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Dancing on the Ceiling In recent days, a variety of technology stocks have surged as a result of robust earnings reports. Microsoft's impressive cloud and AI performance have been particularly noteworthy, leading to a ~8% increase in its stock value. The company was on the verge of breaking its single-day record for market capitalization growth. In contrast, cryptocurrency markets have experienced a far more substantial upswing than equities over the past few days. Bitcoin has once again spearheaded the crypto rally, as expectations for future rate hikes dropped substantially due to continuing cracks in the regional banking system. However, this time, the change in the narrative was triggered by a larger-than-anticipated decline in deposits for First Republic (FRC), which has inflicted severe damage on FRC’s balance sheet and will be difficult to overcome. On Tuesday, FRC's stock plunged by about 49%, followed by another 25% drop on Wednesday morning. In other news, the ongoing U.S. debt ceiling crisis presents a compelling and potentially precarious situation that warrants close attention. Earlier in January, the U.S. government reached its borrowing limit and has since relied on "extraordinary measures" to manage its cash flow due to the absence of new treasury issuances. As a result, the Treasury's cash balance has been steadily decreasing this year, and financial markets are becoming increasingly concerned as funds are expected to run out by June, potentially leading the government to default on its debt obligations. This scenario merits close monitoring, as evidence suggests that a technical default could trigger contagion effects, which, in a worst-case scenario, could potentially double the U.S. unemployment rate to around 7%. Furthermore, a divided Congress will make raising the debt ceiling particularly challenging for Democrats unless compromises are reached. Market apprehensions are evident in soaring credit default swap spreads—an indicator of the cost to protect against a U.S. government default—as well as the spread between 1-month and 3-month Treasury Bill yields (approximately 3.4% vs around 5.1%) widening. Recently investors have sought 1-month Treasury Bills that mature before the predicted exhaustion of government funds, causing the price of 1-month Bills to rise and their yield to fall. From a technical standpoint, Bitcoin has experienced a minor pullback from its local top of around HKEX:31 ,000 and has since tested the 50-day moving average before regaining some bullish momentum. In the event of another pullback, traders will likely watch for the 50-day moving average to serve as support once again. MA9 and MA50 are also beginning to converge, with a potential crossing of MA9 below MA50 imminent. This would be a bearish signal. When MA9 previously crossed above MA50, Bitcoin gained significant momentum, underscoring the importance of a potential crossing of MA9 below MA50. Looking ahead, key dates to monitor include May 3rd and 4th, when the upcoming FOMC meeting is scheduled. The Federal Reserve has already hinted at a further 25 basis point hike, which the market has likely priced in. Nonetheless, exercising caution is advisable, as the Fed may take unexpected actions during this meeting.
BINANCE:BTCUSD
by Coinrule
QE or QT?Last week, the Federal Reserve (Fed) went ahead with the 25bps hike that many expected, causing a spike in the U.S. dollar and a temporary halt to the rally that equities and risk-on assets were experiencing. This rate hike has come under scrutiny from market analysts. In the past two weeks since Silicon Valley Bank ( SVB ) and Silvergate Capital collapsed, there has been a multi-billion dollar capital outflow from financial institutions. The primary driver of this depositor flight comes from individuals and asset managers moving capital from low-interest savings accounts to high-interest money markets in the form of treasury bills which pay upwards of 4%. In the week of the collapse of SVB, low-risk investment vehicles that invest money in short-term government and corporate debt saw net inflows of approximately $121 billion. This 25bps hike will increase the yield of newly issued treasury bonds (worsening depositor flight) and cause the value of existing bonds with lower yields to decrease. Ultimately, this initiated the collapse of SVB as the dollar value of the existing treasury bonds that the bank held as collateral fell below legally required levels, resulting in the bank announcing that they needed to raise capital, which culminated in a run on the bank’s reserves. Hence this rate hike further increases systemic risk within the market, displayed by the price of credit default swaps (the cost to insure bondholders against a default) going vertical for many banks within the economy. Consequently, it seems strange to some analysts that the Fed didn’t at least pause rate hikes after the latest FOMC, especially considering Powell stated that he considered pausing in the days leading up to the meeting. After SVB began to unwind, the Fed announced the Bank Term Funding Program (BTFP) in order to try and limit the contagion within the economy. The scheme provides eligible depository institutions with liquidity in return for posting collateral such as under-water treasuries and mortgage-backed securities. Some market participants initially interpreted this as the Fed commencing another round of quantitative easing ( QE ); however, the actual mechanism is very important here. QE is the Fed’s way of injecting the most liquidity into the economy. If the Fed were actively engaging in this, the medium-term outlook would become much more bullish. BTFP collateral posted to the Fed, at least for now, must be swapped back to the bank at the end of the term and comes at a cost. So without going deep into the details, the impact on liquidity is quite different from actual QE. In reality, the recent banking crisis and the Fed’s response display that, in the short term, a pivot to accommodative monetary policy is for now ruled out. The BTFP scheme perfectly displays how monetary authorities will utilise all available measures to preserve stability during further tightening, likely meaning that a hard landing is now firmly on the cards. From a technical perspective, the weekly Bitcoin chart looks good. The bullish momentum from MA9 crossing above MA50 has played out as Bitcoin has rallied towards the key psychological resistance of $30K. Bulls will hope for a weekly close above the $29K resistance level, which should ignite the rally to $30K and beyond. Should this bullish momentum break down, the market will likely test the $24 - $25K support range. A fall through this would likely result in a breakdown towards the $21K - $22K supply zone, where there are presumably a lot of unfilled longs that weren’t filled before the current rally. The fact that the relative Strength Index is hovering around overbought levels indicates that the market could be primed for a reversal and supports the bearish scenario. As we advance, the U.S. CPI data release on the 12th of April will have a bearing on short-term market direction. Soft CPI figures will provide risk-on assets such as crypto with bullish momentum while hurting the U.S. Dollar and yields. Again, volatility will be high around this time, so caution should be exercised, most notably in leveraged positions.
by Coinrule
Sweet Divergence Since the start of January, most leading macro markets have experienced a reversal around their 38.2% Fibonacci retracement levels. However, BTC has shown resilience and fought the cross-asset sell-off. This divergence is likely driven by the fact that there has been over $1 trillion in net liquidity added to the market since the bottom in October, primarily driven by the People's Bank of China and the Bank of Japan, helping to off-set the damage the Fed is doing to risk-on assets such as the crypto market. Considering BTC tends to be somewhat of a liquidity sponge, it tends to outperform other assets when there is a boost in liquidity. However, the jury is still out on whether BTC's performance indicates the end of the bear market for crypto or a temporary outlier. Despite BTC's recent outperformance, it's still catching up to significant rallies in other markets between Q4 2022 and Q1 2023. An important note is that the S&P 500 has never seen a bear market bottom before the unemployment rate began to rise, and this is yet to be the case. Furthermore, the yield curve is currently the most deeply inverted it has been since the 1980s, ultimately signalling that long-term interest rates are lower than short-term interest rates. An inverted yield curve has been a perfect predictor of the last seven recessions since 1960, ultimately implying that it's likely the market isn't out of the woods yet. When yields and risk assets diverge, historical patterns suggest that other assets quickly catch up to the sell-off. Although yields have moved exponentially since last month's CPI data, markets expect them to stabilize at last year's high levels. It would likely take very hot inflation data and a significant rate hike following the next FOMC meeting on the 22nd of March to trigger the next leg lower for risk assets. Until then, BTC is expected to continue ranging, waiting for its next cue. In other news, a recent article by Forbes threw Binance into the fire after they released an alleged hit piece on the exchange and its founder, Changpeng Zhao (CZ). The article drew parallels between the exchange and the now-defunct FTX after Binance allegedly transferred $1.8 billion to hedge funds such as Tron, Amber Group and Alameda Research between August and December 2022. However, CZ then hit back at this, arguing that the article referred to some old transactions from Binance's clients. He then reiterated that the exchange always holds user funds 1:1 and that this can be referenced through Binance's proof-of-reserve system. From a technical perspective, it is clear from the weekly chart that Bitcoin has been trading between two significant demand and supply zones. The bulls will be hoping for a weekly close above the $25,000 supply zone, which would light the way towards the massive $28,800 to $30,000 resistance, the Head and Shoulders neckline. An important contributor to the bullish scenario is that EMA20 and EMA200 are beginning to converge, with a potential cross in the coming weeks. The importance of this should be considered, as EMA20 crossing below EMA200 back in September accurately predicted short-term market direction. Bears will rejoice at the fact that many traders believe that a final Elliot Wave 5 sell-off is to come. This would likely result in a break below the $15,500 - $16,500 November market bottom. As we advance, all eyes will be on the CPI data releases. U.S. CPI data on the 14th will likely dictate the outcome of the rate decision of the FOMC on the 22nd. Volatility will be high around these dates, so caution should certainly be exercised, especially in leveraged positions.
by Coinrule
2
Fight or Flight?On February 1st, the Federal Reserve (Fed) announced a widely-expected 25bps rate hike. This was the rallying cry for the current market rally to continue. Is this confidence warranted? An interesting note is that the FOMC meeting minutes and the associated press conference appeared contradictory in nature because there was not a straightforward hawkish or dovish narrative across both. The statement was hawkish. Meanwhile, Fed Chairman Powell’s language in the press conference was remarkably dovish, describing the disinflation process as having started and as "encouraging and gratifying". This was the point that markets took as the signal to continue the recent rally. Precious metals, equities, and risk assets have all seen significant post-meeting relief. The first innings of a recession always appear to be somewhat of a soft landing in which inflation and growth begin to slow gradually. Yesterday’s meeting echoed the idea that recent indicators point to a modest increase in spending and that inflation has eased, precisely what the first innings of a recession would predict. As markets, potentially shortsightedly, adopt the soft landing narrative, the Fed’s lack of pushback against easier financial conditions added fuel to the fire. Given this, it is doubtful that markets will stop rallying until one of two cases occurs: First, if data comes in hot, it potentially frightens markets into thinking the Fed will turn back hawkish and raise rates more than the recently observed 25bps hike. The second scenario is the other extreme. Should data start coming in highly recessionary with lower inflation and weak growth, this will eliminate all believers in the soft landing narrative, thus halting the rally. However, at present, it looks like the market rally of 2023 could continue until either of these scenarios happen. An important thing to note is that whenever inflation has exceeded 5% in the past, it has never come back down without the Federal Funds Rate exceeding the rate of CPI inflation. Considering the Federal Funds Rate is currently between 4.5% and 4.75% whilst CPI inflation is at 6.5%, more rate hikes are on the horizon unless data comes in highly recessionary. CPI data on the 14th of February will provide significant insight into whether or not the Fed will follow the likes of the European Central Bank & Bank of England and go with a 50bps hike rather than a 25bps hike. Another important thing to note is that Apple , Amazon , and Alphabet (the parent company of Google ) all missed earnings last night. If three of the world's largest companies missed earnings, it does not breed confidence for economic hopes of avoiding a recession. One thing seems certain, the S&P500 is likely to take a hit when the NYSE opens later today.
