Current State Of The Market
(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
Technical: BTC attempted to break out of the near term $42,000 upper bound, but sellers stepped in on the backs of chairman Powell’s hawkish statements. At the time of writing, BTC is again trading between the $39,000 – $40,000 support level, but it is barely hanging on
Markets: We see many macroeconomic risks as the Fed plans to raise rates by 50 basis points or more, and the increased lockdown measures in China further add to supply chain pressures
Recommendation: Even though there are many apparent risks, we believe BTC will hold above $30,000 support based on current data. We recommend a Grid bot with a $30,000 lower band and $50,000 or higher for the upper band, depending on how bullish you are on BTC. I recommend 30-40 grids because we are in a choppy environment. I would close the trade if we hold below $30,000.
Important News
- Apr 19: The International Monetary Fund (IMF) cut its global growth projections with a 3.6% GDP rate for the global economy this year and 2023. This represents a 0.8 and 0.2 percentage point drop from its last forecasts
- Apr 21: Fed Chair Jerome Powell supports a half-point interest-rate hike next month and signaled support for further aggressive tightening to curb inflation by noting that he saw merit in “front-end loading” policy moves
Bitcoin remained essentially unchanged this past week. Prices closed between the $39,000 – $40,000 support zone on Sunday. It was another week of following in the footsteps of the equity market and waiting on global developments for crypto assets. On Monday, all seemed well as Bitcoin made a bullish move up after making a false breakdown of the $40,000 support and force liquidated nearby stop orders. In the next couple of days, we were able to break over the previous week’s top of $41,000. However, just as things were looking up, news of Chairman Powell’s support for a 50 basis point rate hike was reported, causing a sell-off that erased the past few days of work.
Our View
From a long-term view, Bitcoin is still within the trading range it established at the beginning of this year. Due to the rising interest rates, there has been a steady outflow of volume in the bitcoin spot and derivatives market. U.S treasuries became a more attractive investment with higher rates, and risky assets became less appealing. Lowered volume in derivatives directly correlates with less leverage, thus leading to the recent muted volatility. Many traders are still expecting a capitulation event in the cryptocurrency market. Still, with 65% of the supply in the hands of price-insensitive long-term holders, we are not hugely concerned with this possibility. One of the best approaches for longer-term traders is to simply let the market show strength, weakness or put on a trade where the risk to reward makes sense.
Source1: glassnode
Recommendation
Depending on the trading style and risk tolerance, you have multiple ways to position yourself in the current market condition.
Risk-averse | hands-off approach
Use the Grid Trading Bot with a lower range of ~$30,000 and an upper range of ~$50,000 or higher. It is beneficial to set the number of grids to 40 – 60 for a good ratio of profits per grid. Remember to manage your risk. If bitcoin breaks under $30,000 meaningfully, we could see further downside.
Swing Trading | hands-on approach
The way I look at trades is always in terms of risk and reward. After seeing buyers step up and defend the $39,000 – $40,000 support zone multiple times in the past, I believe this is a good area to put on a trade. Because we have seen prices bounce off this area many times in the past, it is more than likely that we will continue lower if prices break under this area. I would take a position here and set stops under $37,000 or $38,000, a 6% drawdown from current prices. With sell orders at $45,000 – $55,000 area, a 12% – 37% gain. This trade presents a risk-reward ratio of 2:1 in the worst case and 6:1 in the best case.
Bitcoin’s daily volatility in the past 30 days is 2.43%. Its approximate average daily range going back 60 days is $2,047.
Technical Analysis
With the bullish sign of the false breakdown last week, bitcoin briefly reclaimed the 100-day simple moving average (purple line), a technical indicator many traders use to indicate the general market trend. We are watching to see if bitcoin can again hold the $40,000 support, and the next thing is reclaiming the 100 SMA to build up the bullish case. Below, you can see the times it acted as support or resistance in the past year marked in blue.
