Uncharted 34: Elevator up, elevator down

10 March 2023

Dear subscribers,

In Uncharted 33 we feared that the low Bitcoin Risk Signal and bitcoin’s steady positioning in the bullish quadrant could be soon upset by the piling up of idiosyncratic risks. You probably noticed just that happen in the last couple of weeks. Most prominently, the Fed signaled a renewed dialing up in hawkishness, while crypto-friendly bank Signature has seized operations. The ripple effects are seen in our signals and macroeconomic indicators that paint a rather bleak short-term picture with a few structural glimpses of hope here or there.

As the price jigsaws back down to levels we saw two months ago, one thing is clear about crypto’s liquidity games: While traditional markets are known to take the stairs up and the elevator down, crypto has been high-tech enough to take the elevator in both directions.

Let’s dig in!

Photo by Ryunosuke Kikuno on Unsplash

You can expect blowups and explosive errors in fields where there is a penalty for simplicity. - Nassim Taleb

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At a glance

• State of the System

  • Bitcoin dipped below the $20k psychological level, with bullish momentum fading and perceived risk escalating given macroeconomic tensions.

  • Holding the nearest support level of $19.2-$19.5k is crucial to avoid deeper drops, but sentiment has turned cautious and the SBT Bitcoin Risk Signal has accelerated toward the high-risk extreme.

  • The outlook for altcoins is not bullish, with the SBT Altcoin Cycle Signal dipping to the bitcoin regime and suggesting a short-term bearish outlook, but attention is on bitcoin, as it will set the stage for alts.

• The macro environment

  • The market has shifted to price a 25bps rate hike as the most probable outcome for the March FOMC meeting, with the terminal rate priced above 5.6% and the DXY pushing higher.

  • The short-term upside for bitcoin is limited until inflation cools and the DXY retraces triggering the next wave, although a structural bottom may be forming according to cross-asset analysis.

• Crypto’s course

  • The market is still positioning on the short side despite profit-taking, and low open interest is indicative of apathy.

  • A higher allocation in cash is prudent until bitcoin sets the stage, and relative beta should do best under this environment see figure 12.

• Outlook

  • Altcoins are losing momentum as bitcoin faces pressure toward lower support levels. According to the dynamics between drawdowns and returns, we could see a bottom - see figure 13.

  • While the lack of bidding or take-profit zones below current levels is a concern, bitcoin’s recent liquidity dynamics show a move to the upside in the works.

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State of the System

Since the last update, bitcoin has retraced significantly, it is fluctuating around the $20k psychological support level and -17% since Uncharted 33. Bullish momentum faded - and is at risk of turning bearish - while perceived risk escalates in view of macroeconomic tensions and banking concerns. The State of the System is fragile as we move away from the extreme of the bullish quadrant and make way to the neutral quadrant (figure 1).

It’s been a liquidity game for the last couple of weeks (months) and the same players pressuring bitcoin at support levels and the counterpart fighting for support to hold. Is this a slowdown within a longer-term bull run (neutral quadrant)? Or is it the beginning of the end of the 2023 run (bearish quadrant)?

Figure 1

Bitcoin is once again around the $20k psychological level. In short, the insufficient liquidity did not stand a chance against the increased selling pressure caused by idiosyncratic factors such as those hinted at in Uncharted 33. It is paramount that we hold the $19.2-$19.5k level (nearest support) to avoid deeper drops to more liquid levels (figure 2) below $18k to the $16.9k level. The ultimate test is reclaiming the $20k plus range or shaking off the selling pressure and holding at current levels ($19.2-$19.5k). As this Friday continues, the latter - a holding of $20k - seems to remain a valid possibility ahead of the weekend.

Figure 2

We are on thin ice, however. The SBT Risk Signal has accelerated toward the high-risk extreme (figure 3) as activity is skewed to the sell side and $20k buyers remain shaky. Crypto tensions continue with selling pressure created by the Silvergate and Voyager troubles, as well as the Mt. Gox repayments lining up in the not-too-distant future (while the claims deadline has been delayed again). Meanwhile, traditional risk assets turn risk-off as there are concerns of a broader banking issue with Silicon Valley Bank. However, in the past, the risk signal at the extreme has led to subsequent price stability as long as we don’t remain there for a prolonged time.

Figure 3

Sentiment has turned cautious amidst the challenging environment. Instead of seeing a stronger spot demand, the demand for downside protection (puts) has increased as per the 1-month 25D skew (figure 4, “value” represents 1m 25D skew), while the put-to-call open interest ratio reinforces that view.

Figure 4

The charged environment and sour sentiment have weighed on altcoins, as well. The SBT Altcoin Cycle Signal has dipped to the bitcoin regime (figure 5), indicating that the altcoin season or dominance has come to an end. The outlook for the altcoins is not bullish, the combination of a decreasing Altcoin Cycle Signal and increasing Bitcoin Risk Signal suggests a short-term bearish outlook. However, this could be the sign of a bottom as well: once the risk signal has topped out and altcoin drawdowns begin to decrease. Our attention is on bitcoin as it will set the stage for alts.

Figure 5

Note that a stronger-than-expected bitcoin in the next few days may well lead to a fresh round of short squeezes: A phenomenon we have observed repeatedly this 2023 where strong bearish narratives have been repeatedly undercut by strong market performance of crypto and other risk-on assets.

Enjoying the Uncharted so far?

👍 | 👎

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The macro environment

Given the market conditions described above, we believe that keeping an eye on the macro environment is paramount. The market is again positioned in a protective stance, awaiting the upcoming catalysts: the outcome after the FOMC meetings on March 21 and 22 and whether bitcoin’s ties to traditional assets strengthen.

Uncertainty over the March FOMC meeting outcome has increased as the market is back and forth between a 25bps and 50bps rate hike (figure 6). For the better part of the week, 50bps was the most likely outcome, yet a higher-than-expected unemployment rate (3.6% vs 3.4%) shifted the odds to a 25bps hike (figure 6). The outcome of the meeting will be the catalyst behind bitcoin’s next move.

Figure 6

Our attention is on the DXY at the moment because risk assets’ upside is limited as…