Editors' picks
by Coinrule
23
The Revival In the past two weeks, the market has seen a significant increase in bullish momentum leading many to believe that the proposed ‘echo bubble’ that many predicted for 2023 may indeed play out. It was initially unclear what was driving this momentum but the market gaining confidence that CPI will continue to decrease, as well as a temporary liquidity increase thanks to the ongoing US Debt Ceiling increase crisis, seem to be important factors. The U.S. CPI data published on the 12th of February was in line with expectations with a 0.1% reduction. There is evidence to suggest that if CPI inflation continues to fall in 0.1% increments M/M, and if recessionary predictions play out as expected, then the FED could potentially hit its 2% Y/Y target as soon as May. An important thing to note is that this was the last CPI print that will be calculated based on the current methodology that considers two years of data. February’s data will be calculated on a single year of data meaning that future 2023 CPI prints will be based on consumption in 2021 alone. Considering 2021 data instead of 2020 and 2021 will likely bring the upcoming CPI numbers down leading analysts to believe that the FED is indeed engineering a pivot. One event that could temporarily put a halt to the rally is that Genesis, the parent company of Grayscale, is said to be planning to apply for chapter 11 bankruptcy as soon as this week. It’s worth noting that the discount on $GBTC has widened to -43% over recent days after it had climbed back up to -36.5% following the December lows. Many analysts feel that the market already has this event priced in, however, it is certainly something to keep an eye on. From a technical perspective, Bitcoin broke out from the falling wedge pattern and ripped above $20,000. Bulls will be hoping for a weekly close above the $21,000 resistance which would light the way towards $28,700 which is the prior head and shoulders neckline and 61.8% Fibonacci retracement level of the $3,782 2020 low to $69,000 2021 high. Bears will support the prediction of Elliot Wave theory that the observed rally is part of a Wave 4 correction. This means the market could potentially still have a Wave 5 selloff to come which would test the lows. The above Bitcoin weekly chart shows that the bullish momentum the market is experiencing in 2023 lies within the boundaries of Wave 4 meaning that the market may not be not out of the woods yet. An important event to watch in the coming weeks is the FOMC meeting on the 1st of February. Following this meeting, the FED will release projections for the Federal Funds Rate in the coming quarters which will have a significant bearing on the short-run market direction. Volatility will be high around this time and caution should be exercised when entering positions.
by Coinrule
1
Powell Time The past two weeks have been relatively calm as Bitcoin traded in the $16,000 to $17,500 range. It appeared that the contagion effects from the FTX collapse were slowly starting to fade, however in the past few days more information has surfaced surrounding Grayscale Bitcoin Trust (GBTC) and its potential insolvency. On Wednesday GBTC closed down -7.42%, giving prospective buyers a record 43% discount on Bitcoin. Many are hypothesising that a large institutional investor is dumping shares of the ETF in order to patch a hole in their balance sheet and maintain solvency. After all, it has since been revealed that many institutional players, such as Grayscale’s parent company (Digital Currency Group), had significant exposure to FTX and its associated companies. You would assume that investors would flock to buy at these discounted levels, however Grayscale is currently being sued by hedge fund Fir Tree in order to investigate potential mismanagement and conflicts of interest. It’s likely that many investors will wait for the outcome of this litigation before making a definitive decision. In other news, Jerome Powell, chair of the Federal Reserve (Fed), gave a speech on 30th of November where he detailed that a 50 bps rate hike was coming. Interestingly, this immediately caused a surge in risk assets and equities, the opposite from what macroeconomic theory would predict. This is likely due to markets reacting to the higher probability of a “pause” (a period where a central bank holds rates constant to assess if and how its policies are working) based on Powell indicating that future rate hikes might be less significant. However, it appears that the market overreacted to this news as the gain in equities following the speech has since been wiped out as the S&P500 has corrected to the levels it was at prior to the speech. From a technical perspective, bears will be hoping for a break below the $15,500 support level which would likely bring new market lows not seen since 2020. This support has held since our last market update however it is yet to be retested. Additionally, since our last update where the MACD initially crossed its signal line, the short term upwards momentum played out and the histogram has remained bullish. Another important point to note is that the Money Flow Index (MFI) has been trending upwards since it bounced off oversold levels in early November. If this trend continues to play out and the oscillator moves towards 80, traders may look to exit long positions and start to look for short entries. The two key events to watch in the coming weeks are the December 13th announcement on U.S CPI inflation and the Federal Reserve's December 14th announcement on rates. If inflation comes in soft, it’s likely that risk assets and equities markets will see at least a short term increase in bullish momentum. Inflation figures will likely dictate the Fed's decision on rates the following day and will determine if they stick to the 50 bps hike that Powell hinted at. These two events will have a major bearing on short run market direction. However, if GBTC continues to capitulate and the fund does indeed unwind, the short term future will be bleak for crypto.
