IN THIS ISSUE

🟧 Jakob on the Built on Bitcoin Podcast
💰 USDh yield recap
🎥 Hermetica Hangout: JRNE
📈 Weekly market review

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Jakob on the Built on Bitcoin Podcast

Jakob Schillinger, our Founder and CEO, sat down with Jacob Brown on the Built on Bitcoin podcast to dive into USDh.

With the Bitcoin builder spirit roaring back, new stablecoins have been flooding into the Bitcoin ecosystem. Jakob breaks down how USDh stands out from the crowd and shares his vision for bringing the Bitcoin Dollar to emerging markets.

Tune in now:

USDh Yield Recap

Bitcoin-backed and yield-packed. This week sUSDh holders just took home a 14% APY.

Stake USDh and let your Bitcoin dollars work for you. 

Hermetica Hangout: JRNE

Get ready for our next Hermetica Hangout on November 12th with JRNE, a trailblazer in integrating luxury jewelry with Bitcoin technology. By embedding NFC chips in their pieces for traceability and authentication, JRNE is revolutionizing the jewelry industry. Follow Hermetica on X and turn on notifications so you don’t miss a single Hermetica Hangout.

JRNE will join us to chat:

Follow the Hermetica X account, and turn on notifications so you don’t miss this one.

Market Review

Trend

The moving averages (MA) in Figure 1 are as follows:

• 7-Day MA: $71,836

• 30-Day MA: $67,487

• 180-Day MA: $63,787

• 360-Day MA: $58,300

• 200-Week MA: $40,653

Price: $76,052

Price has surged well above all moving averages. As the votes came in and Trump’s victory seemed assured, prices moved past all-time highs (ATHs) putting Bitcoin into price discovery. Needless to say, Bitcoin is in a bullish trend and that will remain so as long as it stays above these moving averages.


Mean Reversion Levels

There is a case to be made that if Bitcoin price retests previous ATHs ($74,000) before going higher, then it is a buying opportunity. However, if the trend breakout fails then we estimate support levels to be at: $74,000, $72,000, $70,000, $68,000, $66,000, $64,000, $61,000, $60,000, $55,000, and $49,000. 

Bitcoin Return

• 1 month: 25.40%

• 3 months: 24.80%

• 6 months: 23.54%

• 12 months: 106.66%

Annual returns on Bitcoin remain very high at 106.19% as the recent rally compensates for lower price data falling out of the dataset. Bitcoin’s 1-year trailing return will remain high until October 2023 - February 2024 assuming price doesn’t rally much in the meantime.

Periods of above average returns are typically followed by periods of below average returns and vice versa. Now that we have suffered below average returns for 9 months and old data is falling out of the dataset, Bitcoin returns are likely to be positive.

BTC ETF Flows

Net BTC ETF inflows since last Friday were $1.28 billion.

This was a big week for Bitcoin ETF flows. Average daily flows were $256.58 million. Inflows on the day after the election were $1.37 billion which are the largest daily inflows since the last ATH push in March of this year. However, weekly inflows were about half the previous week since the Friday and Monday before the election saw large outflows.

Bitcoin’s price broke through ATHs this week on the same day net ETF inflows peaked.

Volatility

Bitcoin's implied volatility (DVOL) is currently at 53.83%, placing it at the 34.9th percentile.

DVOL remains low despite the price reaching all-time highs this week. Market makers’ positions typically benefit from a move back toward the center of a long-term range, as their short option positions move farther out of the money. Surprisingly, DVOL has not responded positively to the recent rally, at least after the initial breakout. Deribit market makers likely adopted a "risk-off" stance heading into the election with low gross exposure. As election results unfolded, it became clear at a certain point that Trump was going to win.

The put/call ratio has increased from 0.47 to 0.6 over the past week, indicating a significant rise in open put positions. Market participants appear to have sold puts on election night and may now be selling calls to create strangles around the current price. The net effect is a cratering DVOL despite the range breakout.

Basis Spread

The basis spread, or the price of a futures contract over its spot price, is positive across all maturities. The average spread of all maturities has risen from 11.25% to about 12% in the last week and from 7.5% to the current 12% in only a month.

In the days before the election, market participants were adding to their long positions while prices were not rising, thus increasing systematic leverage. The pressure was released when sidelined traders purchased spot and cleared all the resting sell orders at ATHs, and/or market makers removed their offers from the ask, allowing the price to surpass ATHs. Most traders who took on leverage before the rally are now in profit and looking to take profit in the short term. Profit-taking could push prices down if late buyers don’t step in to keep prices up.

The futures curve is in an inverted contango from the front month (November 29) onward. The front month (November 29) APR is higher than all other maturities except the front week maturity (November 15). The basis falls continuously from the front month (November 29) to the September 2025 expiration in a smooth curve. There is about a 3% difference between the lowest- and highest-yielding maturities. The spread between maturities has been widening (curve steepening) in the last few weeks, although it is not nearly as steep as it was on Tuesday during the election (Figure 6). A steep downward-sloping contango indicates demand for closer maturities is outstripping supply and becoming detached from Bitcoin’s long-run APR. The more detached close maturities become, the more bullish the market is on near-term price action.

