Wild Week: The Four Forces Driving Crypto Markets
Is the pullback over? Here's the next major signal I'm looking for.
It was a roller coast week in crypto. Bitcoin rose 10%, fell 10%, and then rose 10% again—all within the span of 48 hours!
What caused the volatile moves? And does this week’s price action change my outlook for a deeper pullback before continuation higher?
In this report, I cover how lower trading volume, banking system woes, interest rate expectations, and anti-crypto regulatory attacks are influencing the markets. Then I take a look at Bitcoin’s monthly price chart to form a game plan for the short and long-term.
This issue is longer than usual because I’m going on vacation next week, so I want to have a comprehensive game plan in place so that I know what to do depending on which scenarios play out without having to do as much analysis and I’m not being reactive based on my emotions at the time.
TLDR Price Outlook
Short-term (days to weeks): Neutral. Trading volume and liquidity has been low. This leads to volatility and makes it more difficult to predict shorter-term price movements. So I’m not trying to predict them for now.
Medium-term (weeks to months): Neutral. $28.8K by April’s monthly candle close on Sunday night is my line in the sand for determining if Bitcoin’s current/recent pullback is over or not. I don’t have a strong opinion right now and I don’t need to have one. I don’t need to catch every move because I’m primarily in investor mode now because I believe that the bear market is over.
Long-term (months to years): Bullish. After Bitcoin broke out above $25K, I switched from swing trader mode to investor mode because that signaled a change in market structure to me. I took partial profits at around $30K on the Bitcoin I started buying at around $16.5K, but I’m happy to hold the rest and I’m happy to buy more at lower or higher prices (above $35K) because I have a bullish outlook over the course of the next 2-3 years.
Low Volume and Liquidity: The Environment for Volatility and Unpredictability
Crypto trading volume has been on a steady decline since the peak of the last bull market. The lower liquidity makes price more susceptible to volatile swings, and according to Avi Felman, some entities may be intentionally triggering them.
The low volume and liquidity set the scene for the crazy moves we saw this week. It also makes it more difficult to predict shorter-term price movements. Price can swing higher or lower depending on that actions of a smaller pool of market participants.
Fortunately, trying to catch every small, short-term move is not a part of my strategy. I’m not a day trader. My strategy is primarily to shift my allocation according to major market cycles. I pile into the start of bull markets and take profits when bear markets start. I take trades when I’m expecting 20%+ moves, but it’s only with a small portion of my portfolio.
Another Bank Failure
News broke this week that First Republic Bank is failing (similar to Silicon Valley Bank) and might be rescued by the FDIC. The stock dumped as if it was a shitcoin.
US officials now have two general options: let banks fail or stop hiking interest rates in order to mitigate further damage to banks. I don’t see them letting big banks fail.
Interest Rate Expectations: Higher for Longer Then Back to Easing
I still think the US interest rate (along with other forms of monetary debasement such as increasing the money supply and taking on trillions of dollars in federal debt) will be one of the biggest drivers of Bitcoin’s price going forward. You can see the historical inverse correlation on the chart above.
Lower interest rates incentivizes investors to park more money in risk assets such as crypto and stocks relative to bonds, and stops the fight against inflation which further underscores the benefits of Bitcoin.
Here are interest rate traders’ latest expectations for the Fed’s timeline for pausing rate hakes and returning to easing:
The timeline for the expected change in regime from tightening to easing has been pushed out over the course of the past few weeks. I believe that this has had a negative impact on Bitcoin’s price and that it will continue to do so for a couple more months, until closer to the flip, unless expectations change.
Anti-Crypto Regulation Haunts Markets
The other main narrative that I believe has been influencing the markets is the anti-crypto regulatory attacks by Senator, Elizabeth Warren and SEC Chair, Gary Gensler.
In parallel, there’s been an onslaught of anti-crypto propaganda pieces in the news lately, all with the same stale talking points. I haven’t seen any evidence that it’s a coordinated public relations campaign.
This political debate, like other political debates, has nothing to do with facts. A study by Chanalysis found that less than 0.3% of crypto activity in 2022 was illicit. How does this compare to cash? We can never know because cash transactions aren’t trackable.
The news is likely deterring a portion of normies whose opinions are primarily dictated by their news sources from investing in crypto. However, trust in media and government has never been lower across the population as a whole.
According to Pew Research, trust in government hasn’t been higher than 30% since 2007.
Smart money doesn’t seem deterred. Bitcoin is up over 75% so far this year. It has significantly outperformed the stock market.
However, we can see that the government’s hostility towards innovation is pushing jobs offshore.
Coinbase has said that they’re considering relocating the company.
I think it will take retail and institutional investors some time to digest the regulatory uncertainty before the bull market can really get ripping. But freedom and facts always prevail over a long enough time horizon.
Bitcoin: $28.8K Line in the Sand
I have been expecting a pullback of about 15-30%. The current pullback has been about 13%. For comparison, the previous pullback, during the Silicon Valley Bank collapse, was about 22.5%.
Is the pullback over? My criteria for determining the likelihood of a continued pullback vs continuation higher is whether the current, April monthly candle closes above or below $28.8K. The monthly candle closes on Sunday night.
If Bitcoin closes above $28.8K, I’ll no longer be looking for a deeper pullback. A weekly candle close above $30.4K would make me even more confident that the pullback is done.
I wouldn’t buy more Bitcoin there, however, because I think we’re going to get a larger dip within the next few months. At best, I think it will take some time to grind up to $35K, the top of the resistance zone that I’ve boxed out in orange in the chart above. I’d be happy to buy above $35K because I think it’d be pretty smooth sailing to $44K and then to $58K from there.
If Bitcoin closes below $28.8K, I’ll think it’s likely that the pullback is not over. Here are the areas of support where I’m looking to buy the dip if we get there:
$25.5K: the 200-week moving average and the level that previously served as a key level of resistance on the weekly chart.
$23.3K: Key level on the monthly chart shown above.
$20K: Served as support during the SVB collapse and USDC scare, a key level on the monthly chart that I’ve talked about a bunch in past reports, and the 200-day moving average. I think it’s unlikely that Bitcoin goes this low.
Check out my last report for more detailed analysis on all of the above. That report is still very much valid. Most of the day to day swings don’t have much impact on my outlook as a longer-term investor.
Regardless of what happens over the course of the next few weeks, I’m still extremely bullish on crypto (Bitcoin in particular) over the next 2-3 years.
My technical analysis of the high time-frame (monthly and week) price charts tells me that it’s highly likely that bear market has ended and that we’ve started a new bull market uptrend. High time-frame uptrends are extremely powerful in crypto, so I’m mostly just HODLing at this point.
From a fundamental perspective, the chart below from a16z shows continued growth in actual users of crypto, in line with users of the internet when it started.
The need for a decentralized currency system that’s managed by code rather than opinions, with a fixed supply, that can be used to transact nearly instantly at almost no cost has never been greater.
In addition, Bitcoin’s halving is about a year away, and past bull markets have kicked off about a year before halvings. Check out my Twitter thread wherere I’ve been rounding up top investors’ and traders’ price targets for the top of the upcoming bull run.
This is not financial advice. It’s just my own personal thoughts and game plan.
I’m going on vacation tomorrow, so you won’t get another email from me for at least another week. I might post an update or two on Twitter if anything crazy happens.