Crypto Market Outlook: Tough Times Ahead – Part Deux

Volatile is the best word to describe the price action in the crypto markets of late. Through a combination of the disastrous geopolitical landscape, slowing economic growth, and an impending central bank tightening, price swings in high-risk beta assets like cryptocurrencies have been extreme. It's a tough environment out there.

Not much has changed in my crypto outlook over the next few quarters since my most recent post on the theme. In particular, due to the deteriorating macro environment, I remain bearish in the medium term. However, we are starting to see some positive long-term chain developments that should be encouraging for long-term bulls. For the sake of positivity, such developments will therefore be the focus of this article.

However, starting with the technicals, the daily chart of BTC (USD-BTC) shows how volatile the market has been lately. We have now had multiple rejections at both the $45k resistance level and the $34k support area. In the short term, these are the levels that investors should watch. If we break below $34k, then $30k seems inevitable and should be bought, while conversely, a break above $45k would make me reconsider for a bearish bias and could be the boost for cryptocurrencies. macro decoupling.

For Ethereum (ETH-USD), price action is looking somewhat precarious and is apparently preparing to make a move one way or another. $2,350 remains support while $3,350 is the key resistance area to watch. If we break below $2,350, $1,700 looks like a reasonable proposition and would again represent an excellent long-term buying opportunity. However, there are more downsides to ETH relative to BTC today.

Going back to Bitcoin via the weekly chart, it seems increasingly likely that we will at least test the key $30k support level sometime this year given the unfavorable macro backdrop. Again, as I have said repeatedly in the past, $30k would be an absolutely must buy opportunity for those long-term bullish cryptocurrencies.

What makes the $30k area even more important from a technical perspective is that this level is roughly equal to the 61.8% Fibonacci retracement of the entire run up from the March 2020 lows. If we fail to hold $30k 200 week moving average seems to be the next key area as there is no support between $30k and $20k. Although painful, such a move would be consistent with previous bear markets and would again represent an excellent long-term buying opportunity.

What makes me more and more cautious that the low is not yet in 2022 is the fact that we have yet to see a capitulation style volume spike that has occurred at all of the recent lows in late 2019, early 2020 and mid-2021, as we can see in the graph above. Although not a prerequisite for a market bottom, a capitulation-like surge in volume helps give us confidence for when that bottom may be close.

Given the incredibly unfavorable macro outlook Set to weigh crypto assets in the coming quarters, it is hard to see Bitcoin, Ethereum, or any other crypto asset making a sustained move higher in the foreseeable future. What we know during growth cycle downturns is that high beta stocks underperform low beta stocks and like it or not, cryptocurrencies have been trading in line with high beta risky assets for quite some time. weather.

What we also know happens historically during a growth cycle downturn is the strength of the US dollar, which in times of stress becomes the ultimate haven asset, if only out of necessity and foreigners scramble for dollars. While Bitcoin and cryptocurrencies can clearly still appreciate in value when the dollar rises, a strong dollar environment is a significant headwind for risk assets. Furthermore, the geopolitical tension we are seeing today will only exacerbate this dynamic.

Eventually, we will see cryptocurrencies undergo macro decoupling, but for now, the growth outlook remains a significant headwind.

Longer term developments

Turning now to the aforementioned long-term developments in the crypto space, we are certainly starting to see some constructive signs for those who are long-term bullish on cryptocurrencies, like myself.

First of all, we can see that sentiment is slowly but surely reaching extreme fear levels. However, it is important to note that sentiment can remain both euphoric and fearful for long periods of time, which is why I prefer to use a 20 or 50 period moving average of sentiment indicators like the Crypto Fear & Greed Index below. Readings below 20 for the 20-period moving average appear to be excellent opportunities to slowly deploy equity.

In terms of the derivatives space, open interest has dropped significantly from the November high to a level more indicative of a stable, less leveraged market, although open interest still remains at higher levels than we saw during the lows. in mid-2021. It looks like there is still some remaining speculation that needs to be cleared from the system before we can confidently say the low is in for now.

