First Mover: Federal Reserve Soup Now Includes Bitcoin, DeFi, Silver, GameStop
 February 2, 2021  Everything you need to make sense of the crypto markets and beyond Sponsored By:  By the CoinDesk Markets Team Edited by Bradley Keoun If you were forwarded this newsletter and would like to receive it, sign up here. Bitcoin (BTC) +4.6% $35,068 Ether (ETH) +4.2% $1,433 (Price data as of Feb. 2 @11:23 UTC) TODAY:
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PRICE POINT Bitcoin, ether rise while XRP fades and Reddit sours on silver. Bitcoin (BTC) was higher for a second day, pushing toward the upper end of the range between roughly $30,000 and $36,000 where it has traded for the past couple weeks.
Ether (ETH), the second-biggest cryptocurrency, rose toward a new record, potentially fueled by fresh interest in the blockchain's decentralized trading systems amid widespread dismay over the retail-investing platform Robinhood's handling of the GameStop saga. (See Token Watch, below.)
XRP (XRP), whose prices had nearly tripled in the past five days in what appeared to be a coordinated pump by a group of users coordinating on the messaging app Telegram, tumbled 25% on Monday as the effort fizzled. Hey, it's crypto.
In traditional markets, European and Asian shares rose and U.S. stock futures pointed toward a higher open, amid renewed optimism for economic stimulus and the distribution of coronavirus vaccines. GameStop shares lost nearly a third of their value on Monday following last week's 400% short squeeze.
Silver, whose prices had shot up to an eight-year high after a series of posts on Reddit's WallStreetBets forum calling for a "short squeeze," tumbled as some commenters pushed back against the narrative; precious-metals analysts for the lenders HSBC and Commerzbank warned that the rally would be hard to sustain. Gold weakened 0.6% to $1,849 an ounce.
MARKET MOVES How the Fed might balk at new "taper tantrum" – as economy reheats.  As rising populism coincides with lower employment levels, the Fed may choose to let the economy run hot rather than try to taper its $120 billion-a-month of bond purchases. (Bank of America) With the coronavirus vaccine distribution well underway, Wall Street analysts are sketching out what the economy might look like as 2021 unfolds and social-distancing measures recede.
The short answer is that activity is set to heat up, which could also provide the first real test of the hidden inflationary pressures that might have built up over the past year. Whatever happens will likely prove crucial for the bitcoin market, since the cryptocurrency has become one of the most popular ways for big investors to bet on the likelihood of rising prices or dollar debasement.
The U.S. Congressional Budget Office projected on Monday that gross domestic product will expand by 3.7% this year, after a 2.5% contraction in 2020. But Bank of America, the second-biggest U.S. lender, is even more optimistic, recently boosting its forecast for this year's growth to 6%, from 4.5% at the start of the year.
A key question for the inflation-watchers, of course, is just how much stimulus money will be pumped into the economy by the U.S. government and the Federal Reserve.
President Joe Biden has proposed a $1.9 trillion stimulus bill, but a group of senators from the opposition Republican party on Monday released details of a $618 billion proposal they argue is more appropriate. Bank of America's analysts assume the package will end up around $1 trillion.
Why it matters is that as Americans start to get out and about, a surge in consumer spending looks likely. The Bank of America analysts estimate there's already some $1.6 trillion of excess savings that might start to trickle into the economy.
"The jolt from stimulus, the support of excess savings and the green light from lower virus cases should unleash pent-up consumer spending," the Bank of America economists wrote. "Stronger growth means a lower unemployment rate and greater inflation pressure."
That outlook raises the question of how the Fed might respond, with Fed Chair Jerome Powell stating last week that it's "too early to be talking about dates" for tapering the central bank's $120-billion-a-month of bond purchases – funded via money-printing – that are currently ongoing to provide stimulus to financial markets.
By the middle of this year, if the economy is recovering quickly, Powell and his colleagues might find it harder to characterize any talk of tapering as still too soon. Because these are typically well-telegraphed affairs, the actual tapering might start six to seven months after that. Call it early 2022.
