Core Strategy

Crypto Equities Portfolio

Context for This Week is Important

It was a tough week for crypto. BTC continued to grind lower while alts were hit hard, the result of several overlapping headwinds.

• The weakness started last Friday into monthly options expiry and was followed by a sharp leverage wipe on Sunday. Thin liquidity, combined with capital chasing new coins such as ASTER and AVNT, helped trigger the move.
• Equities also posted their first negative week in nearly two months, compounding pressure on crypto.
• Not to mention negative seasonality trends, weaker liquidity conditions, and a neutral DXY added to the unfavorable backdrop.
• Intramonth flows may have also played a role in the weakness. Since BTC ETFs launched, returns have skewed to the front half of each month. Median daily returns since January 2024 highlight the growing impact of systematic flows. Quarter-end timing after a strong run for crypto likely added further profit taking.

Despite this, the setup for Q4 remains constructive, as I will rehash below. If anything, weathering such a storm should be encouraging for bulls into a new quarter.

Tactical View: Need BTC to Start to Participate to Add Confidence in Market Turnaround

Friday brought some positive signs with a strong altcoin rebound and the Coinbase/Binance spread moving positive for ETH and SOL, signaling strong U.S. demand.

One lingering concern is that BTC itself has not shown the same Coinbase premium. As recent cycles have shown, sustained alt rallies require meaningful BTC participation.

Growth Data Has Reaffirmed Q4 Outlook

To reassert my view on Q4 and the broader macro backdrop, I continue to believe the setup for crypto is sound.

The current administration has laid out several key objectives:

1. Rebalance trade
2. Reduce fiscal deficits
3. Lower the debt-to-GDP ratio

Tariffs were implemented to collect tax receipts on U.S. consumption of foreign goods. All else equal, they can help narrow trade imbalances and reduce fiscal deficits by raising nominal spending, but they also weigh on real activity, with disproportionate effects on lower-income households that are more sensitive to price increases. Some of these dynamics are already evident in YTD data.

The circularity of tariffs as a deficit-reduction tool is that tax receipts depend on sustained nominal economic growth. If growth falters, trade volumes and tariff receipts decline, undercutting their effectiveness.

There are a few ways to counter this drag on real growth: productivity gains, an increase in labor supply, and/or pro-growth monetary policy.

Productivity growth is possible through advances in AI and pro-business reforms, but these drivers are slower-moving and less directly under an administration’s control. Expanding labor supply would help ease inflationary pressures, but with immigration flows reversing, this path appears politically and practically constrained. That leaves monetary policy as the most immediate lever, with the administration pushing for more accommodative settings and accepting above-trend inflation as the trade-off for sustaining growth.

An additional byproduct of tariff-induced uncertainty is its impact on the labor market: firms tend to slow hiring, while consumers adopt a more cautious stance. This dynamic pulls the Fed’s dual mandate into conflict. Easier monetary policy is also intuitively dollar-negative, and when combined with incremental diversification away from U.S. assets by global trade partners, the conditions for a weaker DXY fall into place.

This is the backdrop we are in. While risks remain, the likely outcome is (1) rate cuts into a slowing but still solid economy, and (2) prolonged dollar weakness, both of which are constructive for earnings and for liquidity-sensitive assets such as crypto.

Against this backdrop, I see recent growth-positive data somewhat differently from the prevailing market interpretation that “good news is bad news.” Instead, I view it as supportive:

1. The Fed has been clear that data has shifted their focus more toward the labor side of the labor/inflation dual mandate
2. Markets still price two cuts for the remainder of this year
3. It would take a sustained run of strong labor data and hot inflation prints to shift the Fed back toward hawkishness, particularly given Powell’s acknowledgement that a near-term inflation uptick is likely “one-time” in nature
4. The influence of Trump-appointed doves, alongside Powell’s looming exit as Fed Chair, makes a rapid pivot back to hawkishness even less likely
5. Perhaps most importantly, based on the fiscal and trade constraints outlined above, the room for the Fed to be hawkish without shifting the economy into a recession is limited

These dynamics help explain why gold has performed so well year-to-date, and particularly in recent weeks. Gold is front-running this macro setup. It tends to move first, as it does not carry the same risk premium as other liquidity-sensitive assets such as crypto. Historically, once gold begins to consolidate, BTC has played catch-up, a rotation we have seen multiple times this cycle.

Some may argue that capital is already far out on the risk curve given equity strength, but much of the performance in equities is tied to the secular growth trend in AI and AI infrastructure. These areas are somewhat insulated from the macro dynamics discussed above. The equal-weighted S&P underscores this point. The broader equity market has not participated in the recent leg higher, and this relative lack of breadth coincides with BTC’s underperformance.

Seasonality Turning Positive

It is also worth noting that seasonality trends for crypto are about to turn favorable. Seasonality is often viewed with skepticism, as it lacks a clear causal mechanism, but when patterns demonstrate consistency over time, they warrant attention.

Since 2016, BTC’s performance has historically lagged from mid-August through September. October, now just days away, has been Bitcoin’s strongest month on average, with positive seasonal trends typically extending through year-end.

Fed Liquidity Headwinds to Fade

Beyond seasonality, another factor turning more constructive is the easing of liquidity headwinds. While not the only driver, central bank liquidity remains an important influence on the broader environment for crypto.

After the debt ceiling was raised in July, Q3 was set up as a difficult period for liquidity. Reserves were siphoned from the private sector to rebuild the Treasury General Account (TGA), which had been drawn down earlier in the year. At the same time, the reverse repo facility (RRP), which had acted as a buffer to absorb new bill issuance, was rapidly depleted. Notably, BTC peaked almost exactly as the RRP balance fell below $50B.

Now, with the TGA nearly full, that headwind is likely to fade. This should not be viewed as a fresh injection of liquidity into the economy, but it does remove an important drag on liquidity-sensitive assets such as crypto.