The First Crypto War in the World
(Any views expressed below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
Last week crypto markets saw a solid rebound despite the ongoing conflict between Russia and Ukraine. Bitcoin temporarily decoupled from the S&P 500, hinting at the possibility that the Russia–Ukraine conflict has driven demand for digital gold.
Summary
Technical: $45,000 upper resistance $35,000 lower support for BTC
Markets: Expect bursts of volatility as the market seems highly reactive to developments in Ukraine, Fed rate, inflation, and regulations
Macro: Slow down in growth in Europe due to rising energy costs and a general decrease in consumer spending
Recommendation: Similar to last week, widen the price range of the Grid Trading bot and reduce order number as we are range-bound with periods of high volatility
Important News
- March 8: Yellen leaks details of a crypto policy plan
- March 9: Biden signed an executive order on cryptocurrencies ordering different government agencies to draft guidance
- March 10: US inflation, measured by the annual change in Consumer Price Index (CPI), accelerated in February to 7.9%, the highest figure since 1982
- March 10: The European Central Bank said it would end the asset purchase program sooner
Events to watch
- March 16: Fed Interest Rate Decision
Bitcoin traded within a tight consolidation range in the past week. After the previous rally, bitcoin saw strong resistance at $45,000 and made a quick move back down. It found buyers in the $38,000 area and prices stabilized. On March 8th, Yellen’s team accidentally leaked Biden’s cryptocurrency policy details, which immediately drove bitcoin prices up 9%. However, bitcoin reversed the entire move as CPI figures came out and showed a 7.9% increase in inflation. The United States has not seen CPI gain this high in over 40 years. Bitcoin is now consolidating in an extremely tight range around the $39,000 level.
As bitcoin traded in this tight range, a relative balance between the bulls and bears seems to have been established. However, given the number of volatile macro events, this delicate balance can be disrupted by any positive developments in the Ukraine conflict, seller exhaustion, or negative news.
Our View
Russia’s Ukraine invasion and Western sanctions created a perfect environment to prove bitcoin as an anti-inflationary asset. With growth slowing in Europe and inflation spilling into America, it makes the perfect storm of recessionary fears combined with high inflation. Stagflation concerns seem more likely to come to the center stage. These macro-events will create a lot of headwinds for bitcoin. We will have to wait and see if bitcoin can realize its role as an instrument to hedge inflation or hold its status as a risk asset.
One positive development this past week is Biden’s executive order on cryptocurrencies. It seems likely there will be more mainstream adoption in the cryptocurrency space. We hold the same view as last week. Everyone should wait for a clear direction signal and prepare for short-term volatility.
Recommendation
Since last week, not much has changed as we wait on news and further market developments. The Grid Strategy is more relevant now with the tight trading range and bitcoin’s news-driven price. Our recommendation stays the same, using the Grid Trading Bot with a lower range of ~$30,000 and an upper range of ~$50,000. It is beneficial to spread orders over 50-80 grids to decrease transaction frequencies. Traders can also put some capital towards the DCA Bot in anticipation of a market correction. It is best to set the frequency to 1 week as the market is still range-bound.
Bitcoin’s daily volatility in the past 60 days is 3.96% compared to 3.17% last week. Its approximate average daily range is $2,200.
Technical Analysis
Bitcoin has been consolidating within a very tight range this past week. If you eliminate the news-driven whiplash moves, bitcoin has traded in a tight 2,000 dollar range. At writing, bitcoin prices remain at $39,000, the 50% Fibonacci retracement, a level of support that many traders use. As prices hang out in the middle of the $33,000 – $45,000 trading range, bitcoin can quickly move in either direction.
We can see clearly that the $45,000 level has been held firmly as resistance after being tested several times in the previous month. It is likely Bitcoin will continue to bounce between $35,000 – $45,000, with periodic shots of volatile moves.
Future Outlook
Demand
Some people might think bitcoin’s recent growth came from demand in Russia. While buying from Russia increased to roughly 210 bitcoins per day, it didn’t significantly impact the overall market, which transacts approximately 250,000 bitcoins daily. Others can argue that bitcoin’s recent action is pricing in countries’ future demand rather than Russia’s purchases. However, if there is no influx of future demand and bitcoin’s price keeps rising, bitcoin may be gaining acceptance as a hedge asset for volatile market conditions.
Supply
‘Faith’ is becoming increasingly apparent among bitcoin investors. Over 60% of available bitcoins haven’t moved for over a year, indicating institutions and retail investors are holding bitcoin more strongly and could be seen as bullish. Bitcoin supply that has not moved in over a year is approaching an all-time high, as soon by analytics firm glassnode.
Correlation with Risk Assets
Bitcoin has always been considered a risk asset, similar to tech stocks. However, recently there have been signs of decoupling. Bitcoin has risen about 10% from February 24th, with Nasdaq hardly moving at writing. If bitcoin keeps diverging from other risk assets, this could signify the market sees bitcoin as a hedge in periods of uncertainty.
A divergence between Bitcoin and Nasdaq
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