State of the Crypto market! Macro series pt 6
Updated
Part 6 Hello everybody! Hope you have read the other 5 parts of our analysis so far. It took us a bit longer to put out the final part to include the altcoin market as well, but here it is! We won't include Bitcoin as we did that in part 5 and our analysis is already playing out. The bounce both in stocks and the crypto markets has played in ways that we've expected and we think there is some extra room to the upside for crypto markets as a whole. At the moment it is hard to determine whether more upside from here would also indicate new ATHs soon, therefore although it is possible that we get new ATHs in 2022, we don't think they will come very quickly. At the same time there are some major downside scenarios we need to be aware of, so we'll go through everything step by step.
The first thing we'll look into to get a better understanding of where the market stands right now, is Ethereum. ETHUSD fell from about 4900 all the way down to 2150, but really found support around 2400 and has now bounced up to 3050. It's currently sitting above its Monthly Pivot and seems to have reclaimed all major support levels between 2700 and 3000. However it is still not above its Yearly Pivot, neither has it is reclaimed its 3100-3200 major support or has crossed above any of its major moving averages like the 50-200-300 DMAs. Trading below these moving averages isn't bearish in itself and trading significantly below them can be seen as a sign that the market is oversold. However for us to assume that there is a long term bullish trend in place, we'd need to see the market close above them for some time. Not only that, but for us to assume that the bull is really back, we'd need to see the market reclaim the 3500-3600 area which for now is major resistance. Until that occurs we assume the market is still trading in a range and it is better to take it level by level. For now more upside is indeed likely and a move towards 3500-3600 is imminent, with a pullback down to 2800 being possible before break above the current resistance cluster. A key observation is that we are currently seeing the market pull into 50-200 death cross, while the bottom pretty much occurred very close to the time the market bottomed. This is precisely what we'd expect from a death cross (market to find a local bottom, pull into the cross and then go down again). In this occasion it makes even more sense as the market fell too much very quickly and didn't even retest the broken support levels. Now in terms of the potential downside, in our opinion the market will eventually test 1300-1700 as we believe it is 1. Going down to sweep the quadruple bottom, 2. Fill the two gaps left open on CME, 3. Touch at least one of the two high volume nodes between 1200 and 1800, 4. Touch the S1 Yearly Pivot.
Of course we get a fairly similar look when looking at the Total Market Cap or Total Market Cap excluding Bitcoin. They can both give us some extra information on the market than Bitcoin or Ethereum alone, although they aren't too different. As you probably already know, there are times where Bitcoin does better, or Ethereum does better or other sectors of the market do better, and it increasingly feels like at the moment there isn't clear sign that one will massively outperform the other as the market is somewhat saturated. Since July all we have seen is some sectors do incredibly well, just to deflate and give their place to another sector, and that's a clear sign that inflows in the market have decreased substantially. These decreased flows in turn significantly lower returns, especially in a market that is already up 10-20x from just 2 years ago. Currently both metrics are showing significant strength, with the Altcoin Market cap looking somewhat stronger and cleaner. It is below the 300 DMA and into a major supply zone, but has closed above the Yearly and Monthly Pivots, yet the Total Market cap is still below the Yearly Pivot. 2-2.2T is a very significant resistance zone for TOTAL, so closing above it might not be easy, yet even then we'd expect the market to stay between 2.2-2.5T for a while before being able to tell whether it will go above 2.5% and fully resume the bull. Until then 0.9-1T is possible for a final bottom. The situation for TOTAL2 is pretty similar, with 1.1-1.2T being the major resistance zone and 1.4T being the point that we assume the bull resumes if we close above. The truth is that when TOTAL was down to 1.5T the market was extremely oversold based on all sorts of metrics, potentially the cheapest it has been since March 2020 and has now come more towards neutral levels even though it is still 'cheap'. The thing is though, that being cheap doesn't mean that the market can't go lower, as usually the market goes from cheap, to very cheap, to extremely cheap, without that happening all in one go. Based on all our previous macro analysis we don't expect this bull to be over, we did expect a bounce and we are aware the the final bottom might be in. Yet, due to all the macro conditions it is very likely that some point in 2022 we could see markets roll over and the Fed to be forced to do an 180 degree turn. What we don't know is whether this could happen at any point in 2022, or even in 2023. Until then it isn't unreasonable to expect the USD to go down along with bonds, while commodities and stocks rally together as the economy and markets do better than expected. This could be because of consistently getting data better than expected, inflation coming down to around 2-3% and the Fed rate hikes being priced meaning that most of the panic selling around the Fed hiking rates has already occurred.
