The Weekly #228
The Weekly #228
A market becoming more constructive
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A Market Becoming More Constructive
The cryptoasset market looks to extend its weekly gain of 9.9%. Bitcoin is trading at $24,439 while ETH trades just below its key $1.7k level.
Overall, it’s been a positive week where regulatory clarity is fuelling investor strength as opposed to weakness. The Securities and Exchange Commission proposed that all SEC-registered investment advisors to put all of their clients’ assets into “qualified custodians”. This could dramatically change the way trading platforms are interacted with by managers and more kin to the traditional financial model of clearer segregation.
Still, it seems the market is welcoming any forward move by the regulators even if those moves invoke questions around practical implications and viability of the proposal with today’s relatively immature infrastructure.
Last week, the crypto market index cemented itself above the $1T mark as well as the 200w MA.
Looking at BTC, the asset now faces the ultimate boss battle after breaking the $24k level. BTC is looking to break a cohort of tightly packed weekly MAs at the $25k level. If broken, there are relatively clear skies up to ~$30k.
For the bulls, being supported at $23.4k was key for seeing further upside action. For the bears, the daily chart printing a possible bearish (regular) RSI divergence is a reason to be cautious.
At the same time, without the weekly printing a similar divergence, maybe this caution is only for the near-term while BTC hovers near resistance. The weekly chart also prints the ‘death cross’ while the daily prints its ‘golden cross’.
Just like the macroeconomic signals, the mixed technical set up means you can likely find data to support your own view.
There are clearer bullish signals to be looked at.
First, only three assets in the top 100 by market capitalization (excl. stablecoins) have printed negative performance over the past week. A rising tides lifts all boats is typical of a bullish market period.
Second, DeFi dominance is breaking its 4.8% resistance level for the first time since August 2022. It is possible this could be yet another fakeout but, unlike the market structure last summer, investors appears to be more constructive.
Third, the trend in daily exchange volume also looks to be breaking its past 2 year trend.
While still down 77% from ATH levels in 2021, we note a possible volume ‘support’ at $30B/daily. Previously, whenever we see spikes in volume, these have been brief and equally sharp on the downside. This may signal that a higher baseline of investor market interest has been formed - a necessary signal for the market to become more constructive.
Bitcoin Reminds Everyone Who’s Boss
It's also important to note where the performance is being driven from.
Contrary to be consensus bets heading into the new year, ETH has underperformed BTC by ~5% with ~0.079 being an unbeatable level for ETH/BTC since May 2021. The shanghai upgrade relative valuation play has failed to materalize yet.
The reward for investors has been for taking on risk in higher beta ETH plays like LDO and RPL which have substantially outperformed BTC by >110% YTD.
However, just like for ETH, high beta BTC plays are now outperforming the market too. On what has been an overlooked sector by the market, DeFi on Bitcoin, has been bid by investors. Stacks, a Bitcoin-tied smart contract protocol, has gained 115% over the past week.
The narrative around Bitcoin and its utility has likely been aided by the recent growth NFTs such Ordinals. Question marks have been raised around Bitcoin’s scalability relative to its peers which may be leading investors to place bets around scalability infrastructure - specifically those that will extend the initial excitement around Bitcoin securing economic activity beyond simple token transfers.
The other scaling solution, lightning network is also printing ATH levels on key metrics including aggregate channel capacity (5,132 BTC) and channel size (0.073).
The lightning network is a classic example of how a network can be valued based on Metcalfe’s Law. As the number of lightning network nodes come online and channels open up between them, the more likely that a user can find a vendor or service provider that can facilitate the necessary channel swap. In other words, the network becomes more valuable proportional to the square number of connected nodes within the system (n2).
Looking ahead, we see other overlooked sectors such as privacy as being re-priced. One asset that may lead the charge here is Zcash which is now testing its 200d MA.
On-chain analysis indicates that more zCash users are shielding their assets from the unshielded pool.
At the same time, privacy coins have a long way to go to get on par with Bitcoin’s transactional activity. Zcash and Monero post only a fraction of the tx count than Bitcoin.
It seems that a privacy-coin rally would be a relative value play as opposed to driven by fundamental growth that was overlooked by the market.
On the macro front, broader risk assets have become muted with the S&P 500 down 0.5% while NASDAQ printed a 2% decline.
Investors are concerned that central banks will keep borrowing costs high (or increase further) for longer. Geopolitical tensions intensifying is also doing little to provide investors with confidence.
