Market commentary
First off, yes the sell-off was brutal. This was especially true for the second wave (I will come to the different waves later). I have tried to structure this report as follows: my views on macro events, market structure, and a technical chart analysis. Additionally, each section will include some views/posts from people I follow whose comments add value to the current analysis.
Macro Events
It started with the environmental concerns regarding the PoW (proof of work) consensus mechanism. And a few days later, Hong Kong and China made headlines that weighed heavily on the prices in the crypto market overall. But let us dig a bit deeper now and analyse these events separately.
Environmental concerns (PoW)
Most retail traders blame Elon Musk for the price volatility on the back of his decision to withdraw the service to pay for a Tesla with bitcoin. In my mind, I would say that his comments served to increase volatility in the short term. But the far more important implication is the potential slowdown in the corporate adoption of bitcoin (putting bitcoin on the balance sheets).
There was a great deal of corporate involvement in BTC when we were trading between $50-60k. I was also of the firm belief that we would soon see additional large corporations admitting that they had decided to put bitcoin on their balance sheets. Environmental concerns will not kill corporate adoption by any means, but it will slow it down substantially.
Regulation in Asia
Hong Kong to restrict crypto exchanges to professional investors: First, Hong Kong and China mainland are not (yet) aligned in terms of policy making, especially for the financial sector. The regulatory push by Hong Kong policy makers is comparable to the tightening we see in Europe and the US. Asian regulators are more concerned to keep control over the gambling nature of their citizens. And please keep in mind that the tightening of the regulation was pre announced and well communicated. In my opinion, I see not much negativity in regulatory developments. It will strengthen the market/trading infrastructure and makes is ready for the potential large capital that is waiting on the side-lines (corporations, pension funds, private clients from large universal banks like JPM, UBS, Morgan Stanley, etc.).
Chinas headlines from the Financial Stability and Development Committee of the State Council (by Colin Wu – He is one of the guys I follow for China mainland news. I very much agree with his views (link above, just translate it into English)). The headline that China will ban or crack down Bitcoin mining and trading opened the door for a lot of interpretational speculations. The mining part is not the part that worries me as a Bitcoin holder/investor. It probably helps to further decentralize the hash power and enforces mining operations to find “cleaner” energy sources and pushes out unregulated mining operations. The bigger issue for me is the other part regarding Bitcoin (or crypto currency) trading which goes with Chinas aim to have a stable financial market. Colin Wu does a good job in drawing the upper and lower band of the potential policy outcome. Worst case, China could try to ban all OTC transactions which would make it impossible for Chinese citizen and mining operations to cash out their crypto currency holdings into fiat or USDT (Tether stablecoin).
Market Structure
Since today is Tuesday, I will add some technical analysis on BTC to visualize my idea of the current market structure. I need to go back a bit to be able to see the full picture. Basically, in hindsight it looks like that on the 19th of April the market revealed some serious cracks (especially in BTC and in the DeFi sector). The overleveraged retail trader got shaken out like we have not experienced before. A massive $9bio liquidation in the main crypto currencies and a 15% BTC price drawdown was the result (we reported this in an earlier market commentary). On the other hand, we had the largest single day DeFi liquidation on the 19th of April (over 3 times higher than the average over the past few month – see picture below).
If I would have looked at the BTC chart on an isolated basis, all the signs were there to reduce long positions. We had a beautiful break out of a rising wedge with a lot of volume and liquidations (19th of April – see chart below).
Bitcoin BTC (4h)
And now the part which blurred my vision. When BTC broke into my old consolidation range of $44-50k, ETH turned into a rocket and rallied between the 23rd of April till the 12th of May over 108% (see chart below).
Ethereum ETH (4h)
The ETH rally was not purely driven by derivatives. The funding rates in perpetuals and the term basis of both ETH and BTC were still on elevated levels but nowhere close to the 19th of April levels (see pictures below). There had to be a lot of spot buying going on as well.
BTC Perpetual Funding Rate
BTC Jun21 Term Basis
ETH Perpetual Funding Rate
ETH Jun21 Term Basis
The main point though I am trying to make here is that the ETH rally was dragging up the whole crypto market. For once it was not BTC showing the way. Even though we did not go back to the ATH in BTC everybody was cheering ETH and the amazing performance in such a short period of time. It did not only hold BTC price elevated but also lit up a monster rally throughout the DeFi sector in particular most of the low energy usage chains. Many of the traders forgot or dismissed that we had a textbook confirmation of a bearish pattern (the rising wedge) in BTC.
Then macro events hit us hard. Elon Musk (12th of May) and later Hong Kong and China (21st of May). Especially the news out of China sparked some massive spot selling volume from Chinese investors. Nevertheless, ETH did a lot better over that crazy time span of 23rd of April till now. ETHBTC is still up roughly 40% at the time of writing (see chart below).
It remains to be seen if Bitcoin’s problem on the environmental front and the mass adoption of corporations will also affect the ETH price. My takeaways from the macro events and the market structure are that I still see upside potential in the two most important assets (Bitcoin and Ethereum) but I have to extend my time horizon for fresh ATH further back. Regulation will always take longer than expected and I got blinded by the crazy rally of ETH. But I see much clearer now and will position myself accordingly.
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