On the precipice
Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
Despite a slew of negative, but necessary, sentiment from the Fed, BTC has held up fairly well this week, dancing around the $20k mark as bulls and bears continue to wage an existential battle. With US CPI figures coming in at a 40 year high of 9.1% on Wednesday, and the Euro losing parity against the Dollar, the overall picture remains decidedly grim. However, crypto’s relative performance, for the moment, is somewhat resilient.
Liquidity
As has been established throughout the past year, crypto, especially in the wake of institutional entrants, remains strongly correlated with equities. With the Dow, Nasdaq, and S&P 500 falling following the 9.1% CPI print, and again on Thursday following JP Morgan’s below-forecast earnings report, how has BTC and crypto as a whole fared so well?
There are several lenses for examining this, but for the sake of pragmatism let’s outline the most obvious one – a dearth of liquidity. As per the chart below, Bitcoin liquidity has taken a major knock in recent months as market participants derisk, sideline, and in many cases, exit entirely.
BraveNewCoin - Bitcoin Liquidity Index (green)
With the air of uncertainty growing ever-thicker, liquidity has grown thin on major order books, opening the door for inorganic price manipulation from large entities. The most popular strategy for this is the use of TWAP (Time-weighted-average-price), which essentially constitutes automatically buying a consistent amount at regular intervals. For instance, during last week’s surprise run from 20,4k to 21,7k, a major trading desk was running a TWAP throughout.
Why?
Driving prices up on BTC derivatives (specifically, perps) creates froth, which encourages retail traders to buy up spot BTC at higher prices, before entities front-running this price action conclude their buying and begin to redistribute tokens to late buyers. This allows said entities to profit both from selling to late buyers and by liquidating trapped shorts.
Indeed, this is part and parcel of any nascent market. However, the fact that a handful of entities are capable of moving price counter to equities evidences the need for greater adoption and less imbalanced wealth concentration in the space.
Earnings
Earnings continue to dictate overall movement, with even JP Morgan (JPM) falling short of expected results. Further, the banking monolith has paused buybacks of its own stock, despite being at a yearly low – a perplexing decision that rightfully has many analysts concerned.
Next week brings with it a slew of major earnings reports, which have grown increasingly important as a barometer of the real impact of inflation on business and individuals. You can monitor the US earnings calendar here.
Final Thoughts
The noise is hard to ignore, with bulls and bears seemingly tearing each other apart over ~1% swings on social media. And yet, ignore it we must. To weather these trying times, it’s vital that we observe, catch, and dismiss our biases in favour of a hard look at the data. Sri Lanka’s recent collapse is by no means an isolated incident – with the Dollar Index (DXY) soaring, no fiat currency has been immune to the actions of the Fed. Contagion is unavoidable in a world that has grown inextricably interconnected, and the impact of continued, significant rate hikes, is likely to cause further suppression. There is little advice to be offered in these unprecedented times other than to prioritise capital preservation to weather the storm. In other words – protect, preserve, survive.
