Crypto: on the verge of breakout or breakdown (Patreon)

Over the past two weeks, we saw a macro driven move to the upside for cryptos . However, the pace of the strength is slowing versus the previous two week period.  For further price action, all eyes are focused on a variety of macro data this week including FED and employment data. A major break in either direction could set off the direction for the next leg. 

Chart: Bitcoin consolidating in a tight range

Macro is still the main driver of price action. Despite the fact that crypto fundamentals are still weak, macro and flows have been very positive for risk assets. Inflation have decelerated YTD, and yields have fallen. The below chart is important in the markets today. The 10 year is at the support line of a upward trending range that started a year ago. 

After reaching the peak of 4.3%, the 10 year retraced around 20% to the current level of 3.5% which is at a technically important support level. Now TA is usually useless in isolation, but when combined with real events, then key price levels becomes important points of focus as the entire market will be focused on where the new trend will form. In this case, the support level could either break (positive asset prices) or continue upward trend (negative asset prices), 

ETH/BTC Spread

Another indicator is the ETH/BTC spread. Generally ETH will outperform when crypto fundamentals are strong, ie around the ETH merge, or if transaction count is increasing significant during the Defi and NFT bubbles. This is because ETH creates value whenever there’s real demand for the blockchain. 

Conversely, BTC is seen as a asset allocation play into crypto and hence is more sensitive to macro flows. In the chart below, we can see that the ETH/BTC spread is testing the bottom of the range. What we actually want to see is this spread moving higher while risk assets move higher as well, which would indicate that both engines: fundamental and macro is improving. But just based on the current setup, if the macro tailwind is done, then the current upward momentum could quickly stop without fundamental support.

ETH deflation

Although fundamentals are not all bad. Because of the recent pump, ETH supply is now again in a deflationary mode. Now it’s not entirely correct to call this fundamental, as the deflationary mode is reflexive of price action and flows. Remember that as long as ETH gas prices is above a certain level, more ETH is burned than created as the blocks are produced.

Crypto open interest chart

Finally, to get an indication of the level of leverage in the system. Futures open interest was highest after the FTX collapse as people rushed to go short BTC and ETH. But as the market have pumped, open interest have declined as people have closed their shorts. We have yet to see systematic increase in long leverage, which means that there’s dry powder on the side lines.

Which is to say that if the Fed meeting turns out to be a dovish one, and the 10year breaks the support line, then there is likely to be another leg up in crypto as people are not positioned at all for such a quick macro turn.

Disclaimer: The content of this post is solely for entertainment and not investment advice. Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions