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Crypto’s downturn is about more than the macro environment

The global economic downturn should not have a long-term negative effect on cryptocurrency prices, even if it is influencing crypto in the short term.

It’s been a tough year for risk assets across the board, and it’s fair to blame the macroeconomic situation. A combination of factors has ignited a surge of inflation in developed economies and forced central bankers to react.

As a consequence, several events — including inflation, payrolls, interest rate announcements, and speeches from monetary authorities (especially in the United States) — have had a relevant impact over the risk asset prices globally. As bad news prevailed, the turmoil spread across different asset classes and regions. By mid-September, all the main stock indexes from developed countries recorded double-digit negative returns (year to date, currency adjusted).

In these turbulent waters, crypto assets were severely harmed. The Nasdaq Crypto Index (NCI), which represents the performance of the most relevant crypto assets, had dropped 52.3% (year to date) by Sept. 12. During this crisis, crypto also exhibited an unprecedented high correlation with traditionally risky assets, notably stock in tech companies, which comprised one of the most heavily damaged sectors. Under these circumstances, it is worth questioning whether or not the crypto winter is a result of a macro scenario. Let’s see what the data can tell us.

Related: The market isn’t surging anytime soon — So get used to dark times

We fitted a simple regression model to understand how macro shocks impact the NCI returns. We used the Nasdaq 100 (NDX) returns, which are highly correlated to crypto, as a proxy variable for changes in the macro landscape. Our data-driven approach also indicated two outlier dates that demanded a special treatment, but we will explore this later on. Using daily returns from March 1 to Sept. 12, the estimation indicates that, for 1% variation in the NDX, one should expect 1.27% variation in the NCI. Considering that the NDX had dropped 21.9% by Sept. 12, we can infer that 27.0% of the NCI’s negative return was directly caused by the macroeconomic situation. This is definitely a substantial amount, but there is still a 34.6% drop to be explained. Can we declare macro “not guilty” for this residual drawback? The model gives us some clues.

The two outlier dates were identified purely by data-driven criteria. But, taking a closer look, there is some meaningful storytelling around these dates. The first date is May 9, which coincides with the collapse of Terra (an algorithmic stablecoin ecosystem), and the second is June 13, the very same day when Celsius, the then-leading centralized crypto lending platform, halted withdrawals. According to the model, these two days are responsible for 22.4% drop, and the latter accounts for two-thirds of the drop.

Both Terra and Celsius are examples of classic economic disasters: a currency crisis and bankruptcy of overleveraged agents, respectively. These situations usually occur when risk aversion rises (exactly what happens during major and widespread crises). A famous quote attributed to Warren Buffett fits pretty well in describing this idea: “You don’t find out who’s been swimming naked until the tide goes out.” Although it is not fair to put all the blame on the macro environment for these events, it is hard to believe that it didn’t play a key role through accelerating the deadly spirals and amplifying the spillover effect across the rest of the crypto ecosystem. It would be fair to classify these two cases as macro-boosted crypto-specific events (what a fancy name).

After removing the effect of the two outlier dates, we land on a negative return of 15.5%, which can be labeled as pure crypto performance. Well, if you call it a winter, you probably live quite near the Equator line. The chart below shows the alternative trajectories implied by the model:

NCI and alternative scenarios. Source: João Marco Braga da Cunha

All of these statistical gymnastics are great, but what does it mean for investors who have witnessed half of the market melt down? First, in spite of the high correlation, the links between the current macro situation and the future possibilities of crypto and blockchain technologies are extremely weak. There is no reason to believe that this crisis will have an impact over the long-term outcome of crypto investments.

Second, the macro-boosted crypto-specific events that have had a substantial impact over prices were purely technical and had no effect on the foundations of the investment thesis. It is reasonable to expect that their impact will be reversed in the medium term.

