Pionex Research 

05.08 – 05.15

Abstract

• Bank failures and Trade-Fi black swan events present short-term opportunities for cryptocurrencies.
• The long-term prospects of cryptocurrencies rely on strong economic fundamentals and purchasing power, and we need to see changes in liquidity in the cryptocurrency market and a rise in the market value of stable coins.
• We believe that due to the significant reduction in stable coin balances, it is currently difficult to see a strong trend for altcoins.
• We expect Bitcoin to break through in the next few weeks. Our target price for the breakthrough remains at 35,000 – 36,000. However, there is still a possibility of a retrace to $24,000 – $25,000 before the next leg up.

Technical Analysis

Last week, we made a prediction that Bitcoin would experience a pullback after reaching the $30,000 mark, and recent market movements have largely validated this forecast as we approach our first level of support at $27,000. Although the $27,000 support level has been tested multiple times over the past three months, we view it as relatively weak. Instead, we believe that the clearer pullback level is the larger breakout level at around $24,000 – $25,000. This level is also coincidentally the production cost per Bitcoin for miners with a ~$0.06 KWH electricity cost, as shown on the chart below.

We recommend purchasing at these price levels and prioritizing structured product orders, as this aligns with the basic principles of supply and demand economics. If the electricity cost for producing a Bitcoin falls between $23,000 and $24,000, miners will not produce more when the price falls below this range. This is similar to gold production – if the cost of producing and selling gold is higher, producers will stop producing gold, resulting in a reduction in the supply of gold in the market. However, Bitcoin has a fixed production schedule, so if the price does indeed drop to this level, there will be fewer miners participating in the market, which will lower the security of the Bitcoin network. Generally, the production cost serves as the market’s lower limit and provides the strongest support.

On the daily chart, the market seems to have formed a lower high at $29,500 and is currently testing the $27,000 support level again. However, we view this support level as weak and see the formation of a bearish head and shoulders pattern. Using the measurement from the head to the neckline ($27,000), the potential move lower could be around $3,000, with a target support level of $24,000 – $25,000 in line with Bitcoin’s production cost.

Due to the above views the view we made in the past 2 weeks – that the risk-to-reward of getting long near $27,000 – $28,000 is not attractive remains unchanged.

From a narrative point of view we brought up Meme coins pumping while a lack of “new money” has entered the market making it unsustainable. Also Bitcoin’s market volatility has been tied to banking news, including First Republic being acquired by JP Morgan and other banks discussing potential failures. Interestingly, Bitcoin experienced a reversal following these events, while it had previously ran up following similar events. However, recently we have seen that more regional bank failures failed to develop into larger leg ups in Bitcoin. These are both signs of local exhaustion in our view.

While we may not see a breakthrough of 30,000 this week due to lack of momentum over the weekend, we still anticipate one in the coming month. Our breakthrough target price remains at 35,000-36,000, and we remain bullish on Bitcoin in the mid-term.

Macro Analysis

The Fed Raises Interest Rates Again, But Bitcoin Has Yet to Make a Significant Breakthrough

At the recent FOMC meeting, the Federal Reserve increased interest rates by 25 basis points, maintaining the federal funds rate between 5% and 5.25%. This move was in line with market expectations, and it is anticipated that the federal funds rate will keep rates here until the end of 2023. However, it is important to note that this was the first time the Fed did not include language about potential future rate hikes, indicating a pause might be here.

The Fed’s statement highlighted that economic activity had moderately expanded in Q1, with strong employment growth and low unemployment rates. However, inflation continues to be a concern. The Fed reiterated its commitment to keeping the core PCE at 2% and clarified that 3% is not under consideration. The Fed’s objective is to promote maximum employment and a long-term inflation rate of 2%. The market currently predicts that the year-end federal funds rate will be around 4.5%, which contradicts the Fed’s data and has led to a dispute between the market and the Fed.

The market believes that the Fed will need to adjust interest rates as a recession looms. However, the Fed has stated that it will firmly resist inflation and avoid cutting interest rates. If the market’s prediction is correct, risk assets could increase, while if the Fed’s analysis is accurate, the market’s anticipation of rate cuts could lead to a decline in cryptocurrency and stock prices, putting substantial pressure on the market.

