LONG TERM VIEW: Where are we in the cycle?
SHORT TERM VIEW: What might happen in the next 2 weeks?
The end of the year is the time for predictions. Here’s a couple of one that we love from VanEck:
With each passing day, the inevitability of a Bitcoin Spot ETF draws nearer. At this point, it seems that it is not a question of “if” but “when” in our opinion. Recently, BlackRock revealed that it received $100,000 as “seed capital” for its proposed Bitcoin ETF.
Currently, Bloomberg analysts put the probability of an approval in January at 90% whereas the prediction market prices a 80% chance of an approval by January 15.
Earlier this year, we estimated the potential impact of an ETF approval on Bitcoin price. We highly recommend you to check it out here . Nonetheless, here’s a recap:
Market price future expectations, and when clarity increases, the market tends to react aggressively. This is especially true for crypto as it is a nascent market prone to regulatory crackdown and with unestablished institutionals.
To illustrate this, let’s look at the past price action after major events with cryptocurrency CEOs:
In this chart, we see that when a major CEO left its role and unclear issues got resolved, markets reacted positively. This is because future expectations got clearer and as markets are forward looking, price readjusted to the change in expectation and investors waiting on the sideline started to deploy their capital back into the market.
Our take:
We believe that the recent issue around Binance is likely to act similarly. Let’s think about that for a second: during the last years, Binance was the most hated exchange and there was always a big cloud of doubt around it. Will the SEC try to shut it down? What’s the future of Crypto in the US? Etc.
Now, with CZ out of the game, fines paid, and major issues resolved, the future of Binance (and US crypto regulation going forward) got clearer: the SEC will not try to kill the exchange, nor crypto. This is a strong signal for investors as we have eliminated a substantial black swan and it can trigger major capital inflow as the market has now more clarity.
Clarity + Catalysts = Strong bullish bias for crypto
Source: Certainty In Markets Ushers In New All-Time Highs (substack.com)
If you’ve been following markets and macro events, you most likely know that the last weeks have been filled with two important events that investors care a lot about: CPI release and FOMC meeting.
CPI Release:
As per our train of thought, the CPI release came without surprise and is confirming the view that we held for the past months: the worst of inflation is behind us.
The Federal Open Market Committee (FOMC) is a key component of the Fed. It is responsible for making decisions regarding monetary policy, specifically with regard to short term interest rates and the money supply so that the Fed's dual mandate of price stability (inflation at 2%) and economic growth is respected.
The last meeting, which took place on the 13th December, marked a key inflection point. Even though the Fed fund rate stayed in the 5.25-5.50% range, it is the first time since the beginning of the tightening policy (QT) that Jerome Powell, the Fed chairman, adopted a real dovish stance. He talked about inflation being under control and indicated that borrowing costs would likely reduce in 2024.
As quoted by Powell: “We added the word ‘any’ as an acknowledgment that we are likely at or near the peak rate for this cycle,”
The signal is clear: another wave of liquidity is coming and the market is now pricing a 25 bps rate cut by July:
Stocks reacted strongly and the Nasdaq played with its all time highs (ATHs), up 43% year to date.
Makes sense right? If the Fed fund rate decreases, this means more liquidity and this is good for the market, right?
Well, if you’ve been following our work for some time, you’ll understand that fed fund rates are only part of the liquidity picture. In fact liquidity has been injected into the market for over a year now in less common forms: like the RRP balance for instance (more info on that here ). Now, the state taken by the Fed is just the cherry on top as the shift in liquidity is directly supported by the Fed and their direct actions.
Now the question is: What’s next for markets?
If we compare this situation with the Volcker fight against inflation, we see that the day he declared victory started a long term secular bull market on US equities.
Will this situation repeat in 2024? Only time will tell, but we think that the state of the Fed signals further monetary expansion in 2024. Given the sensitivity of crypto to liquidity, this should be bullish for this asset class.
This is one chart from Raoul Pal's “Everything Code” thesis that illustrates this view. First, we see a strong relationship between liquidity and Bitcoin. Second, we note that a 20% YoY increase in liquidity could imply a Bitcoin at $218,000 in 2024. While this number might be a bit overstated, it seems that the direction of the market is clear.
Crypto is a game of attention and one of the best indicators to gauge retail sentiment is Google search interest over time. This is what this chart looks like for the last five years:
What we see is clear: Bitcoin is up +150% year-to-date and has been trading consistently around the $40-43k levels over the past 2 weeks; yet, google search trend of “cryptocurrency” is still really low
The corollary is that the interest from retail is low at the moment. This is bullish as retail investors are the low end of the smart money curve. Usually, when they begin to show attention to crypto, it means that we are near a cycle top.
TL;DR: Low retail interest to crypto tells us that we are still early in the cycle.
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