Pionex Research 05.01 – 05.07

Abstract

This article analyzes the impact of macroeconomic fundamentals on the demand for cryptocurrency trading to predict the market trend and provide trading strategies.

Macro Environment Analysis

Coin-Tech Stocks Rebound as Interconnectedness

The financial reports of Microsoft, Google, and Meta have exceeded expectations, leading to a substantial rebound in Nasdaq index futures. This temporary recovery has alleviated concerns about the underwhelming financial results of First Republic Bank and has fueled the rise of technology stocks. Considering the intimate association between technology stocks and cryptocurrency, the coin market has also witnessed a significant upswing. Nevertheless, the earnings season continues to be fraught with uncertainty. While the positive developments at Microsoft, Google, and Meta are noteworthy, they do not assure favorable outcomes for upcoming financial reports.

US monetary supply shock in March

M2 is the largest classification within the monetary system, covering all forms of currency that hold potential purchasing power in the real world. Following a 2% decrease in February, the US M2 money supply experienced an additional 4% decline in March, marking the swiftest monthly reduction since 1930 and serving as a significant economic red flag. It has been nearly a century since we last observed a contraction in the money supply, and we may now be confronted with a substantial recession and a consequential banking crisis. During the Great Depression in 1929, we last witnessed a notable reduction in M2, which corresponded with soaring unemployment rates, as well as major failures of both banks and corporations. As the money supply contracts, the designation of Bitcoin as a “digital gold” option for protecting against inflation may become less robust, which is likely to discourage any significant price increases.

SVB and First Republic Bank Contagion?

Since the 2008 financial crisis, the Federal Reserve has maintained historically low-interest rates, which has incentivized banks to lower their rates and expand their balance sheets, contributing to the proliferation of a massive corporate debt bubble. The Federal Reserve reports that US corporate debt has doubled to $20 trillion by the end of 2022.

However, when the money supply contracts, heavily leveraged businesses are inevitably at risk of closure and layoffs. For instance, First Republic Bank reported a 36% year-on-year decrease in deposits due to the contraction of M2 money supply, while loans increased by 23%, creating an unsustainable situation that forced the bank to significantly reduce its loan portfolio and balance sheet to cope with lower deposits.

This contraction of the money supply has resulted in decreased availability of mortgage loans, commercial loans, and overall economic funds, which in turn reduces sources of profit. With inflation remaining high and the contraction of the money supply showing no signs of ending, the core PCE index recently showed a 4.9% increase in the first quarter, which is still relatively high.

Consequently, companies face a shortage of capital precisely when they need it most to pay for expenses, potentially leading to large-scale bankruptcies and layoffs, as was the case with First Republic Bank.

While bearish news for the traditional financial industry, this situation presents an opportunity for decentralized finance (DeFi), as it remains unaffected by liquidity issues. In fact, the recent rebound of Bitcoin and Ethereum suggests that negative news for CeFi is actually bullish for DeFi. However, if the banking crisis spreads to the general industry and affects liquidity, even safe-haven products like gold and DeFi may face indiscriminate sell-offs, as occurred on March 12, 2020.

The Shadow of Stagnation Returns to the Market

1. The much-anticipated GDP data fell far below expectations, with the market anticipating a 2% growth rate while the actual growth was only 1.1%. This result was lower than the forecasts of most investment banks on Wall Street.
2. The core PCE index, the Federal Reserve’s most critical data, grew by 4.9% in the first quarter, surpassing the 4.4% growth recorded in the previous quarter, making it the fifth consecutive time it exceeded market expectations. This new high set a record in a year, indicating that inflation is accelerating. Given that the core PCE is still far from the Fed’s target of 2%, rising from 4.4% to 4.9%, the Fed will undoubtedly need to continue raising interest rates.
3. In the United States, the number of initial jobless claims unexpectedly dropped by 16,000 to 230,000 last week.

The latest data presents an interesting mix, with GDP growth falling short of expectations, core PCE inflation exceeded expectations, and initial jobless claims were lower than expected. While weak economic growth and rising inflation can be a concerning combination, a strong labor market could provide some support to the economy. The Fed may view this combination as a reason to continue raising interest rates in the near term to keep inflation in check. However, overall, these macro factors may not have as significant an impact as last year, and other indicators should also be considered.

