*|MC:SUBJECT|* *|MC_PREVIEW_TEXT|* | Good morning my tasty friends. I hope you're all having a wonderful start to your Saturday.
In this installment of your favorite crypto newsletter, we're looking at the current macro setup, what's behind the bearish price action, seasonality, and what comes next.
I'm in Maryland this weekend and my wife is going to be pissed if we miss the wedding, so let's jump right into it.
| | | Expected Moves
Volatility has come down a bit over the past two weeks, with BTC and ETH implied vols pricing in expected weekly moves of about 10%. Nothing out of the ordinary but indicative of some premium versus realized.
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Macro Matters
At the moment the deck seems like it's stacked against crypto. Let's break it down.
After bouncing off the low end of the range, cracks started to emerge in bitcoin's bullish momentum around mid-July. It wasn't entirely apparent at the time, though in hindsight, it's clear the market was anticipating a shift towards the economic environment we now find ourselves in. An environment in which both the rate of change of economic growth and inflation are slowing down, where risk asset performance is lackluster at best.
The storm will eventually pass as we traverse the business cycle, but these points in the cycle are typically times where it's prudent to manage risk appropriately and protect your portfolio from the increased probability of sudden drawdowns.
Here's what I'm seeing that's indicating to me that we're likely in the midst of decelerating growth and inflation and heightened risk for asset prices.
1. The Federal Reserve Bank of Atalanta's GDPNow model is forecasting a significant decline in economic growth from about 3% perviously, to a current estimate of closer to 2% for Q3 2024.
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2. The Federal Reserve Bank of Cleveland's Inflation Nowcast is tracking a considerable deceleration, with current estimates for headline inflation to come in around 1% versus roughly 2.5% at the beginning of July. | | |
Growth slowing, check. Inflation slowing, check.
These are simply model based estimates, and the Fed doesn't exactly have the best forecasting record, so let's look at the markets for any confirmation…
3. US equity sector performance isn't exactly screaming robust economic growth. We're seeing clear signs of outperformance in more defensive and interest rate sensitive sectors of the market.
Would Consumer Staples and Utilities outperform versus Technology and Energy if everything was awesome?
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4. Commodities are telling the same story. From the price of oil to industrial metals and agriculture, the growth and inflation warning signs are everywhere.
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The cracks have clearly emerged, but this doesn't mean a recession is pending or something worse is lurking. If anything, this is the normal course of business and weakening conditions often invoke a policy response. We know rate cuts are coming, which should support asset prices over the intermediate term.
That said, as bullish as I am on crypto, it's import to be cognizant of the environment you're in and manage risk appropriately. Trade the market you're given, not the one you want.
If you're buying mid-50s thinking we're going straight up, you might be waiting a little while, at least until these conditions change, which in my view, could persist until next quarter.
For more on this, watch this week's episode of the tastycrypto show. | | |
Seasonality
Crypto price action sucks. Blame it on the season?
While the macro backdrop isn't exactly supportive, neither is the calendar. I take seasonality with a grain of salt, given crypto's limited price history and the market's ability to render most analysis instantly useless.
On the other hand, September historically tends to be one of the worst months for both Bitcoin and Ethereum prices. On average, the price of Bitcoin has declined around -4% while ETH has fallen -9% during the month.
| | | Volatility also tends to see a pick up in September, especially for Ethereum which has historically averaged an annualized realized vol of 90% during the month, compared to its current implied vol which is trading with a 60 handle. | | |
Correlations
Cross-asset correlations tell a similar story and to an extent reflect the macro environment we find ourselves in.
Bitcoin's correlation with equities over the near-term is nearing the highest level(s) we've seen over the past year, which tells me it's all the same trade. Macro is in the driver's seat.
The growth lower, inflation lower environment can be conducive to a stronger dollar which also doesn't bode well for bitcoin/crypto, given the very strong negative correlation between bitcoin and the dollar index which has materialized over the past month. | | | Maybe we're nearing a bottom or maybe we see a 40 print before this is all over, I have no idea. What we can control is a proactive approach to risk management.
For me, I'm bullish long-term, but short-term macro aware. This means... staying away from leverage, being patient, not overzealous, and while I'm adding to dips, remember the real "dips" in bitcoin are often 10-20% weekly corrections. So again... Patience.
If you're trading around a long-term position and have profits, don't forget to take them.
50k-70k is the range... For now. | | | | | |
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