The Weekly #233
Markets fully reverse previous gains due to liquidations but we don't yet see a confirmation of a fakeout.
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Teetering on the Edge
The cryptoasset market has fully erased its early 8.5% gain in April with the global MCAP index falling back to the $1.117T mark on Monday. While the bulls have reason to be concerned, we see the index is hovering at key levels, and it remains to be seen whether this is just a brief cooling off from overbought levels or a fakeout.
Last week, one catalyst that pulled risk assets down was surprising inflation data with UK inflation for March holding above 10% and general expectations (9.8%). There was renewed fear that higher rates were here for longer while others provided reassurance that inflation pressures incl. food were to ease substantially in Q3-4 2023.
On the US side, tighter credit thanks to Bank failures are seen to be the number one catalyst for rapid disinflation.
Our current mental model for the present market phase is the April-May 2019 period when beta finally broke through the support-turned-resistance during the latter stages of the bear market.
While history can rhyme, we note several distinctions in this phase vs. 2019 including the relatively extreme tightening cycle and the regulatory clampdown including on-shore US.
BTC broke its key level of ~$28.2k but has now fallen 12% from its 2023 highs of $30.9k.
So if April-May 2019 is the model, why is it being challenged already? As we mentioned above, the macro continues to be a key driving force.
It’s Always Been Macro
Equities and crypto correlations remain positive and elevated. SPX, following a 16.4 VIX, is being pulled down as traders weighed the latest corporate earnings. BTC continues to move in lockstep - being traded as a risk asset as expected.
The counterweight is a weaker dollar where anti-dollar assets like oil, BTC, and Gold are poised to do well. We also expect this trend to continue.
Over the past few weeks, equities and the dollar have both weakened, an untypical relationship in the markets and could be a sign that the market is worried about underlying issues in the economy.
A rapid fall in inflation combined with gains in unemployment is the recipe needed for a delayed pivot by the Fed. We are some time away from that but a slower economy (incl. credit) and the labor market is simply part of the disinflation equation.
Net liquidity in markets also doesn’t show any sharp declines or trend reversal to the increase seen since October 2022.
This comes as the US nears its debt limit deadline which GS believes could occur in the 1st half of June 2023.
In Search For Direction Using On-Chain Lenses
Using more crypto-native lenses shows a similar make-or-break point in the market. After bouncing off its electricity production cost (red), BTC has climbed back to its total production cost (purple).
Historically, after full miner capitulation phases have been completed, BTC then either tracks its total cost or crosses above it and then uses it as support in more prolonged bullish periods.
Now, BTC is roughly moving in line with its total cost meaning a constructive outlook in Bitcoin’s total production cost is a constructive outlook on price.
Bitcoin’s SOPR shows that traders are selling at an aggregate profit with the index keeping above 1 for now.
Adjusting to only factor in short-term traders, SOPR (7d MA) is also approaching 1 and presents a good zone for re-entry for the bulls that believe that we’re in a more prolonged bullish period.
Alt L1s on their USD ratios are also looking constructive after 12m+ of declines.
SOL/USD has broken through its 200d MA as support and is now using it as support. We see SOL/USD consolidating between $20 and $25.7 with a break above the latter as confirming a momentum reversal.
There are question marks still as the cryptoasset market is also exhibiting risk-off behavior with ratios like ETH/BTC falling 6% since mid-April.
ETH/BTC simply exhibits range-bound behavior in a broader oscillation around its 200d MA. We, therefore, see 0.0648 or 0.0618 as the next target depending on whether the first is supported or broken.
Headline trends like daily exchange volume are also failing to print higher highs and higher lows.
Trends in DeFi dominance also indicate the market has been relatively disinterested in the higher-risk sector.
The 4%-5% range-bound oscillation since May 2022 doesn’t signal exuberance. At the same time, we are hovering at the lower end of the range which is a reason to be more constructive than dismissive.
This is unless 4% is broken to the downside - in that case, a new market regime has begun.
One catalyst to build momentum in either direction for alt assets could be the outcome of the Ripple vs. SEC legal case. The decision is believed to be imminent but no one knows exactly when the ruling may come.
We see this as a material catalyst that the market is not discussing as much as we think it deserves.
Decentral Park Market Pulse
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Global Market Cap
$1.12T; At the make-or-break key level where August 2022 resistance is now being tested as support once again.
DeFi MCAP
$46B; DeFi sector declined 11.8% last week. The sector remains above its daily 200d MA but uses weekly 200d MA as resistance (not yet broken) and appears to be in neutral/limbo ground - not oversold or overbought.
Trader Positioning
BTC OI weighted funding rate shows a resilient set of bullish traders despite the weaker spot action. Levered longs were more flushed out on the 23rd of April but a full reset in trader positioning has not occurred in the past week which may be a reason to be cautious.
ETH OI weighted funding rate also indicates traders taking a predominantly bullish stance but note a full reset occurred on the 23rd of April unlike for Bitcoin.
Markets saw a total of ~$650m long liquidations since April 17th due to corrective action in spot markets last week.
Digital asset investment products saw outflows totaling $30m last week - ending a 6 week's run of inflows.
Grayscale Trusts
GBTC’s discount to NAV has expanded to 38.6% after narrowing to 35% due to positive spot action. Trust continues to act as a high beta play on the underlying but so far has been unable to narrow past 35%.
ETHE discount to NAV is also expanding to 50% after narrowing to 46%. ETHE also continues to act as a high beta play on the underlying but so far has been unable to narrow past 46%. GBTC’s floor discount is likely a reflection of Grayscale legal battle with the SEC in regard to GBTC spot ETF transition.
BTC/USD Aggregate Order Books
Order books look fairly even on the bid side with heavier resistance up to $27.8k
Miners
Bitcoin hash rate continues to climb to new ATHs (354m TH/s) as Bitcoin network difficulty increases for a 5th time in 2023.
Hashprice has spiked over the past week due to corrective spot action but we still see an overall decline in the index in 2023 as a more likely scenario.
Bitcoin profitability remains close to 3-year lows (0.0677 USD/day for 1 TH/s) and corroborates with the miner capitulation cycle as being completed in the 2023 new year.
Few positive performers over the past week:
Top 100 (7d %):
Radix (+5.5%)
BitTorrent (+3%)
LEO Token (+2.3%)
Edgecoin (+0.2%)
Tron (-0.3%)
Bottom Top 100 MCAPs (7d %):
Injective (-29.8%)
Coinflux (-23.9%)
Arbitrum (-22.5%)
Rocket Pool (-22.2%)
Frax Share (-21.0%)
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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.