A Soft Landing?
(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
General: Exchanges have seen a monthly net outflow of 96,000 BTC per month, signaling that more people believe there is further upside
Technical: BTC failed at the $48,000 resistance and pulled back into the $42,000 – $46,000 support zone from last week
Markets: We are seeing the market take a breather this past week after both the equity and crypto markets went on a solid run
Recommendation: Same recommendation as last week. We recommend using your favorite trading bot (Grid, DCA, Moon) to get long in the $42,000 – $46,000 support zone
Important News
- Mar 28: Shanghai, China starts its largest COVID-19 lockdown since the start of the pandemic
- Mar 29: President Biden’s 2023 budget proposal suggests applying several accounting and tax reporting rules to digital assets. This move could generate $11 billion in revenue over a decade.
- April 1: U.S Nonfarm Payroll increased jobs by 431k actual vs. 490k forecast
This past week, the crypto market remained largely unchanged, following the $200 billion increase in total cryptocurrency market cap in the previous run-up. Bitcoin is down ~4.5% following an anticipated pullback outlined in last week’s newsletter. Ethereum is currently up ~6.5% on the week, surprisingly outperforming bitcoin.
Monday 4/4
Q1 In Review
As March comes to an end, we are wrapping up the year’s first quarter. Let us take this time to reflect on all that has happened in 2022. We started this year on the back of some powerful headwinds. In December of 2021, we saw bitcoin drop 20% in one day due to cascading liquidations caused by over-leveraged traders. At the start of the new year, we had high inflationary scares and the Fed’s commitment to start rate hikes. The fear of more expensive capital costs caused both the equities and cryptocurrency market to take a leg down. When all was said and done, bitcoin was down roughly 29% on the year and down ~51% compared to its all-time highs just three months ago. This initial sell-off seemed to have priced in all negative news and more. From February onwards, the crypto market was stuck in a trading range. This was a bit surprising as Russia invaded Ukraine during that time, causing commodity prices to soar, and the Fed raised rates by 0.25%. After the FOMC meeting in March, we had gotten clarity from the Fed and digested Ukraine’s invasion. With the unknown out of the way, investors became more confident in the market, and we saw an increase in trading activity. It was a classic case of “buy the rumor sell the news” but in the opposite direction.
Our views
We hold the same view as last week, cautiously bullish. With institutional money flowing into digital asset investment products and over 50% of bitcoin being held by long-term holders (>6 months old), we can’t help but feel bullish for the near future. However, not everything is optimistic. The 10yr-2yr yield curve has officially moved into negative territory this past week, signaling a possible recession. We also believe that the Fed was too optimistic about the chances of producing a soft landing. The Fed waited until inflation was way over its 2% target and will require them to increase rates much faster than if they had acted preemptively. With these two opposing sides in mind, we think bitcoin still has a leg up but expect slowed growth and pressures from raising rates.
Recommendations
In the past week, bitcoin traded in a small consolidation range. Traders who followed the trading plan outlined in last week’s article should be in at a price around ~$44,000. If you have not gotten in a position, there is still a chance that the consolidation is not over. Like last week, we recommend buying your favorite coins when bitcoin is in the $42,000 – $44,000 range or using the Grid Bot or DCA bot to start building a position.
For the Grid Bot, we recommend setting a lower range close to the current support of ~$40,000 with a higher upper range of ~$70,000. It would also be best to set fewer grids, so you are holding bitcoin longer and selling at higher levels. An alternative method is using the DCA bot to start buying every day and hodl your coins if you expect we are going to be testing all-time highs. As always, manage your risk. If we fall back under the $37,000 – $40,000 area, it will be a bearish signal.
Bitcoin’s daily volatility in the past 60 days is 3.75% compared to 3.78% last week. Its approximate 30-day average daily range decreased to $2,000 compared to $2,060 last week.