Technical Analysis:

The recent rise in Bitcoin price can be the result of multiple factors resonating together, with the lagging reaction of the US Federal Reserve’s monetary policy and the bank crisis being the main drivers. Before January of this year, the Federal Reserve printed a large amount of money and provided loans to banks to inject funds into the market. The collapse of some banks has strengthened the argument that Bitcoin is a hedge against inflation. Bitcoin quickly broke through $30,000 from $20,000 in March. If there had been no news of bank collapses, the market could have collapsed again and dropped below $27,000. The strengthening attractiveness of Bitcoin has led to an increase in buying activity, with volume and price both rising and bullish sentiment soaring.

It’s clear that many investors had high hopes for Bitcoin’s price and started buying it during the hype. However, the four-day low of $20,000 was missed by many. Currently, Bitcoin’s price is experiencing fluctuations at relatively high levels, with some people even willing to buy it at $30,000, which could indicate an overhyped and potentially deceptive market. Experienced investors may choose to sell their Bitcoin, take profits, and wait for better opportunities to repurchase at lower levels. It’s normal for the market to experience retracements at pressure levels, such as Bitcoin’s current level at $30,000. Patience is a crucial trait for investors, and it’s best to avoid buying during frenzies at high prices.

Whale sell-off

In the course of Bitcoin’s history, notable whale trades have frequently occurred at price peaks. This could be attributed to the experienced players who have accumulated substantial quantities of Bitcoin having a superior comprehension of when the market may be overheated in comparison to regular traders. These whales are sometimes referred to as “smart money.” Therefore, tracking their activities over time and observing when large amounts of previously inactive tokens are transferred on specific dates can be exceptionally advantageous. This phenomenon is commonly known as the “whale shadow.” Currently, there have been two instances where whales moved tokens over ten years old in April, which corresponds with the recent decline to 31,000.

Bitcoin Experiences Volatile Market as Bulls and Bears Clash in a Massive Shake-up

On the evening of the 26th, Bitcoin experienced a rapid surge, reaching $30,000 before plummeting to around $27,200 in hours, exhibiting its typical rollercoaster-like volatility. The extreme fluctuations caught many European and American investors off guard, while some Asian investors awoke to find their contract accounts had been liquidated. According to Coinglass data, positions worth more than $350 million were liquidated within 24 hours, and both long and short positions were affected. The cause of the sudden drop remains unknown. However, on-chain analyst @Phyrex_Ni suggests that profit-taking and exit strategies were likely implemented, especially after Bitcoin surpassed the $30,000 threshold, which may have been premeditated.

Our Viewpoint

Expanding on our previous stance, it is highly likely that interest rate hikes will be put on hold for the remainder of the year. However, if the contraction of the money supply persists, it could present significant economic challenges. Our analysis suggests an economic landing process may occur within the next 3-6 months. This could prove to be a daunting task for a debt-dependent economy such as the United States. Nonetheless, we do not predict a hard landing as the Federal Reserve and the government will take necessary measures to prevent it. In fact, the Federal Reserve may act earlier than expected to stabilize the situation. While interest rate cuts and balance sheet expansion may be implemented eventually, we can anticipate some market corrections and pullbacks beforehand. Despite the current upward trend of Bitcoin’s price, it is crucial to be mindful of the uncertainties and risks. Our stance on the market is to remain neutral until Bitcoin convincingly breaks through and maintains its position above the critical $30,000 level.

Trading Recommendation BTC Buy-the-Dip

I think if the price drops to around $27,000 in the short term, it will receive strong support. Therefore, I recommend using the structured product on Pionex – the “Buy Low Sell High” bot, with parameters set at $27,000 for a duration of 6 days. If the price does not drop to $27,000, investors will earn an annualized interest rate of 6.87%. If the price drops to $27,000, the bot will successfully buy at the bottom, establish a position, and earn interest. At the same time, I suggest that investors who are still on the sidelines can choose the “Buy Low Sell High” bot with parameters set at $25,000 for a duration of 6 days. This strategy is more conservative and can earn an annualized return of 2.38% even if the price does not retract to $25,000.