Report: Global Markets Slowing Down, Crypto Gaining Strength

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ConsenSys Media

10 min readAug 21, 2019

With BTC leading, read standout findings from Delphi Digital’s Quarterly Macro Outlook Report.

Delphi Digital is an independent research boutique providing institutional-grade analysis on the digital asset market. These are the findings for Q2 2019. All data are shown as of July 30, 2019.

Key Takeaways:

Large-cap cryptoassets provided greater returns compared to small and medium.
Bitcoin is gaining traction a way to hedge against the rising risk of currency devaluations and uncertainty regarding trade wars and falling real bond yields.
Weaker nation-state currencies increase the demand for gold and Bitcoin as alternative asset classes.
New financial products like crypto ETFs and institutional custody solutions are highly anticipated.
Defi continues to be a growing narrative with the total amount locked in Defi applications rising nearly 200 million over the past year.

Current State of The Crypto Market

BTC vs. Total Market

The gains of Q1 accelerated in Q2 for the public crypto market as bitcoin emerged onto the global stage as a viable non-sovereign alternative asset.
BTC was one of the top-performing crypto assets in Q2, rising 160% versus the rest of the crypto market’s ~60% gain over the same period.
Bitcoin has arguably the strongest narrative driving its demand, at least in the near term.

Large Caps Dominate Q2

Large caps returned approximately 120% in Q2 compared to just 40% and 25% for its small and midcap counterparts, respectively.

Notable Performers

There were 12 projects with a market capitalization of over $15 million which outperformed Bitcoin year-to-date.
Exchange tokens were the sector that saw the most outperformers.
ChainLink was the only cryptocurrency to post three-digit gains on Bitcoin, with Ren being the second runner up — gaining 95% on BTC YTD.

Uncorrelated Asset

Bitcoin has traded closely with the fluctuations in gold prices, lending support to its “digital gold” narrative.

Source: Coinmetrics.io, S&P Dow Jones, ICE, MSCI

Heightened trade tensions between the U.S. and China have served as a boon for bitcoin as investors seek out non-sovereign assets to hedge against the fallout from the trade war.
The rising risk of currency devaluation, especially among reserve currencies, is a longer-term catalyst that should propel BTC higher along with gold.

Mixed Signals for U.S. Economy

This July marked the longest economic expansion in U.S. history, surpassing the previous record that ended roughly 20 years ago in the decade leading up to the dot-com bust.
However, growth in this cycle has been relatively tepid compared to prior expansions, partially because of the damaging aftermath following the Great Recession. Therefore, the economy hasn’t been able to “overheat,” which tends to drive up inflation.
The economic outlook for the U.S. is quite mixed, putting substantial pressure on the Fed’s next move.
Fed funds futures have implied a 100% probability the U.S. central bank cuts rates by at least 25 bps in July since last month’s FOMC meeting, despite a better-than-expected jobs report and a June inflation print above economist estimates since.

Similarly, U.S. GDP grew 2.1% in Q2, down from the first quarter’s 3.1% rate, but above consensus estimates of 2% on the back of strong consumption and rising government outlays.
On the downside, business investment fell sharply, partially attributed to rising uncertainty surrounding trade wars and tariffs.
Executives are hesitant to increase capital expenditures until there’s more clarity on the downstream effects of ongoing trade disputes, which are already having a noticeable impact on global supply chains.
Wage gains for the average American haven’t accelerated at the pace one would expect with sub-4% unemployment, which also helps explain part of the weaker inflation narrative.
As a result, the Fed has pivoted drastically from its 2018 playbook towards more accommodative policy measures to boost demand and spark inflation.
This pivot has caused a resurgence in risk assets, notably global equities, which have gained more than 20% since their Q4 2018 sell-off.

Yield curve inversions are adding to growth concerns given their historical tendency to precede recessions.
Typically, longer duration Treasury bonds offer higher yields than shorter duration counterparts to compensate investors for the increased interest rate risk, which are less likely to fluctuate in the short term. However, yields on 10-year U.S. Treasury bonds recently dipped below those of 3-month U.S. Treasury bills, causing serious concern that a recession may be around the corner.
The New York Fed calculates the probability of a U.S. recession over the next 12 months, which surged above 30% at the end of June for the first time in more than a decade.

Source: Federal Reserve of St. Louis. New York Fed

Risk Assets Triumph

After suffering one of the worst quarters in decades, U.S. equities have retraced all of their 2018 losses and then some with the S&P 500 hovering near all-time highs.
The drastic reversal in central bank policy to start the year brought new life back to risk assets, a trend that continued in the second quarter
Bitcoin has outperformed every asset class with its 160% gain year-to-date.

Stocks Hit Record Highs

Public equities in the U.S. have climbed back to all-time highs with the S&P 500 and NASDAQ 100 hovering near record levels.