by Coinrule
1
Contagion?The past two weeks have been filled with more pain as the contagion effects from FTX have continued to spread and the market has started to get more information on the events that culminated in the FTX scandal. On November 11th, Sam Bankman Fried (SBF) stepped down as the CEO of FTX. Shortly after, John Ray III was appointed as the new CEO, a Chicago-based lawyer who has previously served as a restructuring officer in multiple high profile bankruptcy cases. Since being appointed, John has stated “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” A harrowing statement from an individual who handled the restructuring of Enron, a company that used SPVs to hide $38 billion in debt. The first part of the bankruptcy filing details how FTX was structured and outlines four groups of subsidiary businesses: FTX US, Alameda Research, FTX Ventures, and FTX’s overseas businesses. Shockingly, the FTX US balance sheet showed that the company allegedly had just $316,000 in total liabilities, a number that couldn’t possibly be correct considering the exchange held billions of dollars in users assets which would qualify as liabilities. Surprisingly, these deposits have seemingly been expelled from the balance sheet report. The reason for this is likely because the balance sheet report was provided by SBF himself and was unaudited, deplorable for a company that was registered with the SEC and had custody of user funds. As for FTX, the (most likely) cooked books claim that FTX held over $2.258 billion in total assets versus less than $500,000 in liabilities, quite literally impossible for a company that currently has a multibillion dollar blackhole in user funds. Even more surprisingly, only Alameda Research (one of the four FTX subsidiaries) had their accounts frozen in the two weeks following the collapse. In short, this could have allowed individuals connected with these subsidiaries to liquidate everything on their books to ensure the 'correct' individuals get paid whilst leaving the everyday user empty handed. As the contagion was threatening to spread and exchanges were coming under increasing pressure, the market has been closely watching what will happen to Digital Currency Group and its subsidiaries Genesis and the Grayscale Bitcoin Trust (GBTC). Genesis, among the largest OTC desks and lenders in the space, seems under major pressure after rumours circulated that they were trying to raise $1B to avoid bankruptcy. Furthermore, GBTC might still unwind potentially releasing hundreds of millions of BTC and ETH into the market. Considering that GBTC owns 640K BTC (3.3% of the current circulating supply) the implications for the market could be immense. To contain this ongoing ‘bank-run’, many exchanges are moving to implement “Merkle-tree proof of reserves”, a cryptography concept that would allow for real-time monitoring of the quality of exchange reserves and the liquidity buffers they have. Although many exchanges are now moving to implement this voluntarily, when new regulation follows the FTX scandal, it’s likely that displaying proof of reserves will be a fundamental requirement of all centralised exchanges. So far, despite rumours about various high-profile exchanges spreading, no other player has been dragged under in the market turmoil. From a technical perspective, the price action of the bitcoin daily chart will be satisfying viewing for the bears after the price depreciated significantly following the collapse. Bulls will find some confidence in the MACD indicator crossing above its signal line which could be evidence of a short-term change in sentiment. One important level that has so far held up is the $15,500 support. If this level is lost, the desolate market that’s been ever-present the past two weeks could worsen. Another important point to note is that the Bollinger Bands indicator currently has a large spread thereby implying volatility is high, a welcome sight for scalpers. We will truly know the extent of the scandal once more information comes to light following the FTX bankruptcy filing. Until then, the extent of the fallout will most likely depend on the interconnectedness between FTX and other market participants.
by Coinrule
1
Time for Change?The past two weeks have been another two weeks of low volatility, making October the month with the lowest volatility for some time. However, in the past few days, the upper and lower Bollinger Bands have begun to diverge, implying volatility is starting to pick up. Many active traders will be happy to see a change from the sideways market we have experienced in recent weeks. From a technical point of view, the bulls will rejoice at the fact that we finally flipped the $20,500 resistance to support and have since retested that level. Bulls will now have their eyes on the $22,800 level which they will be hoping to flip in order to light the way towards $24,000. However, a fall below the $20,500 level would see a return to the range we previously escaped from. The bears will be hoping to see a break below the $18,200 support level which would likely result in new yearly lows. Another important indicator to keep an eye on is the MACD. At present, there is a very small spread between the MACD line and the signal line. If the MACD crosses below the signal line, this would provide support to the idea that we are heading back towards the $18,000-$20,500 range. In other news, the resignation of UK Prime Minister Liz Truss seems to have restored some confidence in the markets. Consequently, the Pound has gained some serious ground back against the dollar. It now trades at around $1.16, the highest level since the disastrous ‘mini-budget’ was announced. With the newly elected Prime Minister Rishi Sunak having a background in banking and finance, bulls will be hoping he has a firm grasp on the importance of stabilising inflation and the economy. If his government can do this, we could be poised for a more bullish market outlook in the coming months. Additionally, UK regulators have been urged to ease collateral requirements to avoid a pension-fund blow-up. Market participants will be keeping a close eye on this as the collapse of a large UK pension fund would send shock waves throughout the entire financial system and would signify a bleak short-term outlook for the economy. Either way, it’s likely that in the coming weeks and months, the outcome of key macro events will dictate the direction of the market. Whether it's a return to up-only or more chaos, things are really starting to heat up.
