Dear subscribers,
The Fed, the SEC, the CFTC, regulators, even much of the media… Everyone seems to be banding against crypto this year and nevertheless, we see resilience in bitcoin that is carrying over into important moves in the further crypto space. Since Uncharted 32, bitcoin has gained significant momentum, pushing it to near $25k multiple times. Despite the low risk of an aggressive drop, we do anticipate headwinds in the next months due to concerns about sticky rates and regulatory risks targeting key players in the crypto space.
The SBT Bitcoin Risk Signal remains stable at the lowest risk value, but idiosyncratic risks and macroeconomic headwinds continue to cause concern. Small-cap altcoins have shown signs of higher momentum, supporting the view that the broad market is seeking altcoins for excess returns. We will look at some interesting altcoins in the Crypto’s Course section of this report.
Let’s dig in!
A little spark of madness can ignite the flames of innovation. - Robin Williams
At a glance
State of the System
Bitcoin has experienced a surge and remains in the extreme of the bullish quadrant, but there are concerns about a potential retrace due to stickier rates and US crackdown on the crypto market.
Bitcoin has been trading within the $23.2-$25k range and attempts to break the $25k resistance level have been unsuccessful. Caution is advised despite the SBT Bitcoin Risk Signal being stable at 0 as market sentiment is more cautious.
The SBT Altcoin Cycle Signal has increased, indicating greater altcoin dominance. Small caps have shown higher momentum compared to other altcoins as L2s and Dino coins lose steam against Meme coins.
The macro environment
There is more uncertainty over the Fed's next move, as the market prices a less lenient Fed in the upcoming FOMC meeting, potentially leading to stickier rates towards H2.
With the market gradually pricing in a less lenient Fed, bitcoin could face even greater exposure to a contraction in liquidity, potentially impacting its performance and that of other assets.
Crypto’s course
Bitcoin's momentum has been impacted by intensifying headwinds, causing four rejections at the $25k resistance level. In the short run, the price is expected to bounce off the $22.8-$23.2k support level, subject to risks not escalating.
The SBT structural framework suggests the potential of another altcoin run as Meme coins begin to outperform Dino coins and small caps show the greatest impulse.
Layer 2s - one of the leading narratives of 2023 - could log another run given that bitcoin does not turn bearish. We are eyeing three Layer 2s that show potential (figure 13).
Outlook
The market is favoring high volume and volatility altcoins, but investors may want to consider being selective - looking for higher upward relative beta - given that bitcoin is losing steam and pressured toward the lower end ($23.2-$24k) of the short-term range ($23.2-$25k), while continuing in an overall sideways pattern.
State of the System
In Uncharted 33, we see that bitcoin has experienced a minor retrace, but it remains in the extreme of the bullish quadrant (figure 1) after gaining significant momentum. The price is up more than 10% since the last update. This surge has driven the price close to $25k, with the risk of an aggressive drop low as per the SBT Bitcoin Risk Signal. However, as we enter the second and third quarters of 2023, headwinds are picking up: concerns about stickier rates are growing while the US continues to target key players in the crypto space, which could trigger a medium-term retrace in the crypto market (longer-term any regulatory hostility should only strengthen crypto).
Since Uncharted 32, bitcoin has been trading within the $23.2-$25k (figure 2) range, turning the $23k resistance level into support. The price action has attempted to break the $25k resistance level four times but has been unsuccessful. After these attempts, bitcoin retraced toward the lower end of the short-term trading channel. We are keeping an eye on the 8SMA because if it crosses below the 16SMA, it can trigger short-term bearish momentum, and bitcoin could retrace toward the $22.7-$22.9k range.
In the days since Uncharted 32, the SBT Bitcoin Risk Signal has been reactive to bitcoin's development. The signal increased slightly but then retraced, avoiding a move into the high-risk zone (figure 3). The SBT Bitcoin Risk Signal is stable at the lowest risk value (0), indicating that the risk of a pronounced drop in bitcoin's price remains low. However, we should keep an eye on any changes in the signal, as a sudden shift could signal a change in market dynamics and a potentially broader sell-off.
Despite the stability of the SBT Bitcoin Risk Signal, idiosyncratic risks persist in the crypto market. The recent US government crackdown on stablecoins, staking services, and custody services has sent shockwaves through the market, leading to investor anxiety. The news that Paxos has cut ties with Binance, and scrutiny over Kraken's staking services due to regulatory concerns have further fueled uncertainty, which could result in a loss of institutional confidence. In fact, the highest weekly fund outflows of 2023, totaling $32 million (figure 4), were reported in the aftermath of these developments.
In addition to the idiosyncratic risks facing the crypto market, macroeconomic headwinds are also a cause for concern. Recent economic data, including hot January CPI prints and signs of a strong economy, have led to worries that interest rates could remain sticky in the coming months, potentially dampening the market's growth prospects.
The SBT Altcoin Cycle Signal has increased since Uncharted 32 (figure 5), indicating greater altcoin dominance. The recent retrace of bitcoin has affected altcoins, with fewer in the green than in previous weeks. However, small caps have shown signs of higher momentum, supporting the view in Uncharted 32 that the broad market is risk-on and seeking altcoins for excess returns.
Enjoying the Uncharted so far?
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The macro environment
Earlier this week, bitcoin’s 5% run eroded as the SP500 logged the worst trading day of 2023 (-2%) as uncertainty over the Fed’s next move spreads. Hot CPI January prints, robust PMIs, labor market, and retail sales hint at a healthy economy.
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