The Flight to Safety
(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.)
“Anyone can ride a bull. It takes discipline to dance with a bear.”
-unknown
Summary
Technical: As predicted in the previous newsletter, we broke the realized price of $22,000 and retraced to $18,000. $18,000 was projected because BTC always broke under the realized price before bouncing in the past three bear market bottoms. Many technical indicators are showing that we are near at least a local bottom. However, due to macroeconomic conditions, we believe there could be another leg down to around $13,000 – $15,000 following a relief rally.
Markets: Equity markets continue to fall after the Fed raised interest rates by 0.75% at the last FOMC meeting. This was seen as highly probable after the high inflation numbers came out, but the Fed reiterated its promise to fight inflation to the best of its abilities. This turned into selling pressure as the expectation of another 0.75% rate hike was raised for the next meeting. The Crypto market continues to get hit with bad news as one of the most renowned funds, 3 Arrows Capital, was liquidated by its lenders during the market meltdown.
Recommendations: If you followed our suggestion of buying BTC or ETH in the $18,000 – $20,000 range, you are now in profit. I would exit my position if BTC rebreaks the $18,000 support and buyers do not step up. If you don’t have any positions currently, I would use 20% – 30% of cash to open up Grid or Moon Bots at current prices.
Important News
- Jun 14: the annual rate of the U.S. Producer Price Index rose by less than expected in May to 10.8%；
- Jun 15: Crypto fund 3 Arrow Capital cannot meet margins calls and was forced to liquidate. Link
- Jun 15: Retail Sales in the US fell by 0.3% on a monthly basis in May, down from a 0.7% MoM gain in April;
- Jun 15: Fed hikes its benchmark interest rate by 0.75%, the most significant increase since 1994
- Jun 16: The Bank of England raised its base rate by 0.25% to its highest level for 13 years, around 1%, but warned that the British economy risks falling into recession
- Jun 20: Babel Finance limits withdrawals for fear of insolvency. Link
Last week the long-awaited FOMC meeting occurred on Wednesday, and it did not disappoint. The Fed decided to hike interest rates by 0.75%, and the Initial reaction seemed to the upside even though America had just received the largest rate hike since 1994. The next day, things made more sense as market participants priced in the Fed’s failure to tame inflation, forcing them to play catch up. This FOMC meeting marks the most crucial rate decision in quite some time. With the turbulent market caused by the 0.75% rate hike, crypto fund Three Arrows Capital was pressured into default and liquidated by lenders. The fund had already taken massive losses due to the collapse of Luna and was positioned long in the market given its CIO, Su Zhu’s Bitcoin super cycle thesis. Three Arrows Capital has been active since 2012, marking the collapse of one of the oldest funds in the crypto space. The Bitcoin market has now experienced two major capitulations in this bear market. The first was with Luna and the second is due to last week’s forced liquidations of 3AC and general industry-wide deleveraging.
Recommendation
Swing Trading (Manual) | hands-on approach
If you entered a position in the $18,000 – $20,000 range, I would set $24,500 as my target. As I said above, if prices get below $18,000 again and we do not see buyers step up, I would exit my position. Some on-chain indicators have reached previous bear market levels, indicating that we are near a bottom. However, I am not confident about where we go from here with the macro risk in the stock market. I want to see further seller exhaustion and overleveraged firms flushed out.
Risk-averse (Grid Bot) | 1 – 12 month
As discussed in the previous newsletter, we recommend adding 10% – 20% of your cash position to open a new Grid Bot when Bitcoin prices hit $18,000. If you followed our suggestion, your Grid Bot should be in profit. Any Grid Bots opened in the $20,000 – $22,000 range should be flat or slightly negative. Now you should have 40 – 50% of your capital deployed.
