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A coil spring looking to be released
It has been another low volatility period generally for crypto with majors still chopping around at key levels for over 120 days.
BTC/USD wicked up to $19.7k last week with the orange coin failing to hit new higher peaks over the weeks. The channel range is becoming tighter. Any rally towards $20.5k may no longer be expected but rather telling for possible market direction medium-term.
For the bears, the falling wedge pattern formed since summer is of concern - lower peaks coinciding with slightly lower support (bids for BTC are coming in at lower prices).
This also comes at a time when volatility indices for BTC have falling to yearly lows, suggesting a significant move is on the cards. While these indices are direction agnostic, bears will be quick to highlight 2018 when BTC formed a similar pattern in both price and vol before sharply declining from $6k.
Bitcoin is also below its average on-chain cost basis for both long-term and short-term holders (market cap < realized cap).
The extent of the current delta between the two measures is not as extreme as previous cycles. With the macro backdrop, it seems reasonable we may re-test these prior drawdowns.
Even for other networks that have gained the attention this year from fundamental catalysts (merge) has seen dwindling on-chain activity. Metcalfe’s law-type valuation models continue to trend down which is currently diverging from price.
A recalibration is in order but will it be price or on-chain activity?
For the bulls, a long-term outlook for crypto maybe easier to digest where BTC is actually correcting in a rising wedge.
Here, BTC/USD can retest the lower wedge line (~$12k) but may be bid up quickly given market participants may already be setting limit orders from $10-$20k in anticipation of a drop. A drop in price may not be a sustained one.
Macro still paints a deteriorating picture
Equities took a breather last week with S&P 500 and NASDAQ 100 up 4.74% and 5.78% respectively.
Their rallies off of earnings season maybe short lived with equity futures down 43-60 BPS on Monday morning.
Highly valued equities are likely to struggle over the coming months when investors consider real rates. Every time US10Y real rates have risen, any bounce in equity indices have failed to gain meaningful momentum.
Fast forward to today and real rates have made new highs hinting at further damage to equities.
The flip-side is the historical performance of equities in and around the US mid-term elections. Since 1950, US stocks have never posted negative returns in the 12 months following a mid-term election. Positive performance can even be found closer to the actual event too.
What makes this market particularly challenging to navigate is that crypto (beta) is not maintaining its correlation with equities.
After several weeks of outperformance, BTC is now starting to underperform NASDAQ 100, with the ratio falling 4% last week and 1.3% so far this week.
Correlation analysis also shows that BTC may now be exhibiting safe haven qualities for investors vs. being a risk on asset.
Specifically, a decelerating positive correlation with SPY 0.00%↑ and QQQ 0.00%↑ and climbing correlation with gold.
The implications here is that 1) a meaningful rally in equities may not trickle over to crypto as we have been so used to and 2) crypto may suffer from gold’s lacklustre performance driven by positive real rates and a strong dollar.
That said, BTC and gold may equally be poised to lead the recovery once dollar and U.S. yields pull back down the line.
For now, treasury yields around the world do not appear to be slowing down. The likelihood of a quick reversal in monetary policy by central banks seems low while the same central banks are paying attention to backwards looking indicators pointing to sustained elevated prices.
The rate of change in mortgage costs is likely to put pressure on the renters who avoid are seeking to avoid the growing cost of buying property. Rent of shelter index has been the only component truly driving up CPI in the U.S. So seeing price collapse very near term is still arguably questionable.
Charting the rate of change of 30-year mortgage rates vs. ISM (18m lead) indicates a very sharp collapse in ISM over the coming quarters.
Perhaps the key question is how tolerable these central banks will be before yields become too costly for them.
We’ve seen the BoJ spend more than $30B to prop up the Yen which has struggled to tolerate excessive volatility in their currency markets. This ‘yield curve control’ has capped Japanese bond sell offs but has equally added higher pressure to dollar.
The effectiveness of these interventions are likely limited so long as the differentials between ultra-loose Japan and tight U.S. remained wide.
Dollar gauges like DXY is now just 2% from its all-time high since 2002.
Goldman strategists note this week that dollar strength “feels several quarters away” and does note expect the Fed to ease “until 2024.”
Sterling’s bounce against the dollar, regardless of new leadership, seems to also be on borrowed time with borrowing costs remaining sky high vs. vast net issuance of gilts next fiscal year. The drivers are different but the outcome is the same - dollar strength.
The U.S.’s gambit is now to combat inflation while not blowing up other countries via a rising dollar. One route is treasury buybacks where the Fed can buy treasuries in the secondary market to improve yields and suppress yields.
The problem here is that it will not solve for inflation and if measures outside of rate hikes don’t manage to suppress elevated prices, the Fed’s upper bound on yields may meet pierce opposition.
DeFi
Last week on October 19th, a draft of the Digital Commodities Consumer Protection Act (DCCPA) was leaked which outlined how the CFTC would regulate the crypto industry.
