Trakx Weekly Update: Peace Hopes Lift Crypto

Key Crypto Market Figures

CTIs Weekly Performance

Digital asset markets regained their bullish momentum last week, as reflected in the 3.1% return generated by our flagship large-cap Top10 Crypto CTI. The strongest performer over the period was the Lending CTI, which gained just over 10%. At the other end of the rankings was the Recovery CTI, which declined by 3.4%.

A Done Deal?

One of the most consistent patterns in the US-Iran conflict over the past 100 days has been a cycle of escalating threats followed by de-escalation (or “TACO” in market vernacular), culminating in President Trump declaring that a deal has been reached. Last week was no exception. On Thursday, Trump took to his social media platform, Truth Social, and threatened to hit Iran “hard”, including strikes on the country’s major oil export hub on Kharg Island. The comments pushed crude oil prices higher and triggered a wave of risk aversion that weighed on digital asset prices. Just a day later, however, Trump performed a dramatic U-turn, announcing that the large-scale military action he had planned would be called off because negotiations between the two sides had finally achieved a breakthrough. Although investors have witnessed this “escalate-to-de-escalate” strategy several times in recent months, markets nevertheless responded positively to the news, helping reverse the bearish trend that had dominated digital asset prices in preceding weeks.

Part of the reason investors reacted favourably was that this latest announcement appeared more substantive than previous declarations. Trump concluded his statement by saying that the “time and place of the signing” would be announced shortly. Over the weekend, he provided further detail, stating that a Memorandum of Understanding (MoU) — the precursor to a final peace agreement — is expected to be signed this Friday in Switzerland. While this would represent a positive and necessary first step towards ending the conflict, the absence of a publicly available draft means significant uncertainty remains over whether the MoU can ultimately evolve into a durable peace settlement. Only time will tell.

In-Line US Inflation

Unlike the previous month, US consumer price inflation behaved itself in May, coming in broadly in line with expectations on both the headline and core measures, the latter excluding the more volatile food and energy components. The fact that inflation did not continue to surprise on the upside was welcome news for markets and helped stabilise crypto prices on the day. Nevertheless, with both inflation measures still running above the Fed’s 2% target, the report did little to alter market expectations that policymakers are unlikely to cut interest rates in the near term, especially as the May non-farm payrolls report released the week prior showed the US labour market regained momentum over recent months.

Against this backdrop, it will be interesting to see the tone struck by Chair Warsh during his first post-FOMC press conference this week. This could be particularly significant for digital asset markets because, as we highlighted in last month’s update, cryptocurrencies have historically struggled during the first month of a new Fed Chair’s tenure, reflecting uncertainty around how the central bank’s reaction function is impacted by the new leadership.

Good News For Bitcoin Miners

One of the most underappreciated features of the Bitcoin protocol is its ability to self-regulate block production and maintain network stability regardless of fluctuations in mining participation. This is achieved through periodic adjustments to Bitcoin’s mining difficulty, which is recalibrated every 2,016 blocks — approximately every two weeks based on the network’s target of producing one block every ten minutes.

Yesterday’s adjustment saw mining difficulty fall by more than 10%, marking one of the largest downward revisions in Bitcoin’s 17-year history. The decline reflects a recent drop in network hash rate, as some miners have scaled back operations amid tighter profit margins caused by weaker Bitcoin prices. Prior to the adjustment, the estimated break-even cost of mining a single Bitcoin stood at around $84,000, almost $20,000 above the prevailing market price. By lowering the computational effort required to discover new blocks and earn associated rewards and transaction fees, the difficulty adjustment should provide miners with a temporary boost to profitability.

Sources: Trakx, Coingecko, Alphavantage

Market Trends

• Bitcoin hits a two-week high above $65,500 as the US-Iran deal sends oil sliding: CoinDesk
• Bitcoin rises despite US inflation hitting 3-year high: Where will BTC price go?: Cointelegraph
• Bitcoin Mining Difficulty Plunges Over 10% as Price Decline Squeezes Operators: Bitcoin World
• This is Bitcoin’s Shallowest Bear Market—But is the Bottom In?: Decrypt
• a16z crypto leads $355 million raise for Canton developer Digital Asset: The Block
• Morpho Raises $175M in One of DeFi’s Largest-Ever Funding Rounds: The Defiant

Trakx CTIs Performance

Sources: Coingecko and AlphaVantage

*Return of bitcoin is calculated since 01/05/2020, while CTIs performances were calculated since their respective launch date.
**Includes simulated performance.
***The risk signal is determined according to the historical volatility level, the higher the riskier.

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Disclaimers: No Investment Advice. Index returns and statistics are for illustration only. Index returns do not reflect any transaction costs or expenses. Past performance does not guarantee future results. The information provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the newsletter content as such. Trakx.io does not recommend that any cryptocurrency should be bought, sold, or held by you. Readers shall conduct their own due diligence and consult their financial advisors before making any investment decisions.