However, funding rates are now largely neutral, clearly showing signs that speculators have reigned in their leveraged positions a bit.

From an on-chain perspective, the market value to realized value (MVRV) ratio shown below has also dropped significantly in recent times, surpassing the lows we saw in mid-2021. The MVRV ratio serves as a A rough indicator of the average profit/loss position of BTC holders and has been cited by many as an important long-term valuation indicator for cryptocurrencies. Clearly, however, there is still room for this ratio to drop further lower, with readings coming in below one that is generally seen as an excellent long-term buying opportunity. Such an outcome is possible this year and would be highly opportunistic.

Much positivity can be gleaned from recent long-term buyer moves. First, whale buying activity picked up significantly in January and February as the price plummeted below $40,000. Quite simply, if you are a long-term holder, you want to buy when the whales (ie smart money) are buying. The red and orange dots below indicate the purchase of whales, while the blue dots indicate the sale of whales, courtesy of Ecoinometrics.

Extending this observation across the ownership distribution, we can see how long-term holders (represented by the blue to green colors below) are slowly beginning to increase their ownership percentage of outstanding supply, a dynamic noted in an article recent of in the block:

“Bitcoin Distribution Cycle: Bitcoin holders tend to follow a pattern based on price activity and the dominance of new entrants over old ones. It goes something like this:

1. Price increases attract new entrants, leading to higher price increases

2. Speculation spirals out of control as short-holders (represented in red and orange above) rush in while long-holders sell and create the cap

3. Prices crash and many new entrants make a loss.

4. Long-term players buy back and accumulate more of the shares

Right now, it looks like we're somewhere between steps 3 and 4, with Bitcoin reaching an all-time high in November and short-term traders down as much as 32%. Simultaneously, long-term holders are starting to increase their share of the supply, as shown by the black arrows on the UTXO age indicator."

We can also see this same dynamic illustrated below (blue line), as the percentage ownership of coins in circulation by long-term holders increases, a trend historically associated with periods of crypto weakness but indicating buying opportunities. attractive to such long-term holders. .

Apparently, long-term positive signs for the various on-chain data are starting to show up all over the place. In fact, the reserve risk indicator seems to be finally entering a representative area of ​​favorable long-term buying opportunities, although I would like to see this metric drop a bit more before I get too bullish. Reserve risk is a measure of price relative to bank HODL and is used to assess long-term holder confidence.

Likewise, idle flows, which measure the ratio of market capitalization to annualized idle value, are getting too close to the long-term buy zone.

Like the percentage of transfer value in earnings (measured by the 90-day moving average), a development recently noted by glass node.

Long-term exchange movements continue to trend favorably, as there has been a clear ongoing increase in investor willingness to hold BTC off the exchange (i.e., HODLing in cold storage).

And finally, another development that I would like to point out that bodes well for the crypto space as a whole is how the hash rate (which can be considered a proxy for the security of the Bitcoin network) has come to peak. time high, despite the fact that Bitcoin is still almost 45% below the highs set in November. This is certainly a healthy trend and one that we may not necessarily see during 2021.

As we can see, despite the short term macro headwinds at present, we are starting to see some constructive signs in the longer term and are approaching levels where investors can start dipping their toes into the market slowly but surely once again.

Summary and key points

• Volatility has come to dominate the crypto markets as of late.

• Given the unfavorable macroeconomic outlook, this is expected to continue for the next few quarters, particularly as cryptocurrencies trade in line with high beta stocks.

• Technically, a break below $34k for BTC and $2,350 for ETH could usher in further declines. Such results would provide excellent long-term buying opportunities.

• We are slowly seeing long-term positive developments from various on-chain indicators as Bitcoin is slowly but surely making its way into the buy zone.

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Publisher's note: The bullet points in this article were chosen by the editors of Seeking Alpha.