A Painful Waiting
(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.)
“Waiting is painful. Forgetting is painful. But not knowing which to do is the worst kind of suffering.”
— Paulo Coelho
Summary
Technical: BTC got temporary support from the 2-year low of ~$30,000, but sellers took control and brought prices down to $25,500. However, buyers quickly stepped in and brought prices up to $27,000, reversing the momentum. Prices are now hovering around $30,000 but could go in either direction
Markets: Crypto markets led the move down this past week, with equities following. Inflation data shows that it might be leveling off, but PPI and CPI data still came in above expectations, which could put pressure on the Fed to continue their hawkish stance
Important News
- May 11: The consumer price index (CPI) in April increased 8.3% annually, down from 8.5% in March;
- May 12: The producer price index (PPI) in April rose 0.5% on the month and 11% from a year ago, a decrease from the record 11.5% in March;
- May 13: University of Michigan index drops to 59.1, meaning US consumer sentiment has fallen to the lowest since 2011.
- May 17: Powell says Fed won’t hesitate to keep raising rates to combat inflation
What a week it has been in the crypto market. We saw the demise of a $37 billion protocol that was a top 10 project in terms of market cap. If you haven’t heard yet, Terra Labs network grinded to a halt last week as their algorithmic “stable” coin UST depegged from the US dollar. Their token Luna fell basically 100% from $80 to $0.000189 over the last few days. This event will go down in history. I won’t go over it here as many others have already covered the events in-depth, but this shows the importance of knowing the asset you are investing in. Do your own research and do not depend on anyone else.
Source1 Tradingview
This happened as Bitcoin was making a move lower, breaking under its previous local support of $37,000. We warned short-term traders to exit their positions under $37,000, and in this case, it was the right call as prices hit a low of $26,000, a 30% decrease. With the bearish sentiment bringing the market down, it seems to have exasperated Luna’s demiss, causing LFG to step in and defend the UST peg with their 80,000 BTC. This added selling pressure on the already down-trending Bitcoin price, adding fuel to the fire.
Technical Analysis
Bitcoin traded down to a low of $25,500 this past week, but it quickly reversed with a surge of buying volume. The move lower seems to have put in a local low for the crypto asset as the daily candle formed a hammer candle which is often associated with a potential reversal point. In conjunction with an RSI reading of under 30, the reversal bar began building a more robust signal that this is a possible bottom.
No one knows if this will be the ultimate low for Bitcoin. I’m more biased that Bitcoin will move sideways and gradually lower. Of course, the market will do whatever it wants. It doesn’t matter what I think. But with some of the indicators we look at below, it seems like if we’re going to see an ultimate bottom, it’ll have to go a bit lower.
Bitcoin is very close to its realized price (orange line), which is the average price of all Bitcoins when it was last transacted. As seen below, in the past, bear markets prices found a bottom whenever prices have gone under the realized price. Currently, the realized price is near $24,000.
The MVRV score is another way of graphing the realized price. It represents a ratio between the price and realized price. When prices get to the green zone, we are getting close to the “value zone” which historically has been near the bottom.
One last indicator is the 200 simple moving average. We are looking at this on the weekly chart, so this line represents the average price of the past 200 weekly price bars of Bitcoin. As you can see from the chart in both the bear market of 2019 and 2020, we bounced exactly off this level. History doesn’t repeat itself, but it often rhymes.
Recommendation
$25,500 probably isn’t the ultimate bottom, but it is not a bad spot to start putting on some risk.
Hodler (Moon Bot) | 1 – 3 year time frame
Those in it for the long run can open up moon bots with 10% – 20% of your capital. This way, if Bitcoin drops further, you can create another bot with your free capital, thus bringing down your average cost. But be warned that opening a moon bot right now will be the same as putting 10% – 20% of your portfolio in Bitcoin / Ethereum and waiting to sell on the way up. The upper range is far away from current levels, and the lower range is close by, so the bot will only hold a tiny portion of your USD waiting to buy lower.