by Coinrule
2
Between BlackRock and a TornadoThe connection between traditional finance and crypto is more closely linked than ever before as institutional demand for our treasured asset class rises rapidly. Last week we saw BlackRock, the world’s largest asset manager with approximately $8.5 billion under management, endorse bitcoin by offering a spot bitcoin private trust to their U.S-based investors. Being the largest asset manager in the world, it could be likely that all of their competitors will quickly follow suit to ensure they also offer the capability to their clients. To provide additional access, BlackRock also partnered with Coinbase to provide infrastructure for their institutional clients to invest in crypto assets. BlackRock’s industry leading portfolio management software, Aladdin, is used by over 200 of the world’s largest institutional investors and manages over $21 trillion in assets. Aladdin and Coinbase will combine forces to offer a seamless portfolio management system for crypto, with Coinbase handling the execution and custody of the assets whilst Aladdin will handle the portfolio management aspects all through the Aladdin interface. It could be argued this is a major step in proving the legitimacy of bitcoin, especially with BlackRock being the main influencer on ESG investing. It additionally showcases the demand for exposure to the asset from BlackRock’s institutional clients. Tornado Cash – the popular mixing service that enables on-chain privacy – came under heavy fire last week from governments globally. The US Treasury Department’s Office of Foreign Asset Control (OFAC) sanctioned the protocol – leading to any American using the site breaking sanction laws. The sanction was argued due to the allegedly high number of illicit funds being laundered through the protocol and to prevent hacker groups, such as the Lazarus Group, from laundering stolen crypto funds. Dutch authorities arrested one of the protocol’s developers and have stated they will take further action against DAOs that may enable money laundering. Could this be the start of the war on Decentralised Finance (DeFi)? The implications of being linked to, or seen facilitating on-chain activity, with a wallet in connection with Tornado Cash have also prompted “decentralised” protocols to ban addresses from using their services to remain compliant with regulatory bodies. Due to the transparency and accessibility of crypto, any individual can send anything to any wallet address, with the owner unable to stop their wallet from receiving transactions. The banning of Tornado Cash sparked an onslaught of withdrawals from the protocol to famous personas’ wallets, such as Jimmy Fallon and Dave Chappelle, leading to them having broken sanctions laws and being punishable for up to 30 years in prison… technically speaking. Aave, the popular lending and borrowing protocol, banned the wallet of the founder of Tron, Justin Sun, as he was sent funds from Tornado Cash by the same unknown entity. The act of Aave banning wallet addresses has created a stir in the crypto community, with many individuals doubting how decentralised these protocols actually are with their ability to intervene and ban wallet addresses. Some commentators have argued the act of government submission completely contradicts the ethos of crypto and DeFi. Coin Centre, the crypto privacy advocacy group, has stated they will challenge the sanction as it “exceeds statutory authority”. Ever since crypto began, nation-states using crypto for their own benefit was seen as the final boss before global adoption. Last week Iran funded an import worth $10 million using crypto. Their usage has been instigated due to them being the second most sanctioned country in the world behind Russia – limiting their ability to trade with other nations using the existing banking systems. One of the country’s ministers also stated that “By the end of September, the use of cryptocurrencies and smart contracts will be widely used in foreign trade with target countries.” The increased usage of crypto from states like Iran could be seen as a double-edged sword. It demonstrates the key tenets of sovereignty and impartiality where every individual should have the right to transfer value. However, depending on your geopolitical preference it could be deemed only useful by those not accepted into the system and arguably the wrong people. This use case increasing in prevalence could also give further credence to governments to ban and regulate crypto with the argument and trump card of national security. Conversely, Ukraine has used crypto to raise well in excess of $100 million in donations to aid their fight against Russia – which would likely be viewed as a positive by the same people who condemn its usage by Iran. As with any technology, the usage and the users define its morality, despite the technology always remaining impartial. When analysing price action, these developments have not had a major impact on the price of bitcoin. From a technical perspective, bitcoin is positioned between a rock and a hard place in an ascending channel, with the $24,500 level proving hard to crack. The 100-Day moving average is also hovering at this level. A higher timeframe close above this level could be a strong indicator that the rally could continue with the next target likely being the $28,000 level where 2021 yearly candle opened and where we consolidated over summer 2021. Rejection from here could see us retest lower levels and the 200-week moving average that is situated around $23,000. However, with fear and greed reaching the highest levels seen in the past 4 months and Dogecoin and Shiba Inu pumping hard, these are telltale signs that an interim market top may be forming. The S&P 500 is also touching some strong resistance around the $4,300 level and with even further institutional involvement and intertwined portfolio management systems, rejection from this level could be the catalyst for a return to lower levels – with crypto potentially taking the hardest hit.
