Stuck or It’s Time To Take A Breather
(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 made a deceive upside move on Monday, breaking us out of its tight $2,000 range. We are currently above the monthly VWAP at $31,500. If we can hold above it, we should see an easy move to $34,000, discounting any macro developments
Markets: Crypto markets had a quiet week last week while the equities market made a strong move to the upside off the FOMC minutes. The general sentiment was that the Fed supported raising rates quickly so they could have more flexibility later in the year and even possible pause rate hikes
Important News
- May 25: The U.S. Census Bureau’s latest data shows new home sales fell by 16.6% in April from the month before, the most significant monthly drop since 2013
- May 25: FOMC minutes released. Most members supported a 50 bp hike in both June and July, but they are open to the possibility of pausing rate hikes if the economy weakens
- May 27: Core PCE inflation in April rose at 4.9% annually. The annual rate of price gain in April was 6.3%, down from 6.6% in March, while the monthly pace of price gain was 0.2%, down from 0.9% in March;
- May 27: The University of Michigan’s gauge of consumer sentiment in May fell to 58.4 from the initial reading of 59.1 earlier in the month, its lowest level in more than 10 years;
We saw the equities market outperform this past week and a temporary de-coupling between Bitcoin and S&P500. Last Wednesday, through the FOMC minutes, we saw a more dovish tone from the Fed. Most members supported 50 bp hikes for June and July, but they saw a potential for a pause in Q4. With the front-loading of rate hikes, we could see inflation subside or cracks in the economy, which would lead to a pause in rate hikes. The equities market reacted well to this news, and we believe the next two rate hikes have been priced in, leaving some room for a run-up in equities and cryptocurrencies. This past week, Bitcoin did not have the same up move as equities and moved in the opposite direction breaking its previous months of high correlation. In the chart below, you will see SPY and BTC on an hourly chart with a correlation of ~1 in the past month but falling to a low of ~0 this past week. We do not believe the correlation is broken, and we reiterate our belief that this correlation is due to the Fed’s monetary policy.
Technical Analysis
Last week, we said Bitcoin was compressing its energy before making a big move with an upside bias. This week that scenario played out, and Bitcoin broke out of its upper range resistance of $30,500. We also saw buyers continue to absorb the large selling volume near the lows, around ~$28,000. As shown by large transaction volumes in the chart below, buyers stepped up aggressively as prices moved lower, offsetting the sellers’ supply.
We are currently over the monthly volume-weighted average price (VWAP) of Bitcoin, which sits at $31,300. The monthly VWAP represents the average price of all Bitcoin transactions for this current month. The current price being above the monthly VWAP shows most traders who bought this month are in profits and less likely to sell. The VWAP is shown as the yellow dotted line in the chart below.
This move up is the short-term relief rally we have been expecting for the past 2 weeks. As seen from the volume distribution over price chart below, we can observe a strong resistance level at around $32,500, where 260k BTC exchanged hands. Past that, we see the next major resistance level around $36,000, where 404k BTC was transacted. This on-chain metric aligns with the resistance level we observe from the chart at $35,000, which marked the previous yearly low earlier this year. 
Fundamental Analysis
1. Market Sentiment Tracks
The latest data shows Bitcoin monthly implied volatility (IV) continues to go down and slides into a new range from 80~85. It proves our view last week that the market’s priority was to slow down and stabilize the price action. We also pointed out that a potential healthy bottom is around $28k if low volatility continues.
2. A Peek Into History
As we have seen recently, the fundamental case for Bitcoin is still robust, with long-term holders barely budging in the face of price volatility. The percent of circulating supply that has not moved for more than a year continued climbing and broke the all-time high of 65.5%. We saw circulating supply top out with a bottom in Bitcoin price during similar situations in 2018 and 2019, indicating investors are continuously accumulating. The chart below shows a bull trend following the accumulation vs. price divergence. However, as observed, the whole cycle took approximately 2 years.
3. Option Volatility
We might be seeing continued accumulation in Bitcoin due to the prevalence of hedging instruments such as options contracts. As we can see from the 2 charts below, there is a steady increase in the put-to-call ratio in Bitcoin options contracts. A put contract lets you sell your Bitcoin at a pre-determined price even if the price is under it. So basically, putting a cap on how much money you can lose if prices fall. The second chart is the cboe SKEW index, representing the market perceived risk of a black swan event such as Covid occurring in the future. The combination of these 2 factors shows that investors are still cautious about the current crypto environment but pricing in less unknown risk for the equities market.
Recommendation
Swing Trading (Manual) | hands-on approach
The recommendation we suggested last week has played out exactly to plan. To see our recommendation check out last week’s article here. I got in this trade over $30,500 because the trading range was getting tighter, and after multiple tests of the bottom support, I believed we had sufficient demand to follow through. We are currently over the monthly VWAP of $31,300, and we can use that to gauge buyers’ momentum. I would still leave stops around $29,500 but use your own risk tolerance.
Hodler (Moon Bot) | 1 – 3 year time frame
For those with Moon Bot already open, we suggest holding. We have the same recommendation as last week for others without a position. If you believe in Bitcoin for the long run, you 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.
Risk-averse (Grid Bot) | 1 – 12 month
Those who followed our Grid Bots recommendations are in profit. We would not suggest opening Grid Bots on the way up, as our general view is still there might be a second leg down. With the people who have a shorter time frame in mind, I would recommend holding, or you can lock in profits if desired. If Bitcoin moves lower towards $25,000 support, we recommend adding another Grid Bot with 10% – 25% of spare cash. I would use a lower bound of ~$20,000 and an upper bound of ~$37,000, with 40 – 50 grids.
Bitcoin’s daily volatility in the past 30 days is 4.34%. Its approximate average daily range going back 60 days is $1,988, down from last week.
Our View
It’s Time To Take A Breather
The inflation data has clearly shown signs of peaking. This gives the Fed a period to tune back its policy trajectory. In an interview, Atlanta Fed President Bostic said that further interest rate hikes could take a pause in September. The Fed’s minutes released on May 25 reconfirmed Bostic’s words: “Many participants judged that expediting the removal of policy accommodation would leave the Committee well-positioned later this year to assess the effects of policy firming and how economic developments warranted policy adjustments.”
We think two pieces of information are hidden in the Fed’s minutes:
1) The Fed thinks the ongoing tightening operations and policy trajectories have worked, and it’s time for the economy to take a breather.
2) The Fed’s rate hikes have shaken the economy’s fundamentals, and if not put on hold, something bad would occur afterward.
As a result, we hold the same opinion as Bostic that the Fed will continue raising rates by 50 basis points in the next two meetings, but there is a high possibility of a pause in September, and the market now is pricing in this good news.
Source: CME FedWatch Tool
Last time we played a contrarian role stating that a significant turning point for major assets will soon play out. The market expectation for the Fed has shifted down with the completion of the Fed’s preliminary stage intervention. This time, we further state that there’s a high probability for the Fed to surrender. If the Fed stops the rate hike in September, the reason underneath might not be that inflation is fully tamed, but rate hikes and balance sheet roll-offs have hurt the economy. What’s more, the market desperately needs to take a breather, or we might see a recession in the near future.
Citigroup Economic Surprise Index (CESI) is obtained by weighting the difference between macroeconomic indicators that exceed or fall short of expectations. If most macro indicators exceed expectations, the surprise index will rise, and if most macro indicators fall short of expectations, it will fall. The surprise index has plunged again into negative territory and is about to hit a new low since the 2020 Covid outbreak.
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