Where To Next?
(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.)
Summary
Technical: BTC had a relief rally after the FOMC meeting but was rejected at the $40,000 level. Sellers stepped in and took prices below the crucial $37,000 2-month low/support. At the time of writing, BTC is rapidly falling, targeting the $30,000 major support
Markets: The Fed raised rates by 50 basis points but says they see evidence that inflation has peaked, and they do not have plans to raise rates by 75 basis points. However, the market is not accepting the Fed’s statement and is gradually pricing in a 75 basis point raise
Recommendations: Sit tight until a bottom is formed, and we will revisit
Important News
- May 2: The Institute for Supply Management (ISM) Manufacturing PMI index hit a 20-month low in April at 55.4%, the figure was lower than March’s 57.1% and is the lowest since August 2020
- May 4: Fed raises interest rate by 50 basis points, the highest increase since 2000
- May 5: The Bank of England’s Monetary Policy Committee approved a 25-basis point rate hike, taking the base interest rate up to 1%
- May 9: Luna Foundation Guard sells BTC reserve to prop up UST peg to the dollar
The markets had a volatile week as Bitcoin fell 15%, breaking its 2022 year-to-date low of $32,933. This is quite a bearish sign for Bitcoin; let’s go over events affecting this week’s price action. Starting off the week, we were consolidating on the $37,000 support while awaiting the FOMC meeting decision for prices to show direction. After the Fed announced a 50 basis point rate rise, the market rallied in line with market expectations. In the statement, Chairman Powell said they committed were not currently considering a 75 basis points hike, and data shows that inflation might have peaked, thus supporting their view of a “soft landing.” Both the clarity this brought the markets and the reassurance of no 75 basis point hike induced a relief rally in the markets. However, sentiment changed the very next day as both equities and cryptocurrencies dived. Bitcoin broke its 2-month support of $37,000, tested and held multiple times in the past weeks. We will visit more on our views on the Fed and market reaction below.
Source5: coinglass.com
Our View
Every time it seems like we might see some direction in the market, we go back into trading in a sideways range. We believe sellers stepped in after the relief rally in the markets because chairman Powell was too optimistic about inflation and the economic condition. On Friday, the CME’s Fed Watch tool showed an 82% chance of a 75 basis point hike and an 18% chance of a 50 basis point hike.
Source1: CME Fed Watch tool
Talking to analysts, the general consensus is the equities market is untradeable right now. We are stuck between a tightening monetary environment and the market trying to make a move. The market will remain untradeable until inflation eases up or a recession comes alongside a significant drawdown in the equities market, and the Fed is forced to stop tightening. This is relevant to the crypto market because, as you might know, the correlation between stocks and cryptocurrency remains at the all-time highs. It is tough to call a direction in this environment, but this is the best time to use the Grid Bots to arbitrage profits with the increased volatility. Remember that 70% of the time, Bitcoin is moving within a rangebound environment. So wait for the market to bottom out and capture the opportunity when Bitcoin trades within that range.
Recommendation
Currently, the market is very high volatility and high risk. We do not recommend trading in this environment unless you are highly experienced and know the risks. We recommend waiting for Bitcoin to form a bottom before considering entering the market.
Risk-averse (Grid Bot) | hands-off approach
Those with Grid Bots open should watch how Bitcoin price reacts to the $30,000 critical support. As stated last week, if Bitcoin prices fall below $29,000, we could see continued selling as that is the major level of support that we have bounced from multiple times in the past 2 years.
Swing Trading (Manual) | hands-on approach
Traders who followed this recommendation last week should’ve gotten out of their positions right under $37,000, which would’ve saved you from the current drawdown to $30,000. It was unfortunate that the markets reacted this way after rallying to $40,000, but that is part of the game. Currently, we would not recommend taking on a position because we need to see a bottom form before taking action.
Bitcoin’s daily volatility in the past 30 days is 2.78%, up 0.6% from last week, a dramatic increase from the falling volatility of the last few months. Its approximate average daily range going back 60 days is $2,047.
Technical Analysis
The market is a bloodbath, with Bitcoin hitting $30,000 in just 1 day. After Bitcoin broke the $37,000 support, prices slowly grinded down and then broke the $34,500 support, where the bears rushed in and took prices down 12% on Monday. The next major support is $29,000 – 30,000, marking the 2-year low. If we break this level, I wouldn’t be surprised if we quickly moved to $24,000, then $20,000; Those two prices were areas where we have seen support and the most volume traded. This does not mean we won’t see buyers show up before then, but except from those two levels, we have not seen many transactions in the other price zones in between.
Source2: Tradingview
Next, we will take a quick look at the UST / LUNA chart. UST is an algorithmic stable coin pegged to the US dollar made by Terra Labs. UST briefly went off its peg a couple of days ago and saw lots of FUD (Fear, Uncertainty, Doubt) being spread on Twitter to get people to sell their Luna and UST. People scared by the de-pegging of UST started to withdraw their money and swap them for other tokens, which caused a chain reaction, ultimately causing UST to be worth as low as 0.48 USD. Luna was caught in with the downfall of UST; it fell as much as 57% on the day, reaching levels not seen since 2021. The LFG (Luna Foundation Guard), which previously bought over 42,000 Bitcoins, is now forced to loan out their Bitcoin to support UST’s peg. This further put traders on edge and contributed to the general crypto market crash. If you want to read more into what happened, go to this link.
Source2: Coinmarketcap
Fundamental Analysis
Bitcoin prices are around the same levels as last year, but option IV is almost half what it was before. Bitcoin’s options implied volatility has risen from 64% to 80% in the past couple of days. The current IV is still low compared to last year when IV was 150%. This tells us that a lot of leverage has left the market.
Source4: t3index
It can be seen clearly from the chart below that a relatively large amount of BTC has been transferred to exchanges since 6 May, causing exchanges’ balance to bottom out marginally. This shows potential selling pressure is accumulating and still seems to have almost no sign of ending.
Source5: glassnode
On top of that, the exchange balance on major stable coins such as USDT also edged up correspondingly on 6 May but then calmed down a little bit in the following weekend, indicating funds are fleeing quietly without an intention of return soon.
A Clear Path Has Emerged
This week, the Fed’s action gives further policy projections. It has succeeded in precisely managing market expectations in terms of rate hikes and Quantitative Tightening by calibrating those mismatches that go inconsistent with the Fed’s expectations.
Source: CME FedWatch Tool
At writing, we see traders pricing a 50 bps rate hike for the next FOMC meeting with more than 90% probability. This changed from the early reported 75 bps rate hike because of the enormous drops in the Nasdaq and S&P500 today. With Nasdaq down almost 20% from its most recent highs, putting it close to bear market territory, traders are pricing in a reduced chance the Fed will raise by 75 bps.
So the only thing for sure is we are witnessing the most aggressive tightening cycle since 2000, and we’re still in the middle of it. What’s more, it’s far from the end. Under the context of the Fed’s rising rates and rolling off its balance sheet, the next step we will keep an eye on is changes in real interest rates. In terms of real interest rates, the most important variable that matters is how the follow-up expected inflation data would develop. We will closely watch US economic numbers, consumption data, further proof of global demand, and updates on the global supply chain. Dynamic moves of these data combinations will create huge impacts on the expected inflation curve and become the market’s primary driver in the next stage.
Sources:
1: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
2: https://www.tradingview.com/
3: https://coinmarketcap.com/currencies/terrausd/
4: https://t3index.com/indices/bit-vol/
5: https://www.glassnode.com
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