There have been many ebbs and flows to the cryptocurrency market through the years. One common theme that has attracted both retail and institutional investors is the relationship and intuition that if global central bankers debase fiat currencies with ultra-easy monetary policy, there should be more upward movement of cryptocurrencies. We can see the relationship between M2 money supply year-over-year growth and the price moves in bitcoin and ether (Figure 1). Monetary policy acts with a lag, but sure enough, as M2 growth accelerated, the prices of each moved higher. Then, as M2 growth slowed down, there was downward pressure on bitcoin and ether.

Figure 1: M2 money supply versus Bitcoin and Ether prices

Figure 1: M2 money supply versus Bitcoin and Ether prices
Source: Bloomberg

Taking this a step further, as more rate hikes this year are priced into the SOFR futures curve and as this easy policy is removed, prices in Cryptocurrency futures have moved lower as well. Seen as ‘long duration’ assets given there is little near-term cash flow and most fundamental value is ascribed to future growth, cryptocurrencies should not be expected to do well in an era of rising rates, the same way longer-dated fixed income, credit instruments or high-growth tech stocks should not, either.

Figure 2: SOFR One year forward future prices versus bitcoin and ether prices

Figure 2: SOFR One year forward future prices versus bitcoin and ether prices
Source: Bloomberg

Based on the hawkish speech by FOMC Chairman Powell at Jackson Hole, we should expect even more pressure for the Fed Funds Target Rate to move higher. This has had an inverse correlation with money supply growth. Thus, we should expect money supply growth to continue to slow, putting even more pressure on cryptocurrencies.

Figure 3: Fed Funds Target Rate versus M2 money supply growth

Figure 3: Fed Funds Target Rate versus M2 money supply growth
Source: Bloomberg

Figure 4: Relative value of Bitcoin futures versus Ether futures

Figure 5: Ether futures price term structure

Figure 6: Ether futures daily Ichimoku cloud

Figure 7: Micro Ether options implied volatility term structure

Figure 8: Three month Micro Ether futures (MET) implied volatility

Figure 9: Micro Ether options 25 delta risk reversal

Figure 10: Micro Ether call skew

Figure 11: Micro Ether put skew

Figure 12: Micro Ether opens volume and open interest (as of 8/31/22)

Micro Ether Condor example

Figure 13: Micro Ether condor