The Weekly #224
Renewed positivity, growing futures dominance, and a nuanced macro backdrop
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Up, Up and Away
We are only half way through the first month of 2023 and it’s already feeling like this year will be markedly different than the previous.
Crypto markets extended their gains over the weekend, gaining 8.7% over the past 3 days. Global MCAP (cryptocap) now stands at $933B - 25% above the $740B floor that was put in throughout Q2 2022.
BTC clawed back $20k, reaching a high of $21,400 while ETH rallied to a high of $1,585.
The rally was so profound that global MCAP breached its 200d MA which last occurred in August 2021 before rallying a further 82% to its ATH level.
The 200d has been a useful barometer for gauging momentum shifts in the crypto markets where breaches below/above can colour the medium/longer-term trajectory.
May 2019 +14%
Jan 2020 +28%
April 2020 +21%
August 2021 +36%
One breached, the indicator has also been used as strong support with all but the May 2019 case showing examples of this. Fast forward to today, and this model implies the new support at ~$900B with next resistance ~$1T (+8%).
Technicals on shorter-term timeframes suggest a near-term correction may be on the cards but the a sustained run on the longer-term timeframes is what traders will be double clicking on.
Investors now point to similar fractals seen during 2019 where BTC rallied 84% off from its then local bottom to breach past the prior key support levels that were re-tested several times post cycle peaks. This implies a BTC target of $29k to breach for the bulls.
The rally appears to be more tactical than anything. Towards the end of the year, alongside equities, sellers got the ‘selling out of their system’ as the downdraft became less steep. Last quarter’s unseasonably dire returns left the market poised for a reversal jump.
Expectations on the macro side weren’t great either. On new year’s day, investors perceived a hard landing as the most likely outcome in 2023.
During bear markets crypto and equities can have face-melting rallies as we can see throughout the 2018-2020 period (30-90%) for crypto an $SPX in 2022 (10%-18%). This is also part of why it’s important to pay attention to the market’s posture overall.
Crypto is no different to other asset classes like equities when it comes to boom-bust cycles. Gains often occur after investors slash bullish bets and decline following buying sprees.
As Decentral Park noted in the new year, indicators pointed to bears in disbelief market structure. This is all too familiar mechanism that makes these rallies powerful - bears doubling down coming out of a largely defensive posture by the market sets the stage for a one of those bounces.
One of the more interesting dynamics over the past week has been the relative strength of BTC > ETH.
Heading into the rally, the ETH/BTC ratio had already reached key resistance of 0.0775 where technicals indicated an overextension. Bitcoin, in true fashion, reminded traders who was boss with ETH underperforming BTC by 8% from Wednesday to Sunday.
The futures market played a vital role in price action. Total short liquidations reached $80m+ on Saturday (3d SMA) - the largest amount since the 18th of July 2022 when ETH wicked down to $880. This marked another time when pessimism peaked where investor risk appetite had been cut to the bone.
Fast forward to today, and this recent move comes as investors were shorting crypto in record numbers with ~75% of total fund inflows being short product inflows.
Looking ahead, a reset in positioning is likely due with the bulls now at risk of overextending on the other side against what continues to be a very nuanced outlook for risk assets in 2023. Traders are likely anticipating a flush and a reset in funding.
That said, the current rally can and will resume if bears continue to double down on their position. Negative funding at new local highs is often fuel for further upside. The June-August 2022 period is a good example of an extended bears-in-disbelief rally dynamic that took >50 days to flush out.
Funding rates have flipped positive +0.014% where traders are taking a predominantly bullish stance but this is becoming more neutralised by the day. A more neutralised rate may mean bulls may be less at-risk of being caught on a reset.
The growing dominance of the futures market is particularly salient against an increasingly illiquid spot market. Total liquidation volume for ETH as a percentage of CEX volume has spiked to new ATHs (0.007%).
While still nominally low, the key point here is how futures drive spot prices as opposed to the other way round. Not that liquidations events are becoming a dominant forced seller in the secondary market.
On-chain indicators were also useful but not perfect. More established indicators like MVRV illustrate how much BTC is in ‘deep-value’ territory. However, a low arbitrary score doesn’t speak to the broader market factors with the first deep value print in July 2020 print being suboptimal for being long for a longer-term view.
Instead these metrics can be useful to gauge when to layer into the market especially when they corroborate with other market indicators. The time in deep value is as important as the deep value print itself.
The macro, despite being nuanced, has also played a part. A weaker dollar since September 2022 has started to support risk assets like crypto with correlation coefficients now reverted back to -0.89. Dollar gauges like the $DXY are now at key support (101.4).
Dollar strength will ultimately comes down to whether the market has correctly discounted Fed rate cuts towards the end of 2023 against a gloomy economic outlook. Dollar shorts has become the consensus trade on Wall Street so, in keeping with today’s theme, the dollar may be set up for a tactical rally.
A weaker dollar can ‘import’ inflation back to the US given more competitive exports but more expensive imports - but that’s a story for another day.
New York Fed probability of a recession is now at 47% with such a high reading providing no false signals yet for over 60 years.
A fed that keep rates at 5% for an extended period of time may be the catalyst for its next bounce but the impact on the crypto markets in that outcome is unknown. Most of the price drivers there have boiled down to more intra-market factors such as forced selling and market contagion from company collapses.
For those that see positive correlations returning for crypto and equities, the outlook isn’t necessarily constructive.
Equity indices have been stopped in their tracks as the technicals have forecasted after rallying 3.6% YTD (4000).
Morgan Stanley’s Mike Wilson stated earnings adjustments have yet to play out heading into earnings season with a worst case scenario for SPX being a 22% slump from current levels. The VIX is also plunging indicating low market fear which has coincided with market tops in the current bear market.