Regarding the possibility of a recession, Powell’s statements suggest a mild recession but do not rule out the potential for an economic downturn. However, if obstacles arise that could hinder the Fed’s goals, it will be ready to shift direction and adjust its monetary policy. It should be noted that any policy changes by the Fed signify that the economy is already in decline. The Fed will not alter its policies lightly unless a recession is imminent. For instance, during the pandemic, the Fed adjusted its policy when the unemployment rate increased. Similarly, in 2008-2009, they started cutting interest rates when banks were failing, and people could not pay their mortgages. Therefore, when the Fed is compelled to change policy, it indicates that the economy is already in a recession and asset prices in a down-trend.

Banking Crisis Continues To Spread

US bank stocks are facing another round of turmoil, with West Pacific Bank’s stock price plunging. The bank is reportedly exploring various strategic options to support its financial situation and avoid being taken over by regulatory authorities, such as Silicon Valley Bank. However, media reports indicate that there are currently no potential buyers showing strong interest in acquiring the bank, and it may instead consider splitting or financing its operations. Insiders also warn of the risk of significant losses for any potential buyer due to discounted loan assets.

The drop in West Pacific Bank’s stock price has also impacted other regional banks, with the S&P regional bank sector experiencing a sharp decline. Alliance Western Bank and Zion Bank both fell by more than 10%, indicating that the banking crisis is far from over.

Data shows that there is still considerable liquidity pressure within the banking system, with the Federal Reserve providing outstanding loans to financial institutions through two loan support tools. The loan sizes for the traditional support loan plan and the new tool have both increased, further indicating the pressure within the banking system.

The recent 25 basis point rate hike announced by the Federal Reserve may exacerbate concerns about the outflow of deposits from small and medium-sized institutions. Reports suggest that major banks and private equity firms are unwilling to inject capital into regional lending institutions without government support, as they are concerned about potential book losses of loan and investment portfolios.

Cefi Bearish, Defi Bullish

Billionaire investor Stanley Druckenmiller has announced his short position on the US dollar, citing expectations of interest rate cuts from the Federal Reserve to address economic slowdown. This move could benefit alternative assets such as cryptocurrencies like Bitcoin, Ethereum, and XRP, as a weaker dollar usually leads to increased interest in these assets.

As the US economy faces increasing uncertainty, with inflationary pressures rising and potential Fed action to mitigate economic slowdown, a weakening dollar could decrease the value of traditional investments, such as stocks and bonds, and make alternative investments more attractive to investors seeking higher returns and hedging against inflation.

Since 2022, the US dollar index has shown a perfect inverse correlation with BTC

Since 2022, the US dollar index has shown a perfect inverse correlation with Bitcoin, which is currently attempting to break the $30,000 threshold, while Ethereum is trading around $2,000. A weak US dollar may increase investment in cryptocurrencies for several reasons. First, in an environment of a depreciating dollar, traditional investments may perform poorly, and investors may seek alternative assets such as cryptocurrencies. Second, a weaker dollar may increase commodity prices, including digital assets such as Bitcoin, which are often viewed as a store of value and hedge against inflation. Additionally, cryptocurrencies are decentralized and not tied to any single economy or central bank, making them a safer investment choice during periods of economic uncertainty. Increased demand for cryptocurrencies may drive up their prices, benefiting existing holders and attracting new investors.

Recent bank failures, including First Republic Bank, Signature Bank, and Silicon Valley Bank, highlight the necessity of DeFi, with the total size of these banks accounting for nearly half of the number of bankruptcies in 2008. As people may be wary of putting their money in banks, this could be good news for Bitcoin and gold.

Let’s look at the gold chart, gold has been consistently rising and Bitcoin has been following suit. While there is not a perfect correlation in the past 20 days the correlation between gold and BTC is anywhere between 50 – 100% while correlation with SPY has been steadily decreasing.

Correlation Chart

Coinbase Facing Crisis Amid Continued Regulatory Crackdown

Coinbase, one of the largest cryptocurrency exchanges, is currently facing a major challenge as the US Securities and Exchange Commission (SEC) intensifies its regulation of cryptocurrencies. The SEC’s crackdown on all cryptocurrency exchanges has caused concern among investors and traders, with many questioning the agency’s approach. Coinbase is fighting back against the SEC, insisting that the tokens it trades do not have security issues and filing a lawsuit against the agency.