Related: What will the cryptocurrency market look like in 2027? Here are 5 predictions

Third, the crypto ecosystem is all right. The crisis washed away some bad actors and ill-designed projects, but all the pillars are standing intact. Decentralized finance (DeFi) protocols worked as expected. Ethereum just finished the most relevant update in crypto history. Second-layer solutions are evolving. There is growing adoption of nonfungible tokens (NFTs) and other forms of digital culture, and so on.

Crypto’s downturn is not all about macro. But it is likely that we would be in a comfortable autumn if it wasn’t for the crisis. And why should we be skeptical about the possibility of a crypto summer after the macro turmoil recedes? It’s been said: “To appreciate the beauty of a snowflake, it is necessary to stand out in the cold.” To get tanned in the crypto summer, you must be exposed.

João Marco Braga da Cunha is the portfolio manager at Hashdex. He obtained a master of science in economics from Fundação Getulio Vargas before obtaining a doctorate in electrical and electronics engineering from the Pontifical Catholic University of Rio de Janeiro.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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Data challenges the DXY correlation to Bitcoin rallies and corrections ‘thesis’

Analysts and traders strongly adhere to the “Bitcoin is inversely correlated to the strength of the U.S. dollar index” thesis, but a closer look at the data suggests otherwise.

Presently, there seems to be a general assumption that when the U.S. dollar value increases against other global major currencies, as measured by the DXY index, the impact on Bitcoin (BTC) is negative.

Traders and influencers have been issuing alerts about this inverse correlation, and how the eventual reversal of the movement would likely push Bitcoin price higher.

Analyst @CryptoBullGems recently reviewed how the DXY index looks overbought after its relative strength index (RSI) passed 78 and could be the start of a retrace for the dollar index.

Moreover, technical analyst @1coin2sydes presents a bearish double top formation on the DXY chart, while simultaneously Bitcoin forms a double bottom, a bullish indicator.

Correlation changes over time, despite the general inverse trend

The periods of inverse movements between Bitcoin and the DXY index have never exceeded 36 days. The correlation metric ranges from a negative 1, meaning select markets move in opposite directions, to a positive 1, which reflects a perfect and symmetrical movement. A disparity or a lack of relationship between the two assets would be represented by 0.

Dollar Index DXY 20-day correlation versus Bitcoin. Source: TradingView

The metric has been below negative 0.6 since Aug. 19, indicating that both DXY and Bitcoin have generally followed an inverse trend. In fact, the longest-ever period of inverse correlation has been April 14 to May 20.

Saying that Bitcoin holds an inverse correlation to the DXY index would be statistically incoherent since it had a negative 0.6 or lower in less than 30% of the days since 2021.

The dollar strengthened after the FOMC minutes

On Aug. 17, officials at the United States Federal Reserve indicated that additional interest rate hikes would be needed until inflation eased substantially, according to the minutes from the July 27 meeting.

Dollar Index DXY (orange, right) vs. Bitcoin (blue). Source: TradingView

The report caused the U.S. dollar to appreciate versus major global currencies, as the market gave the Fed a vote of confidence. Meanwhile, Bitcoin dropped 11% in two days to $20,800, reinforcing the inverse correlation thesis.

Still, a correlation does not imply causation, meaning it is impossible to conclude that the DXY’s positive performance negatively impacted the Bitcoin price after the minutes from the Federal Reserve meeting were released.

Correlation should not be used to predict short-term moves

Even though pundits and influencers often use 20-day correlation data to explain daily price movements, one should analyze a more extended timeframe to understand the potential impacts of the DXY index on Bitcoin price.

Dollar Index DXY (orange, right) vs. Bitcoin (blue), 2021. Source: TradingView

For instance, 2021 presented some positive correlation between the DXY dollar index and Bitcoin. Maybe some of the movements were anticipated by either side, but no extended periods of inverse correlation were present.

More importantly, events solely relevant to the cryptocurrency might have distorted the metric, such as the first U.S. Bitcoin exchange-traded fund launch on Oct. 19, 2021. Other examples include Tesla announcing a $1.5 billion Bitcoin investment on Feb. 8, 2021.

