MacroTactical Crypto #26
You can listen to this episode right here.
Today’s note is 2000 words (10-minute read)
The exogenous and endogenous stories have simultaneously improved for crypto since my last note discussed the intriguing resilience of crypto and NFTs. A bunch of outside and inside factors have now converged at once to jolt crypto off the lows, with ETH and alts especially zippy.
There is an ongoing dance between global macro and crypto-centric factors that looks something like this:
Bitcoin with major global macro and cryptocentric moments (2019 to now)
That chart is not meant to be an exhaustive summary of everything that has mattered for crypto in the past few years… It’s just a snapshot diagram of the ongoing interplay between the endogenous and exogenous factors that take turns buffeting crypto.
The best trades in finance are always ones where most or all winds are blowing in the same direction. Right now, global macro is a short-term tailwind for crypto and institutional liquidations climaxed right on schedule at half-year-end, so we have a bounce. Here are some of the factors to think about going forward. Some are good, some are less good.
1. GOOD. Forced crypto liquidation from 3AC, Celsius and others is done. Institutional redemptions into month-end, quarter-end and half-year-end are done. Amazingly, the exact low tick in GBTC was 4:00PM closing time on June 30. Bullish.
GBTC 30-minute chart, June 8 to now
And for what it’s worth, TSLA selling 75% of their bitcoin is good news for BTC, not bad. Elon is an unserious participant in crypto and now he’s one less paper hand that needs to liquidate. Musk has been more of a reverse indicator than a directional one in crypto anyway. His frequent flip-flops and sophomoric crypto chicanery make the asset class seem sketchier, not more credible. Bullish.
2. GOOD. A wide range of extreme bearish sentiment indicators in stocks triggered a massive wave of tactical buying, creating what is now a mildly confusing scenario where everyone is bullish stocks because everyone is bearish stocks (!).
I could find 100 of these charts, but here’s one of the nicer ones to show how risk averse fund managers are right now.
3. GOOD. There was a similar torrent of technical bottom signals in crypto. The price action in NFTs and some of the stuff I described in my last piece in early July, and more recently many more signals have emerged. For example, Glassnode points out that the number of paper handed BTC owners is back down to levels that typically mark the bottoms in BTC. Mostly diamond hands remain.
Here is one of many interesting charts they feature in this commentary.
% of BTC wealth, by holding period
4. GOOD. Depending on who you believe on the cost of production, BTC also bottomed near its cost of production around $17,500. The current cost of production is debatable and depends on a range of assumptions, but most estimates put it in the $13k/$20k area. If you want to read more about how much it costs to mine one bitcoin, this article is good.
For reference, this is how bitcoin prices have behaved relative to cost of production:
5. GOODISH. An exact week for The ETH Merge (19SEP22) is confidence-inspiring and has driven the recovery in ETH and alts. I bet The Merge will be one of the great buy the rumor / sell the fact events in crypto, like Elon’s appearance on SNL.
September 19 is a long time from now, so we are still in the “buy the rumor” phase. These giddy ETH vibes could prevail for a month or two given how far Ethereum has plummeted. Remember that after something collapses, the percentage magnitude of subsequent rallies can be epic!
For example, here’s the path of something that starts at $1 and then drops 80%, rallies 300% and drops 80% again, over and over:
The premise behind my short ETHBTC idea in MTC20 (World Computer vs. Digital Gold) was that crash risk in ETH was greater than crash risk in BTC as a huge wave of liquidation panic was about to hit. The thesis played out for a bit, but now that there is a Merge narrative with a specific date attached to it, it makes no sense to be short ETHBTC.
6. Maybe good, maybe bad. The market is now talking about US recession, while housing has peaked, and commodity prices are crumbling. This takes the heat off the hawkish Fed narrative and has put Fed rate cuts on the table by mid-2023. 10-year yields peaked the same week crypto bottomed in mid-June. On the surface, this is good for crypto as Fed tightening is kryptonite for fiat debasement plays.
On the other hand, if we enter a regime where demand destruction and earnings contraction are a major narrative, that’s not good for stocks and if 2020-2022 correlations hold… Weaker stonks are bad for crypto. The dynamic between recession and Fed easing and crypto really depends on the stickiness of inflation. If inflation is sticky, the Fed will not cut as soon as the market thinks. If inflation craters, the Fed can pivot as soon as Jackson Hole (end of August).