The dispute between Coinbase and the SEC highlights the challenges facing the cryptocurrency industry in the US. While the industry has grown rapidly in recent years, it is still largely unregulated, and there is a lack of clarity on how cryptocurrencies should be regulated. The SEC’s approach has been criticized by many in the industry, who argue that the agency is treating all cryptocurrencies as if they are the same, without taking into account their differences.

The outcome of the legal battle between Coinbase and the SEC is likely to have significant implications for the cryptocurrency industry in the US. If Coinbase is successful in its lawsuit, it could set a precedent for other companies in the industry, providing greater clarity on how cryptocurrencies should be regulated. However, if the SEC prevails, it could lead to stricter regulations for the industry, which could have a significant impact on the growth and adoption of cryptocurrencies in the US.

Despite the uncertainty surrounding the regulatory environment, the cryptocurrency industry continues to grow, driven by increasing adoption and interest from investors. The recent market volatility, driven in part by the regulatory uncertainty, has not deterred investors, with many continuing to view cryptocurrencies as a long-term investment opportunity.

Fundamental Analysis

Stable Coin Balances Continue To Decline

The chart above displays the total balance of stable coins held across all exchanges. Currently, the stable coin balance on CEX is at $20.7 billion, representing a 45% decline since the start of the year, and hitting its lowest level since May 2021. The stable coins monitored by Glassnode consist of BUSD, GUSD, HSUD, DAI, USDP, EURS, SAI, sUSD, USDT, and USDC. The consistent decrease in stable coin balances signifies a decrease in liquidity and buying interest in the market.

Stable coins are essentially reserve funds utilized to purchase cryptocurrencies, and as the balance of these coins declines, so does the market liquidity. The decrease in stable coin balances is a bearish signal for the overall market in the short term, especially for altcoins, when an upward trend encounters stable cryptocurrency market value that is not growing.

The decline in stable coin balances is partly attributed to regulatory scrutiny of fiat currency inflows from banks and exchanges, such as Signature or Silvergate being shut down in the US. Despite the regulatory attempts to suppress cryptocurrencies, the present situation is still promising. We remain optimistic about the future since we believe that better regulations will emerge globally, like in the UK and Hong Kong, where there will be different fiat currency inflows with clearer regulatory requirements. A wave of interest is emerging from countries such as South Korea, Japan, and Australia. Thus, based on these factors, we are still hopeful that we may achieve the target of Bitcoin reaching $36,000 in the second half of this year.13113579j

RHODL Ratio: Buying On Dips Is Still The Right Strategy

The RHODL ratio is a metric used to identify the price high point of each macro cycle of Bitcoin. The green wave band indicates that the market is approaching the bottom of its cycle, which has historically been a good time for investors to buy BTC at a low price in each cycle. The ratio can also predict the position where the Bitcoin price may need to pull back (topping out) when the RHODL ratio line enters the red band, and the time when the BTC price may rebound after spending some time in the green band (buying on dips).

Currently, the RHODL ratio is still within the range of the green wave band, suggesting that the price is still suitable for buying at a low price in the current cycle. This aligns with the previous report that suggested buying Bitcoin below $35,000 was suitable for buying at a low price, which indicates the correctness of the previous long position view at the low level.

Overall, the RHODL ratio is a useful metric for predicting the price movements of Bitcoin under extreme market conditions, and it suggests that the current market is still in a favorable position for buying BTC at a low price.

Trading Recommendation

Currently, I plan to buy Bitcoin in the price range of $25,000 to $27,000. As we discussed earlier, the cost of mining one Bitcoin is approximately $24,000, so the downside is limited, and I do not believe that the price will significantly drop below this level. Additionally, buying at $27,000 and selling at $36,000 can provide a solid return of 40%. Even if there is an unexpected pullback in the price, I do not think it is likely to go below the 200-day moving average of $22,000. This represents a 15% drawdown compared to the potential 40% return, which is a risk that I am willing to take because Bitcoin seems to be ending a converging triangle and attempting to break out. I will buy a dip-buying package with parameters set at $27,000 and a 3-day holding period, which offers a 56% return rate. If the Bitcoin price continues to drop to $26,000, I will buy dip-buying packages with parameters set at $25,500 or $25,000. The more the price drops, the more Bitcoin I will buy to maximize my profit. Overall, I plan to execute this plan in the next five days and reassess my strategy as the price fluctuates.