Moreover, analysts point to the Chinese crackdown on mining in May 2021 as the culprit for the market downturn below $40,000. Those events could not have been anticipated by the DXY dollar index, so any ongoing correlation might have had little impact during those periods.

Consequently, those waiting for a turnaround on the DXY index before placing bets on a Bitcoin rally have no statistical backing. Whenever positive (or negative) developments specific to the cryptocurrency industry take place, the historical correlation loses relevance.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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Market Strategist Expects Stock Market to Drop 50% From Here, Says There’s ‘Going to Be No Middle Class Left’

Market Strategist Expects Stock Market to Drop 50% From Here, Says There’s ‘Going to Be No Middle Class Left’Following Jerome Powell’s hawkish commentary at the annual Jackson Hole Economic Symposium, major stock indexes, cryptocurrencies, and precious metals slid significantly in value. Over $240 billion was erased from the crypto market and the Crypto Fear and Greed Index continues to slide lower, edging toward “extreme fear.” Furthermore, the chief strategist at bubbatrading.com, Todd ‘Bubba’ […]

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Bitcoin derivatives show a lack of confidence from bulls

High correlation to stock markets and recession risks limit optimism on the part of BTC investors.

Bitcoin (BTC) has been trending up since mid-July, although the current ascending channel formation holds $21,100 support. This pattern has been holding for 45 days and could potentially drive BTC towards $26,000 by late August.

Bitcoin/USD 12-hour price. Source: TradingView

According to Bitcoin derivatives data, investors are pricing higher odds of a downturn, but recent improvements in global economic perspective might take the bears by surprise.

The correlation to traditional assets is the main source of investors' distrust, especially when pricing in recession risks and tensions between the United States and China ahead of House Speaker Nancy Pelosi's visit to Taiwan. According to CNBC, Chinese officials threatened to take action if Pelosi moved forward.

The U.S. Federal Reserve's recent interest rate hikes to curb inflation brought further uncertainty for risk assets, limiting crypto price recovery. Investors are betting on a "soft landing," meaning the central bank will be able to gradually revoke its stimulus activities without causing significant unemployment or recession.

The correlation metric ranges from a negative 1, meaning select markets move in opposite directions, to a positive 1, which reflects a perfect and symmetrical movement. A disparity or a lack of relationship between the two assets would be represented by 0.

S&P 500 and Bitcoin/USD 40-day correlation. Source: TradingView

As displayed above, the S&P 500 and Bitcoin 40-day correlation currently stands at 0.72, which has been the norm for the past four months.

On-chain analysis corroborates longer-term bear market

Blockchain analytics firm Glassnode's "The Week On Chain" report from Aug. 1 highlighted Bitcoin's weak transaction and the demand for block space resembling the 2018–19 bear market. The analysis suggests a trend-breaking pattern would be required to signal new investor intake:

"Active Addresses [14 days moving average] breaking above 950k would signal an uptick in on-chain activity, suggesting potential market strength and demand recovery."

While blockchain metrics and flows are important, traders should also track how whales and market markers are positioned in the futures and options markets.

Bitcoin derivatives metrics show no signs of “fear” from pro traders

Retail traders usually avoid monthly futures due to their fixed settlement date and price difference from spot markets. On the other hand, arbitrage desks and professional traders opt for monthly contracts due to the lack of a fluctuating funding rate.

These fixed-month contracts usually trade at a slight premium to regular spot markets as sellers demand more money to withhold settlement longer. Technically known as "contango," this situation is not exclusive to crypto markets.

Bitcoin 3-month futures’ annualized premium. Source: Laevitas

In healthy markets, futures should trade at a 4% to 8% annualized premium, enough to compensate for the risks plus the cost of capital. However, according to the above data, Bitcoin's futures premium has been below 4% since June 1. The reading is not particularly concerning given that BTC is down 52% year-to-date.