My view is that inflation will be sticky mostly because of the way it’s measured. The rent component of CPI and PCE tends to be a lagging indicator that tracks housing prices with a lag of 12-18 months and therefore even as inflation in the real world cools, the data won’t show anything conclusive until well into 2023. So the Fed and the official data will be stickier (more hawkish) than they should be.
7. BADDISH. The regulatory tortoise continues to lurk and the hare has stumbled enough that the turtle is gaining. Policymaker speeches are boring, but it’s sometimes important to read them anyway. This one, from Fed Vice Chair Lael Brainard, is worth the seven minutes. It’s direct, and not wonky. Here’s an excerpt:
… while innovation and competition can reduce costs in finance, some costs are necessary to keep the system safe. Intermediaries earn revenues in exchange for safely providing important services. Someone must bear the costs of evaluating risk, maintaining resources to support those risks through good times and bad, complying with laws that prevent crime and terrorism, and serving less sophisticated customers fairly and without exploitation. In the current crypto ecosystem, often no one is bearing these costs. So when a service appears cheaper or more efficient, it is important to understand whether this benefit is due to genuine innovation or regulatory noncompliance.
You cannot rule out the existential risk of a random US headline drop like:
*SEC RULES SOLANA IS A SECURITY, MEETS ALL FOUR PRONGS OF HOWEY TEST
This article describes a recent class-action suit alleging Solana is an unregistered security. I’m not betting on any rapid action from the SEC given they are still noodling stuff from 2017, but you never know. It’s a risk to any centralized token, but a bigger risk to the centralized token that just launched a phone and is oft-pumped by the biggest big name in Big Crypto.
8. BAD (maybe). The durability of this rally in risky assets is debatable. I think this is another squeeze of the shorts and underweights in stocks, but not a real bottom. The toxic combination of high inflation, higher rates, quantitative tightening, falling growth, and collapsing confidence means earnings are at risk and we get another leg down in late summer, early fall.
With those eight points to ponder, the takeaway is this: The crypto bottom makes sense, ex-ante and ex-post. Panic liquidations put in the low for crypto and risky assets were massively oversold. While I am skeptical on the durability of the broader risky asset rally, I could be wrong.
The goods and the bads net out to net positive in my mind. So while I was pretty high conviction on the bottoming view in MTC25, my conviction that we follow through big time to the topside is low. Forming a solid bottom is not the same thing as launching back to the moon.
Therefore, I think we consolidate for a while. We have built a solid base at 18700, so that’s the bottom of the range and the two topside levels would be base case: 25390 (old spike low, now resistance) and more bullish case: 28300 (marked in orange; old base pre-crapout and last thrust high before the collapse in June). Here’s the chart:
BTC hourly with expected consolidation range and stretch topside level
20000-25000 the tight range. 18700-28300 on the wide.
They lost, but ermmm… Did we win?
There has been some fun and lively debate about whether DeFi won or lost in the recent collapse of Luna, 3AC, Voyager, and Celsius. The whole thing is covered nicely here:
Give that thing a read, it’s entertaining and useful.
Basically, the debate comes down to the fact that the three epicenters of crypto’s latest implosion were centralized projects, not DeFi. But the chart of a basket of DeFi stuff still looks like this:
DEFI-PERP on FTX
DEFI-PERP tracks the price of a basket of Decentralized Finance coins, using a weighted average of the prices of KNC, MKR, ZRX, REN, REP, SNX, COMP, TOMO, RUNE, CRV, DOT, LINK, MTA, SOL, CREAM, BAND, SRM, SUSHI, SWRV, AVAX, YFI, UNI, WNXM, AAVE, BAL.
So you either lost 100% in CeFi or you lost 80% in DeFi (not including the yield you farmed beforehand), even while true DeFi projects worked as designed. Can’t really call that a win? But maybe you can? I dunno.
AAVE, Uniswap, MakerDAO etc. worked perfectly, and never broke. So that’s good. Overall, it’s another win for truly decentralized stuff—truly DeFi stuff is less likely to be a scam, rugpull, ponzi, cashout, or whatever. That’s why I prefer BTC over ETH and friends on most time horizons.
In MTC25 (July 4), I said: Crypto markets look suspiciously resilient down here. I still believe that to be the case, but I don’t think there is mega upside—and I doubt we have made the final low in NASDAQ or US equities. Prepare for a chopfest with a bullish bias into August as this crypto winter drags on through the hot, hot IRL summer.
That’s it! Thanks for reading.
Don’t follow the crowd. Don’t fight the crowd. Think for yourself.
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