Bitcoin
It was another week of range-bound trading for Bitcoin with low volume. Price continues to consolidate around the $28k range after the big move higher on March 13th.
This price action is consistent with previous bitcoin cycles. As we’ve covered in previous issues, bitcoin tends to consolidate for 6-8 weeks of range-bound trading after 20% moves with strong volume in either direction.
If previous cycles are any guide, we are now approaching the part where bitcoin “breaks out” of the tight range with a decisive move in either direction.
As you can see from the chart above, Bitcoin’s implied volatility is approaching 50%, and historically it has not remained near those levels for too long.
Another factor that could limit the bitcoin spot volume traded is the current price to transact in the network. The recent popularity of NFTs on the Bitcoin chain, enabled by the Ordinals Protocol, has caused transaction fees to soar. Currently, the cost to process a transaction on the next block is close to USD $30.
In terms of price catalysts for the week, we have key inflation data out of the U.S. that could impact markets more so than before. Inflation data will take center stage going forward, as the Fed signalled that its next decision will depend on the data.
Lastly, in terms of key support and resistance levels, we continue to track the 200-week moving average price as potential support, currently at $26,112. In terms of resistance, we continue to monitor the $30k and $35k as key resistance levels to the upside.
Digital Asset Markets:
The Fed is killing the asset-less
Part 1: The Asset Economy and The Street Economy
A capitalist economy is made up of two separate economies: “the asset economy” and “the street economy”.
The asset economy is precisely that: the asset markets. Every time you transact in real estate, gold, stocks, bonds, bitcoin, and other financial instruments, you are transacting with assets. If you own any assets, you have been a part of this economy - and you are a proud asset owner. And, most likely, you’d be considered to be in the “middle class” or above.
The street economy is basically every other market. When you’re buying groceries, taking an uber, getting a haircut or going out to dinner, you are participating in the street economy. Everyone participates in this economy almost by default, regardless of the social sphere.
To put some numbers on this, according to Zillow 68% of Americans own real estate, and 58% of Americans own stocks, according to Gallop.
Everyone in the asset economy interacts with the street economy, but everyone in the street economy doesn’t necessarily interact with the asset economy. This is a key concept to remember.
On average, most people interact with the street economy several times a day. However, most people only transact with the asset economy a few times a month or a year in some cases.
This means that any changes in the street economy are felt by everyone - very fast. But the changes in the asset economy take longer for people to complain about.
How the 2 economies interplay: Inflation in the asset economy usually precedes inflation in the street economy. Because those who participate in the asset economy are usually “closer” to the Fed and try to anticipate its moves. Once asset prices inflate, the newly-found wealth of the asset-rich makes its way into the street economy via higher spending and then everyone starts demanding raises. This makes services inflation sticky when it comes to the street economy. The Fed doesn’t like either type of inflation running above its target, but asset price inflation typically puts a lot less political pressure on the Fed and government than street inflation. So, when street inflation starts running high, the Fed jacks interest rates higher until overall demand drops such that companies size down and unemployment trickles higher - which slows down demand. The circle of (credit) life.
To use the most recent example - the wave of Covid stimulus in 2020 drove asset prices to new record highs. “Asset Inflation”, using equity prices as an example, peaked in November 2021. “Street inflation” as measured by the Consumer Price Index, peaked in July 2022. This prompted the Fed to start raising rates in March of 2022 - in an effort to cool down both. Both equity markets and CPI are off their highs.
Part 2: Something Broke
To be clear, the Fed does not like inflation in either economy (asset or street). Raising rates has the effect of cooling inflation in both economies - by raising everyone’s financing costs and depleting disposable income across the economy.
To combat the most recent wave of asset price inflation and street economy inflation, the Fed embarked on the most aggressive rate hike cycle in recent history. And it was successfully bringing down asset prices and street economy inflation… until something broke.
That “something” was none other than the U.S. regional banking system.
Banks take in deposits and use the deposit money to buy long-dated government bonds. When the Fed rose interest rates, it caused the value of the bonds that banks held to drop precipitously. Bank depositors and shareholders then caught on to the fact that banks were sitting on trillions of unrealized losses and started pulling out their deposits and selling their stocks. Four banks have gone bankrupt so far. To maintain faith in the U.S. banking system, the Fed ensured that all depositors from bankrupt banks would be made whole and would not lose money. While depositors have been made whole so far, stockholders and bondholders have not. Despite the Fed’s best intentions, stock owners and bond owners will continue selling regional banks and bonds - since nobody is guaranteeing their investments. When depositors see their bank stock price and bonds selling off, they too will want to withdraw. This will trigger a slow bleed of the U.S. regional banking system until more of them inevitably collapse.
