No-hype conversations about crypto and blockchain.

We are at the proverbial fork in the road for Bitcoin it seems: are we bouncing off the $30k support, or are we breaking lower to $24k?

My take is this: the digital asset space, mainly Bitcoin, was the emerging asset post-Covid crash during the 2020 boom and into 2021. Thus it was the first to reach it's mid-cycle correction. The lagging markets, namely equities, are about to start their mid-cycle corrections. Wait for Bitcoin to be the first horse out of the mid-cycle transition and lead us back towards the peak of the broader cycle.

Let's set the stage and try to take in as much information as possible to give us a good idea of where we may go.

World News

The 'Delta Variant' headlines are weighing heavy on the markets right now as reports of spiking hospitalizations and fully-vaxxed individuals contracting different strains of the same virus roll in.

San Francisco, a place where ~75% are fully vaxxed from ages 12+, has seen a sharp rise in covid-related vaccinations.

While lockdowns may not be on the docket for reactionary measure against the advent of a new and more contagious strain of covid, consumer demand may certainly falter at a time when such demand is already at record lows.

This type of environment would be a case for the stagflation scenario where savings rates go up, consumer demand goes down, and prices continue higher due to record liquidity.

Macro Outlook

The main talking points:

  1. Inflation
  2. Market Peak
  3. Stagflation

The FED has been in tough waters recently as monetary policy has spurred a frenzy of inflation fears among investors and economic actors alike. The large buying spree of treasuries and mortgage-backed securities has caused asset prices to boom. Fiscal policy has stimulated consumer demand causing supply bottleneck inflation for certain consumer goods.

Even with these fears, long term bond yields are slumping in light of the delta variant news. This will put increased pressure on the FED to continue QE and not taper rates. Which would then heighten inflation fears yet again. So it is this constant battle for equilibrium between inflation and stagflation as the FED needs to incentivize labor participation without disincentivizing consumer sentiment — which, if unchecked, could lead to deflation.

The Delta-variant brings:

  • Risk of economic slowdown
  • Labor participation rate staying low
  • Consumer sentiment staying low

Inflation fears bring:

  • Slowed economic growth (high prices and lower purchasing power)
  • Collapsing bonds
  • Collapsing equities (higher borrowing costs, input costs and wage increases)

With the Delta variant and inflation fears, it is a perfect storm for a 10-20% haircut on wider equities market during a time in which things looks over-extended and investors aim to de-risk into the dollar.

The last time bonds slumped while equities continued to rip higher, the following happened:

This is what the 10-year yield looks like compared to the S&P-500 right now:

This could be a tell tale sign that equities are about to see a mid-cycle correction. This won't however be a time of recession though. The FED still has a heavy hand in QE and the system is flushed with cash without inflation reports coming in too hot to begin hawkish policy (depending on the denominator used). Buying the dip mentality could lead us into the final wave of this broader cycle before the FED begins expected tapering in 2022.

Bitcoin

This interesting chart I found correlates perfectly with on-chain analytics pointing towards whales accumulating during this Bitcoin mid-cycle correction.

Orange represents the Bitcoin price. Blue and Red represent Bitcoin long positions taken.

I pulled up the Bitcoin All Time Index vs Bitcoin Longs and it's easy to see people began longing Bitcoin at a rate just as volatile as the price has been dropping. This tells me that smart money realizes the opportunity.

This on-chain chart proves that:

Around the same time, supply held by wallets with over 1000 Bitcoin and under 10,000 Bitcoin have been accumulating.

Regardless of what happens in the short term, I do believe this cycle continues into 2022 until the FED starts tightening policy. Bitcoin has the advantage of being the fastest growing speculative vehicle during a time of which speculative investing is unintentionally incentivized by federal policy. This is why I believe this is a market agnostic slowdown – during a historically slow quarter anyway  – and why I think Bitcoin will be the first to lead the last push towards the broader cycle peak.

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