Technical Analysis
Bitcoin traded in a very tight range this past week, with a high of $48,400 and a low of $44,200. Most of the trading was within a $1,500 range. The pullback we outlined in last week’s article played out perfectly as bitcoin made a test of the $44,000 support level. The question now is whether the pullback is over or do we make a deeper retracement. This week we are watching the $43,000 area as a buy zone, but if prices break over the recent top of $48,400, we could quickly move to $52,000.
Ethereum saw a ~6.5% gain on the week, outperforming bitcoin. Ethereum began this period of strength after it was successfully tested on the Kiln testnet on March 15th. If successful, this would transition Ethereum into a proof of stake protocol and hopefully solve the issues of its high network fees. If Ethereum can hold current levels and break over $3,500, it could quickly move up to $4,000 resistance.
We see a general trend of decreasing amounts of bitcoin being held on exchanges. This is a bullish indicator because the only reason bitcoin is moved to exchanges is to be sold. When moved off-exchange, it is usually stored in a cold wallet or equivalent, representing that investors want to hold for the long term. According to glassnode, 96,000 bitcoins have flowed out of exchanges throughout March, reaching levels last seen in 2018.
The impact of this consistent outflow of bitcoins is that the amount of bitcoin on exchanges has reached yearly lows.
Fundamental Analysis
Demand
A significant indicator has fundamentally changed this week. Bitcoin closed above the realized Short-Term Holder Cost Basis for the first time since Dec 3rd, meaning more recent bitcoin buyers are in profit. The Short-Term Holder Cost Basis considers all addresses that have bought and held bitcoins less than 155 days ago. As long as bitcoin prices keep above this level, it is hard to be bearish.
Another critical data point is the Realized Cap HODL percentages provided by glassnode. This tracks the percentage of bitcoins held by long-term holders, defined as holders that have held bitcoin for longer than 155 days. Bitcoin long-term holders have been steadily increasing since the correction in May of 2021. Looking at the chart below, we can see a massive decrease in the percentage of long-term holders before any sustained bearish moves. This represents the “smart money” is exiting their positions, often meaning we are near the top. This happened before all of the significant drawdowns in 2014, 2017, and 2021. However, we can see that there is still substantial accumulation leading us to believe there is still upside for bitcoin.
Future Outlook
With a war raging in Europe and price increases at a four-decade high, Federal Reserve Chairman Jerome Powell said the Fed will seek to raise interest rates to curb surging prices without damaging the job market. This painted a picture of a “soft landing” rather than a recession.
The clearest soft landing was achieved in 1994 and 1995 when the Fed under Chairman Alan Greenspan raised its benchmark rate from 3% to 6% as the economy was rebounding after a brief recession. Inflation was successfully tamed and declined further afterward. And unemployment leveled off at about 5.5% before resuming its decline two years later. If Powell follows Greenspan’s footsteps, the Fed will raise rates by 300bps in the coming 12 months. However, according to Bill Dudley, a senior adviser to Bloomberg economics, it is highly unlikely that the Fed will achieve a soft landing. Bill says, “The Fed will need to tighten sufficiently to push the unemployment rate back up by more than 0.5 percentage point. Over the past 75 years, every time the unemployment rate has moved up this much, a full-blown recession has occurred”.
Following the 1995 scenario, the rate hike will trigger the two-year treasury yield to surge to a 3% policy target. As a result, it is highly possible that the Fed will start QT (Quantitative Tightening) earlier than expected to prevent a potential yield curve inversion. We could then face a world with the 10-year Treasury yield topping the 3% threshold. There will be a massive revaluation of asset prices, and pullbacks will happen to both risk assets and safe havens like gold and silver. Cryptocurrencies could meet several headwinds as an indispensable part of global asset classes, including soaring volatility and massive selling pressure.
The Fed will try to create a “soft landing” with preemptive actions before economic data further deteriorate by releasing more dovish tones or indicating accommodative policy projections. However, they are in a very tough spot. To combat inflation, they have no other choice but to raise rates. Like we said before, be bullish in the near term but keep an eye out for further macro developments.
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