Dear subscribers,
In this edition of Uncharted: Bites, we summarize the major points from Uncharted #14. The analysis begins by analyzing bitcoin's trading channel and the headwinds affecting its trend. All in the context of systematic selloffs due to a strong dollar and the upcoming Fed May meeting. After we deep dive into a healthy on-chain state and hedging activity in the derivatives market. The tightening shock may have been priced in, leaving room for upside potential.
Let’s dig in!
TL;DR
Bitcoin dropped below $40k following selloffs across asset classes.
The DXY at a significant price level and an upward move could restrain bitcoin.
April VC crypto investments are above the median, despite a low fund flow environment.
Long-term holders accumulated while short-term holders capitulated.
Healthy on-chain fundamentals led to increased hedging activity on the derivatives side.
Altcoin season loses steam as attention veers to bitcoin's next move.
The speculation behind the upcoming Fed meeting seems priced into the latest correction. Near-term upside is possible.
Bitcoin versus a strong dollar
Bitcoin’s trading channel narrowed to $37-$42k (Figure 1) as risk-on assets faced selloffs due to a strengthening dollar and vulnerable macroeconomic conditions. The next big move is highly dependent on capital flows and the DXY 102 significant level.
Figure 1: Bitcoin trading channel: $37-$42k
The inversed relationship between bitcoin and the DXY (Figure 2) denoted that a strengthening dollar could impede a move above $42k. However, the underlying cause of the DXY move is the key driver that will affect bitcoin.
Figure 2: DXY versus bitcoin
A tighter monetary policy could drive the dollar higher and cause a pessimistic fallout for risk-on assets and bitcoin. However, if the greenback soars due to foreign currencies weakened by developments on the war front, the effect is inconclusive. Overall, we follow the consensus belief that the Fed will accelerate its tightening of policy based on the rising rate of inflation (Figure 3). Therefore, some pressure is expected.
Figure 3: The Fed’s fight against threatening inflation
The upcoming pressure, derived from a tighter monetary policy, was priced in across markets. Gold remained the only asset class trading the green year-to-date, but it followed US equities, bonds, and bitcoin in their downward trend (Figure 4).
Figure 4: Risk-on and a risk-off selloff
The shaky sentiment reflected last week's fund flows (Figure 5). Nearly $14 billion were pulled out of US equities, while $3.3 billion flowed to US fixed-income securities. The trend could accelerate since we expect capital to flow out of international markets due to weaker non-US currencies denominated returns.
Figure 5: Capital flows
Fundamental health leads to hedging
Despite the turmoil in traditional and crypto markets and outflows from US equities, the rate of institutional capital flowing out of cryptos eased (see Uncharted #14). Furthermore, the size in dollar terms of VC crypto investments increased this month (Figure 6), which confirmed the ongoing belief in the crypto market’s long-term viability amidst a systematic selloff and strong dollar.
Figure 6: VC’s divesting in the crypto space
The crypto space is healthy as ever. Swissblock’s proprietary signals and the stablecoin supply ratio oscillator reflected capital rotating into bitcoin as the bottoming process was developing - looming altcoin season and easing bitcoin risk (Figure 7). Yet, as US equities headwinds spread to crypto, stablecoins gained ground.
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