The Wolf Den #936 - Unrealistic Expectations
We all have them.
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In This Issue:
Unrealistic Expectations
Bitcoin Thoughts And Analysis
Legacy Markets
Coinbase’s Research Turns Up Interesting Findings
Are We Still Doubting Tether’s Reserves?
FTX Repayment May Happen By EOY
Operation Chokepoint 2.0 Is Still Underway
Bitcoin Will Skyrocket: Key Catalysts for Price Surge | Macro Monday
Unrealistic Expectations
After enjoying a few months of intense gains, I can't help but feel impatient when Bitcoin isn't breaking through price barriers and reaching new cycle highs every day. Even worse are pullbacks that bore us to death and drag out the inevitable… I imagine many of you feel the same.
Whether we like it or not, the crypto markets have ingrained some peculiar biases into our brains. We exhibit razor-thin patience, compete fiercely over mere 2% gains, and perceive one month in crypto as equivalent to ten months in any other market. I suppose it’s all part of the process.
One of the most distinct differences in a crypto investor's mindset is our failing perception of what constitutes a ‘quiet market’ and its implications. While I wouldn't objectively classify Bitcoin as being in a quiet period currently, it feels that way, prompting me to bring us back to reality.
Zoom out and take a look at this chart. It says everything you need to know about how dislocated our expectations really are.
Anyway, I want to take today as an opportunity to discuss the significant opportunity that an actual quiet market presents, along with its telltale signs, in case we do experience one this year in crypto or you face it somewhere else.
Quiet Markets Breed Mistakes
Quiet markets can lead to explosive volatility, occasionally surging to levels multiple times higher in a single day than they have been for weeks or months. However, before this volatility spike, the subdued market activity can affect the emotions of participants, resulting in feelings of boredom and frustration. Traders and investors experiencing these emotions are more prone to making mistakes in their use of systematic approaches and quantitative tools. For instance, stop losses set on volatility levels could easily be misplaced, leading to potential danger and losses.
Quiet Markets Demand Focus
Similar to the previous point, quiet markets can be a timed trap, ready to catch you off guard if you're not attentive. Maintaining investor sanity becomes increasingly challenging as prices move within tighter ranges and headlines spread misinformation, fear, uncertainty, and outright lies. Different types of investors will rely on different strategies, with some choosing to ignore the markets and wait, while others search for clues of breakout directions. Both approaches are valid and demand high levels of focus.
All Quiet Markets Turn Loud
Aside from the assets that are delisted and fade away into oblivion, quiet markets are typically the precursor to increased activity as market participation fluctuates over time. Patient investors are often handsomely rewarded for outlasting others who lose faith or are shaken out. It's important not to overlook a quiet market simply because it is quiet. Conversely, jumping from one active market to the next is almost a guaranteed way to lock in losses.
Quiet Markets Setup Strong Moves
While I don't dictate market laws, an asset that has experienced substantial volatility compression is likely to break out with a sharp move. When I'm inclined to trade, I favor breakouts due to their high risk/reward potential. However, trading in quiet markets requires a plan, particularly if you're aiming to trade your way out of or through these conditions. The challenge lies in filtering out the noise and illusions to accurately predict when the market is poised for a breakout. A solid understanding of technical levels is immensely beneficial in this regard.
The crypto market is far from quiet at the moment; in fact, it's quite the opposite. We've simply become accustomed to interpreting one or two slow days as 'quiet,' especially when prices don't move in our favor.
Adding to this issue are the expectations that traders and investors have regarding price movements before the halving. Historically, there aren't any reliable price patterns for our current position in the cycle in relation to the halving. Price movements historically, and to a lesser extent now, are influenced more by the context of the given time period rather than solely by the halving event.
In the 60 days leading up to the 2012 halving, Bitcoin's price remained flat. In contrast, in the same period before the 2016 and 2020 halvings, Bitcoin appreciated by 45% and 73% respectively. The context of the previous two halvings included significant events such as Brexit, the ICO boom, and the onset of Covid-19, along with quantitative easing measures, which heavily influenced price.
This time around, the market's attention is squarely on Wall Street's next move and ETF flows above all else. Additionally, the growth of the network and Wall Street's involvement will likely bring more publicity to the halving, potentially creating a positive feedback loop attributed to the halving itself.
