The Drip #9
There are a multitude of topics that I have been brewing over in the digital asset industry, blockchain, and traditional finance over the last week that I want to get on paper, per se. I have been thinking about where this space is ultimately headed, what the world will look like, AI, short to mid term financial landscapes and more. Today, I am going to jump from topic to topic and explain my thought processes for each to either spark some dialogue or broaden some perspectives, either way, these will be less edited and/or less cherry-picked and will reflect how my brain thinks about things.
Before we jump into it, let me preface this brain dump with the fact that I encourage you to offer some of your own insight, disagree, agree or even prove me wrong but most importantly to brew up some nice hot coffee before you read. Let's start.
Here are the topics I am going to cover:
- Bitcoin Market Analysis
- The Death Cross
- The FOMC
- Inflation / QE
Bitcoin Market Analysis
There are always a few best practices to follow when it comes to adequately analyzing the state of Bitcoin. The first for me is usually a brief technical view on the daily and sometimes weekly time frames to conceptualize price action. Next, is to zoom out and look at macro market structure for trends and patterns. After that, some on-chain analysis is crucial to either oppose or support your technical and macro perspective. Lastly, is to stay up to date on external fundamental factors that have influence on the market.
There are a couple ways to look at the price action of Bitcoin. The first way is to establish some trendlines using candle closes and opens.
Let's break it down. In January/February (left side of the chart) we had a semi-similar market structure that also had speculators extremely worrisome of a coming bear market. Price action topped at around 42,000 and started the descending wedge. Price broke out of the descending wedge (a bullish pattern) and began it's climb back up to the 38,000 S/R level (indicated by yellow rectangle). After breaking through that S/R level for the first time in February it began to backtest it as support and upon support confirmation broke bullish to new ATH.
Looking at our current structure we can see a somewhat similar formation, a top of around 42,000 on the bullish reversal attempt in mid-May. This trendline looks more like a descneding channel than a wedge to me which indicated continuation unless rendline is broken, which it has to the upside. We are now backtesting that same S/R level we did back in February.
The differences here is in January the market showed bullish momentum on the January 29th options expiry (record-setting) indicated by the green arrow when market makers aggressively hedged their OTM (out-of-the-money) short calls by spot longing into the S/R level. Retail then traded into the momentum and back up to the S/R range where the major external catalyst (Tesla announcing balance sheet BTC purchase and payment acceptance) sent us upwards, rapidly. Also, January was the last of the major 6-month GBTC purchases. This was entirely institutional-led. Can we say the same for our current structure?
If we do successfully backtest this S/R and flip as support we still need to break through the absolutely massive resistance at 42,000 (indicated by horizontal dotted line). 42,000 represents the neckline for the obvious 6-month H&S (head and shoulders) which is a bearish pattern. The 200-day moving average is also converging quite nicely in the 42-43,000 range as resistance (indicated by the rectange under the red cross). The biggest worry people have though is the upcoming death cross (indicated by red cross) where the 50-day will break through the 200-day moving average to the downside, another bearish signal.
Remember the further you zoom out the more perspective you gain, also HTF (high timeframe) patterns always take precedence over LTF (low timeframe) patterns. So let's zoom out.
Before you ask, I dont have enough knowledge of Wyckoff patterns, as Im sure is true for 99% of people on Crypto Twitter, so I am not going to analyze macro structure based off of that particular pattern. I will however zoom out and discuss Bitcoin's history alongside some S&P 500 examples to broaden our perspective on bearish indicators.
The Death Cross
Death Crosses are entirely overhyped and misunderstood. Again, people online usually have no idea what theyre talking about and share shit their favorite influencer/trader posts to appear smart without actually taking the time to learn it for themselves. So, let's discuss moving averages, lagging indicators, and the upcoming death cross.
First thing to remember is that moving averages are lagging indicators which means they follow price and are not always accurate when predicting future price action. Secondly, moving averages that trend downward indicate slowed momentum not necesarily crashes. Finally, the longer price takes to bottom the more likely it is to continue downward as it is an indication of a downtrend and inversely the shorter price takes to bottom the less likely it is to continue downward as it is NOT an indication of a downtrend.
Let's talk about previous death crosses in Bitcoin's recent history, of which there were 3 with an impending 4th. Out of the 3 past death crosses 2 were good indicators of further downside, and therefore a good selling area.
Number 1 was after the 2017/18 top which marked the end of the previous bullmarket. As you can see it took 31 days for price to bottom out before the death cross at a 65% drop. The bulltrap occured when price bounced back into the 50-day MA which subsequently crossed below the 200 MA and marked another sell off. This is an example of a successful death cross signaling further downside.
Number 2 was after the 2019 mini cycle in which price took 48 days to bottom out before the death cross at a 33% drop, another successful death dross signal.
