Dear subscribers,
Bitcoin retested the $23k resistance level driven by decisive price action. The continuing of the rally is put into question as next week’s FOMC meeting is expected to move markets. Supply on exchanges is more liquid, increasing the likelihood of selling pressure if things turn sour. However, speculating demand was noted in the futures market as downside protecting eased due to stronger confidence in the crypto market.
Let’s dig in!
TL;DR
Bitcoin retested the $23k resistance level as the DXY showed the first signs of weakness.
Ethereum outperformed this week, followed by bitcoin and the S&P 500 as the US bond market began to normalize.
Bitcoin decoupled from US bonds and the DXY, while the correlation to US equities loosened.
Long-term holders started to accumulate as short-term holders sold at a loss, decreasing the odds of a liquidity shock.
Upside demand increased in the futures market as the open interest increased and basis spreads widened.
Swissblock’s Bitcoin Risk Signal showed a subsiding risk of a pronounced move discouraging the demand for downside protection.
The number of perpetual swaps with negative funding rates decreased reflecting confidence in the altcoin-driven market.
Normalizing markets
Last week we analyzed the pressure exerted on bitcoin by a strengthening dollar. As investors’ eyes turned to earnings reports to gauge the economic conditions coming into the FOMC meeting, it seems that demand remained robust, leaving the DXY - inflation pressures - as the ultimate culprit for the ongoing bear market. Thus, bitcoin made a strong comeback earlier this week at the expense of a decreasing DXY.
Figure 1: DXY drop paved the way for a stronger bitcoin
Considering the fragile US bond market (see Uncharted #19: DXY Extension), the recent rise of the DXY is more likely due to collapsing non-US bond markets and global currencies (Figure 2).
Figure 2: Weaker global currencies driving the DXY
To further understand the state of the US-bond market and, therefore, the potential liquidity for bitcoin, we put into context the inverted yield curve along with the rise in US Treasury yields. The target rate probability of a 100bps rate hike next week has gradually decreased (30%), and more certainty of next week’s FOMC meeting outcome has led to a wider spread between the US10Y and the US02Y (Figure 3).
Figure 3: Widening spread between the US10Y and the US02Y
Looking at last week’s fund flows, the demand for US fixed-income securities (Figure 4, left graph) reinforced the why of the lower US10Y. The inflows led to higher bond values, driving yields lower. Considering the increase in short speculator positions for the DXY (Figure 4, right graph), there seemed to be a change in sentiment as investors began to see the light at the end of the tunnel.
Figure 4: Fund flows suggested a stabilizing market
A normalizing US bond market and a weakening dollar have led to a renewed risk appetite. US equities outperformed alongside bitcoin, and ethereum (Figure 5), as more than half of corporations reported better-than-expected earnings.
Figure 5: Stellar ethereum followed by bitcoin and the S&P 500
The risk appetite was present in the crypto market, as can be seen in last week’s fund flows: Altcoins logged inflows (yellow), while bitcoin and ethereum recorded outflows (Figure 6, light blue). However, short-bitcoin (red) continued to dominate in inflows, suggesting certain skepticism about the near term.
Figure 6: Crypto fund flows dominated by short-bitcoin and altcoin ETFs
All in all, it is not clear whether we are out of the woods just yet. The inverted yield curve has led to recessions in the past, the bond market remained fragile, and the Fed could surprise markets next week. Traditional markets appear to be the most sensitive to uncertainty as corporate earnings will continue to shake the market. However, as bitcoin’s correlations began to break down (Figure 7), we could see a further improving price action.
Figure 7: Bitcoin decoupling from traditional assets
Bitcoin setting up for the next move
Following the dampened sentiment in the last month, long-term holders began accumulating bitcoin once again (Figure 8, red area). However, short-term holders struggled to sell at a profit, as denoted by the short-term holder SOPR (Figure 8, red area). Historically, when the said metric has failed to break above 1, the market has remained in a bear market. Bear in mind that a bull market is confirmed when the metric rebounds off the 1 threshold (Figure 8, gray area).
Figure 8: Long-term holders accumulating while short-term holders sell at a loss
We believe that the bull run will reignite once short-term holders’ demand accelerates, considering their relationship. The figure below exemplifies the bullish price action during a long-term holder distribution phase following an accumulation phase.
Figure 9: Short-term holder demand leads to a decisive price action
The distribution mentioned above suggested that more bitcoin are available for short-term holders to buy, increasing liquidity in the market. The liquid and illiquid supply shock phases (Figure 10) reinforce the strong price action that is potentially brewing. Whenever the rate of highly liquid and liquid supply shock has decreased, bitcoin’s upward move accelerated (Figure 10, gray area Liquid supply).
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