Insights on the Crypto Down Cycle: Edition #6

Saturday, May 28th, 2022

Starting next month June, the FED will begin its Quantitative Tightening (QT) program to progressively reduce its balance sheet over the course of a couple of years at the rate of $95 billion every month

#1 | Global Market Overview – FED Rate Hikes Could Impact Crypto Market

Our new issue this week:
In closing the previous week, the Equity market has been down for 7 weeks in a row. This means now it only needs one more week to match the record only seen since 1923. At the same time, $BTC already broke its own all-time record of 8 down weeks in a row.

Consumer sentiment also reached a record low in the last 5 years as rising inflation was felt. At the same time, the risk of a recession becomes an imminent concern in consumers’ minds.
Starting next month June, the FED will begin its Quantitative Tightening (QT) program to progressively reduce its balance sheet over the course of a couple of years at the rate of $95 billion every month. It is almost double the size of the reduction rate the last time the FED trimmed down its balance sheet from 2017 to 2019.
The deterioration of the liquidity supply was felt in the market: $DXY rose. Which mounted pressure on the USD-denominated debt of the EM borrowers. The last QT ended when the equity market tumbled almost 16% at the end of 2018.

In Europe, ECB also signaled to end of the negative interest rates experiment. We observe the fixed mortgage rate climb up this month from 1% to 1.3% for a 25-year mortgage.

On the technical side, with the market crash that happened in May and we are entering the month-end / quarter-end rebalancing time, the fixed weight portfolio mutual funds (e.g. 60:40 bond/equity funds) will need to build up equity positions in order to reach target weights. We also saw liquidity deterioration for both equities and bonds in the charts below as measured by the market depth metric based on the average number of contracts on the best bid/ask. This low liquidity environment implies that market price can be impacted significantly, on both sides possible, by any large trading pressure.

#2 | Cryptocurrency overview

On the crypto side, the exchange net position change also indicates the market has been selling in panic during this recent market crash.  Which is similar to what was observed in May 2021. Only when the selling wave was over and $BTC moved out of the exchange in a consistent manner again that the market could finally find the bottom in July 2021.

The BTC/USD long positions on Bitfinex are intriguing to watch as it shows how professional traders do with their margin in different market environments. We can see they usually play contrarian moves. I.e buying when the market is panicking and selling when the market is greedy. E.g: building up a long position when the market crashes (for example in May-21 and Jan-22). And then unwind the position gradually once the market starts moving in its predicted direction.


Overall, we think that $BTC will likely move in a range while the macro market is finding the bottom. Any tactical short-term rally – due to a low liquidity environment, rebalancing period, short squeeze, or previously oversold conditions – will be short-lived, and should be treated as an opportunity to reduce existing exposure rather than building up a larger position for a sustainable uptrend.

Thank you for your attention!

Published on  May 28th, 2022 |

***Disclaimer: views given in this channel are for informational purposes only and are not financial advice.
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