by Coinrule
Resistance to ChangeJuly was a reassuring month for crypto, and financial markets in general, stimulated by the Federal Reserve deciding a 0.75% rate hike was sufficient to slow inflation. They also stated the 2.25-2.50% federal fund rate is now neutral – no longer contributing to growth or contraction within the economy. This caused markets to rally on the expectation there may not be many further rate hikes and the possibility the worst may be behind us. Last year, July marked the bottom of the summer correction and the start of the rally that resulted in new all-time highs. This year, July saw a 16.6% monthly gain for bitcoin – the highest monthly gain since October 2021. This was outshone by ether’s monumental monthly gain of approximately 57% – the largest since January’s 2021’s 78% gain and the fifth best month over the past 5 years. The ETH/BTC chart conveys this spectacle well. Ether appreciated by 28% against BTC since the start of June – demonstrating the increased upside Ethereum has compared to its larger counterpart. However, last week it was Ethereum Classic (ETC), that saw the greatest gains. ETC saw a 94% surge within 4 days, with price still trading within 20% of the high. It is suspected this was caused by The Ethereum Merge that will result in Ethereum moving from proof-of-stake to proof-of-work (POW). This will render the Ethereum miners’ expensive equipment, used to solve the mathematical puzzles used in POW, obsolete and the miners’ $18 billion annual revenue disappearing. On the other hand, Ethereum Classic will remain proof-of-work, driving Ethereum miners to potentially put their equipment to use securing the Ethereum Classic chain. However, Ethereum Classic’s mining revenue amounts to only 3% of Ethereum’s. AntPool, one of the largest mining pools and an affiliate of Bitmain, a large mining equipment manufacturer, announced it would invest $10 million to develop and create new applications on the Ethereum Classic ecosystem in an attempt to increase the adoption of the blockchain, and the sales of their rigs. Bitmain also stated they will accept payments for their machinery in ETC. Will Ethereum’s fundamentalists win? On August 2nd, ETC total value locked (TVL) sat at $230,000 and transaction volume was $162 million compared to ETH’s $57 billion TVL and $3.8 billion transaction volume. The loyalists will require some serious network effects to capture any market share. Fidelity has stated that bitcoin will be the only 401(k) crypto product they will offer with a 20% allocation limit per portfolio. It could be argued that this is a huge step in the right direction with a behemoth asset manager, such as Fidelity, believing bitcoin is a suitable product for retirement plans. On the other hand, it also demonstrates the rest of the space is generally regarded as unproven and untrusted. This opinion was echoed by three anti-crypto American senators this week who deemed Fidelity’s move to include bitcoin as “immensely troubling”. Institutional hesitancy towards altcoins can be understood when considering institution’s risk aversion. The nature of the nascent crypto space where the “build fast and break things” approach, which can sometimes be taken advantage of, is also a hinderance. Incidents such as the $190 million exploit on popular token bridge Nomad that occurred this week is case in point. Solana also experienced issues this week with popular Solana wallets, Phantom, Slope and Trust Wallet, being exploited with their users’ funds being drained from over 8,000 wallets. After the collapse of CeFi and now these breaches on hot wallets, crypto asset security has become an even bigger priority for all crypto users. Ledger, the popular hardware wallet provider, has perfectly timed its rumoured discussions of seeking to raise an additional $100 million in funding. It is rumoured the round will be at a higher valuation than their previous $380 million raise at a $1.5 billion valuation last June – showcasing the growing demand for protecting crypto wealth even during this market downturn. Thankfully, resistance to change can provide profitable opportunities as the herd stays away from “risky” assets. Howard Marks details in his investment bible, “The Most Important Thing”, that the highest risk-adjusted returns are obtained when buying assets that are considered “not fully understood, fundamentally questionable on the surface, controversial, unseemly or scary, deemed inappropriate for “respectable” portfolios or recently the subject of disinvestment”. We wonder what asset class meets these criteria…
by Coinrule
The Merge Trade Ethereum’s rise from the ashes over the past two weeks has demonstrated why you should not underestimate bear market rallies. Prior to its explosive surge, covering over 50% in a week, the second largest crypto asset was tracking bitcoin’s moves closely. Now it appears to be the one leading the rest of the market and showcases the market’s shift to a more risk-on stance. Last week saw the second week of inflows to Ethereum crypto funds, investors predominantly being institutional investors, totalling $5 million. This is a major shift compared to the past three months where there were 11 consecutive weeks of outflows. The catalyst for Ethereum’s upside is assumed to be the news relating to the Ethereum Merge which includes the transition from a proof-of-work to a proof-of-stake consensus mechanism. A timeline was spoken during an open developer call, detailing the Merge could be expected September 19th. The Merge will result in Ethereum becoming deflationary due to annual issuance being slashed by 90%. This increasingly supports the narrative that ether is a growing store of value. Investors have caught onto this prospect, leading to the asset being argued undervalued as future supply is diminished. Overall, the market’s strength has been impressive, especially considering the higher-than-expected 9.1% CPI data prompting potentially further future rate hikes from the Federal Reserve. However, something to keep in mind is the ferocity of bear market rallies being created by short sellers getting squeezed. This leads to them being forced to buy back their short positions to prevent further losses causing further buying pressure and resulting in another cycle of short sellers buying back. Last week centralised exchanges recorded their lowest trade volumes since December 2020, leading to order book liquidity being thin and volatility being heightened - creating the perfect storm