At the time of publishing, bitcoin is holding the $39,000 – $40,000 level surprisingly well. Even though bitcoin and S&P500 are currently highly correlated at the moment, it seems like bitcoin is showing resilience. Looking at the chart below in the past two weeks, we see bitcoin holding sideways steadily while SPY has been making consecutive lower lows. Even though the moves are highly correlated in direction, bitcoin has not yet held under its 2-week lows. We are in a vital spot for bitcoin as it seems buyers see it as a value zone and keep buying every time prices fall under these levels. But keep in mind that this short-term strength may not carry over to the longer timeframes and that bitcoin is still highly correlated.
SPY Vs. BTC Correlation
Fundamental Analysis
Illiquid supply has reached fresh all-time highs from both relative and absolute scales, meaning fewer bitcoins are available for sale. Some wondered if this meant that the last 30% of bitcoin holders would control the price. If prices decline rapidly, new players will enter the market, seeing these are good prices to buy. The current bitcoin price will always be the value the whole market sees as fair.
Given the ongoing circulating supply (i.e.14.6 million Bitcoin) and 19 million Bitcoin in total, it is estimated that if the hodlers of the illiquid supply increased their holdings by 30%, there would be precisely zero Bitcoins available.
Source1: glassnode
Source1: glassnode
Is BTC matured enough to be uncorrelated with US Dollar?
BTC vs. DXY (inverse scale)
After a few weeks of sideways action, bitcoin finally made a move above the $40,000 threshold, but that didn’t hold for long. Based on Bitcoin’s relationship with the U.S. Dollar Index (DXY), it might struggle to hold $40,000 because the DXY just hit a 52-week high of 101. This inverse trend between the dollar and Bitcoin has been clear and consistent over the last 10 years, meaning Bitcoin tends to underperform when the U.S. dollar gains momentum and vice versa.
US Dollar: Our Currency, Your Problem
The market expects an insanely aggressive Fed tightening cycle, reflected by rising treasury yield and booming US Dollar. For the next FOMC meeting and a few more meetings after that, Wall Street holds common expectations that the Fed will raise rates by 50 bps or more and start Quantitative Tightening (QT). Analysts across the street think this move may bring more upside to US treasury yield and the US dollar.
The U.S. dollar reached 129.43 yen for the first time since 2002 after the Bank of Japan stepped into the market again to defend its ultra-low interest-rate policy, drawing a sharp contrast with the United States, where Treasury yields hit new highs.
In February, Japan’s benchmark inflation measure was still at 0.6%, far below the central bank’s 2% target. While US CPI increased 8.5% in March, a weakened yen is shaped by fundamental differences. Monetary operations intensified this situation with global capital blows and turned into a classic bust cycle. Till now, the Japanese Yen has declined the most among G10 countries. We believe the falling Yen / Usd rate might bring potential domino effects in the world markets.
Japanese Yen declines the most among G10 countries, Source2: Bloomberg
It is important to note that the Japanese Yen has long been used as the base currency for financing purposes in Asia. The capital chain of bonds may collapse due to Yen’s decrease compared to the Dollar, thus trimming liquidity in the Asia-Pacific region.
On a larger scale, the sharp rise in US bond yields is attracting dollars from all over the globe to flow back. Forex reserves of small countries will continue to shrink in the face of widening interest rate spreads. This leads to increased default risk. Sri Lanka recently just announced its default and national bankruptcy due to its worst economic crisis in more than 70 years. Pakistan just experienced a 12.7% price increase in March. Egypt and Tunisia both seek assistance from the IMF, and there are still many small countries like them.
In 1971, President Nixon’s Treasury Secretary, John Connally, famously told a group of European finance ministers about the export of American inflation that the “dollar is our currency, but your problem.” And now, when the enormous dollar liquidity tide starts to go down, it’s inevitable that the problem will grow asymmetrically today.
Sources
1: https://studio.glassnode.com/
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