Federal Reflexes
5 min read

Federal Reflexes

Cryptic ball: did you have a plan?

It was wishful thinking, indeed. And apparently, the eeriness I talked about yesterday was felt by many too. After all, the more an asset tests a support level, the more likely it is that it will fail to hold it. But, as explained and charted in Tuesday's newsletter, it was with no surprise to see that the "last bounce" scenario was unfortunately correct, with bitcoin finally breaking down below $45.5k - dropping 6% towards $42.5k, the last support from December 4th dump.

As I also wrote, alts would suffer if that scenario played out. That's why ether fell up to 10% and most ETH killers fell up to 15%. Bitcoin is the boring currency now, and it will continue to experience less volatility than higher-risk plays. But why did this happen? Well, the dump coincided with the release of the US Fed's minutes from its December meeting. These were published at 7pm UTC and the S&P 500 started dumping immediately, while bitcoin took 30 minutes to follow.

While everyone knew tapering had begun and interest rate hikes have been planned, the minor news that the Fed will start selling assets out of its balance sheet came as a shock - as it reinforces the commitment to fighting inflation, which will impact the performance of more speculative assets, like tech stonks and crypto. What's important to understand is that while this isn't a major shift, more and more people are coming to grips with the meaning of the tightening of the Fed's monetary policy - and this "reflexivity" can change everything!

And while there are no good reasons to believe the bull run has reached its top, if more people start cashing out this creates incentives for more people and institutions to cash out, helping push prices down further. In some ways, crypto is already experiencing this with extreme fear level since last month. But if global stocks don't bounce soon (futures indicate they will bounce today), the feeling will compound and bears may become more aggressive.

So, what's next? Well, currently bears are not that confident. After all, BTC only fell 6%. This is not even a dip by crypto standards. Everyone's playing the wait and see game. But if the current price action is just a dead cat bounce, we can expect $42k to fail and after we'll most likely fall to $30k, with only meagre support around $40k. Overall, I'm now feeling the Biden administration is okay hurting the stock market over the next months to tame inflation, eventually mitigating the damage with some bullish news before the mid-term elections in November.

Note this is a change in my stance. Before I thought Biden would be more comfortable in supporting bulls in Q1 and Q2, appealing to the general public's inflation fear right before the elections. Maybe I wasn't wrong and this new stance isn't warranted. But for that wishful thinking to come true bulls must come into scene in the next weeks. After all, we're now seeing negative funding rates in Deribit and that has historically hinted at a local bottom. But if negative funding persists that hints at a change in trend. Supercycle thesis, save us!

Chart art: is this a dead cat bounce?

I last shared this range Tuesday, cautioning for the possibility bitcoin would break down. Did you have a plan for that scenario? And now? What will you do if BTC loses $42k? Lastly, note yesterday liquidations were the highest since December 4th, but were not that high. And note funding rates at Binance are still positive, which hints at further downside.

Three things: is this real life?

Tweet tip: is this your favourite influencer?

Beware of those who follow this route. Follow the humble Cobie instead!

Meme moment: is this a meme?

Ah, narratives, those ever-changing monsters.

Meme moment, part 2: are you ready?

Prepare for the worst, hope for the best, and trade the volatility. 

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Our newsletter offers opinions and insights from analysts in the cryptoasset space. It is not intended to be investment advice, and should not be treated as such. You must not rely on its information as an alternative to financial advice from a qualified professional. Without prejudice, we do not undertake or guarantee that its information is correct, complete or non-misleading; or that the use of guidance in the report will lead to any particular outcome or result.