The Wolf Den #422 - Back To The Basics
Is Bitcoin A Safe Haven? IntoTheBlock
In this report, we bring to you the latest in on-chain cryptocurrency analysis. We look at the blockchain directly and analyze balances, transactions, and the overall activity of market participants. This gives us a unique insight into the future of the market.
This section is written in conjunction with IntoTheBlock (ITB). ITB is an intelligence company that leverages machine learning and advanced statistics to extract intelligent signals tailored to crypto-assets. IntoTheBlock tackles one of the hardest problems in crypto: to provide investors with a view of a crypto asset that goes beyond price and volume data.
The Wolf Den research team uses IntoTheBlock to dig deeper and get the most important insights about the crypto market.
Is Bitcoin A Safe Haven?
Crypto Markets recently experienced one of the largest drawdowns in this halving cycle, correcting as much as 52%, which was only surpassed by the July 2021 54% drawdown. As macro concerns regarding liquidity have emerged, crypto has recently begun trading like a leveraged Nasdaq ETF.
Source: IntoTheBlock Capital Markets Insights
While Bitcoin has often been described as a store of value or a hedge against inflation, the latest price action suggests the opposite. As evidenced by the graph below, the correlation matrix shows a temporary (30 day) positive correlation between the top two crypto-assets and indices like Nasdaq 100 and S&P 500.
Source: IntoTheBlock Capital Markets Insights
The correlation coefficient is useful to grasp the relationship between an asset's price and another. If the correlation is close to a value of 1, as is currently the case with Bitcoin and Nasdaq100, it means that there is a high statistically significant relationship between the prices of the two.
Source: IntoTheBlock Capital Markets Insights
If you dig into the indicator and look at December, these were showing inverse correlation. Zooming out further to 6 months, you can see that Bitcoin has been largely uncorrelated with the Dow Jones, as the path is all over the map. Long term, they are no correlated, but come together in a risk off environment.
The recent market volatility exacerbated by the fear of a more hawkish federal reserve has led Bitcoin and the crypto market in general to act more closely correlated with the stock market. And as the never ending debate continues on Bitcoin's value proposition as a safe haven, commodities like gold and silver have started to show negative correlations.
While it is still too early to treat crypto as a hedge to the general market turmoil, the scarcity mechanisms in assets like Bitcoin and Ethereum will allow them to mature in time and detach from their short term correlations to traditional assets.
Bitcoin Thoughts And Analysis
I remain long Bitcoin with leverage and spot. My entries are shown below. Liquidation price is shown as well, but is not an issue. I always use stop losses, and my stops are currently in profit, especially knowing that we are likely to see heightened volatility today with the Fed meeting. I will make money on this trade, no matter what.
As painful as this drawdown has been, it's clear that people have the memory of goldfish. We have been here many times, the last one being only 8 months ago, leading to a long and boring summer.
Price dropped from 60K to 30K in TEN DAYS last May, a much more aggressive and terrifying situation. You can see this on the left of the chart. Further, there was endless FUD about Bitcoin - China's legit ban, hash rate, energy, Musk etc. This time we have one factor - the Fed and their policies, which should eventually be absorbed and priced in.
There's no reason, in my mind, to be believe that the situation is worse today than it was 8 months ago. Tens of billions have flowed into crypto since that time, only strengthening the long term case. Every institution is talking about it. And inflation has clearly worsened, the core argument for Bitcoin.
Chill out, things will be fine.
WEEKLY CHART
The week is almost half over and looking good so far - which we all know is meaningless until we cross the finish line. For now, we have a BEAUTIFUL bullish hammer candle, but would need to see it confirm and then another bullish candle next week. We have been consistently fooled by similar candles.
You can see that the next major resistance now is $39,600, the red line that signaled a break in bullish market structure - the lower low. That's my immediate target. I believe it "should" be retested as resistance, even if we are going down further. "Should" does not mean will!
These are the key likely areas of supply and demand. You can see the beautiful bounce so far from this area of liquidity.
DAILY CHART
Here are some daily levels to watch if you are actively trading. As you can see, $37,300 has been a strong resistance on the bounce. Low time frames have finally flipped it to support, would be a nice sign to see this on the daily close as well.
Back in the bands. Target for a Bollinger trader would be the centerline, currently just above $40,000, but dropping down.
HOURLY CHART
I rarely zoom into the hourly chart, but this is fun.
Confirmed cup and handle.
Never a reversal pattern, only valid as continuation. You can see that price rose into the pattern and is flipping the neckline to support.
Target is around $39,600, which as you know is "coincidentally" the key resistance on higher time frames.
Minimum target based on the depth of the cup.
This can easily fail, but it is confirmed by the rules of technical analsysis.
Altcoin Charts
As expected, alts are getting smashed on their Bitcoin pairs, as traders FOMO into Bitcoin and out of their alt positions. I have discussed this probability a number of times.
The USDT pairs look fine if you are not concerned with the sat value of your portfolio. I shared a number of setups with that in mind yesterday. If you are trading against Bitcoin, you are seemingly standing in front of a speeding train.
Ethereum 2.0 Gets A Rebrand
The Ethereum Foundation put out a blog yesterday outlining their intentions to rebrand Ethereum 2.0 as the “Consensus Layer.” Ethereum (the current version) and Ethereum 2.0 have been popular mainstream ways of describing the asset, but the developers have been referring to the two as the “execution layer” and “consensus layer.” The reasons laid out by the foundation fall into four categories: mental models, inclusivity, scam prevention, and staking clarity. I copied below the mental models reasoning.
“One major problem with the Eth2 branding is that it creates a broken mental model for new users of Ethereum. They intuitively think that Eth1 comes first and Eth2 comes after. Or that Eth1 ceases to exist once Eth2 exists. Neither of these is true. By removing Eth2 terminology, we save all future users from navigating this confusing mental model.”
IMF Attacks El Salvador
The feud between the IMF and El Salvador has been growing, and neither side appear to be giving in. A new report from the IMF directors said, "there are large risks associated with the use of Bitcoin on financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities. The directors urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status."
In response to the criticism received by the organization, President Bukele tweeted a meme waving goodbye to the antics of the IMF. He simply didn't give a F***. The IMF vs. El Salvador battle is an important one, setting precedent for other countries that are considering Bitcoin as legal tender.
Watch FOMC Today
At 2:30 PM EST today, Jerome Powell will take the podium and assume the role of most powerful man in the world.
You can watch it live at the link above.
Nobody knows how markets will react, but volatility is highly likely. My feeling is that the market has already priced in the worst case, that being 4-5 rate hikes, as well as further quantitative tightening. If Powell sticks to 3 hikes and lays out a reasonable road map, then markets should be fine.
We will see, but if you are trading today, it's very risky.
My Recommended Platforms And Tools
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I use RoundlyX to buy small amounts of Bitcoin every single day. They automatically round up my credit card purchases (with 10x multiplier) and invest them in crypto. Absolutely brilliant. Passively invest money you don’t need without a thought. Further, they have integrated with Voyager (see above) to offer commission-free purchases.
Rewards Code: WOLF
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Subscribe to my YouTube channel for free daily content.
Follow me on Twitter at @scottmelker. This is where I am constantly updating my trades and sharing ideas.
On-chain and fundamental analysis, research, predictions and indicators, all in one place. Highly recommend.
The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.