Number 3 is where it gets interesting. We saw a flash crash of 57% during the Liquidity Crisis of 2020 that only took 6 days to bottom out before a death dross. This is an example of price crashing versus price in a downtrend. Remember it took a month for price to bottom out in 2018, indicating a macro momentum slowdown over time and very weak structure, it took a month and a half in 2019 for price to bottom out indicating the same thing.
Number 4 is our current upcoming death dross. Much like Number 3 our most recent crash lasted only 9 days with a 50% haircut. This tells me it is not an indication of a downward trend but a flash crash much like 2020. After the Death Cross of 2020 it took the market 34 days to fully recover to previous highs. If the death cross happens in the next few days then this is directly in line with my previous Grayscale expiration theory that much of the market manipulation from institutional investors will subside post-July.
Another similar scenario happened in 2015 where the price of Bitcoin flash crashed 40% in 7 days, then the death cross occured as a lagging indicator which marked a massive uptrend. In my opinion, this upcoming death cross will go out with a whimper rather than a bang.
Let's take a look at the S&P 500.
The S&P 500 has been in an 11 year on-going bullmarket, for reasons outside the scope of this braindump. Within those 10 years, it experienced 5 death crosses and have all been treated as healthy corrections to an overall bullish index. Let's look at Bitcoin.
Very similar story. Take it how you will. We could range for a year and a half, we could sell off or we could moon in the next couple of months. Anyone tells you something in absolutes is lying to you.
I think we've covered enough Bitcoin analysis so I am going to call an audible and not go over on-chain metrics as I want to be able to cover the other topics as well.
Just today the Federal Open Market Commitee took place and every informed player in the investment space was watching. Well, it was rather underwhelming, the Fed arent really going to change much, their single mandate to maximize employment is the continued mission. Overall, they remained relatively doveish.
The FED will continue to buy $80 billion in bonds and $40 billion in mortgage-backed-security secondary markets per month until they have hit their goals. Which means interest rates should stay the same so equities indices should be fine, bonds should be worse off and FX markets are great volatility trades, especially the Dollar.
Their goals are the following:
We should not expect hard tightening until these goals are somewhat met which all point to late 2022. We can, however, expect tapering from spending as we approach these goals. This means 'Up Only', right? It seems this way because of the role the Fed must play.
The role the Fed plays here is highly psychological as it pertains to the speculative investment space (retail and some hedge funds) and will continue to drive market sentiment. Does QE directly correlate to assets magically appreciating in price? No. QE lowers rates by tightening internal financial systems/buying up collateral and incentivizes borrowers to invest in risk assets. However, the broader public believes QE means "Up-Only." A strong case could be made when we look at that S&P 500 chart above, though huh?
The thing that even the big guy's are not understanding is the prices arent necessarily over inflated or over valued, it's literally just the devaluation of the denominator (the Dollar). This causes people to be weary of macro market conditions and want to short every equity, tech stock etc. The reality is the value over time is relatively stagnant when compared to things like the Fed's balance sheet or Gold, as you can see from Raoul Pal's comparisons. I think this plays a key role in how the next couple of years plays out, however it does not mean that it will.
The Fed knows the majority of househould wealth is tied up in equities, so they cant afford to have the equities market collapse. If it collapses, the sell off would put even more cash in the comemrcial banks balance sheet that will be left un-collateralized. Un-collateralized cash is bad for money market rates and currently QE has yet to start actually easing, by means of lending growth. Most month/over month lending charts are showing contraction since March 2020 and have yet to incentivize lending. Until then, the stock market needs to remain unscathed which is why talks of tapering were postponed to September/October time, when forecasts indicate lending will begin taking place again.
So our stock market is being held up, but could possibly fall, interest rates are going to remain 0-.25%, and the Fed will continue to lend collateral to banks to incentivize deposits. What about inflation? Prices wont rise, goods, services and assets will be valued higher because of a devaluing dollar, and judging from today's FOMC, will continue to do so. It looks like inflation-hedge assets are the play.
Is Bitcoin an Inflation-Hedge Asset?
In my opinion, I think Bitcoin acts more like a tech stock far out on the risk curve right now. It's road to being a pristine store of value is early but well on the way. Whether nations adopt it for remittances, CBDC's adopt it for payment rails, or corporations put it on their balance sheets, Bitcoin is slowly becoming what it was meant to be. As of now, it's network effect is only just entering the tipping point but is most definitely too early to be valued as a true inflation-hedge asset. The reality is, in the current financial conditions, it doesnt fucking matter. It truly is Up Only as long as the Fed continues to QE and consumers begin taking on debt.
Brain Dump Session
That's enough brain dump for you today. I might make these a normal occurence when I have things on my mind I want to cover.
I didnt realize how long these would take, but here are things I will cover in the next brain dump session:
- Taproot / Lightning
- Tether Issue (stupid in my opinion – but I will address it nontheless)
- NFT vs NTF
For now, I might do another brain dump next Tuesday or Thursday. Friday I'll be covering Rejuve for our Paperbyte series, and the tokenization of real estate / funds like Blackrock turning us from an owning to a renters economy next Wednesday. Stay tuned.