The End of Low Interest Rates
(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 (TLDR)
Technical: We failed to hold the $20,000 support, but buyers were able to hold up $18,700, establishing a higher low on the daily chart. The trading range is thus set at $22,000 top resistance and ~$18,500 bottom support. The price action in the last couple of weeks reminds me of the May consolidation where we were trapped in a trading range waiting on news to drive direction. Our slow stochastic indicator indicates an upwards move is in progress, and we should see prices reach $22,000.
Markets: Recession fears dominate the market as crude oil futures (CL) plunges 8.2% on the day. The US dollar (DXY) raises to a 20-year high, and 10 yr bonds see increased demand as traders look for a safe-haven amid recession concerns. With the increased demand for 10 yr treasuries, we saw an inverted yield curve as 10 yr rates fall below 2 yr rates (this isn’t supposed to happen). The yield curve inversion has predicted every recession ever since 1956. The FOMC minutes will be released Wednesday at 2 PM EST, a market-moving event as the market awaits further guidance from the Fed.
Recommendations: At the risk of sounding like a broken record, we again recommend buying major coins with a moon or grid bot near $18,500 support if you are still all cash. We recommend at least holding 50% of your crypto portfolio in cash as there are still many mounting macro risks in the market. Currently, prices are flattening out, so this is the moment to allocate some of your cash position. Usually, prices drop or run up 20% from these tight consolidation ranges. But we don’t call bottoms here, just smartly allocating our portfolio.
Important News
- Jun 28: The Conference Board’s consumer confidence index for June fell to 98.7 from 103.2 in May, the lowest level since 2013
- Jun 29: US Real GDP contracts at an annual rate of 1.6% in Q1, slightly worse than the previous estimate for a decrease of 1.5%
- Jun 30: Core personal consumption expenditure (PCE) prices rose 4.7% annually, 0.2% less than May but still around multi-decade highs since the 1980s. PCE, including food and energy, stayed flat at 6.3% YOY
- Jun 30: El Salvador purchases 80 more Bitcoins at $19,000. Link
- Jul 1: 3AC files for bankruptcy in New York. Link
- Jul 1: Voyager suspends withdrawals after lowering the limit to $10,000 daily. Link
- Jul 1: Eurozone inflation came in at 8.6% for June, a new record high
- Jul 1: U.S. ISM Manufacturing Purchasing Managers Index (PMI) 53 vs 54.9 estimates showing a slowdown in consumer demand
This past week marked the end of Q2 and the half-year mark for 2022. Bitcoin saw a -37.3% decline in June, its largest monthly decline since 2011. The S&P 500 dropped -20.58%, the worst half-year performance ever since 1970. Other times in history when we had worse performance in the S&P 500 were during some of the worst market conditions. However, following these turbulent times, the next half year has always resulted in double-digit percentage gains.
We also saw the 10 yr – 2 yr yield curve turn negative once again, which signals a possible recession the longer it spends under the 0% mark. Investors fleeing to longer-term bonds (safer) drives down rates. So when short-term bonds have less demand and higher yields than longer-term bonds, the yield curve turns negative.
I will cover more about a review of Q2 in a later newsletter this week, so be on the lookout for that!
Recommendation
Swing Trading (Manual) | hands-on approach
Our swing trade is still on from the ~$18,500 – $19,000 entry. With developing macro risk and prices slowing down, I want to lower our price target to be more conservative. Instead of targeting $24,000, which is very optimistic given current conditions, I would target $21,500 – $22,000, the top of the trading range. This trade still gave us around a 3:1 risk-to-reward ratio, also illustrated on the chart below. One more risky active trade you could put on is buying when prices reach ~$18,500 – $19,000, stopping out under $18,000 and targeting $21,000 – $22,000. Other than the two trades described above, I don’t see any other good positions to take.
Risk-averse (Grid Bot) | 1 – 12 month
Our opened Grid Bot continues to arbitrage profits during this trading range bringing our grid profits up to 3.2%. This is the perfect environment for a grid bot as it will keep making small profitable trades and effectively lower your average cost. As discussed in the previous newsletter, if you are still all cash, we recommend adding 10% – 20% of your cash position to open a new grid. I would use a lower bound of ~$15,000 and an upper bound of ~$30,000, with 50 – 60 grids.
Hodler (Moon Bot) | 1 – 3 year time frame
If you believe in Bitcoin or Ethereum in the long run and are sitting mostly or all cash, we recommend using 10% – 15% of your capital to open a Moon Bot. Below is our sample Ethereum Moon Bot that opened 16 days ago.
