Core Strategy

We will discuss changes made to our Core Strategy and Crypto Equities Portfolio at the end of today’s note.

Crypto Equities Portfolio

Wrapping Up a Consequential Week in Macro

We’re wrapping up what was a pivotal week in macro, and by extension, crypto.

At the FOMC meeting on Wednesday, Fed Chair Jay Powell struck a more hawkish tone than markets were expecting, which was immediately reflected in September rate cuts getting priced out, and a pullback in risk assets. However, he didn’t completely shut the door on a September rate cut, and the presence of two dovish dissents (Waller and Bowman) helped markets partially look through the hawkishness, as demonstrated by the rebound into close.

Fast forward to Friday, and we received a major downside surprise in the NFP report. July job gains came in well below expectations, and the prior two months were revised sharply lower.

This created a clear disconnect between Powell’s posture and the hard data, injecting fresh uncertainty into the policy outlook. Risk assets rolled over, while yields dropped sharply, particularly the 2-year, which collapsed as rate cuts were priced back in and investors de-risked.

We also saw renewed small-cap underperformance versus large caps, a rotation away from lower quality assets. This type of capital rotation often precedes underperformance in altcoins. Keep this in mind as we walk through our portfolio adjustments later in this note.

Adding to the headwinds, we are also approaching a seasonally weak period for crypto. As we’ve been highlighting, mid-August through September is historically the worst stretch of the year for the asset class.

Compounding this, the Treasury’s plan to refill its General Account means liquidity conditions are likely to deteriorate into mid-to-late September, another drag on liquidity-sensitive assets like Bitcoin (see our video from Wednesday on the matter).

We are also seeing a negative shift in flows. CME Bitcoin futures open interest has unwound significantly over the past couple of weeks, reflecting a waning appetite for exposure from institutional players.

Spot volumes are also rolling over. Below, we include a chart of aggregate daily volumes across BTC, ETH, and SOL to visualize the slump.

Meanwhile, Bitcoin dominance looks poised for a bounce. While that often reflects BTC outperforming on the way down, it’s worth noting that we might also see BTC lead during a rebound. The chart itself isn’t conclusively bullish or bearish, but it’s something to keep in mind as we assess the current environment.

Our View: The Setup is Challenging, But Friday’s Developments Present a Compelling Bull Case

Broadly, the near-term backdrop for crypto isn’t great: deteriorating liquidity conditions, flows reversing, economic uncertainty, etc. But there is a compelling case for outperformance on the horizon.

On Friday afternoon, the Fed announced that Fed Governor Adriana Kugler had submitted her resignation. Appointed by President Biden, her departure opens up a spot that would presumably be filled by a Trump-aligned appointee, likely someone who favors rate cuts and may be his preferred next Fed Chair.

This development, combined with existing dissents at the Fed, as well as the weak jobs print on Friday, makes a September cut more likely and raises the prospect that Fed independence becomes a key topic for markets heading into year-end.

Zooming out, if we do get cuts in September, it will be in the context of:

1. An economy that’s slowing but still posting decent underlying growth. As evidenced by real sales to private domestic purchasers (this metric is currently preferred over GDP since it removes the volatility of net exports from the equation), growth is slowing but in fine shape.
2. An unemployment rate still sits at a manageable 4.2% due to slowing labor force growth, offsetting slowing jobs growth.
3. And a core PCE that is down from its highs, but still above target at 2.8%.

If the Fed is cutting into an economy that’s still growing, with unemployment (relatively) in check, and inflation still elevated, that’s a macro cocktail that should favor allocation to crypto. Monetary conditions will be easing, allowing credit to expand, while real rates fall (in one way or another). Monetary debasement hedges will certainly be in demand.

Adjusting Our Positioning Accordingly

With that backdrop, we think the best risk-managed approach is not to raise cash, but to overweight Bitcoin in the near term and look for opportunistic ways to rotate back into altcoins as the setup improves. Should the outlook deteriorate further, it will allow us wiggle room to raise cash to avoid a more substantial drawdown (despite the crazy week, BTC is only down ~8% from its highs).

In our Core Strategy portfolio, we’ve increased our allocation to Bitcoin to 80%, while trimming ETH to 10% and SOL to 5%. All remaining altcoins in the portfolio now carry a 1% weight each.

We’ve taken a similar approach in our Crypto Equities portfolio, cutting each equity position in half and reallocating 50% of the portfolio to Bitcoin via a spot ETF.