Core Strategy

Our base case assumes that the macro environment will remain accommodative for crypto through year-end. However, in light of recent market action, we remain alert for signs of a local top (not a cycle top). That said, it is difficult to justify a risk-averse stance at this stage and think it is right to lean into this altcoin rally.

Strong Dollar + UST Supply Drove Today’s Weakness

The crypto market’s weakness earlier this week stemmed from broad macro derisking ahead of the CPI release. We anticipated that this setup shifted risk asymmetries to the upside post-CPI, which proved correct as CPI matched expectations, leading to a strong risk asset rally. Fed Funds futures showed increased confidence in a lower path for rates over the coming months.

However, despite this constructive backdrop, yields on the 10Y and 30Y treasuries rose sharply on Wednesday and Thursday, contributing a cross-asset weakness that eventually impacted crypto this afternoon.

While BTC remained resilient through most of the day, it succumbed to the broader macro pressure in the afternoon, erasing its earlier gains.

The rise in yields following CPI has puzzled many, especially given that the print showed housing prices starting to roll over and market confidence solidifying around a Fed rate cut next week.

Some have attributed the yield spike to the hotter-than-expected PPI release. However, this interpretation is likely flawed, as the subcomponents of PPI that feed into PCE, the Fed’s preferred inflation gauge, were lower, prompting analysts to marginally lower PCE forecasts.

PCE Forecasts Pre-PPI:

PCE Forecasts Post-PPI:

Fed Funds futures were unmoved, further indicating a lack of inflationary concern from PPI.

With the above in mind, we believe the rising yields and pressure on risk assets were driven by the increased supply of treasuries brought to market this week. Yesterday’s $39B auction of 10Y notes, which seemed to have gone well, was followed up today by a $22B auction of 30Y bonds.

It is our view that this added supply, in the face of a rising dollar, led to the spike in yields and added weight to risk assets.

The 30Y Treasury auction showed mixed demand. The U.S. Treasury issued $22 billion in 30-year bonds with a 1.2 bps tail—significantly higher than the 0.2 bps average—alongside a slightly below-average bid-to-cover ratio of 2.39x. While domestic demand rose to 19.1% from the 17.8% average, international participation dipped to 66.5% from 67.7%, highlighting the negative impact of a stronger dollar on foreign demand.

The Takeaway

The bright side here is that there are no additional 10Y or 30Y auctions scheduled for the remainder of the year, leaving only a 20Y and 5Y auction (outside of short-dated issuance), which are likely to be less impactful as they are shorter in duration than the 30Y bond.

Further, it is worth noting that this reinforces the treasury’s need to cut interest rates and issue debt at the front end of the yield curve in order to reduce interest expenses and keep the market liquid and stable.

Thus, we are likely to see the Fed continue to be a partner to the treasury and remain dovish, and perhaps start to entertain the cessation of QT. The treasury is also likely to continue to be judicious in their decision on where on the yield curve they will issue new treasury debt. So long as yields and/or the dollar do not get out of control, this should be considered positive for crypto prices.

ETH and DeFi Catalysts: WLFi Purchases

ETH and ETH-adjacent assets demonstrated strong performance today, catalyzed by World Liberty Financial’s (WLFi) asset purchases. WLFi, a DeFi platform linked to President-elect Donald Trump, purchased $10 million in ETH and $1 million each in AAVE and LINK early Thursday.

This drove ETH up 7%, while AAVE and LINK surged 30% (Hopefully, you caught our crypto comments video on Tuesday). WLFi is led by Trump as “chief crypto advocate” and supported by his sons as “web3 ambassadors.”

For context as to why they purchased LINK and AAVE, the platform integrates Chainlink’s pricing and cross-chain tools and plans to deploy an Aave v3 instance, with objectives to attract new users and share revenue with liquidity providers. The purchase of AAVE and LINK were part of the deal between the two ecosystems and is meant to further align incentives.

Market participants are also speculating that WLFi may target additional ETH-adjacent assets like MKR and OP (Core Strategy constituents), both of which saw strong price performance on high volume over the past 24 hours.

While there’s no evidence yet of future integrations with MKR’s ecosystem (aka Sky) or Optimism’s layer-2 network, this activity suggests constructive sentiment around these assets. We will monitor developments closely, but these WLFi purchases are undoubtedly positive for ETH, MKR, OP, and the rest of the ETH ecosystem in the near term.

MicroStrategy (MSTR) and Nasdaq 100 Inclusion

Finally, attention shifts to MicroStrategy (MSTR) as the Nasdaq 100 reconstitution announcement looms tomorrow. While MSTR has underperformed BTC since late November, its risk/reward profile has improved, with its inclusion a major index serving as a significant possible catalyst.

The key risk for exclusion is that it is deemed a financial company by the Index Business Classification (IBC). The Nasdaq 100 only includes non-financial companies so this would preclude MSTR from being added to the index. However, the lack of redesignation thus far suggests inclusion is increasingly likely.

Further, our favorite ETF experts, James Seyffart and Eric Balchunas, believe the odds favor MSTR being added, and we put significant weight on their expertise.

We think it is possible that this triggers a significant rally beginning with Friday’s announcement through the actual rebalancing on 12/23. The major caveat, of course, is that BTC performance remains stellar, which as of now is our base case.

Tickers in this report: BTC -3.34% , XRP -0.45% , SOL -4.30% , ETH -3.18% , HNT -1.91% , STX -11.95% , MKR, BNB, CORE, JTO -2.45% , BONK -3.87% , RAY, MSTR 0.86% , SMLR -3.74% , COIN -7.17% , HOOD -5.65% , MARA -4.77% , RIOT -3.76% , WGMI -4.71% , CLSK -5.06% , WULF -7.12% , IREN -3.41% , CORZ -3.13% , BTDR -8.03% , BTBT -1.29% , HUT -2.76% , HIVE -3.69% , AVAX -4.41% , XRP -0.45% , GDLC, BITW, OP -4.36% , MKR