Major event warning
Previous
- ⭑⭑⭑ Silvergate discontinued SEN services which allowed institutions to move money to crypto exchanges
3-7 Tuesday
- ⭑⭑⭑ Fed Chairman Powell testifies to Senate
3-8 Wednesday
- ⭑⭑ Beige Book
- ⭑⭑⭑ Fed Chairman Powell testifies to House
- ⭑⭑⭑ ADP Nonfarm Employment Change
3-9 Thursday
- ⭑ Jobless claims
- ⭑⭑ Fed Gov Waller speaks
3-10 Friday
- ⭑⭑ Building Permits
- ⭑⭑⭑ U.S. unemployment rate of 3.4% expected
Summary
- Gary Gensler says everything is a security. Gary is not the law, but it does mean the SEC will relentlessly pursue Crypto Companies
- Silvergate crash and liquidity crunch. Dropped by Coinbase, Galaxy, and Circle
- US 2 YR treasuries hit a cycle high of 4.944%, showing further rate hike expectations
- Expectations of rate hikes have increased from 5.25% – 5.75%, and likely to be no pivot till 2024.
- Small volume, no pullbacks/resistance on the way up = no liquidity/support on the way down.
- Bitcoin supply on exchanges has hit an all-time low
- 67% of the BTC supply has not moved in 1+ years, an all-time high
Two weeks ago, we said that macroeconomic conditions did not look positive in the US, which was true, and the S&P has been down trending ever since. However, the positive news of Hong Kong looking to legalize Crypto trading and China injecting liquidity into their economy countered these headwinds, and Bitcoin moved higher. This reminds us that Bitcoin is a global asset, and we need to be aware of the news from around the world. Bitcoin seems stuck in the middle of this battle between QE of the East and QT of the West. When comparing the aggregated Bitcoin volume, we can see it has traded with half as much volume in January than other January in the past, and even less volume was traded in February. This led to a very weak market structure as there is less market liquidity, so smaller sellers or buyers can move the market significantly, as seen last Thursday.
Macro
With the weight of macroeconomic pressures and stickier-than-expected inflation, the market could no longer hold on to hopes of a Fed pivot and moved to the downside. However, what was interesting is that Bitcoin made the opposite move. This was a refreshing sign as Bitcoin seemingly decoupled from traditional equities, as seen in the chart below. The 30-day correlation between Bitcoin and the Nasdaq index has reached its lowest point since December last year, near zero. This is a good sign for Bitcoin for the moment. It is less influenced by TradeFi markets on the bullish and bearish side. Bitcoin held strong while S&P was taking a big hit last week, and now while the S&P bounced, it moved strongly to the downside. While not the divergence in the direction we wanted to see, it showed resilience previously.
However, with the U.S. market recovering from its downtrend and the Chinese stock market pushing to the upside, we could see Bitcoin potentially finding demand near current prices. Some have dismissed Hong Kong’s intention to support cryptocurrencies to be traded. However, China Daily, an online newspaper run by the CCP, published an article titled “Hong Kong ready to become Asia’s crypto hub,” which makes it seem like the CCP is serious about exploring allowing crypto back. We see this as an ongoing tailwind for crypto for 2023 and 2024.
Futures open interest dropped by nearly $700 million during the time of the 5% drop. This indicates that the sell-off caused a cascading liquidation and probably multiple margin calls. The large order caused almost $200 Million in cascading liquidations in the overall market. We last had such big liquidations in BTC during the FTX and Celsius implosions.
The on-chain data shows us that the supply on exchanges as a percentage of the total supply has steadily dropped over the past 3 years. This shows that more and more supply is being taken off exchanges. The main thing to focus on is the lack of supply available. If demand stays consistent, this would be a big positive for BTC’s price development in the future.
Technical
BTC
Bias: Long-term Neutral, Short-term Bearish
We had a relatively flat week until Thursday when Bitcoin suddenly lost 5% in a matter of minutes. This was a reminder for us never to be complacent in the crypto markets; volatility can come anytime.
This type of sharp move is even more pronounced, given the collapse of FTX. When FTX collapsed, the order book for all crypto thinned, meaning large orders would easily affect the market price. It is a good time for bulls when the market trades up on low volume with little to no pullbacks. However, when the market moves up with weak structural support, large orders can also cause prices to crash because there was not enough volume participating in the up move.
You should focus on these levels for BTC to continue its current trajectory.
3 Levels
- $21,500 | This level needs to be reclaimed for this uptrend to continue.
- $20,500 | The initial monthly support level should be held for bulls to show their strength. It is also the level before the FTX collapse.