Bullish Bitcoin futures curves are typically special inverted contangos (Figure 6), where the front month has the highest APR, which then decreases with each subsequent maturity, though APR remains positive along the entire curve. This is roughly how the curve looks today.

This is the most bullish curve in the short term, as market makers use the front month as a substitute for perps and spot during periods of high demand.

Macro

US Presidential Election
This Tuesday, Donald Trump won his second term as U.S. president. Trump’s favorable stance towards crypto has been a major factor contributing to Bitcoin’s positive performance this week. The correlation between Trump’s odds of winning, as seen on betting markets like the crypto-native prediction platform Polymarket, and Bitcoin prices was strong before the election. When Trump’s odds dropped on October 31, Bitcoin declined alongside and remained suppressed until Tuesday evening, when Bitcoin surged along with Trump’s improving odds. In last week’s newsletter, we mentioned our belief that, regardless of the election outcome, Bitcoin would likely be higher this week. However, after observing the strong correlation between Trump’s odds and Bitcoin prices, we believe we may have underestimated the impact of Trump’s pro-crypto stance on Bitcoin’s performance.

That being said, Trump’s victory is not the only reason Bitcoin rose post-election. Historically, elections have suppressed positive price action and increased volatility in the months leading up to the event. Fund managers often reduce risk ahead of exogenous “events” that could impact their portfolios, which typically means reducing position sizes and holding more cash. This event risk, coupled with fund managers’ reluctance to take excessive risks near year-end, generally makes election years challenging for financial asset performance.

Once the election concluded, however, sidelined capital rushed back into markets, suppressing volatility and elevating prices. Markets appeared to attempt front-running this post-election move at the start of October, only to be thrown off course in the week before the election.

USA (Dollar/USD)
This Thursday, the Federal Reserve held its November FOMC meeting. In that meeting, the Fed dropped short-term interest rates by 25 basis points (bp), in line with market expectations, which had the odds of a 25 bp cut at 85%. Powell did not provide much additional information in the post-FOMC press conference, wisely refusing to answer any questions regarding the recent election or Trump’s future policy.

Last September, the Federal Reserve announced its first 50 bp cut in the Fed Funds Rate, the range of rates at which banks are incentivized to lend to each other overnight. Prediction markets put the odds of a 50 bp cut at 53% and a 25 bp cut at 47% before the announcement. By cutting 50 bp in one meeting rather than the more conservative 25 bp, Powell signaled that he may have made a mistake by not starting the rate-cutting cycle earlier. Typically, rapid rate cuts respond to strong deflationary undercurrents in the economy. These undercurrents may still be present, but two months out from this first cut, asset prices are looking strong. Trump’s second administration may run high fiscal deficits, just like Biden’s outgoing administration, and these deficits, coupled with falling rates, could further support financial asset prices.

PRC (Yuan/CHY)
Other central banks are following the U.S.'s lead and have now begun easing monetary policy. The Chinese government announced a stimulus package on September 24th, which came into effect on October 7th. This package includes a policy-rate cut, mortgage-rate cuts, and 800 billion yuan ($114 billion) in support of the stock market.

Two weeks ago, the Chinese media company Caixin reported that the PRC is considering issuing 6 trillion yuan in central government bonds. The funds raised from these bond sales are expected to stimulate the Chinese economy through consumer handouts, local-government refinancing, and 1 trillion yuan to recapitalize banks.

The Hong Kong stock exchange surged 30% in a month, an impressive rise even by Bitcoin’s standards. This marks a major shift in Chinese monetary and fiscal policy, which has been extremely restrictive since 2020. Consequently, Chinese easing is a substantial boost to global liquidity.

Israel-Iran/Palestine Conflict
The last few months have seen the Israeli-Iran/Palestine conflict escalate. Israel assassinated the entire leadership of Iran’s proxy army, Hezbollah, followed swiftly by conventional HSBM warning shots from Iran against Israeli targets. Israel responded with its own targeted warning shots near Iran’s nuclear enrichment facilities and oil refineries.

Israel carried out the assassination of Hezbollah’s leadership in preparation for a potential invasion of Lebanon, which may commence in a few weeks. Currently, Israel has sent scouts to secure footholds in southern Lebanon. In response to the assassinations, Iran launched a hypersonic ballistic missile (HSBM) strike on Israeli military targets. About 90% of Iran’s HSBMs bypassed Israel's anti-missile defense shield and hit their intended targets. Iran targeted areas near major Israeli military facilities as a “warning shot” in anticipation of a possible formal Israeli invasion of Lebanon. Israel conducted a counterstrike on Iran in response to this missile barrage but avoided hitting critical oil infrastructure, as markets had feared.

With the election over, this conflict will be one to watch for potential negative shocks to global markets. Any escalation of this conflict could positively impact oil prices and increase real inflation in the U.S. economy.

Macro Volatility
S&P 500 implied volatility (VIX) currently stands at just 15.19, while U.S. Treasury implied volatility has fallen to 194.08.

Equity and bond volatility both reached new local highs last week but collapsed after election day, as anticipated. All sidelined market makers who were “risk off” going into the election returned to close the bid/ask spreads in equity and bond markets, thereby collapsing implied volatility across the board.

Sincerely,
The Hermetica Team