progress on economic recovery and towards our medium-term inflation target permits a step-by-step reduction in the pace of our asset purchases over the coming quarters. But monetary accommodation is still needed for inflation to stabilise at our two per cent inflation target over the medium term,” Lagarde said in her prepared remarks.</strong></p></blockquote>



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<p>The key ECB interest rates were left unchanged. Similar to the Fed’s policy, the ECB plans to wind down net asset purchases prior to raising rates.</p>



<p>Eurozone inflation is expected to remain elevated next year, but to decline over the course of the year, mirroring the outlook in both the UK and the US.</p>



<p>The US dollar weakened following the BoE and ECB announcements. The DXY, an index representing the USD against a basket of major foreign currencies, fell almost 0.5% in the two hours following the policy updates, but recovered by midday in New York.</p>




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