- $19,000 | The lower level of the trading range and ultimate level to be held if we want any hope of this uptrend continuing. If this level is invalidated, we will surely revisit lows of $15,500. Our ultimate target is $14,000 – $15,000.
Instead of $22,500 as an important level, we broke through it and established a higher low at $21,500. So this is a key level to watch if we want this current uptrend to be held. Under $21,500, we would have a break in trend, and we expect prices to quickly retrace to $19,500. With the 5% decline, we broke under the 9/21 EMA and 50-SMA. This is the first time we have gotten under the 50-SMA since January, a bearish sign, and it is now a level of resistance above. We have been saying for a while that this rally would be hard to sustain without building a more solid price structure. I would be in at least 60% cash since we are under the $22,500 level.
Interestingly, we saw a bunch of bids at $22,200 (shown in yellow) being pulled right before the sell-off. Did someone know this was going to happen beforehand? On the upside, a large 1000 BTC order block at $22,900 is working as a strong resistance. On the downside, we have a couple of 300 BTC blocks spread apart from $21.5k – $22k, but nothing concentrated like the one above. From this, we can see there is more supply than demand.
Alt Coins
Narrative Economics
The cryptocurrency industry has always been driven by narrative, and the essence of narrative economics is to tell the best story. Famous investor George Soros once said that participating in the financial markets is about identifying and participating in the bubbles and leaving before they burst. Similarly, participating in the cryptocurrency market is about identifying narratives, participating in narratives, and leaving before they are debunked.
LSD Narrative
LSD stands for Liquid Staking Derivatives. LSDs have become a hot narrative mainly due to the Ethereum Shanghai Upgrade plan, allowing users to withdraw their staked ETH after its implementation. LSD’s sources of revenue include ETH staking returns (around 5%), DeFi derivative returns, and interest from perpetual loans.
LSD Player Distribution
The top three ETH LSD players are Lido, Coinbase, and Rocket Pool.
First: Lido, accounting for 74%, a centralized LSD.
Second: Coinbase Wrapped Staked ETH, accounting for 15%, a centralized LSD.
Third: Rocket Pool, accounting for 5%, a decentralized LSD.
The current situation of ETH LSDs is centralized, and Lido is the absolute leader in the market.
LSD Project Classification
Most LSD is asset management, providing users with ETH staking services. Projects like Lido and Rocket Pool belong to this category. A small part of LSD is infrastructure, providing underlying technology to staking service providers like Lido, such as SSV. There is also a type of secondary staking, carried out in Eigenlayer’s smart contract and then staked again in other protocols.
Growth Space
The current ETH beacon chain staking rate is 13.28%, and the average staking rate of other PoS chains ranking top five in terms of staking market value is 60% to 70%. If the ETH staking rate reaches this level, it will be at least triple the current amount.
The narrative of LSD has just begun, destined to leave an important mark in 2023.
Associated Crypto Assets
- LDO
- SSV
- ANKR
- RPL
- FXS
Possible Trade
If you are looking to get into LDO, I would recommend investing in an 11-day duration, 2.2 strike Buy-The-Dip product. LDO has a large demand zone near $2.1 – $2.2. If you believe this uptrend will continue buying at the $2.2 zone is a good price to enter. If it doesn’t reach that price, you will receive approximately 1% return in 11 short days.
Recommendations
Structured Products | Medium Yield – Low-Risk
We have Powell speaking in front of the Senate and House committees this week, which could cause some volatility in the market. Especially with the recent sudden dump in price, traders are on edge, waiting for the next big move. Due to the risk of another outsized move, I will invest in short-term 1-day expiration BTC or ETH Buy-The-Dip products to prevent being stuck on the wrong side. I will invest in BTC or ETH with a strike price of $21,500 and $1,475, respectively. $21,500 marks the most recent higher-low and should be supported if prices move to the downside. So this investment is safer from getting executed but offers a relatively low APR of 14%.
Risk-averse (Grid Bot) | 1 – 12 months: (Sample Portfolio $1,000)
(This is a sample portfolio. Same % gains on a $1,000 or $100,000 portfolio.)
If we reach the $19,000 – $20,000 support level, I will open a Grid Bot with a $12,000 lower limit and a $30,000 upper limit with 100 grids. I would allocate 20% of my portfolio. Even though we expect prices to fall further final bottom of around $13,000 – $15,000, this Grid Bot will be able to buy the dip and make arbitrage profits in the processes. We expect to consolidate near the $19,000 – $20,000 trading range for a while.
Our running Grid Bots are up 4% in total in the past 2 weeks. Bringing our return on investment to 16%.