The impact on the DeFi market has been mixed. On the day of release, the DeFi market contracted by 2.5% to $40B with DeFi market capitalization now standing at $41B. Nothing too drastic there.
However, the biggest impact can be seen on a relative basis where the DeFi/ETH index fell from 26.3% to 25% in the 4 days after the draft was released.
This may indicate that some capital has been moved into crypto beta following the release with DeFi’s market share to ETH being firmly capped for now.
Decentral Park Market Pulse
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Global Market Cap
$886B; Global market cap gained 1.46% last week but is down 2.05% MTD. Failed break out of wedge. No divergences on D RSI.
DeFi MCAP
$41B; DeFi market cap increased slightly by 1.8% last week. Appears the channel range is now being invalidated with DeFi making lower highs over the past 3 weeks with likelihood of recapturing $60B seeming like a tall order.
Bitcoin Dominance
41.8%; BTC dominance hit 42% as resistance last week. Breaking above this level or failing multiple times will both be telling for BTC relative strength performance over the coming weeks.
Trader Positioning
BTC-denominated futures open interest remains elevated (647k) vs. a more flat USD-denominated OI of $12.4b.
Aggregate BTC funding rates remain positive overall indicating traders are taking a predominantly bullish stance. A low volatility and and less trendy market environment may mean traders are more likely to be ‘stop hunted’.
Paradigm report that takers are now getting long vol to capture the increasingly depressed implied levels. RR of shorting vol is becoming less attractive.
BTC put/call ratio unchanged from last week, standing at 0.5 while ETH ticks higher from 0.22 to 0.23.
Grayscale GBTC
GBTC discount to NAV bouncing off all-time-highs of 36.65%. Still within falling channel. 30D volumes reaching new annual lows of 2.78m.
Grayscale ETHE
ETHE discount to NAV also bouncing off all-time-highs of 35.79%. Also still within falling channel. 30D volumes reaching new lows (2.462m).
Volumes
Spot volumes approaching new annual lows ($13.6b) with volume thesis (lower peaks, lower lows in 2022 still playing out). On-chain volume (BTC units) still at annual low demand to transact on-chain.
Aggregate Order Books
Order books look heavier on the bid side. Heavier resistance up to ~$19.6k.
Miners
Bitcoin hash rate remains at all-time-high levels as BTC mining difficulty increases to its highest level (35.63). Large miners deploying rigs at scale plus Texas-based operators resuming mining after a hot summer may have been drivers of higher hash commitment.
Hash/price ratio indicates that miners are facing extreme competition.
Fee markets are currently nonexistent ($200k/daily) meaning the smaller operators are to be squeezed further. It is not clear if miners will look to sell BTC to recapitalize or seek loans with hardware collateral.
perfor over the past week are largely speculative/headline driven:
Top 100 (7d %):
Evmos (+29.9%)
Klaytn (+26.9%)
Huobi (+25.4%)
Aave (+15.1%)
Tokenize Xchange (+14.2%)
DeFi Top 100 MCAPs (7d %):
Enzyme (+41.6%)
DFI.money (+19.5%)
Balancer (+18.5%)
Aave (+15.1%)
Lido DAO (+13.3%)
Gearbox LP LM program is planned to go live today, LPs will earn 10% APR + 3/6/9 months bonuses.
Stride launches stOSMO/OSMO pool on Osmosis later this week, the second liquid staking pool after stATOM/ATOM pool. STRD rewards are expected.
Diffusion, AMM on EVMOS, launched EVMOS incentives program. EVMOS/ATOM, EVMOS/wETH and EVMOS/wBTC pools will receive 400k, 400K and 200K EVMOS in rewards.
Chicken bonds launched a novel bLUSD bonding mechanism and bLUSD / LUSD pool on Curve with 118% APR.
📚 Coinbase to Significantly Benefit From $1.6B Transfer of MakerDAO's USDC, Analyst Says [Coindesk]
📚 The Looming Sovereign Debt Crisis [Concoda]
📚 OFAC vs. Privacy Networks [Jason Choi]
📚 Fundamentals ‘Flashing Red’ as Last Pillar of Credit Crumbles [Bloomberg]
📚 MakerDAO on course to custody 1.1 billion USDC with Coinbase for rewards [The Block]
🎙️ The Debate Around SBF’s Regulatory Ideas [The Breakdown]
🎙️ ATOM 2.0 [Epicenter]
🎙️ How Higher Ed Institutions are Adopting Blockchain [Between2Chains]
🎙️ Balaji Srinivasan [Lex Fridman Podcast]
🎙️ We Have a Liquidity & Recession Problem On Our Hands [Real Vision]
The information above does not constitute an offer to sell digital assets or a solicitation of an offer to buy digital assets. None of the information here is a recommendation to invest in any securities.