By looking at BTCDOM & BTCD we can get a better sense on where the market might be headed next, mainly relative to Bitcoin. For the next few weeks altcoins could keep outperforming Bitcoin, as they fell against it from early Dec to late January. When looking at the first two, we can see that the Bitcoin's dominance has been forming a huge base since its May bottom, yet this last move up was relatively slow and shallow compared to the previous to. The key reasons for this are that 1. Ethereum is gaining more traction, 2. Smaller coins gaining traction too and maintaining some of their value after major moves up, 3. Supply and number of those coins also increasing faster than that of Bitcoin. We can see that through BTCDOM which is an index that consists mainly off Ethereum and some other specific major coins, all of which have done badly. This index is looking pretty bullish in the medium term, as this is the first time it drops so slowly after a major move up and has even formed a golden cross, which occurred (surprise surprise) right at the top of BTCDOM. Hence in the short term we can see BTCD fall and even get all the way down to 36-38% as smaller coins do very well along with Ethereum, while many larger ones do pretty poorly. At the moment the main reason for which we'd expect altcoins to go down vs BTC, is because we expect them to have another major correction in USD terms. After that at some point in 2022 we expect to see Bitcoin rally alone in 2022 due to some major catalyst, like a spot ETF being approved or more countries adopting it as legal tender. Even though this major event could essentially be due to Bitcoin being adopted either by retail or institutions, there is a high chance that the next major move down we expect is caused by the Fed raising rates, which could then force the Fed to once again lower rates and continue QE, with governments being forced to spend more money to keep the world economy alive. This could be another major catalyst for hard money to rally, as investors could dump their cash back into apolitical and liquid hard money, which in turn could then lead into another major alt season, as the huge influx of new money in the space is exactly what is needed for things to take off. In the meantime of course NFTs and NFT related tokens could outperform the rest of the market with ease, and maybe it is NFTs that take the market to the next bull phase and not something else. If that is the case, then the next bull phase might start through ETH and not BTC, and that's why we'll take a look into Ethereum next.
Finally the last thing we'd like to look at is the ETHBTC ratio. Although ETH is the largest part of BTCDOM and BTCD, it is good to look at it on its own as for now it is the only reasonable contender for taking over Bitcoin. The key reasons behind this are 1. Ethereum implementing EIP-1559 and essentially becoming disinflationary/deflationary by burning fees, 2. DeFi still booming, 3. Most layer-2s and Dapps are on Ethereum, 4. NFTs using ETH as their currency (for now), 5. ETH 2.0 coming at somewhere in Q3-Q4 2022 and that being a stronger supply shock than a Bitcoin halving, as its inflationary rewards will drop by 75% and at the same time a huge part of the supply will go into staking. Therefore Ethereum has a lot more potential catalyst for pushing it higher and higher, with NFTs potentially being a repeat of the ICO mania, only to a larger extend. At some point we do expect NFTs to stop using ETH as a currency, yet this might happen in the distant future and not any time soon.