"We believe the Fed will have difficulty justifying persistently large asset purchases in the face of a sustainable decrease in Covid cases, economic overheating, and frothy asset prices," according to Bank of America.
On the other hand, the Fed might flinch.
"We can envision a scenario whereby the Fed signals an intention to taper/starts tapering, markets react negatively, and the Fed finds that they need to continue purchasing or extend the duration of their purchases in order to preserve market functioning," according to Bank of America.
It's that latter scenario – or even just the prospect of it – that might drive bitcoin prices a lot higher. Based on the reluctance of central bankers to withdraw stimulus, not to mention the market lurches late last year when a new U.S. stimulus bill seemed in doubt, the scenario isn't all that implausible. - Bradley Keoun
BITCOIN WATCH Dollar strength looks daunting despite signs of fresh investor demand. Bitcoin's ongoing range play between $30,000 and $40,000 could end with a bullish breakout as demand from investors continues to outstrip new supplies of the cryptocurrency.
In 2021 so far, around 26,000 new bitcoins have been produced by miners on the Bitcoin blockchain, data provider Glassnode said in a weekly report. Yet in the same period, the Grayscale Bitcoin Trust has acquired over 40,000 BTC.
In another bullish indicator, the number of coins held on exchange addresses continues to slide, interpreted as a sign of waning interest from sellers. The balance of bitcoin held across all exchanges fell to a 2.5-year low of 2,349,040 on Monday, according to Glassnode.
On the bearish side, a stronger dollar could play spoilsport to any push higher. The U.S. Dollar Index (DXY), which tracks the greenback's value against major currencies, is looking north, with price charts showing a major bullish pattern known an "inverse head-and-shoulders breakout."
"If a bullish trend develops from DXY's latest breakout, it could be a problem for bitcoin," trader and analyst Alex Kruger told CoinDesk.
TOKEN WATCH Exchange coins, DeFi tokens get fresh look after Robinhood blowback.  Monthly decentralized exchange volume since January 2019. (Dune Analytics, CoinGecko, CoinDesk Research) The spillover to digital markets from the past week's GameStop saga has taken on a new form: Soaring demand for digital tokens associated with cryptocurrency exchanges and the arcane but fast-growing arena of decentralized finance, known as DeFi, which could provide an alternative to Wall Street and traditional trading platforms.
"It seems investors are looking for the next trade to cycle through," Matt Blom, head of sales and trading for the cryptocurrency exchange firm EQUOS, wrote Tuesday in a note to clients.
The exchange Binance's in-house BNB token hit a new all-time high on Monday, just days after rival FTX's FTT token logged a new record, CoinDesk's Muyao Shen reported.
Prices have also hit new highs for tokens from decentralized exchanges, which are essentially just automated, blockchain-based software protocols that can be used to trade digital assets. Uniswap's UNI and SushiSwap's SUSHI both saw big price jumps – a dynamic that might reflect retail investors' growing concerns with centralized trading platforms amid widespread anger over Robinhood's trading suspensions last week. Trading volumes on the decentralized exchanges,, hit a record above $50 billion in January, CoinDesk's Zack Voell reported.
Ether, the native blockchain of the Ethereum blockchain, where much of the DeFi development is taking place, has pushed back toward a record high above $1,400.
"Decentralized trading, decentralized lending, decentralized insurance, decentralized everything starts to make a lot more sense in light of what is happening today in the traditional financial system," Jeff Dorman, chief investment officer of the cryptocurrency-focused Arca Funds, wrote Monday in his weekly newsletter.
WHAT'S HOT Coinbase looks to Nasdaq, Gemini hunts for deposits.
ANALOGS Robinhood raises $3.4B, IMF takes stock of $197T pre-pandemic debt.
 IMF chart shows how public and private debt levels rose during the 2008 financial crisis and never returned to their prior levels, even before the pandemic hit in late 2019. (IMF)
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