Equities Market • Dovish Signal from the Fed: After a highly volatile week in the U.S. market, NY Fed Chair John Williams provided a dovish signal for the December FOMC, saying he sees “room for further adjustment in the near term” for interest rates, which fueled a bullish rebound on Friday. However, the preceding tech rout, which has an outsized effect on SPX prices due to its heavy weighting, was started on the back of persistent profitability concerns. Our view is that the market will not sustain a material rebound until greater advancement is made to quell these investor concerns.

BTC [1] • An Unusual Move: Bitcoin finished its fourth consecutive red week after a -36.1% drawdown, finally finding a local bottom at $80,600. Friday also marked the highest daily trading volume for BTC ETF at $11.5 billion with a net positive flow of $238.4 million, signaling a potential exhaustion of sellers. This drastic move was characterized by a four-standard-deviation shock from the 200-day Moving Average (200D MA), a rare occurrence observed only three times in recent years: June 2022, March 2020, and November 2018. While such a rare technical occurrence improves the odds of a mean reversion, which we already saw over the weekend as BTC touched $88,000, we believe no material improvement to structural BTC flow has yet been made. The compression in Digital Asset Treasury (DAT) stock prices and their market-cap-to-Net-Asset-Value (mNAV) multiple will continue to place financial pressure on these firms. We therefore expect to see more companies forced to sell their crypto holdings to fund share repurchases or meet operational/debt obligations.

BTC [2] • MSTR Faces Possible MSCI Exclusion: Following a -40% Year-to-Date (YTD) drawdown, MSTR now faces possible exclusion from the MSCI USA Index. This action alone would lead to an estimated $2.8 billion in forced passive outflows. Should other major index providers, such as Nasdaq and Russell, follow suit, the cumulative forced selling could conservatively reach $11.6 billion. Worst-Case Contagion: In the event the full $11.6 billion passive flow leaves MSTR, the company’s market-cap-to-Net-Asset-Value (mNAV) multiple could drop to 0.75 . This level of market distress was last observed in May 2022 following the 3AC bankruptcy and the subsequent crypto lending crisis. Given MSTR's significantly higher valuation today (market cap sits at $49 billion, over 24 times the May 2022 level), the firm and CEO Michael Saylor would face unprecedented pressure if the market deterioration continues. Systemic Risk: A forced sale of MSTR's Bitcoin holdings to manage liquidity or execute share repurchases, which MSTR has historically avoided, only selling once for tax-loss harvesting in 2022 and rebuying immediately, would likely trigger a cascading outflow across the entire DAT sector. This action would effectively dismantle the digital asset treasury premium and intensify the existing crypto market stress.

Altcoins • Underwhelming Bounce: While Altcoins rebounded alongside Bitcoin on Friday, the overall performance has been underwhelming. Outperformance remains largely concentrated in DeFi protocols and established L1 tokens, which is a significant departure from the broad risk-on behavior typically seen during market rallies. We believe this dynamic is currently caused by the widespread wealth destruction that occurred on 10/10, alongside the sustained compression of speculative premiums that began earlier this year. We’ve noticed that several profitable protocols have entered a multi-month support range at what we deem a reasonable multiple. Under the pretense of growing crypto adoption, we believe these multiples should eventually converge with those seen in the broader equities market. Therefore, the current range appears attractive for investors with a multi-year outlook on the digital asset space.

Written by @tunaswiminsea