As much as we want to believe there is a blueprint for price before and after the halving, there’s really nothing solid to go off, which makes the journey that much more exciting.
I realize I just went off on an unexpected tangent, but somehow stayed within the confines of the title, ‘unrealistic expectations.’
As long as you remember that the market is NOT quiet and nothing is off the table, you’ll be well on your way. I’m excited to see where this halving takes us this 4th time around; long-term, I am still very bullish.
Bitcoin Thoughts And Analysis
The more I chart, the more I find myself defaulting to Trading Alpha as an indicator to give me a very quick summary of what is happening in the market. I did a charting stream in the afternoon yesterday, and after looking at a number of charts through this lens, came to the conclusion that more downside was likely. You can watch here, if curious.
As for Bitcoin, you can see with Trading Alpha that we had two “Ts” indicating a top, the loss of green (grey for me) dots and the printing today of a red (blue for me) dot.
That said, price is now at the track line, which is a key support.
Alts look even worse, so not much interest there today.
Legacy Markets
Bonds declined globally as the market adjusted its expectations for fewer Federal Reserve interest rate cuts this year, following strong U.S. economic data. This sentiment was mirrored in the selloff of Treasuries and rises in German and UK bond yields. Recent U.S. manufacturing data, which indicated expansion for the first time since September 2022, contributed to a reevaluation of the Fed's monetary policy easing timeline. Fed Chair Jerome Powell emphasized the need for more evidence of contained inflation before considering rate reductions.
In the equities market, European stocks rose, buoyed by gains in the energy sector, while U.S. futures remained steady. Concerns about Tesla's delivery estimates and Walgreens' earnings outlook affected premarket trading. The yen edged closer to a level that could prompt intervention by authorities, while the Turkish lira gained following President Erdogan's support for orthodox monetary policies.
Cryptocurrencies, including Bitcoin, saw a downturn as the prospect of sustained higher Fed rates dampened investor enthusiasm for speculative assets. Bitcoin fell below $67,000, marking a significant drop from its recent high.
Commodities like oil experienced price increases due to geopolitical tensions in the Middle East and reduced supply from Mexico, pushing U.S. crude futures to their highest point since October.
Key events this week:
Eurozone S&P Global Manufacturing PMI, Tuesday
US factory orders, light vehicle sales, JOLTS job openings, Tuesday
Fed’s John Williams, Loretta Mester, Mary Daly and Michelle Bowman speak, Tuesday
St. Louis Fed President Alberto Musalem takes office, Tuesday. He replaces James Bullard.
China Caixin services PMI, Wednesday
Eurozone CPI, unemployment, Wednesday
Japan services PMI, Wednesday
US ADP employment, ISM Services, Wednesday
Fed Chair Jerome Powell speaks, Wednesday
Fed’s Austan Goolsbee, Adriana Kugler and Michelle Bowman also speak, Wednesday
Eurozone S&P Global Services PMI, PPI, Thursday
US initial jobless claims, Challenger job cuts, Thursday
Fed’s Loretta Mester, Alberto Musalem, Thomas Barkin, Patrick Harker, Austan Goolsbee speak, Thursday
European Central Bank publishes account of March rate decision, Thursday
Eurozone retail sales, Friday
US unemployment, nonfarm payrolls, Friday
Fed’s Michelle Bowman, Thomas Barkin and Lorie Logan speak, Friday
Some of the key moves in markets:
Stocks
The Stoxx Europe 600 rose 0.2% as of 9:45 a.m. London time
S&P 500 futures fell 0.1%
Nasdaq 100 futures fell 0.1%
Futures on the Dow Jones Industrial Average fell 0.3%
The MSCI Asia Pacific Index rose 0.5%
The MSCI Emerging Markets Index rose 0.7%
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro fell 0.1% to $1.0731
The Japanese yen was little changed at 151.59 per dollar
The offshore yuan was little changed at 7.2620 per dollar
The British pound was little changed at $1.2562
Cryptocurrencies
Bitcoin fell 4.7% to $66,480.16
Ether fell 4.1% to $3,354.77
Bonds
The yield on 10-year Treasuries was little changed at 4.31%
Germany’s 10-year yield advanced five basis points to 2.35%
Britain’s 10-year yield advanced seven basis points to 4.01%
Commodities
Brent crude rose 1.3% to $88.57 a barrel
Spot gold rose 0.4% to $2,261.55 an ounce
Coinbase’s Research Turns Up Interesting Findings
Coinbase pointed out a number of factors that could be contributing to the recent downturn in markets:
Liquidity interference from US holidays
Corporate month-end (and quarter-end) rebalancing
US dollar demand often picks up around this time of the month / year
Tax season still looms as a potential catalyst for realized profit-taking in the near term
Long BTC short MSTR is adding volatility
Aside from these potential bearish catalysts, Coinbase’s research turned up these additional notable discoveries:
Trading volumes have a propensity to be distorted in the short-term due to trading incentives like point and airdrop farming, temporary fee reductions, and broader market volatility
Leveraged short positions in CME bitcoin futures have climbed to a record high
From the perspective of TVL, derivative protocols in this cycle are far more diversified than the previous cycle.
