Brace For Recession
(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.)
“Do not go gentle into that good night,
Old age should burn and rave at close of day;
Rage, rage against the dying of the light.”
-Dylan Thomas
Summary
Technical: There’s little to update on the technical front this week. Bitcoin hit its 9-day exponential moving average (EMA) at around $21,500, was rejected, and fell back to the $20,000 support. If we break under $20,000 support with heavy volume, we should see a retest of $17,500 bottom.
Markets: The equities market and crypto market made a move up last week as oil prices retraced. The White House announced they would implement a 3-month tax break on diesel and gas to promote oil production. This effort is great but won’t have long-lasting effects on inflation.
Recommendations: 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. Otherwise, same suggestions as last week as markets have stayed quiet. Last week’s newsletter.
Important News
- Jun 22: Fed chair Powell says they must keep raising rates to bring down inflation at Senate hearing
- Jun 23: U.S. manufacturing Purchasing Managers (PMI) Index for June dropped to 52.4, marking a 23-month low
- Jun 23: The service sector saw the PMI reading fall to 51.6 in June, marking a five-month low
- Jun 23: Voyager Digital cuts daily withdrawals to $10,000, citing $665 million exposure to 3AC fiasco. Link
- Jun 24: The University of Michigan’s Consumer Sentiment Index declined to 50 in June’s final reading from the initial 50.2 estimate. This marked the lowest print on record.
- Jun 28: Bank of America says crypto winter has not dampened investor interest in the sector. Link
After a month of falling prices, funds blowing up, and crypto companies on the verge of insolvency, we seem to have finally reached a period of quiet consolidation. This past week Bitcoin consolidated around $20,000, the previous all-time high level in the bull market of 2017. Bitcoin came off a low of $19,593, reaching a high of $21,866 and ending the week at $20,275, a negligible increase. Crypto fund 3 Arrow Capital’s insolvency is still rippling through the market and now has spread to another crypto platform, Voyager Digital. Voyager was forced to limit withdrawal to $10,000 last week, citing a 665 million default from 3AC. In today’s newsletter, we will look at some bear market metrics to see how far along we are in the bear market compared to previous times.
Recommendations
Swing Trading (Manual) | hands-on approach
We have the same suggestion as last week as market conditions have not changed. Last Weeks Newsletter.
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. The sample bot below was opened when Bitcoin prices hit $22,000. The bot has generated 2.7% in trading profits, and in total, it is down 4.22% vs. 9% if you bought Bitcoin at $22,000.
Hodler (Moon Bot) | 1 – 3 year time frame
Below is how our sample Ethereum Moon Bot opened 2 weeks ago. 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.
Technical Analysis
Due to a low volatility week, there is not much technical development. We will look at some longer-term indicators and how prices developed after each of the previous bear markets.
Indicators
Realized Price: $22,000. When prices fell under this for a period of time, it has marked all previous bottoms.
200 weekly simple moving average: $22,555. This level has marked the exact bottom with a 3% margin of error during 3 previous bear markets. Bitcoin has closed under this level only 1% of all trading days.
Weekly RSI: 25. This is the lowest RSI reading we have ever had in the history of Bitcoin.
Bitcoin currently has the lowest weekly RSI reading ever since its inception. We had 3 previous RSI readings under 30, and all 3 times, they marked the bottom of their respective bear markets. We believe Bitcoin is extremely oversold, and if macro conditions improve, this could mark a local bottom for Bitcoin.
During the 2018 bear market, after the RSI reached under 30, Bitcoin’s price increased 350% in the next 210 days.
During the 2015 bear market, Bitcoin’s price increased 341% in 532 days after the RSI came under 30.
We also take a look at the percentage of Bitcoin supply in profit. In previous bear market bottoms, we have seen supply in profit fall to the 40% range. With each market cycle, this indicator has increased its bottom reading due to the number of coins lost and general holder characteristics. Currently, around half of all Bitcoin supply is in profit. If we believe this trend will continue, we could see another 25% drop in Bitcoin price, putting Bitcoin at $15,000 and supply in profit near the previous bear market floors at ~43%.