To exclude externalities specific to the futures instrument, traders must also analyze Bitcoin options markets. For instance, the 25% delta skew signals when Bitcoin whales and market makers are overcharging for upside or downside protection.

If option investors fear a Bitcoin price crash, the skew indicator would move above 12%. On the other hand, generalized excitement reflects a negative 12% skew.

Bitcoin 30-day options 25% delta skew: Source: Laevitas

The skew indicator has been below 12% since July 17, considered a neutral area. As a result, options traders are pricing similar risks for both bullish and bearish options. Not even the retest of the $20,750 support on July 26 was enough to instill "fear" in derivatives traders.

Bitcoin derivatives metrics remain neutral despite the rally toward $24,500 on July 30, suggesting that professional traders are not confident in a sustainable uptrend. Thus, data shows that an unexpected move above $25,000 would take professional traders by surprise. Taking a bullish bet might seem contrarian right now, but simultaneously, it creates an interesting risk-reward situation.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision

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Ethereum price falls below $1.1K and data suggests the bottom is still a ways away

ETH price has stalled around the $1,100 level, but several data points suggest the altcoin’s sell-off is far from complete.

Ether (ETH) price nosedived below $1,100 in the early hours of June 14 to prices not seen since January 2021. The downside move marks a 78% correction since the $4,870 all-time high on Nov. 10, 2021.

More importantly, Ether has underperformed Bitcoin (BTC) by 33% between May 10 and June 14, 2022, and the last time a similar event happened was mid-2021.

ETH/BTC price at Binance, 2021. Source: TradingView

Even though Bitcoin oscillated in a narrow range two weeks before the 0.082 ETH/BTC peak, this period marked the "DeFi summer" peak when Ethereum's total value locked (TVL) catapulted to $93 billion from $42 billion two months earlier.

What’s behind Ether’s 2021 underperformance?

Before jumping to conclusions, a broader set of data is needed to understand what led to the 31% correction in the ETH/BTC price in 2021. Looking at the number of active addresses is a good place to start.

Ethereum network daily active addresses, 7-day average. Source: CoinMetrics

Data shows steady growth in active addresses, which increased from 595,620 in mid-March to 857,520 in mid-May. So, not only did the TVL growth take investors by surprise, but so did the number of users.

The 31% Ether underperformance versus Bitcoin back in June 2021 reflected a cool-off period after unprecedented growth in the Ethereum ecosystem. The consequence for Ether's price was devastating and a 56% correction followed that "DeFi summer."

Ether/USD price at Coinbase, 2021. Source: TradingView

One must compare recent data to understand whether Ether is heading to a similar outcome. In that sense, those who waited for the 31% miss versus Bitcoin's price bought the altcoin at a cycle low near $1,800 on June 27, 2021 and the price increased 83% in 50 days.

Is Ether flashing a buy signal right now?

This time, there is no DeFi Summer and before this year’s 33% negative performance versus Bitcoin, the active address indicator was already slightly bearish.

Ethereum network daily active addresses, 7-day average. Source: CoinMetrics

By May 10, 2022, Ethereum had 563,160 active addresses, in the lower range from the past couple of months. This is the exact opposite of the mid-2021 movement that occurred as Ether price accelerated its losses in BTC terms.

One might still think that despite a relatively flat number of users, the Ethereum network had been growing by presenting a higher TVL.

Ethereum network total value locked, USD. Source: Defillama

Data shows that on May 10, 2022, the Ethereum network TVL held $87 billion in deposits, down from $102 billion a month prior. Therefore, there is no correlation between the mid-2021 cool-off after "DeFi summer" and the current 33% Ether price downturn versus BTC.

These metrics show no evidence of similarity between the two periods, but $1,200 might as well be a cycle low, and this will depend on other factors apart from the network's use.