Technical Analysis
Last week we saw a breakdown of Bitcoin’s $20,000 support. We saw buyers step up at the $18,500 level, which resulted in a short squeeze rally, liquidating 30 million in BTC shorts.
After this recent price action, we established a very clear higher low at $18,500. With buyers stepping up, it now looks like Bitcoin is trading within the newly established $22,000 – $18,000 range. This is very similar to May’s price action. Look below for a comparison. You can expect strong selling pressure at $22,000 and strong demand at $18,000. If Wednesday’s FOMC minute release can’t generate the momentum for Bitcoin to break out of this range, the next event to watch is the July 27th FOMC meeting.
The weekly RSI is still under 30, which represents oversold conditions. This means we have a strong probability of having a rally after this consolidation is over.
The BTC volume transacted at each price level shows 3 major groups of transactions. Each transaction group represents investor interest, so it will act as support when prices are in the zone or resistance when prices are under it. If we breakout from $22,000, the path to least resistance shows we could reach the $30,000 area. The opposite side is falling through the $17,000 support, where we would see $13,000 as the next major support.
Our Unique View: The End of Low Interest Rates
Our Purpose
We always want to provide in-depth analysis from both macro and micro perspectives.
The macro-environment decides crypto’s big trend. These include the Fed’s policy, U.S. economy, regulation-related issues, and especially a clear understanding of the trajectory behind rate hikes.
The micro side can show everyone a more detailed and structural status of the current market environment. Important data such as money flow can tell us the short, medium, and long-term support and resistance area.
A Bad Combination for the Fed to Bear
According to the Bureau of Economic Analysis, the final estimate of first-quarter GDP contracted by 1.6%, reflecting a deeper contraction than previously reported.
Besides that, consumer spending was revised down sharply from 3.1% to 1.8%, marking the weakest number since the pandemic. This metric is an important proxy of the current state of the U.S. economy, especially as predictions of a recession mount.
Plus, the inflation index in GDP in the first quarter rose to 8.2% from 8.1% in the fourth quarter, the highest level since June 1981.
Putting all of these together, we get the combination that the Fed fears to see: a shrinking economy, rising inflation, and waning willingness to spend. But considering this GDP report as a backward-looking overview of economic activity, we still need further data to prove that a recession is here.
The End of Low-Interest Rates
On June 29, Fed Chairman Powell, European Central Bank President Lagarde, and Bank of England Governor Bailey gathered for the annual monetary policy forum the European Central Bank held. The three made a joint statement that the number 1 task for central banks is to curb high inflation, and they all do not rule out the possibility of more aggressive interest rate hikes.
US Fed Funds Rate(LHS) V.S UK Interest Rate(RHS)
Source: Tradingeconomics, https://tradingeconomics.com/united-states/interest-rate
Their actions tell us that the low inflation era might be gone, and the world is shifting towards a higher inflation regime. The low-interest-rate strategy since the Global Financial Crisis will no longer be useful. Bitcoin and other cryptocurrencies are just so young that data from the last decade may be useless at this moment.
Fundamental Analysis
Net Realized Profit/Loss
The largest daily loss in Bitcoin’s history came on June 13th as the selloff pushed its price to fall off a cliff and plummeted all the way down to around $20,000 resistance line. Investors lost $4.23 billion in a single day, or a 22.5% increase from the previous high of $3.45 billion set in June 2021.
BTC Turnover Ratio
BTC Turnover Ratio is a measure of how quickly Bitcoins are bought or sold by investors over a given period. The ongoing data for turnover ratio since 13 June is around the highest year to date, and it is still hovering above 0.6, which shows that investors are focusing more on making short-term profits instead of participating in long-term trading activities.
Balance on Exchanges
Near record low numbers of Bitcoin’s Balance on Exchanges continue, suggesting the existence of a low possibility of selling pressure. However, as circulation dries up, even a small amount of Bitcoin can trigger huge volatility in the whole market. This means big price shocks are still not out of the woods.
Considering the 40+ year high inflation and ultra hawkish Fed, cryptocurrencies are so young that there’s no data to prove their performance during a real economic recession. Moreover, it remains to be seen if some bullish structural behaviors materialize in the following weeks because the liquidity crisis is still unsolved. However, it is an excellent sign for the time being because we see people are continuing to accumulate their Bitcoin holdings, and selling pressures are cooling down marginally.
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