Author: Consensus Lab
After experiencing the difficult and challenging winter of 2022, we ushered in the "spring agitation" market in the first two months of 2023, and risk assets rose to varying degrees. Recently, the resilience of US inflation has resurfaced, the market has begun to revise its expectations for the Fed's dovish stance, and the cryptocurrency market has also fallen back. Although the downward process of US inflation has been repeated, the downward trend has been established. The Fed is likely to stop raising interest rates in the middle of the year, and we should not be overly pessimistic. However, there is still great uncertainty as to whether the US economy will decline, and it is difficult for us to find the driving force for a sharp rise in risk assets.
Looking forward to the market outlook, we believe that after the recent adjustment, the long-short sentiment has returned to equilibrium, BTC will rise after experiencing shocks, and "sell high and buy low" will generate significant excess returns. It is worth noting that the confidence of funds on the market has begun to recover, the activity on the chain has increased significantly, and we will see more Alpha opportunities this year.
The US dollar index rebounded strongly, and risk assets fell under pressure
Since the FOMC meeting in February, the US dollar index has regained its upward trend, and risk assets such as gold and Nasdaq have fallen under pressure. Although CPI fell month-on-month, non-agricultural and PCE data exceeded expectations, indicating that the downward trend of US inflation is not smooth sailing, and the market's optimistic expectations for the Fed's turn to dovishness have begun to be revised.
The US dollar index has rebounded strongly recently, and the Nasdaq and BTC have fallen under pressure
As a post-cycle risk asset, BTC cannot escape the influence of global macroeconomics. The 25300 area is the high point of the rebound in August last year. BTC tried to break through many times last week, but all failed. It is now back to the consolidation range in late January. We believe that this does not mean the end of the upward trend. Although the downward process of inflation has been repeated, the downward trend has been established, which is completely different from the situation last year. The Fed's interest rate hike rate has slowed to 25 basis points, indicating that the end is not far away. Once inflation data continues to fall, the market will be optimistic again. We predict that the Federal Reserve will stop raising interest rates in the middle of the year, and we are optimistic that the market outlook will be volatile and upward. "Sell high and buy low" will generate significant excess returns.
Ethereum's Shanghai upgrade is just around the corner, but ETH's trend is not strong, and the ETH/BTC exchange rate is still around 0.07. Obviously, the market is worried about the selling pressure caused by the opening of withdrawals. According to estimates, under a neutral scenario, 23,000 ETH will be sold every day, lasting for more than 2 months[1]. Based on the current price of $1,560, the total selling pressure is $2.2 billion, which is enough for the market to prepare for a rainy day. ETH's market value is nearly $200 billion. We believe that the impact of staking unlocking is more psychological. The Shanghai upgrade is conducive to the long-term development of the Ethereum ecosystem. We are still optimistic about the long-term configuration value of ETH as the leader of the public chain.
ETH is still in the 1500-1700 range
ETH/BTC exchange rate is still at a relatively low level. Long and short sentiments return to equilibrium, and the contract basis is mildly bullish
The trading mechanism of the on-chain futures trading platform GMX does not require strict equality between long and short contracts, and can provide higher leverage and lower slippage than centralized exchanges, which is favored by high-leverage traders. At present, GMX's position exceeds 100 million US dollars, which has a certain reference value for the overall long and short sentiment of the market.
According to GMX data, bulls have continued to open positions since January this year, with the highest position accounting for more than 90%, showing a consistent bullish expectation. When the price is at the bottom and market participants gradually join the bull camp, it is often the beginning of an upward trend; when the price continues to rise for a period of time, almost all market participants are long, but they have been unable to break through the pressure level, you should be alert to the potential risk of a pullback. After BTC failed to break through the 25,300 area many times, long positions fell from US$160 million to US$60 million, and short positions rose from US$40 million to US$90 million. Short positions recently exceeded 50% for the first time. When the fanatical bulls surrendered, the risk of a rapid downturn of "long killing long" has been greatly reduced.
GMX long positions dropped sharply
GMX short positions increased, exceeding 50% for the first time
Judging from the basis of OKX's BTC second quarter contract, the basis rate exceeded 6% at the peak of the bull market in November 2021, while the current basis rate is 1.4%, only reaching the level of October 2020. Market participants' expectations for the increase in forward prices are relatively mild, and the basis rate still has huge room for growth.
OKX BTC-USDT second quarter contract basis only reaches the level of October 2020. U.S. Treasury yields are high, and the foundation for a full bull market is not yet in place
We have suggested above that we should not be overly pessimistic, but we should not have bull market fantasies at this point. Since March 2022, the total market value of US dollar stablecoins has started a downward trend, coupled with multiple unexpected events such as Luna, 3AC, and FTX, and funds on the market have continued to flow out.
After the Fed raised interest rates several times, the yield on U.S. Treasury bonds is generally higher than 4%, while the yield on stablecoins of large DeFi protocols is generally lower than 3%. Large funds obviously tend to allocate U.S. Treasury bonds with lower risks and higher returns, and therefore continue to flow out of the cryptocurrency market. In the absence of incremental funds, a comprehensive bull market will be difficult to generate. We expect the Fed to start cutting interest rates at the end of this year or early next year, and mainstream funds will gradually allocate crypto assets to help a new round of bull market.
U.S. Treasury yields are generally higher than 4%, attracting capital allocation
The total market value of Ethereum-compliant USD stablecoins continues to decline, and on-chain activity has increased significantly, creating more Alpha opportunities.
Since there are no signs of incremental funds entering the market, we believe that there is currently no basis for a comprehensive bull market. However, judging from the activity of funds on the market, the long sentiment has been significantly better than in the second half of 2022. Since mid-January, ETH has entered a state of continuous deflation, and the USDC APY of Compound and AAVE, the two major DeFi lending protocols, has also risen to the level of March last year. Both indicate a significant increase in on-chain activity and capital utilization efficiency. Although we believe it will be difficult to see a huge Beta market in the first half of this year, active on-market funds make it easier for high-quality projects to enter the "price discovery stage". As the saying goes, "Confidence is more important than gold", we will see more Alpha opportunities this year.
ETH has been in deflation since mid-January
The 7-day average APY of the USDC pool of the two major DeFi lending protocols has returned to the level of March last year. Conclusion: Short-term obstruction does not change the long-term trend, and the market is expected to fluctuate upward in the future
Although there are still uncertainties in macro factors and FTX-related events have not been completely cleared, the worst stage has passed and we should not be overly pessimistic at this time. As the ancients said, "There are storms and heavy rains, but wait for the clouds to clear and the moon to shine." We believe that a deep correction will bring good layout opportunities. We expect the market to fluctuate upward in the future, and we should wait patiently for the clouds to clear and the moon to shine.
References: [1] Estimated Selling Pressure from Partial and Full Withdrawls, @korpi87