for a short squeeze. On Monday, Ethereum’s move to over $1,600 saw liquidations of nearly $500 million within a 24-hour period. However, Ethereum has increasing competition to be the chain leading the pack, in terms of global crypto adoption. In relation to active addresses, Solana has also been dominating the battle for layer one supremacy. In June, Solana registered 32.23 million active addresses compared to Ethereum’s 12.93 million. Over the past several weeks we have been seeing the question: How will crypto attract 1 billion users over the coming years? This has been answered with crypto-native phones – the first to be announced was Solana’s Saga followed by Polygon and HTC. These devices will be specifically designed to interact with decentralised applications, with the user experience of dealing with self-custody wallets and signing for transactions being substantially improved. Additionally, the current app store high fee infrastructure which disincentives developers to build apps will be overhauled with Solana’s Mobile Stack. This could lead to improved decentralised applications with further use cases, better refinement and increased accessibility - causing more people to participate in crypto. From a technical perspective, Ethereum has broken out from the month-long range of $1,050 to $1,250 and is facing resistance around $1,600. The true test will be penetrating the $1,700 key level that marked the summer 2021 lows. The 100-day moving average also looms around $1,900 and will be another test if there is sufficient demand to outweigh the uncertain macroeconomic environment and continue on our upward trajectory. If rejected from this level the move could be rendered a bearish retest of our once strong support and we could retrace lower back into an area of demand. News of Tesla liquidating some of their bitcoin position is not helping the bulls. Their earnings report detailed they sold 75% of their bitcoin holdings during Q2, totalling $936 million, at an average price of approximately $29,000. However, Musk emphasised this is not an indication of bitcoin's fragility but rather Tesla improving its liquidity in light of Covid shutdowns in China and other economic factors.   Reaching the fabled $1 Trillion total crypto market cap level is a strong indication of the resilience of the sector. $1 Trillion is also the market cap of silver, and when compared showcases how small crypto is relative to other asset classes. There are many bullish catalysts on the horizon for crypto, the Ethereum Merge, the Bitcoin Halving and crypto native mobile devices potentially accelerating global adoption to 1 billion users and beyond. Will these tailwinds be able to fight the macroeconomic headwinds of the likely incoming increased interest rates and recession? The past week has shown promising signs, but the real test will be if bitcoin can reclaim and hold the 200-week moving average - continuing to make higher lows. If you are long-term bullish on the space the reverse clause of whatever is ahead should be appreciated. Rejection and a return to lower prices meaning more time to accumulate at lower valuations, or more positively, the market recovering and portfolio values appreciating.
by Coinrule
Cash Isn't Trash? Ray Dalio, legendary investor and founder of the world’s largest hedge fund Bridgewater Associates, coined the term “cash is trash”. However, arguably over the past 8 months cash has weathered the economic storm the best, with the dollar being the strongest among the major currencies. This week we saw examples of multiple fiat currencies taking severe hits against the dollar. The Dollar Currency Index (DXY), which measures the strength of the dollar relative to six other currencies, reached its highest level since 2002 this week. The Turkish Lira was reported to have experienced annual inflation of 78.6% – the highest in 24 years resulting in a 3% decline against the dollar. Europe’s continued energy crisis has resulted in the euro also approaching parity with the dollar, with a 3.5% fortnight decline as investors seek safety. Argentinians have been trying to escape the Argentinian peso by swapping into Tether (USDT) as their economic minister was replaced by a candidate perceived to be less concerned with their 60% inflation. When denominated in Argentinian pesos, this drove the price of USDT up by over 12% from before the replacement. However, it is not all good news for Tether. USDT’s market capitalisation has taken a hit over the past two months, falling from $83 billion, at the beginning of May, by 19% to $66 billion. Meanwhile, Circle’s USD Coin (USDC) continues to make new all-time highs in market capitalization reaching $55 billion this week – suggesting we may have a stablecoin flippening on the horizon. Increasing energy costs combined with the declining bitcoin price has led miners to attempt to strengthen their balance sheets throughout the second quarter of 2022. In aggregate, miners sold more than the amount they mined in May and Core Scientific, who was the largest publicly traded bitcoin miner in terms of bitcoin holdings, released news this week that they have sold 7,202 bitcoin during June. This sale has reduced their holdings by 79% to cover debt repayments and invest in their infrastructure. Bitfarms also sold 3,000 BTC in June – reducing their holdings by 47%. Compass Mining was also reported to have lost one of its facilities due to not making electricity payments and hosting fees to its facility owner. Bitcoin miners are the most susceptible to the asset’s price swings with their revenue and profit margins being derived from bitcoin’s price. During a bull market, miners’ objective is to hold as much bitcoin as possible – increasing the value of their asset base and enabling them to raise additional finance. This incentive is even greater for publicly-traded miners as the value of their shares can also increase in tandem as their balance sheet grows. During bull markets, this acts as a positive and mitigates new coins entering the market acting as sell-side liquidity – prolonging the bull market and resulting in potentially higher valuations for bitcoin and thus the miner’s balance sheets. Conversely, when bitcoin is declining during a bear market, miners’ safest and most sustainable option is to sell their rewards for cash to pay debt repayments and operational expenses. They may also sell the bitcoin held in their treasuries, as seen over the past quarter, to ensure they have sufficient liquidity. During