When we look at the ETHBTC ratio, we can see that ETH keeps putting in some sort of a bottom, then sweep the bottom and go higher. It is clear that the ratio is still in an uptrend and just had another 25-30% correction, so it could continue higher soon. It also bounced nicely on the 300 DMA and the Yearly P, so this correction might have been more than enough. However this doesn't mean that there aren't any bearish signs, as the way the market broke above 0.085 and then had a major dip lower and is still below the 50 DMA is bearish, plus the are some major untested levels lower, all the way down to 0.04. Hence until we see the market close above 0.09, we remain neutral.
The first thing we'll look into to get a better understanding of where the market stands right now, is Ethereum. ETHUSD fell from about 4900 all the way down to 2150, but really found support around 2400 and has now bounced up to 3050. It's currently sitting above its Monthly Pivot and seems to have reclaimed all major support levels between 2700 and 3000. However it is still not above its Yearly Pivot, neither has it is reclaimed its 3100-3200 major support or has crossed above any of its major moving averages like the 50-200-300 DMAs. Trading below these moving averages isn't bearish in itself and trading significantly below them can be seen as a sign that the market is oversold. However for us to assume that there is a long term bullish trend in place, we'd need to see the market close above them for some time. Not only that, but for us to assume that the bull is really back, we'd need to see the market reclaim the 3500-3600 area which for now is major resistance. Until that occurs we assume the market is still trading in a range and it is better to take it level by level. For now more upside is indeed likely and a move towards 3500-3600 is imminent, with a pullback down to 2800 being possible before break above the current resistance cluster. A key observation is that we are currently seeing the market pull into 50-200 death cross, while the bottom pretty much occurred very close to the time the market bottomed. This is precisely what we'd expect from a death cross (market to find a local bottom, pull into the cross and then go down again). In this occasion it makes even more sense as the market fell too much very quickly and didn't even retest the broken support levels. Now in terms of the potential downside, in our opinion the market will eventually test 1300-1700 as we believe it is 1. Going down to sweep the quadruple bottom, 2. Fill the two gaps left open on CME, 3. Touch at least one of the two high volume nodes between 1200 and 1800, 4. Touch the S1 Yearly Pivot.
Of course we get a fairly similar look when looking at the Total Market Cap or Total Market Cap excluding Bitcoin. They can both give us some extra information on the market than Bitcoin or Ethereum alone, although they aren't too different. As you probably already know, there are times where Bitcoin does better, or Ethereum does better or other sectors of the market do better, and it increasingly feels like at the moment there isn't clear sign that one will massively outperform the other as the market is somewhat saturated. Since July all we have seen is some sectors do incredibly well, just to deflate and give their place to another sector, and that's a clear sign that inflows in the market have decreased substantially. These decreased flows in turn significantly lower returns, especially in a market that is already up 10-20x from just 2 years ago. Currently both metrics are showing significant strength, with the Altcoin Market cap looking somewhat stronger and cleaner. It is below the 300 DMA and into a major supply zone, but has closed above the Yearly and Monthly Pivots, yet the Total Market cap is still below the Yearly Pivot. 2-2.2T is a very significant resistance zone for TOTAL, so closing above it might not be easy, yet even then we'd expect the market to stay between 2.2-2.5T for a while before being able to tell whether it will go above 2.5% and fully resume the bull. Until then 0.9-1T is possible for a final bottom. The situation for TOTAL2 is pretty similar, with 1.1-1.2T being the major resistance zone and 1.4T being the point that we assume the bull resumes if we close above. The truth is that when TOTAL was down to 1.5T the market was extremely oversold based on all sorts of metrics, potentially the cheapest it has been since March 2020 and has now come more towards neutral levels even though it is still 'cheap'. The thing is though, that being cheap doesn't mean that the market can't go lower, as usually the market goes from cheap, to very cheap, to extremely cheap, without that happening all in one go. Based on all our previous macro analysis we don't expect this bull to be over, we did expect a bounce and we are aware the the final bottom might be in. Yet, due to all the macro conditions it is very likely that some point in 2022 we could see markets roll over and the Fed to be forced to do an 180 degree turn. What we don't know is whether this could happen at any point in 2022, or even in 2023. Until then it isn't unreasonable to expect the USD to go down along with bonds, while commodities and stocks rally together as the economy and markets do better than expected. This could be because of consistently getting data better than expected, inflation coming down to around 2-3% and the Fed rate hikes being priced meaning that most of the panic selling around the Fed hiking rates has already occurred.
