Don't let $70k BTC surprise you

Compass 129 - Weekend Update

The time has come.

• In his speech last Friday at Jackson Hole, Jerome Powell declared that the "time has come" for a rate cut in September, meeting the market's expectations. Next month, we will witness the first interest rate cut since 2020.

• Powell, as dovish but cautious as he can be, delivered a sober speech, precise in its delivery, without offering more than necessary. He did not specify whether the next rate cut would be 25 or 50 basis points, nor did he venture to predict the pace of future rate reductions. He expressed more optimism about inflation but greater caution regarding employment: the risks of inflation rebounding have lessened, but the risks of rising unemployment have worsened.

• The S&P 500 slightly retreated upon the fulfillment of expectations, although later printed a 1% gain to reach close to its all-time high. Bitcoin was less discreet and recorded gains of more than 6% at its peak during the day, closing the daily candle at 64k. It recovered key support levels and asserted itself forcefully: This strong move up was the catch-up to equities we explained in Compass 129.

• Following Fed Chair Powell’s remarks, the impact on Swissblock's proprietary Bitcoin metrics is palpable: market type shifted closer to Altcoin Season, the Bitcoin Risk Signal dropped back into low-risk territory, and bearish momentum eased.

Speedometers indicating the current state of BTC. The full dot represents the current reading and the white dot represents one week ago.

• Our indicators suggest a favorable environment for such a scenario: risk levels have significantly decreased after Bitcoin successfully consolidated its position (notably, the recent FUD surrounding Mt. Gox barely impacted its price).

• Quoting from our last Compass:

  Should the [Bitcoin Risk Signal] readings of the last days represent a local peak, this rather points to a strong move up.

  Yet again, it paid to take a risk and to move into Bitcoin early when the Bitcoin risk signal retracted from its peak yet hadn’t entered the low risk zone. This should be evident from the chart below.

YTD time series of the Bitcoin Risk Index.

Fundamental health.

• We aim to observe the strengthening of fundamentals alongside a price rise to confirm its sustainability. The network growth is resuming its upward trajectory and even challenged the highs seen in July, where we not only witnessed notable growth but also the breaking of a downward movement that had occurred post-halving.

• Additionally, liquidity is showing signs of recovery, albeit more timidly. What we need to see is not only an indication of an upward trend, but also a strong movement, similar to what we observed in the second half of July. Keep in mind, that we see more price impact in the short term based on the network growth reading versus the network liquidity reading (see this thread for an explanation).

YTD time series of Bitcoin network growth and liquidity, the two subcomponents of our Bitcoin Fundamental Index.

“Perpetual” health.

• A crucial aspect that lends sustainability to this rise is that while Bitcoin is overwhelming resistances with its surge, the funding rates of perpetual futures have not only remained negative since our last reading but have also increased in magnitude: Highly unusual for times of bullishness. This positioning is such that it may fuel an even stronger rise in case of their liquidations.

• One potential reason for this stoop to negative in the funding rates is that an ETF-driven (hence spot-driven) rise in price may reduce the role of derivatives like perpetual futures in legs up in the price.

• Another potential reason for the negative funding rates that may impact the trading dynamics of Bitcoin derivatives long-term is the launch of Babylon staking. The reason this is indicative of structural changes is that