This has put the Fed in a very awkward position. It is raising rates to cool off inflation but bailing out banks at the same time. That’s like pressing on the gas and the breaks at the same time.
Part III: The Death of the asset-less
When the Fed began bailing out banks in March, savvy investors from the asset economy knew exactly what that meant. More stimulus was needed to save the banks.
This prompted investors in the asset economy to bid up asset prices. Since the first bank collapse on March 13th, gold prices are up by more than 8%, the S&P 500 is up by more than 8% and Bitcoin is up by 24%.
The Fed had to sacrifice the fight against inflation in the asset economy in order to save the banks.
Doing this will be painful, as it means that it will most likely have to tolerate an uncomfortably high level of inflation (~5%) for much longer than it projected.
This happens because the asset economy will continue bidding up prices so long as money is being printed to save banks. And there’s no easy way for the Fed to save the banks - to save all of them it would have to lower rates, and inflation everywhere would shoot up. So its best next option is to let asset price inflation “ride” a bit longer, and tolerate higher inflation for longer in the street economy.
This kills the asset-less for a simple reason:
The Asset-Economy people like to bring their new (and preserved) riches back to the street economy. When they do this, it keeps demand for services high - those oysters aren’t going to chuck themselves. This keeps “street inflation” sticky - causing the Fed to keep rates high for longer than anticipated.
What this results in is high asset prices with high financing costs. Translation: assets are much harder to acquire for those who don’t yet own any.
And the gap grows wider with every cycle. As an example, the average wage growth of U.S. salaries in April 2023 was up 0.48% since March 2023 - that equates to an annualized increase of 5.75%. In the same time period, the S&P 500 increased in price by more than 8%, so did gold, and bitcoin is up by 24%.
The gap between those who save in dollars and those who save in assets grows almost consistently.
Until Bitcoin, it was nearly impossible for people to purchase a high quality asset in sub $100 fractions. But bitcoin changed this. Today, everyone can dollar-cost-average into one of the best assets in the world, and join the ranks of the “asset economy” faster than ever before.
Don’t get left behind. Save in bitcoin.
The Week Ahead
The week ahead will deliver key inflation readings out of the U.S. and China. The U.S. data could impact markets as the Federal Reserve mentioned last week that its next decisions will be “data-dependent”.
Additionally, we will get corporate earnings results that are relevant for bitcoin in the likes of PayPal, Robinhood, AirBNB and more!
As always, here’s a summary of the events and data that could move markets in the week ahead:
Notice for Canadian Residents: As of January 4, 2023, Canadian clients will no longer be able to take out new B2X loans. As of February 1, 2023, Canadian clients will no longer be able to open a new BTC or USDC Savings Account, deposit BTC or USDC to existing Savings Accounts or earn yield on any existing BTC or USDC Savings Account balances.
Notice for U.S. Residents: Effective March 1, 2023, U.S. clients will not earn interest on any BTC and/or USDC balance in their Savings Accounts and/or Legacy Savings Accounts. This article is intended for general information, educational and discussion purposes only, it is not an offer, inducement or solicitation of any kind, and is not to be relied upon as constituting legal, financial, investment, tax or other professional advice. This article is not directed to, and the information contained herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to law or regulation or prohibited by any reason whatsoever or that would subject Ledn and/or its affiliates to any registration or licensing requirement. This article is expressly not for distribution or dissemination in, and no Ledn product or service is being marketed or offered to residents of, the European Union, the United Kingdom, the United States of America or any jurisdiction in Canada, and such product or service may only be marketed or offered in such jurisdictions pursuant to applicable laws or reliance on regulatory exemptions. A professional advisor should be consulted regarding your specific situation. Digital assets are highly volatile and risky, are not legal tender, and are not backed by the government. The information contained in this publication has been obtained from sources that we believe to be reliable, however we do not represent or warrant that such information is accurate or complete. Past performance and forecasts are not a reliable indicator of future performance. Any opinions or estimates expressed herein are subject to change without notice. This article may contain views or opinions of the author that do not necessarily reflect the opinions, standards or policies of Ledn. We expressly disclaim all liability and all warranties of accuracy, completeness, merchantability or fitness for a particular purpose with respect to this article/communication. Read our Disclaimers at https://ledn.io/legal/disclaimers