Considering how weak active addresses and TVL data were before the recent price correction, investors should be extra careful when trying to predict a market bottom.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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FTX US Chief Brett Harrison Says Crypto Markets’ Correlation With Stocks Not What Traders Think – Here’s Why

FTX US Chief Brett Harrison Says Crypto Markets’ Correlation With Stocks Not What Traders Think – Here’s Why

Brett Harrison, CEO of crypto exchange FTX US is giving his take on why digital asset markets seem to be closely correlated with US stock indices. In a lengthy thread, Harrison addresses a common criticism of crypto not being a good inflation hedge or a portfolio diversifier since it strongly correlates with the stock market. […]

The post FTX US Chief Brett Harrison Says Crypto Markets’ Correlation With Stocks Not What Traders Think – Here’s Why appeared first on The Daily Hodl.

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$32K Bitcoin price could turn the tides in Friday’s $160M BTC options expiry

BTC price lost the momentum that had pushed it to $32,300 on May 31, but this week’s option expiry could help bulls recapture the key price level.

Twenty-three agonizing days have passed since Bitcoin (BTC) last closed above $32,000 and the 10% rally that took place on May 29 and 30 is currently evaporating as BTC price retraces toward $30,000. The move back to $30,000 simply confirms the strong correlation to traditional assets and in the same period, the S&P 500 also retreated 0.6%.

Bitcoin/USD 12-hour price at Kraken. Source: TradingView

Weaker corporate profits could pressure the stock market due to rising inflation and the upcoming U.S. Federal Reserve interest rate hikes, according to Citi strategist Jamie Fahy. As reported by Yahoo! Finance, Citi’s research note to clients stated:

“Essentially, despite concerns regarding recession, earnings per share expectations for 2022/2023 have barely changed.”

In short, the investment bank is expecting worsening macroeconomic conditions to reduce corporate profits, and in turn, cause investors to reprice the stock market lower.

According to Jeremy Grantham, co-founder and chief investment strategist of GMO, “We should be in some sort of recession fairly quickly, and profit margins from a real peak have a long way that they can decline.”

As the correlation to the S&P 500 remains incredibly high, Bitcoin investors fear that the potential stock market decline will inevitably lead to a retest of the $28,000 level.

S&P 500 and Bitcoin/USD 30-day correlation. Source: TradingView

The correlation metric ranges from a negative 1, meaning select markets move in opposite directions, to positive 1, which reflects a perfect and symmetrical movement. A disparity or a lack of relationship between the two assets would be represented by 0.

Currently, the S&P 500 and Bitcoin 30-day correlation stands at 0.88, which has been the norm for the past couple of months.

Bearish bets are mostly below $31,000

Bitcoin's recovery above $31,000 on May 30 took bears by surprise because only 20% of the put (sell) options for June 3 have been placed above such a price level.

Bitcoin bulls may have been fooled by the recent $32,000 resistance test and their bets for the $825 million options expiry go all the way to $50,000.

Bitcoin options aggregate open interest for June 3. Source: CoinGlass

A broader view using the 0.77 call-to-put ratio shows more bearish bets because the put (sell) open interest stands at $465 million against the $360 million call (buy) options. Nevertheless, as Bitcoin currently stands above $31,000, most bearish bets will likely become worthless.

If Bitcoin's price remains above $31,000 at 8:00 am UTC on June 3, only $90 million worth of these put (sell) options will be available. This difference happens because there is no use in a right to sell Bitcoin at $31,000 if it trades above that level on expiry.

Bulls might pocket a $160 million profit

Below are the four most likely scenarios based on the current price action. The number of options contracts available on June 3 for call (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:

  • Between $29,000 and $30,000: 1,100 calls vs. 5,100 puts. The net result favors bears by $115 million.
  • Between $30,000 and $32,000: 4,400 calls vs. 4,000 puts. The net result is balanced between call (buy) and put (sell) instruments.
  • Between $32,000 and $33,000: 6,600 calls vs. 1,600 puts. The net result favors bulls to $160 million.
  • Between $33,000 and $34,000: 7,600 calls vs. 800 puts. Bulls extend their gains to $225 million.