By looking at BTCDOM & BTCD we can get a better sense on where the market might be headed next, mainly relative to Bitcoin. For the next few weeks altcoins could keep outperforming Bitcoin, as they fell against it from early Dec to late January. When looking at the first two, we can see that the Bitcoin's dominance has been forming a huge base since its May bottom, yet this last move up was relatively slow and shallow compared to the previous to. The key reasons for this are that 1. Ethereum is gaining more traction, 2. Smaller coins gaining traction too and maintaining some of their value after major moves up, 3. Supply and number of those coins also increasing faster than that of Bitcoin. We can see that through BTCDOM which is an index that consists mainly off Ethereum and some other specific major coins, all of which have done badly. This index is looking pretty bullish in the medium term, as this is the first time it drops so slowly after a major move up and has even formed a golden cross, which occurred (surprise surprise) right at the top of BTCDOM. Hence in the short term we can see BTCD fall and even get all the way down to 36-38% as smaller coins do very well along with Ethereum, while many larger ones do pretty poorly. At the moment the main reason for which we'd expect altcoins to go down vs BTC, is because we expect them to have another major correction in USD terms. After that at some point in 2022 we expect to see Bitcoin rally alone in 2022 due to some major catalyst, like a spot ETF being approved or more countries adopting it as legal tender. Even though this major event could essentially be due to Bitcoin being adopted either by retail or institutions, there is a high chance that the next major move down we expect is caused by the Fed raising rates, which could then force the Fed to once again lower rates and continue QE, with governments being forced to spend more money to keep the world economy alive. This could be another major catalyst for hard money to rally, as investors could dump their cash back into apolitical and liquid hard money, which in turn could then lead into another major alt season, as the huge influx of new money in the space is exactly what is needed for things to take off. In the meantime of course NFTs and NFT related tokens could outperform the rest of the market with ease, and maybe it is NFTs that take the market to the next bull phase and not something else. If that is the case, then the next bull phase might start through ETH and not BTC, and that's why we'll take a look into Ethereum next.
Finally the last thing we'd like to look at is the ETHBTC ratio. Although ETH is the largest part of BTCDOM and BTCD, it is good to look at it on its own as for now it is the only reasonable contender for taking over Bitcoin. The key reasons behind this are 1. Ethereum implementing EIP-1559 and essentially becoming disinflationary/deflationary by burning fees, 2. DeFi still booming, 3. Most layer-2s and Dapps are on Ethereum, 4. NFTs using ETH as their currency (for now), 5. ETH 2.0 coming at somewhere in Q3-Q4 2022 and that being a stronger supply shock than a Bitcoin halving, as its inflationary rewards will drop by 75% and at the same time a huge part of the supply will go into staking. Therefore Ethereum has a lot more potential catalyst for pushing it higher and higher, with NFTs potentially being a repeat of the ICO mania, only to a larger extend. At some point we do expect NFTs to stop using ETH as a currency, yet this might happen in the distant future and not any time soon.
When we look at the ETHBTC ratio, we can see that ETH keeps putting in some sort of a bottom, then sweep the bottom and go higher. It is clear that the ratio is still in an uptrend and just had another 25-30% correction, so it could continue higher soon. It also bounced nicely on the 300 DMA and the Yearly P, so this correction might have been more than enough. However this doesn't mean that there aren't any bearish signs, as the way the market broke above 0.085 and then had a major dip lower and is still below the 50 DMA is bearish, plus the are some major untested levels lower, all the way down to 0.04. Hence until we see the market close above 0.09, we remain neutral.
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