May 25, 2022

middle way

When there is too much uncertainty in the market, it is better not to try to guess what will happen next. Instead of it is worth preparing yourself for what will almost certainly come out differently.

I think the market can't always challengegravity. Contraction in US GDP, tech stocks show some “disappointing” results… It didn't even take long last week to get the S&P 500 back to the low point of the current drawdown.

Stock Market Drawdowns: Comparing S&P 500 Trajectories

But here we are back to the same question. Has the bottom been reached? Or is the Fed's quantitative tightening plan about to lead to a major correction?

Stock Market Drawdowns: S&P 500 Map

Frankly, the best we can do is try to apply some game theory to the situation.

On the side of the bulls:

  • The Fed is being cautious.They've been talking about what they're going to do for months now. For now, everyone expects them to fight inflation aggressively. This means that everything that happens this year should already be included in the price.
  • There is still a lot of pressure oncommodities, oil and the global supply chain. But can it really get worse? Maybe not. So while it may take some time for inflation to come down, it is possible that we are close to a local maximum. In such a case, the Fed could claim that inflation is under control thanks to their actions. This would mean that they do not need to do more than what is already included in the price.

Fed balance sheet 2008 vs 2020

On the side of the bears:

  • The Fed's future actions could be factored into the price.This suggests that most investors were ahead of the quantitative tightening by selling their bonds and rising stocks. But that doesn't change the fact that higher rates affect any new debt being issued (or rolled up). And when the Fed unloads its balance sheet, valued or unvalued, it will create more selling pressure.
  • You really can't rule out the long terminflation. There is no doubt that the pandemic has changed a lot. More work from home. Some degree of re-localization of the production of goods. Transformations in the economy continue, and what this means for inflation remains in question. If we get sustained inflation, then the Fed won't be able to stop at what's priced in, and that will certainly cause the market to crash.

Now my philosophy is that you don'tyou can know for sure what will happen. Thus, it is necessary to evaluate what the opportunities are and see if you are ready to deal with everything that could very well happen.

There is one move that leaves you in goodpositions, no matter what happens in the short term. Use the current bear market to accumulate bitcoin (and other liquid digital assets).

If there is a massive market crash, itwill lead to a reduction in the cost of your position. If the drawdown is already priced in and the market suddenly shoots up, you can also participate in this. And the longer a bear market sits, the more prepared you are for the next uptrend.

Is this an attractive strategy? No. It's fucking boring.

Is it possible to improve the return on investment,waiting for a recession or crash to go all in? May be. But if the drawdown is priced in and inflation starts to decline, you may not be able to enter the market at a price lower than it is now.

So buying digital assets that you are reasonably sure will be on the other side of a recession is the way to go.

If market conditions are such that you cannotto see beyond a time horizon of a month or two, the solution is to ... take a wider view. It's true. Ask yourself what are the major trends that are most likely to survive this period of turbulence.

Make no mistake, digital assets are not going anywhere. So now is the time to be patient.

Some upcoming events:

  • the next meeting of the Federal Open Market Committee will be held on Tuesday and Wednesday this week,
  • the latest US unemployment report is due out on Friday,
  • inflation data for March will be released next week.

Of course, inflation is the key to the puzzle. Whether it slows down or speeds up will depend on what the narrative will determine. The rest doesn't matter.

cold offer

Not much on-chain information. The active supply of bitcoin for the year continues to decline, and this is exactly what you would expect during a bear market.

Annual active offer

Yes, whales are accumulating coins ranging from $37k to $40k, but we've seen this before. Without a doubt, this is done in order to sell at the next pump above $45 thousand.

Divergence

The only group of addresses that remains truly active are small investors making the most of this bear market by hoarding coins in anticipation of better days.

Hodling trends

So basically, on-chain data gets cold. Right now the action is not happening here.

Unless we see some weakness in the structure,coming from small investors selling coins en masse, or some kind of bullish pattern where all address categories start piling up, the best we can say is that the data is inconclusive.

But this state of affairs made me think about something.

It is true that the contraction of the active sentenceis just a consequence of the bear market? Perhaps people have lost interest, they “forgot” about their coins, and this will last until bitcoin gets hot again.

But there is another explanation as to why the active supply is small and may actually remain in this zone.

What does the integration of bitcoin into the global financial system mean?

For the most part, this means that institutionalgain control of a portion of the physical supply of BTC. They either block the offer as a reserve asset for themselves or package it up and sell fiat assets with those coins.

In any case, these institutionally locked coins are less likely to move and thus become part of an active supply.

Is this really what is happening right now?Can we tell the difference between the institutionalization of bitcoin and the good old HODL wave? Is the institutionalization of bitcoin to blame for the high correlation between BTC and the stock market?

At the moment I don't know. But the consequences of this are serious enough that we will use the bear market to try to answer these questions.

Stay with us.

Correlations

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