We note a divergence forming between the crypto markets and high growth tech stocks towards the end of last week which looks set to continue. We believe this either may indicate that either:
crypto is leading the equity market where the latter is is factoring in a wide range of mixed economic data as well as geopolitical tensions (crypto is able to cut through the noise and be the first-mover in a risk asset rally) or
Regulatory clarity - a dark cloud formed for a number of investors over the past few months is acting as a idiosyncratic tailwind (vs. headwind) for the market.
For the first, we point to financial conditions easing over the past week which has translated in performance for crypto but not yet equities. Last week, we highlighted the potential for an extended rally using liquidity as our north star.
Global liquidity has improved, whether this is the US Treasury withdrawing from their TGA, the BoJ buying up all domestic bonds in order to sustain its yield curve control, or the PBOC injected record-breaking liquidity to support their economy.
For regulatory clarity, Hong Kong announced on Monday that it plans to let retail trade larger crypto tokens like Bitcoin later this year as part of a licensing regume for Virtual Asset Service Providers (VASP). This contradicts previous analysis that downplayed the potential headlines.
This will likely give investors fresh optimism following a contrast of crackdowns over in the US.
We are also seeing large inventories for small businesses driving dissatisfaction scores which leads the ROC CPI by ~7months.
This coupled with market liquidity conditions improving is a cocktail for risk assets to move higher. A puzzle here is a very tight labor market that will supposedly drive the ISM to ~38 over the next 3 months.
US producer prices rebounding in January may also underscore the persistent inflationary pressures that may drive the Fed to tighten to an extent that allows for sharp contractions in US economic activity over the coming months.
However, as we highlighted before, crypto is now dancing to its own music and that may be just fine.
Decentral Park Market Pulse
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Global Market Cap
$1.087T; The Global MCAP index has gained 2% so far on Monday and appears to be moving into the $1.05T-$1.17T zone. Daily RSIs neutral.
DeFi MCAP
$54B; Bullish break out for the DeFi sector, gaining 14% last week. The sector now moves further above its 200d MA as well as turned its 200w MA resistance to support.
Trader Positioning
Funding rates remains positive indicating traders are taking a predominantly bullish stance. This comes after rates were neutralized on February 12th, allowing for the bulls to reset their positioning.
No significant liquidations over the past day indicating a good level of organic spot buying.
ETH funding rates are also positive at 0.01%.
Grayscale Trusts
Slight narrowing of the GBTC discount to NAV (-46.02%) due to positive spot price action.
ETHE discount to NAV (52.68%) kept flat over the past week with strong support at the 55% discount level. Grayscale trusts are not moving effectively as high beta plays for their underlying assets (divergences between green/white lines).
BTC/USD Aggregate Order Books
Order books look much heavier on the ask side. Heavier resistance up to ~$26k.
Miners
Bitcoin hash rate flies to new all-time-highs (317m TH/s) driven by miners doubling down on BTC price rallying. We see miner risk if spot prices no longer become supportive where the combination of factors including higher costs of energy and increased mining difficulty may create further pain down the road.
This is reflected in Fred Thiel’s statements last week to Wired:
At the height of the 2021 boom, profit margins in the mining business rose as high as 90 percent, says Thiel. But now, they have “totally collapsed.” If the price of bitcoin does not rally, he says, there will be “a lot more pain,” and firms that are only marginally profitable today will find themselves “very underwater.”
Top performing assets driven by narrative shifts and rotation. Only three assets in top 100 are printing negative performance over the past week.
Top 100 (7d %):
Coinflux (+438%)
WEMIX (+108%)
Stacks (+97%)
Filecoin (+75%)
Klaytn (+73%)
Bottom Top 100 MCAPs (7d %):
Baby Dogecoin (-24%)
LEO Token (-0.3%)
Edgecoin (-0.1%)
Mina Protocol (+2%)
Trust Wallet (+2%)
> L1 Digital on Crypto Funds, RWA and DAOs [On The Brink]
> Hester Pierce on the SEC’s approach to regulation [The Scoop]
> Expanding Chain, Expanding Worlds: Polygon [Real Vision]
> Weekly Roundup [On The Brink]
> Bell Curve Roundup [Bell Curve]
> SOL breakout [Laevitas]
> On Future Narratives [ahboyash]
> Bitcoin’s next halving [Will Clemente]
> FTM transfers [Lookonchain]
> Blur NFT roytalties [Peter Reservoir]
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.