Stablecoin dominance is also informative when it comes to risk appetite. Stablecoin dominance (white) has crossed the multi-ear midline after peaking at the upper channel line (peak risk-off). A cross below after peaking has coincided with more pronounced bullish period for the markets (risk-on momentum breaks through).
That said, what is unusual about the break this time around is the peak in stablecoin dominance always coincides with market bottoms. This was not the case in June 2022 with lower lows being printed in throughout Q4 2022.
The bears will call this out and state another peak in stablecoin has to be met with a lower low in order to see a carve out the eventual bottom.
Meanwhile the bulls may state that an intense bear market may be met with a more muted stablecoin dominance given that overall stablecoin supply as actually fallen 21% since its peak in April 2022. One of these takes will turn out to be right in the end.
Finally, gauging short-term investors behaviour will be crucial for measuring market sentiment. Short-term-SOPR, which measures the degree of realised profit and loss for all coins moved on-chain that have a lifespan of less than 155-days, has cleanly broken 1.
This can occur during bull markets as they briefly hold profits before selling, causing the ratio to fall back below 1 (realizing losses). Looking ahead, STH-SOPR keeping above 1 will likely coincide with a more prolonged bullish period as it would indicate short-term traders are becoming more constructive (vs. opportunistic).
Using short term traders is key as these market participants are more sensitive to market volatility and re-spend their coins as the marginal buyer/seller.
In terms of market gainers, the dominant narrative has been liquid staking derivatives. Perhaps unsurprisingly, assets like LDO (+112%) and RPL (+62%) are leading the broader market YTD heading into the highly anticipate Ethereum Shanghai upgrade for March 2022.
Their gains, alongside MANA (+85%) and CRV (+53%) also reflect improving sentiment down the risk curve to smaller cap names but are also likely to face a reset as they too show severe overextensions on the technical side.
Decentral Park Market Pulse
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Global Market Cap
$936B; Bullish break out above the $850B level and 200d MA - key levels highlighted in previous weeks. Daily RSIs indicate markets are overbought at 84.3 while weekly remain more neutral at 49.2. Bulls will likely need to retain the 200d MA as key support over coming days/weeks.
DeFi MCAP
$41.5B; DeFi appears to have completed its recovery since the new year, rallying from $30B to $43B (+41%). Resistance forecast now met as the sector becomes overextended on the daily (RSI 81.5).
Trader Positioning
Futures open interest for BTC and ETH standing at $8.5B and $5.1B respectively. Pick up in open interest YTD still relatively small compared to 2021-2022 trends with broader trajectory staying down to the right. Funding rates 0.013% and 0.019% for BTC and ETH indicating traders taking a moderately bullish stance overall.
ETH’s USD-denominated OI continues to grow relative to BTC’s OI despite a recent pullback in the ratio. If the trend continues, the futures market may have a more significant impact on spot prices for ETH than BTC, particularly if markets stay relatively illiquid.
Grayscale Trusts
GBTC
GBTC’s discount to NAV has narrowed to new lows since early November 2022 (-36.28%). GBTC now acting like a high beta play is likely driven by a combination of both positive spot action (GBTC is relatively more illiquid) and a growing market expectation of Grayscale establishing a new sponsor (e.g. Osprey, Valkyrie, Watchdog Capital). Discount hitting multi-year support where a break above this would colour sentiment around DCG especially if spot action no longer becomes supportive.
ETHE
ETHE’s discount to NAV also narrowing over the past week to 46.81% - the lowest since December 2022. Also driven by the combination of factors highlighted above. ETHE’s discount has narrowed to the same degree in percentage point terms since the lows (12.8% vs. 12.6%).
Aggregate Order Books
Order books look slightly heavier on the bid side.
Bitcoin Mining
Bitcoin mining remains highly competitive with hash rate staying elevated at 266m TH/s (near ATH levels). Meanwhile, Bitcoin mining difficulty has jumped 10% - the biggest gain since October.
Bitcoin hashprice has fallen as a result of BTC’s recent rally, providing relief to operators for now. However, if at any points, BTC finds renewed weakness, miners find themselves back in the capitulation phase which would lead to a higher hashprice (all else equal).
This is why indicators like hash ribbons that have now printed ‘buy’ signals have to read with caution just like in August 2022 when the first ‘buy’ misprint failed to factor in a worsening market due to contagion (i.e. FTX).
Top performing assets in the market have largely been driven by futures dynamics. APT has seen $5-6m consistent short liquidations over the past week.
Top 100 (7d %):
Aptos (+113%)
Decentraland (+84%)
Helium (+66.8%)
Frax Share (+65%)
Solana (+62%)
DeFi Top 100 MCAPs (7d %):
Serum (+200%)
Frax Share (+65%)
Maple (+65%)
Raydium (+64%)
Wrapped NXM (55%)
> Examining Crypto Regulations With Ripple [The Metaverse Podcast]
> The SEC Sues Gemini/Genesis as SBF Starts a Blog [The Breakdown]
> Turns Out…Inflation Was Transitory [On the Margin]
> DCG’s Dillema: Should it Sell Its GBTC Holdings to Repay Gemini? [Unchained]
> Is Lido’s Monopoly a Threat to Ethereum? [Empire]
> Options Flip to Show Stronger Bitcoin Into July [Coindesk]
> Bernstein Expects Crypto Revenue to Jump to Around $400B by 2033 [Coindesk]
> Funding Roundup: Funding Gains Momentum in Second Week of 2023 [Blockworks]
> Digital asset-focused trading funds dominate top 14 equity ETFs in 2023: Bloomberg [The Block]
> LSD Growth [@mhonkasalo]
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.