Stagflation Finally Becomes the Topic
(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 ended the week slightly under where it had opened last Monday. It again chopped around in a tight range of $37,500 – $40,300. At the time of writing, it is holding the $37,000 support zone and failing to reclaim the $40,000 level
Markets: All eyes are on the Fed this week as the FOMC meeting and rate decision will be released this Wednesday. The same macroeconomic risks of high inflation, slowing global growth, and the Ukraine war weigh on the markets
On-Chain: Fundamentals are looking up as Bitcoins older than 1 year old have seen no movement as a sign of long-term holder confidence. Short-term holders are capitulating while long-term holders continue to accumulate
Recommendation: Same recommendation as last week. Grid bot with a $30,000 lower band and $50,000 for the upper band, depending on how bullish you are on BTC. I recommend 30-40 grids because we are in a choppy environment. We will close the trade if we hold below $30,000.
- Apr 26: Russia to cut gas to Poland and Bulgaria
- Apr 26: Fidelity to allow investors to offer Bitcoin as an investment option for 401k retirement plans
- Apr 27: The Bank of Japan committed to defending the 10-year JGB yield target as CPI estimates rose
- Apr 28: Goldman Sachs made its first-ever bitcoin collateralized loan
- Apr 28: Central African Republic lawmakers vote unanimously to adopt Bitcoin as legal tender, making it the second country to use bitcoin as official currency after El Salvador
- Apr 28: U.S. economic growth rate unexpectedly declined in the first quarter by 1.4%, far worse than the forecast of 1% and the previous quarter’s 6.9%
- Apr 29: The personal consumption expenditure (PCE) price index in the United States climbed 6.6% year over year in March 2022, the steepest rise since the series began in 1959
On Sunday, bitcoin prices closed at the ~$38,500 support zone, stuck between the $37,000 and $40,000 levels. It was another week of sideways action with no significant developments in the crypto space. In an almost identical move as the previous Monday, Bitcoin made a bullish move after making a false breakdown of the $40,000 support and force liquidated nearby stop orders. However, the next day fear of Covid spreading in China and de-risking ahead of significant tech stock earnings reversed the equities and crypto market as it rebroke the $40,000 support. We had some positive news in the space during the rest of the week as Fidelity will begin to offer bitcoin as an investment option for its 401k clients, and Goldman Sachs made its first loan collateralized on Bitcoin.
Our View
From on-chain data, we can see a capitulation in short-term holders of bitcoin. However, long-term holders have stepped up and bought up what was sold off. This supports the view that the $37,000 zone is a potential bottom. As mentioned last week, Bitcoin markets have remained resilient even though it was down this week. While SPY and QQQ have been making consecutive lower lows, Bitcoin has been trading in a relatively sideways range. However, the Bitcoin to SPY correlation remains at almost a 1 to 1 ratio, and the market’s perception of it as a risk-on asset suggests it faces significant headwinds.
Source2: https://quantifycrypto.com/heatmaps
With the oncoming FOMC meeting, we believe any hawkish statements released, and potential rate increases are priced in on the equities and crypto market. Looking at the trend this year with the FOMC, we saw a risk-on event after every meeting, and prices moved to the upside. We believe that this time the results may be similar.
Source3: Tradingview
Recommendation
This week we will update the recommendation from last week. Click here for last week’s recommendations.
Risk-averse | hands-off approach (No Change)
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
Bitcoin almost got under the $37,000 support, but it was able to hold on. This week with the FOMC meeting, I would not put on a position with this approach as volatility leading up to and after the event may shake out traders on both sides. For those who took this position, I would recommend closing it and reopening the position after the FOMC meeting because it is highly likely that Bitcoin will fall below the $37,000 stop-loss level just to reclaim it later on.
Bitcoin’s daily volatility in the past 30 days is 2.18%. Its approximate average daily range going back 60 days is $1,980.
Technical Analysis
Prices are gradually grinding lower, and Bitcoin is making lower highs and lower lows trending down. This is a bearish sign, but it is crucial to keep the bigger picture in mind, and that is we are stuck in this $30,000 – $50,000 trading range.
Source3: Tradingview
According to data from Glassnode, in the past couple of weeks, the support and resistance zones have tightened. Bitcoins have had the most transaction volume around the area surrounding $43,000, marking a resistance zone. On the flip side, most of the buying occurred near $38,000 showing this is where buyers have been accumulating, thus marking a level of support. A break under this $37,000 – $38,000 area could result in selling pressure as most recent buyers would be underwater. If that happens, prices could revisit the $34,000 area from a purely technical perspective.
Source1: Glassnode
Fundamental Analysis
A significant development identified first by TXMCtrades is the mild capitulation of long-term holders who had bought within the last year. This group of buyers I will refer to as NLTH (new long-term holders) only bought Bitcoin in the past year and, statistically speaking, has a lower probability of selling compared to short-term holders. As prices fall lower NLTHs are selling, possibly in anticipation of Bitcoin prices falling further. This has two possible implications. 1 price will continue to fall lower as these holders usually do not sell without significant foresight. 2 the lack of LTH selling shows that the case for a bullish Bitcoin within this year is still supported.
Source4: Twitter @TXMCtrades
Another relationship we want to bring up is Bitcoin’s relationship with corporate credit. We use ICE BofA CCC & Lower US High Yield Index Effective Yield (Invert Scale) as a proxy to illustrate credit spread, which shows liquidity condition and capital cost for the whole financial market, especially for U.S. corporations.
Source3: Tradingview
The chart above combines Bitcoin price and our credit spread proxy. It tells us that Bitcoin tends to experience the best gains when capital is cheap and free-flowing. In most cases, bears accompany falling yields.
Dollar Correlation
The Dollar continues to move up, and DXY is hitting 5-year highs in correlation with the 10 Yr Treasury yield breaking its recent top. We discussed the inverse correlation between the Dollar and Bitcoin in last week’s newsletter and are still waiting to see if this reversion to correlation plays out. However, the reason driving the DXY move up is essential in determining if this narrative will play out. If the main reason for the increase in the Dollar is the Fed rate policy and a tighter monetary environment, it would be a strong headwind for Bitcoin. But if difficulties in foreign Countries’ economic policies caused the DXY’s move, it might explain why Bitcoin and DXY have lost correlation.
Source3: Tradingview
Stagflation Finally Becomes the Topic
The U.S. first-quarter GDP data was not only far below market expectations but surprised us with disappointing data in contraction territory of -1.4%. High inflation and a stagnant economy undoubtedly lead us to ‘stagflation.’
The ongoing economic dilemma has brought a trading dilemma with three different scenarios:
1) Economic recession
2) Fed’s potential rate cuts in attempts to counteract a recession
3) Inflation is rising, and the Fed’s to stay on its path of rate hikes
Regarding market reaction, it depends on which logic the market will trade upon, or the three scenarios above might even take turns to play out. The worst-case scenario is scenario 3. The Fed’s tightening policies will undoubtedly cause an artificial recession before meeting its price stability mandate, bringing us into stagflation. If stagflation kicks in, equity prices will turn ugly as earnings deteriorate and liquidity dries up due to Fed’s tightening operation. We have to see if Bitcoin can serve as a haven asset that investors will use to shield against an equities bear market.
Sources
1: https://studio.glassnode.com/
2: https://quantifycrypto.com/heatmaps
3: https://www.tradingview.com/u/jay_tradez/
4: https://twitter.com/TXMCtrades/status/1520573840576991232/photo/1
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