Funding rates for BTC and ETH perpetual futures have climbed from 15% to 50% annualized over the past week.
Below is a chart included by Coinbase that is pretty self-explanatory. It's interesting to see Bitcoin representing 35% of trades and over 50% of the total market, while SOL is trading at double the size of its market position, and ETH’s market cap and trading volumes are evenly balanced. My guess is that a mean reversion is probably due for these figures.
Are We Still Doubting Tether’s Reserves?
Of all the questionable things in the crypto space, there should be no doubt about Tether's reserves, transparency, or security. Tether recently announced the completion of its System Organization Control (SOC) 2 Audit Type 1, signaling the start of its journey towards achieving the highest level of security compliance. This audit is based on five key 'trust service principles' and evaluates aspects such as Security, Availability, Processing Integrity, Confidentiality, and Privacy, including measures like firewalls, intrusion detection, enhanced authentication, network reliability, and problem resolution speed.
Tether's CEO Paolo Ardoino emphasized the significance of the audit, stating, "This compliance measure assures our customers that their assets and data are managed in an environment meeting the highest standards for data protection and information security. This independent validation of security controls is vital for Tether, demonstrating our commitment to being the world’s most trusted and compliant stablecoin." Additionally, Tether announced its intention to undergo the SOC 2 exam annually to uphold its security standards.
In other Tether news, it was discovered that Tether’s wallet acquired 8,888 more Bitcoin worth $629m, bumping its total Bitcoin up to a $5.2b valuation. This acquisition now means Tether is the 7th largest spot BTC holder in the world.
FTX Repayment May Happen By EOY
The FTX repayment process is well underway, and the current expectation is to have creditors repaid by the end of 2024. Nothing is certain until deposits are made into creditors' accounts, but there is a point of clarification regarding the headline percentages being casually discussed: the 90% means customers will receive 90% of every dollar of recovered assets, not 90% of what they once had. In other words, customers will gain access to 90% of the funds FTX is able to distribute to their creditors. Most of the shortfall has been recovered, so creditors may not fare too badly in the end. Additionally, current asset prices are higher, which may have mitigated losses from potential investors who would have otherwise paper handed at some point from then until repayment. If you have a claim, submit it as soon as possible, as the current deadline is set for May and could be extended to June.
Operation Chokepoint 2.0 Is Still Underway
The United States District Court for the District of Wyoming has ruled against granting Custodia Bank, led by Caitlin Long, a U.S. Federal Reserve master account. This account is essential for accessing the Federal Reserve's payment systems. Custodia had sought this account to offer custodial services for crypto assets but was rejected by the Federal Reserve Bank of Kansas City in January 2023. The court's decision puts Custodia at a disadvantage compared to other banking institutions. Judge Scott Skavdahl clarified in his legal rationale that the Fed had the right to reject any application, even if the bank met the master account requirements. Despite this setback, Custodia is exploring all possible avenues, including a potential appeal, which could be very costly. While Operation Chokepoint 2.0 may be ongoing, it's highly unlikely to persist indefinitely. The crypto industry is growing stronger and faster than banks can contain us. There is only one way this ends.
Bitcoin Will Skyrocket: Key Catalysts for Price Surge | Macro Monday
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Hey - new to this substack and the YT channel. Random question - is there a logic behind the gray/blue color scheme of the bars vs. the traditional green/red? is it something behavioral/psychological or just a preference?