Ecoinometrics - A New Hope
January 31, 2022
The latest FOMC meeting came and went without much surprise. For the most part that means risk assets remain in a turbulent zone. No smooth sailing ahead. But among all that a new hope emerges from on-chain data for Bitcoin.
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A New Hope
Before we look at the data let me repeat the premise we find ourselves in.
There is only one narrative running the show. At the moment this narrative is that the Federal Reserve is transitioning from an accommodative to tighter monetary environment and this adjustment could mess up risk assets.
So it doesn’t really matter for the big picture whether you are trading Bitcoin, Ethereum, Apple or the NASDAQ. All those assets will be impacted.
The FOMC is praising the strength of the economy. Of course, let’s congratulate ourselves on a job well done.
The FOMC acknowledges that inflation is much higher than their 2% target. But at the same time they still blame it on transitory conditions without using the word transitory. Aka it isn’t our fault.
But while it isn’t our fault we are still going to raise rates and slash our purchasing program to try and get inflation under control.
And don’t worry, if things get too bad we’ll go back to the money printer.
I’m summarizing here but basically that’s what the market expected. Hence no major reaction for risk assets. This meeting was priced in.
Still, the SP500 is down -12.4% since it’s all time high and the road to recovery is likely to be a distant one. Unless the money printer goes brrrr once more.
It is typical for a drawdown of the stock market in the -12% range to last anywhere from three months to a year. But at least you can comfort yourself by seeing that in terms of depth, this dip is at the edge of where most corrections stop.
So any further downside in the -15% to -20% range is likely to trigger some action from the plunge protection team and the FOMC is likely to revise its stance on tightening conditions.
Meaning if we play the odds the downside is limited from here.
After all, most of the sequence that started after March 2020 is a consequence of the monetary policy of the Fed. So they are in control, they can decide to stop the damage at any point in time.
But it is clear that at least we are exiting the COVID crisis sequence and entering into some new regime.
The 10-year US Treasury yield just climbed back to its pre-COVID level.
And the short end of the yield curve is getting less steep as the rate hikes are getting priced in.
So while Jay Powell is careful to say that the Fed isn’t on autopilot, it is also clear that they can’t just do nothing. They have to at least do some rate hike and stop purchasing assets for a while.
That means we are still in the danger zone for risk assets even though most likely the downside is now more limited.
But if there is limited downside for the stock market, what does that mean for Bitcoin?
Well so far hodlers seem to signal that the price has gone low enough to make BTC a very attractive buy. At least that’s what it looks like on-chain.
First tell-tale sign, over the past 30 days we are once more seeing massive outflows of coins. We quickly went from around 0 to more than 100k BTC leaving exchange addresses over one month.
Clearly that means hodlers like the current price.
At the same time we finally had one consecutive week of both the whales and the small fish accumulating coins. I’m not sure if this is a reliable buy signal, but at least that signifies whales are finally getting confident that they can safely buy at this price (and turn a profit at some later point in time).
And this isn’t some timid buying. Nope. Both groups are buying this dip hard. Check it out.
The small fish are back on the steady uptrend.
And the whales have had their strongest buying pattern since the rebound at the bottom of the April 2021 crash. Interestingly enough both the bottom of May 2021 and the current bottom in accumulation patterns happened around the same price levels.
Overall we don’t have that much blue left on the heat map of the accumulation trend. Again just the fact that a majority of addresses think that now is a good time to accumulate is probably a good signal that there is a strong support over $30k.
But the challenge is to see if this will create some sustainable momentum.
Because as it stands this drawdown is an outlier. You simply don’t see many of these during a post halving sequence.
That being said we see a familiar pattern in the price action of this drawdown. Like something similar to the other outliers.
When we reach the point where there is a sustained accumulation phase the price will shoot straight up. For now even if we are seeing a nice bump there is still a long road to recovery.
But it is when there is blood on the streets that you can find good opportunities to make money. So even though there are some risks of more downside or simply a prolonged period of weak price action until the Fed comes back to its senses, now is probably a good time to build a position and wait for the real pump to begin.
When is the real pump going to play out. Honestly I have no idea. We have lost the guidance from the previous cycles when it comes to timing. Anything can happen.
So let’s keep a close eye on the narrative and see how this 3rd cycle compares to the previous ones when it is all said and done.
Barbell Crypto Strategy
If you aren’t familiar with the concept of the barbell investment strategy the idea is the following: you want to only invest at the two extremes of the risk curve, very safe assets for pretty much guaranteed steady returns and very risky assets that have a high return potential.
No middle ground. Just strike for the extremes as this is where you get the best risk adjusted opportunities.
If you restrict yourself to digital assets Bitcoin, Ethereum and the stablecoins that generate some yield would be on the very safe side. On the very risky side you have… well pretty much everything else.
Since this newsletter is mostly focused on macro I tend to only cover the safe side of things. But if you want me to regularly cover some topics, trends, narratives shaping the other side of the crypto barbell let me know in the comments or shoot me an email or DM on Twitter.
If there is enough interest I’ll start covering the big trends that I see in the space in future editions of the newsletter.
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