Bitcoin vs. Growth Assets

A favorable backdrop for growth stocks may also catalyze for bitcoin, at least in the short run.
Bitcoin has one of the highest growth potentials of any asset globally.
Growth stocks tend to outperform during periods of moderate-to-weak economic activity, which usually spills over into expectations for corporate earnings.
As we know, investors are willing to pay higher multiples for companies with considerable growth potential during these times.
Given the expected slow down in global growth and muted earnings expectations, the backdrop remains favorable for growth to outperform.
If so, bitcoin may be poised to catch a bid as investors reach for riskier assets with significant price appreciation potential.

Source: TradingView, Coinbase, MSCI, BlackRock

Gold Drivers: Real Yields Collapse

Gold appears poised to do relatively well in a world of falling real bond yields.
The precious metal broke out to a six-year high recently amid the race among central banks to ease monetary policy with lower rates and teases of additional stimulus.
Real yields serve as an opportunity cost for holding non-income producing assets like gold and bitcoin.
As yields decline, so too does the attractiveness of holding bonds compared to other non-yielding assets.
Over longer time horizons, gold tends to rise during periods when real yields are trending lower, a notable trend given a great deal of today’s sovereign debt trades with negative real yields.
The lack of counterparty risk also makes gold an attractive investment option.

Twin Deficits & U.S. Dollar

One of the major reasons the U.S. dollar is the global reserve currency is because, by definition, dollar-based assets are held in significant quantities by global central banks, most notably U.S. Treasuries.
Ironically, Treasuries exhibit somewhat of a network effect in that central banks hold them because they boast the most liquid markets, which in turn boosts their appeal as a reserve asset.
Liquidity is a key concern if a crisis forces major liquidations or purchases of foreign securities to manage a country’s native currency.
Many world leaders have been outspoken in their concerns about the influence the U.S. has over the global financial system because of the dollar’s dominant status, but the reality is there is not much of an alternative as a global reserve asset.
Negative government debt yields also reduce the attractiveness of holding other debt securities or deposits, which is why Delphi Digital believes the dollar will remain the GRC for the foreseeable future.
The Congressional Budget Office (CBO) projects the United States’ average budget deficit will be 4.3% of GDP between 2020–2029 and will reach more than $1.3 trillion over the next decade.
The U.S. also runs a significant trade deficit, meaning the country’s imports are larger than its exports.
Typically, these factors would also imply a weaker currency, but once again, the U.S. benefits from the dollar’s reserve currency status, which creates a vast demand for USD.

U.S. Dollar — Global Reserve Currency

The seemingly insatiable appetite for Treasury bonds is what allows the U.S. to run such large fiscal deficits. The government can keep issuing more debt as long as demand remains high. Although much attention has been given to the recent decline in dollars as a percentage of total global reserves, the proportion of USD has remained relatively stable over the last couple of decades (60–65%).
However, the idea that we can keep digging a deeper debt hole with no end in sight is naive in the view of Delphi Digital.
If foreign holders of UST lose faith in the viability of repayment, then sentiment towards the dollar will shift drastically.
Loss of faith will not happen overnight, but the gradual shift away from the dollar as the global reserve currency is a long-term threat to its strength. Look no further than the recent Congressional hearings on Libra to see why policymakers are so intent on keeping the status quo when it comes to the dollar’s influence.

U.S. Dollar Outlook — Short Term

The long-term structural outlook points to a weaker USD, but the current dollar shortage and favorable growth outlook relative to most of the developed world may cap its downside in the near term.

A weaker dollar is not only beneficial for the global economy; it is also bullish for the price of gold.

Weaker Dollar Boosts Gold

Historically, gold and the U.S. dollar have had a strong inverse relationship as a declining dollar means other currencies are appreciating against it, which tends to boost demand for commodities.
A falling dollar is also associated with rising inflation, which serves as a boon for gold as demand for inflation hedges increases.
Risk assets also typically perform relatively well under a weaker dollar regime for the aforementioned reasons (global growth, dollar-denominated debt obligations, etc.)
Dollar weakness would most likely give a bid to bitcoin as well given it trades as both a complement to gold and a risk asset at times.

Expected Returns Look Bleak

The next ten years are unlikely to mimic the last ten, where unconventional monetary policy lit a fire under risk assets and kept rates artificially low.
U.S. equities are expensive across several measures (price-to-sales, 10-year CAPE ratio, etc.), which does not bode well for longer-term expected returns.

Infrastructure & Financial Products

The market has focused on the launch of new financial products and key infrastructure that will be necessary for broader institutional and retail investment.
The most anticipated financial products are physically settled futures, improved custody solutions, and crypto ETFs.

Ethereum: DeFi

Decentralized Finance of DeFi continues to be a growth area for Ethereum as new projects continue to launch and expand.
As of July 23, 2019, the total amount locked in DeFi was $478M (up from $193M a year ago), with the majority or 65.6% locked in Maker — a platform for leverage which underpins a stablecoin, Dai.
Maker’s dominance, along with other lending platforms (Compound, InstaDApp, Dharma, and others) comprise the lending focus of DeFi, which makes up over 90% of the DeFi market.

Access the full report.

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