bear markets, this acts as additional selling pressure dampening price further and prolonging the decline as miners capitulate. The decreased demand for mining equipment, that miners classify as assets on their balance sheets, also causes them to suffer. Some miners utilise their equipment as collateral to access additional financing. When the demand and value of the equipment declines, they are required to post additional collateral to back their loans. This is a problem for participants who do not have access to additional cash – driving them to sell their assets, in most cases the bitcoin held in their treasuries. Alternatively, they can become increasingly levered and take on more debt with less attractive terms to pay off previous debt. It is reported there is $4 billion worth of these equipment-backed loans demonstrating the fragility of the industry if prices continue to fall. These factors appear to have contributed to the decline we have seen over the past quarter leading to bitcoin’s worst-performing quarter since 2011. The main question is whether miners will have sufficient income and cash reserves to survive further downside. The demise of less financially sound miners could lead to the consolidation of the industry. The most capitalised may survive and acquire the smaller entities whilst their valuations are reduced. In the long run, this could prove to be a benefit, leading to more financially strong miners potentially holding increased amounts of coins – further limiting additional coins from being sold on the market by retaining more of their rewards. Bitcoin’s hash rate, the total computing power dedicated to bitcoin mining, reached a new all time high of 237 EH/s in June, since then it has declined by approximately 15%. Bitcoin’s difficulty adjustment, a measurement of how hard miners need to compete for block rewards and is derived from the hash rate, dropped by 1.41% over the past two weeks and declined 2.35% the two weeks before that, suggesting mining activity is on the decline. Reviewing this could provide a good gauge of overall miner participation and some insight into the health of Bitcoin’s mining infrastructure. The miners’ short term move to cash may prove to be the wisest decision to survive these pessimistic times. However, over the long-run the trajectory of bitcoin’s price has demonstrated it is the superior asset in growing and preserving wealth. The next Bitcoin halving, less than two years away, will also affect the economics of mining. Miners will seek lower energy costs, increased efficiency of their machines and a higher bitcoin price to outweigh the lower block rewards. Until we see some strength in the price of bitcoin, maybe cash isn’t trash.
TVC:DXY
by Coinrule
Terra FalloutArguably the number one saying to always avoid uttering in investing is “This time is different”. Usually, it is related to overly optimistic bullish expectations of future market highs due to global adoption finally taking place. Ironically, as this cycle continues it is proving to be different… In all prior market cycles, bitcoin never rested or went below the previous all-time high during following bear markets. Last weekend, however, we saw bitcoin cascade through the previous all-time high via a savage 6% decline within a 5-minute candle – reaching a low of approximately $17,600. A potential catalyst for the sudden drop was significant outflows from bitcoin funds on Friday 17th June, with the Canadian Purpose Exchange Traded Fund (ETF) experiencing its investors redeem approximately 24,500 bitcoin or 51% of its holdings. The majority of ETF investors are institutions, with the inflows and outflows from these funds giving a good gauge of the institutional sentiment around bitcoin and risk assets in general. The drop was also contributed to by the developing contagion from the Terra debacle. The demise of Terra has continued to claim victims who just a few months ago were renowned as being market leaders in their fields. Most notably this includes Celcius and Three Arrows Capital (3AC). These two previously regarded behemoths have come under heavy fire from the declining market prices. The depressed prices have further impacted their low liquidity and highly leveraged balance sheets. Celsius halted all $8 billion worth of deposits from being withdrawn from their platform and 3AC was allegedly liquidated by FTX, Deribit and Bitmex due to them failing to provide additional capital for their poorly performing leveraged positions. Voyager, a crypto exchange, was also affected by 3AC’s demise with them still being owed 15,250 bitcoin and $350 million by the fund. News of this caused Voyager’s stock to cascade 40% lower on Wednesday accompanied by their token depreciating by 25%. However, as one giant falls another grows. Sam Bankman-Fried (SBF) has become somewhat of a liquidity-providing guardian angel for the crypto industry, with loans of $250 million to BlockFi, a centralised lending platform, and 15,000 bitcoin to Voyager via FTX and Alameda Research. Both of these entities SBF founded. FTX US has also utilised the depreciating market prices as an opportunity to sweeten their product offering through the acquisition of Embed Financial, an equities clearing firm that will provide custody and execution for FTX US’s newly launched feature to trade stocks – showcasing their eagerness to expand into alternative markets outside of crypto. Looking at the technical side, bitcoin appears to have found a range to consolidate within for the meantime, with support on the previous all-time high of approximately $19,800 and resistance around $21,300. Breaking out of the range, and making significant progress, may prove to be a challenge for bulls with the 200-week moving average looming overhead at around $23,300. The question on all traders’ minds is how long will this range hold and if $17,600 will be our local bottom for the foreseeable future? With the Federal Reserve’s Chairman Powell reiterating their hawkish stance and view for the increasing crypto regulation at Wednesday’s Senate Banking Committee hearing, it sounds like the potential relief we have seen over the past week should not be taken for granted. Additionally, further developments in the Terra fallout may be discovered further along the currently illiquid crypto path. This dark cloud will most likely keep all market participants with their tap-dancing shoes on and treading lightly as we further navigate these apocalyptic times.
INDEX:BTCUSD
by Coinrule