Our Unique View: From Stagflation To Recession
Recently almost everyone has been talking about recession, including the Fed. It seems a recession is inevitable because investors, analysts, hedge fund managers, and bankers all acknowledge a clear path from stagflation all the way down to a recession.
Recession is becoming a heated topic on Google in recent days
Source: Google Trends
What Is The Difference Between Stagflation and Recession
A recession refers to more than two consecutive quarters of economic decline with a rising unemployment rate and shrinking GDP number. Whereas stagflation is a period coupled with high inflation, but economic growth doesn’t have to be negative.
From Stagflation To Recession
U.S. GDP declined by 1.5% in Q1, while CPI soared 8.6% in May. Investors now doubt the Fed’s ability to realize a soft landing, especially after Fed Chair Jerome Powell acknowledged rate hikes and QT might trigger a recession.
Europe is already at risk, and economists said a recession will come earlier than anticipated: the consumer confidence index in the Eurozone was -23.6 in June, the lowest level since the Covid outbreak. Eurozone composite PMI fell to a 16-month low of 51.9 in June, the services PMI fell to a five-month low of 52.8, and the manufacturing PMI fell to a 22-month low of 52. Economists believe the eurozone could slip into recession later this year because record inflation can cannibalize consumer spending, and the European Central Bank raises interest rates.
What Does The Market Expect From a Recession?
Generally, the business cycle comprises four stages: Peak->Recession->Trough->Recovery+Expansion. A recession is just one of the four periods an economy must experience.
Business Cycle and its four stages
Source: https://slidebazaar.com/blog/basics-of-business-cycle-analyze-in-which-stage-now-we-are-standing-on/
However, the business cycle isn’t perfect and doesn’t fully reflect reality. Governments often have an enormous influence at all stages of the cycle. For example, monetary stimulus can counteract a downward GDP, and the expected tendency towards recession may fail to realize.
Source: CME Fed WatchTool
Investors are predicting the Fed funds rate to peak at 3.25%~3.50% in December, down from last week’s range of 3.50%~3.75%. Furthermore, traders now expect the Fed to start cutting rates in May 2023, causing risk assets to rebound from their recent retreats. Which is to say, the market is now pricing in the most optimistic path toward a recession if the Fed can succeed in curbing high inflation and prevent a long-lived recession.
However, suppose further data (especially CPI number) doesn’t support this aggressive rebound. In that case, we’re afraid a repricing or a second bottom will be inevitable, given liquidity issue hasn’t been fully solved for cryptocurrencies yet.
Fundamental Analysis
Exchange Net Position Changes
Exchange Net Position Changes measures the net amount of Bitcoin exiting or entering wallets of all exchanges. A positive number tells us that people are depositing their Bitcoin to exchanges for selling purposes, while a negative one suggests that investors are withdrawing their Bitcoin from exchanges.
The above graph shows consecutive negative position changes since early June, which are the biggest outflow since November 2020. These large outflows seem to be the power behind Bitcoin’s recovery from the selloffs below $20,000. What’s more, it may be bullish if this trend can sustain itself.
Balance on Exchanges
Balance on Exchanges for Bitcoin also shows record low prints for the last 10 days, coupled with the latest number from Exchange Net Position Changes, suggesting the existence of strong purchasing power and a lower possibility of stron selling activity.
Looking at the chart below, we see the s19 plus miner has its profitability decreased to almost 0 as Bitcoin prices keep declining. This means that older machines are being shut off as they now cost more money to run than they make. Recently we have also seen many reports of miners being forced to sell their Bitcoin stockpiles to continue operations or pay back debt. This is a positive sign because miner capitulation has marked the last phase of previous bear markets.
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