The Macro Landscape Looks Increasingly Positive for Crypto
What were our top readings in the past 2 weeks?
- Is Inflation dead by Reflexivity Research
- The Reverse Repo: Once It’s Gone by James Lavish
- Nobody wants US Treasury bonds by Semafor
- Market Update #9 by Capriole Fund
Our In-House View
LONG TERM VIEW: Where are we in the cycle?
- We expect to see BTC > $100k, ETH > $10k and SOL > $500 as new ATH in the next leg of the bull cycle.
- A dovish stance is starting to appear on central banks sides and global liquidity is starting to be in positive territory. This sets the stage for a bull market.
- The magnitude of price action will be influenced by additional positive news flow, such as the green light for an ETF. Nevertheless, the sequence of events is key and monetary policies (MP) are one of the most important factors to monitor.
- The long term trends that influence crypto adoption are increasingly positive: First, crypto is part of a technological secular trend that is accelerating with AI’s these last months. Adding to this the monetary debasement that will continue in the future due to structural imbalances.
- We believe in ETH as the superior asset to Bitcoin for the next decade. Further, our view is that SOL has the biggest potential for consumer app adoption in the next decade.
- Our favourite altcoins thematics for the next upleg are Socialfi, Gamefi, AIfi & Infrastructure for scalability.
SHORT TERM VIEW: What might happen in the next 2 weeks?
- As expected, the market has been ranging in the past weeks. This is healthy and in line with our long term vision.
- Further the market didn’t seem to care at all about one of the most important news of the year (CZ stepping down as CEO of Binance). This is bullish and confirms the shift in market psychology.
- However this period of consolidation seems to be ending and crypto is on its way for another leg up.
Content Analysis
Is Inflation dead by Reflexivity Research
- The October CPI (Consumer Price Index) report was a positive surprise with numbers below the forecast.
- The main contributors to inflation was the service sector while energy prices and goods were deflationary in October.
- A lagging component of CPI: Owner Equivalent Rent seems to have peaked and is coming down YoY.
- PPI (Producer Price Index), often seens as a leading indicator of CPI, continues its downtrend and saw its biggest decline MoM since the 2020 Covid crisis.
- All of those charts suggest that the worst of inflation is behind us. This means that the cycle of quantitative tightening (QT) of the Fed is over.
Source: https://x.com/reflexivityres/status/1726631354388087272?s=20
The Reverse Repo: Once it’s gone… by James Lavish
Major Takeaways
- During the quantitative easing (QE) phases in 2020 and 2021, the Fed printed and purchased over $5.8T of securities from banks and put those securities on their balance sheet. This increased drastically the cash balances in major banks.
- But this excess cash needed to find its way somewhere and eventually, it flooded the reverse repo facility. In one year, reverse repo balance went from 0 to $2.4 trillion.
- A reverse repo is a repurchase agreement between two parties where banks with excess cash buys US Treasuries from the Fed to generate a rate of return on that cash in the overnight market. Therefore an increase in reverse repo balance decreases liquidity in the system and inversely.
- The US has massive deficits and debt problems and they are in a situation where they are constrained to borrow more to cover their existing deficits.
- But as interest rates have increased at unprecedented pace in the last years, the Treasury could not afford to lock itself into long term high interest loans. Else, their interest expenses would spiral out of control.
- Therefore, they relied heavily on the short end of the curve and drained the reverse repo of about $1,5 trillion in the last few months. If this trend continues, the reverse repo could be entirely drained by Q1 2024.
- While this decrease in reverse repo balance suggests that liquidity is coming back in the system, it creates a worrying situation: if the reverse repo balance gets empty, the Treasury will not be able to use excess cash from banks to fund additional debt and it will need to rely on other tools.
- While there are numerous different things that can be done to finance their deficits, they all lead to the same outcome: more money printing from the Fed and hence monetary debasement.
Source: https://theinformationist.ck.page/posts/the-reverse-repo-once-it-s-gone
Nobody wants US Treasury bonds by Semafor
Major takeaways
- As we’ve said, the US government needs to keep borrowing money to cover its increasing deficits. However, investors are slowly pulling back and are not as eager as before to buy US debt.
- The result of this increasing supply and decreasing demand for Treasury is higher yields. As yields and price are inversely correlated, this has impacted price negatively. The longest-dated Treasury bonds are in a bear market worse than the dot-com bust and almost as bad as 2008.
- But the US is stuck in a loop because, as it is already running huge deficits, the only way for the Treasury to pay the interest is to continue borrowing.
But the US is having difficulty finding buyers for its bonds:
- China, once a reliable buyer of US Treasuries, are net sellers and this trend is set to continue.
- Banks are already sitting on huge paper loss for the bonds as yield increased and are disincentivized to buy more Treasury bonds.
- The Reverse Repo facility balance is getting exhausted signalling that this the Treasury cannot rely on it forever
- While it could find natural buyers at a high enough yields, this will increase interest expenditures and led to an accelerating debt spiral
Hence, we believe that ultimately, the only solution is for the Fed to monetize government bonds through yield curve control program (YCC).
Here again, this will mean more money printing and further liquidity injection.
Source: https://www.semafor.com/article/11/28/2023/nobody-wants-us-treasury-bonds#
Market Update #9 by Capriole Fund
Major takeaways
- Bitcoin holds a particularly strong relationship with US liquidity. Increasing liquidity usually signals that more capital is flowing into the economy and this has an impact on financial markets.
- If we measure US liquidity using the size of the Federal Reserve Balance Sheet, the Reverse Repurchase Agreements (RRPs) and the US Treasury General Account (TGA) we note a strong positive relationship with Bitcoin. Turning points in US liquidity mark almost all cycle tops and bottoms.
- Even if the consensus still thinks that quantitative tightening (QT) is still at play, this measure of US liquidity demonstrates that the bottom occurred in November last year. Since then, it has been trending up, mainly driven by the RRP market, and Bitcoin reacted positively.
- Furthermore, on-chain fundamentals and macro data are signalling that Bitcoin entered into an “expansion” phase for the third time in its history.
- Every time this happened in the past was during the early stage of a bull market and before a period of rapid price momentum.
- However, this indicator always flashed closer to the halving. The early signal that we have now could imply that investors are learning from past cycles and are adjusting their position sooner. This suggests that the next cycle might happen earlier and be shorter in duration than in the past.
Source: https://capriole.com/update-9/?utm_source=brevo&utm_campaign=Update9&utm_medium=email
Charts of the week
- After a strong ETH outperformance during the 2020-2021 bull market, the ETH/BTC pair has formed a consolidation of more than 2.5 years. This means that despite the sharp bear market, ETH has maintained its position relative to BTC.
- We are currently on a long term key resistance level of this consolidation and we expect ETH/BTC to rebound at those levels before a potential breakout of the consolidation and another leg up for ETH/BTC.
- Zooming in, we observe that after a steady downtrend in 2023, ETH/BTC seems to have bottomed out and is forming a reversal pattern in the shape of a double bottom.
- However, we still need to wait and see if this figure is going to be indeed a reversal and ETH/BTC will head back into the high end of the range, or if this is just a continuation pattern within a downtrend that could break the key long term resistance and suggest a new local lows on ETH/BTC.
- So far, we believe that the most likely scenario is for the key resistance to hold. This would coincide with our bigger picture that, even though ETH is usually a laggard, it is in a good position to outperform BTC in the next bull market.
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