Risk-averse (Grid Bot) | 1 – 12 month
With the people who have a shorter time frame in mind, I would recommend opening up a grid trading bot encasing the possible lower support and upper resistance. Use a small portion of your capital (10%) in case Bitcoin makes a move lower into the realized price of $24,000. I would use a lower bound of ~$20,000 and an upper bound of ~$37,000, with 30 – 40 grids. This way, you can maximize these volatile moves while reducing transaction fees. If prices move lower to $24,000, I would open another grid bot with a slightly bigger percentage of my portfolio, 10% – 20%. However, if prices get below $20,000 meaningfully, not just a quick spike down and reversal, I would exit my positions.
Swing Trading (Manual) | hands-on approach
I wouldn’t enter a swing trade position currently. If prices get to $24,000, I would enter a small swing trade with tight stops.
Bitcoin’s daily volatility in the past 30 days is 4.45%, up 60% 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 $2,137.
Fundamental Analysis
1. On-chain Structural Data
This week, a substantial amount of BTC has been transferred to exchanges following the local bottom last weekend, showing further proof of potential selling pressure. But on-chain data from Glassnode also shows that selling pressure decreased marginally, displayed by relatively low bars since May 12th.
Furthermore, the exchange balance for USDT plummeted on Monday but suddenly skyrocketed from Thursday, implying funds escaped from Monday to Wednesday but returned with a huge inflow that led to the all-time high of the exchange balance.
This partly proves our view last week that if we’re still not seeing a rise in stable coin balance, a more dangerous outlook is brewing for the coming sessions. It turned out to be a bloodbath all across the market. Moreover, the surprising data since May 12th partly explains BTC’s big bounce: marginally fewer Bitcoins moving into exchanges and an increase in stable coin balance. We still believe that if we continue to see a combination of further inflow of stable coins and a decline in BTC balance, there could be a much brighter outlook for BTC and other cryptocurrencies in the coming sessions.
2. Potential Headwinds
We use ICE BofA CCC & Lower US High Yield Index Effective Yield (Invert Scale) as a proxy to illustrate credit spread. This indicator reflects the market’s expectation of future corporate default risk, and it is also a very effective market indicator for monitoring financial liquidity. We use the inverted scale in the following chart to better observe the correlation.
The chart shows that it has done an excellent job of fitting Bitcoin since 2020, and it is quite a forward-looking data to imply the future price action trend of Bitcoin. Presently the indicator is rocketing, indicating that market risk appetite has reversed sharply and liquidity has become increasingly tight. Therefore, the headwinds of BTC remain strong, and we may better sit tight and take more precautions in the near future.
Waiting is Painful and Even Suffering
The Fed is creating an artificial dilemma between growth, inflation, and tightening, and its operating range is narrowing day after day. Given that less and less false judgment (i.e. inflation was once thought to be transitory by the Fed) can be tolerated by market participants, mood swings and price swings will become more commonly seen in the market.
As a result, the headline of global macro status in the next few months is more likely to have frictions and recalibrations throughout the Fed’s painful wait-and-see waiting period. During this period, the financial markets are in chaos: policy interpretations are flooded with dovish and hawkish tones, market sentiment will be full of ups and downs, and asset prices will inevitably fluctuate.
Our Unique View
With inflation data continuing to come above expectations, high uncertainties are still rattling the market without a sign of fading. This week’s CPI print gives us a more troublesome outlook: US core prices have jumped substantially by 0.6% MoM in April, and core services CPI (ex. energy services) saw the biggest monthly gain in decades. In addition, US PPI numbers roared at 11%. PPI is a leading indicator over CPI because it is what producers pay to make goods, indicating more inflation is on the way, and the Fed will have to get more hawkish. The overall situation implies inflation is getting WORSE rather than better. However, next month’s data will be more critical and paint a clearer picture of flattening inflation or if the Fed policy is working.
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