This crude estimate considers the call options used in bullish bets, and the put options exclusively in neutral-to-bearish trades. Even so, this oversimplification disregards more complex investment strategies.

Bears have less margin required to suppress Bitcoin price

Bitcoin bears need to pressure the price below $30,000 on June 3 to secure a $115 million profit. On the other hand, the bulls' best case scenario requires a push above $33,000 to increase their gains to $225 million.

However, Bitcoin bears had $289 million leverage short positions liquidated on May 29, according to data from Coinglass. Consequently, they have less margin required to push the price lower in the short term.

With this said, the most probable scenario is a draw, causing Bitcoin price to range near $31,000 ahead of the June 3 options expiry.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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Bitmex Co-Founder Arthur Hayes Says Bitcoin Could Drop to $30K Amid a Stock Market Rout

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Bitcoin traders say $34K was the bottom, but data says it’s too early to tell

Bitcoin traders say the bottom is in, but it’s important to also consider BTC’s correlation to equities markets.

Bitcoin (BTC) price traded down 23% in the eight days following its failure to break the $45,000 resistance on Feb. 16. The $34,300 bottom on Feb. 24 happened right after the Russian-Ukraine conflict escalated, triggering a sharp sell-off in risk assets.

While Bitcoin reached its lowest level in 30 days, Asian stocks were also adjusting to the worsening conditions, a fact evidenced by Hong Kong's Hang Seng index dropping 3.5% and the Nikkei also reached a 15-month low.

Bitcoin/USD at FTX. Source: TradingView

The first question one needs to answer is whether cryptocurrencies are overreacting compared to other risk assets. Sure enough, Bitcoin's volatility is much higher than traditional markets, running at 62% per year.

As a comparison, the United States small and mid-cap stock market index Russell 2000 holds a 30% annualized volatility. Meanwhile, as measured by the MSCI China index, Chinese equities stand at 32%.

Bitcoin/USD (purple, left scale) vs. Hang Seng Index (blue) & Russell 2000 (orange)

There is a high correlation between Bitcoin, the Hang Seng stock market and the U.S. Russell 2000 Index. A possible explanation is the U.S. Federal Reserve's tightening objectives. By reducing bond buybacks and threatening to increase the interest rates, the monetary authority has caused a "flight to safety" movement.

Despite the non-existent returns adjusted by the 7.5% inflation, investors often seek protection on cash U.S. dollar positions and Treasury ills. This is especially true during periods of extreme uncertainty.

Bitcoin futures traders are moderately bearish

To understand how professional traders are positioned, one should monitor Bitcoin derivatives. The Bitcoin futures' annualized premium should run between 5% to 12% to compensate traders for "locking in" the money for two to three months until the contract expiry.

Bitcoin 3-month futures premium. Source: Laevitas

Levels below 5% are extremely bearish, while an annualized premium above 12% indicates bullishness. As shown above, the futures premium dropped below 5% on Feb. 9, displaying a lack of confidence from professional traders.

Although the current 2.5% represents the lowest level since July 20, this date marked a reversal from a 74-day price correction. In fact, a 71% rally followed that event, confirming the thesis that the futures premium is a backward-looking indicator.

Bitcoin/USD (blue) and 30-day correlation vs. Russell 2000 (purple). Source: TradingView

Notice how Bitcoin’s correlation versus the Russell 2000 Index was relatively high on July 20. However, that situation quickly reversed as BTC initiated its rally, independent from traditional markets.

The bottom could be in, but uncertainty could lead to further downside

Similar to the futures premium, the correlation metric uses historical data, so it should not be used to predict trend reversals. Investors, particularly professional fund managers, tend to avoid high volatile assets during turbulent markets.

Understanding market psychology is essential for avoiding unexpected price swings. Therefore, as long as Bitcoin remains considered a risky asset by market participants, these short-term corrections should be the norm rather than the exception.

Therefore, it makes sense to wait for further decoupling signs before predicting a Bitcoin bottom.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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