Hodler (Moon Bot) | 1 – 3 year time frame
Bitcoin and Ethereum have found a temporary bottom in the $18,000 and $900 areas, respectively. As previously discussed, we opened up Moon bots when prices hit $18,000. Below is how our sample Ethereum Moon Bot is performing. If you still do not have any positions, we believe the $18,000 – $20,000 range is a good buy zone for Bitcoin, and the $900 – $1,000 range is a good buy zone for Ethereum.
Bitcoin Volatility
Bitcoin’s daily volatility in the past 30 days is 3.08%. Its approximate average daily range going back 14 days is $1,940. We see a significant increase due to the recent volatility caused by the FOMC meeting.
Technical Analysis
Last week we saw a breakdown of Bitcoin’s $22,000 realized price level. We have been targeting the $22,000 level for the past couple of weeks which coincidentally aligned with Bitcoin’s 200 Weekly SMA.
We talked about how Bitcoin has always broken under its realized price in previous bear markets, and this time history repeated itself. Looking at the MVRV ratio in the 2020 Covid crash, we saw a low of -0.17. We hit a low of -0.16 when Bitcoin’s price hit $18,000.
Under $17,000 – $18,000 support, we don’t see any strong support until $13,000, which proved to be resistance in 2019 and 2020. The $15,000 level can act as a psychological whole number level for traders, but there have not been many transactions at that price to show sufficient support.
Fundamental Analysis
Miner Capitulation
We have seen evidence of the start of miner capitulation, which usually marks the bottom of a bear market. When the 30 SMA of the hash rate crosses under the 60 SMA of the hash rate, miners are shutting off old machines that are now not profitable to run due to the decrease in Bitcoin’s price. We can also see miners selling BTC from their stockpiles to finance their operations through the -8,000 BTC outflow from miners’ wallets. This is the same rate of outflow seen back in the bear market of 2018 – 2019.
What Does NUPL Tell Us
Net unrealized profit/loss (NUPL) measures the overall unrealized profit and loss as a proportion of market cap. It is an on-chain indicator that shows if the whole market is in a state of profit or loss. The thresholds for NUPL are set at 0, 0.25, 0.5, and 0.75. Values smaller than 0 show a state of loss, while those above 0 show a state of profit. Historically, market tops reached above 0.75 (blue line), while bottoms reached below 0 (red line).
When Bottom?
If we rule out the 2020 covid outbreak and its following liquidity overflow and focus on historical data in 2014 and 2018, valuable results can be derived from them. In 2014, the bottom was reached four months after NUPL fell below 0. In 2018, the bottom was reached one month after NUPL first crossed under 0. As a result, considering that NUPL first decreased below 0 in June 2022, if the previous pattern is followed, it would point to a BTC bottom sometime in Q3, 2022. The time also coincides with the emergence of a clearer Fed trajectory. What’s more, inflation data might top out at that time.
Our Unique View: Here Comes The Liquidity Crisis
This week, the Fed announced a 75 basis point rate hike and pushed the federal funds rate to a new range of 1.5%-1.75%, marking the largest rate hike since 1994. Now we are starting to see that to bring down inflation. The Fed would rather let unemployment rise and create an artificial recession by raising interest rates sharply, which would indicate the return of Paul Volcker’s super hawkish policy.
Source: St.Louis Fed
With a clearer path for the Fed, we await further decisive data such as CPI and PCE numbers. The market is implying a 3.5%~3.75% target range at year-end and a 4% upper limit for this 2022-2023 tightening cycle. Moreover, a 25 bps rate cut is anticipated in July 2023.
Source: CME Fed WatchTool
As Dr. Michael Burry said in the movie The Big Short: once the rates kick in, they will begin to fail. With rates being raised at an unprecedented speed, we are beginning to see similar situations that have happened before. Celsius Network, Babel Finance, and Three Arrows Capital are suffering from a widely spread liquidity crisis, and it’s still unclear how ugly the impact might be. We think more companies are still in the center of the hurricane, and ripple effects from these companies are likely to affect the broader cryptocurrency ecosystem. Words like ‘liquidation’ and ‘stop withdraws’ will continue to be in the headlines.
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