September Market Structure
As discussed in my earlier post (“August Bear Rally”) the ETH-merge was in fact a “sell the news” event.
ETH has sold off 26% since the merge.
Supply - On Sept 14th, centralized exchanges witnessed the largest net inflow of ETH since 2016, totaling nearly 1m ETH. This was the 7th largest single-day net inflow ever, i.e. people were moving ETH to exchanges to sell post-merge.
Demand - Despite the changes to token issuance brought by the Merge, I correctly anticipated that there were no marginal buyers waiting to bid ETH after the merge. I do believe the ETH burn mechanism and deflationary aspects will make it increasingly attractive to institutional investors (as discussed in my “Reflexivity” post), though given the macro climate, these investors are in no hurry to bid.
The primary driving factors of the crypto rally off of the lows in June were:
Equity bear market rally (given crypto’s high correlation with NDQ/SPX)
ETH merge narrative trade - a crowded trade that was propping up the market near term
Reversion to the mean bounce given how oversold the market was in June - “even dead cats bounce”
As the above factors are no longer present, I believe the market will continue to sell off, and the true accumulation phase will be lower. After the most recent FOMC meeting, it has become clear that the Fed plans to hike aggressively into a recession. The market had priced in a 75 bps hike this month, before FOMC, but did not expect the dot plot to be so aggressive. Currently 12 out of 19 FOMC members expect a 4.5% - 5% fed funds rate by the end of 2023. As a result, equities have sold off, and crypto has followed.
Current Market Structure
BTC is a good proxy for the broader crypto market, so you can extrapolate the below reasoning across all crypto assets.
At some point, buyers become future sellers - BTC is now attempting to hold onto the lower bound of its 3-month consolidation range. This means that almost everyone who has bought and held Bitcoin over the last 3 months (and over the last 2 years by default) is now underwater, or off-sides in their positioning. Should prices continue to move against the majority of market participants, positions will unwind.
The majority of transactions (70-80%+) have occurred above the current BTC price. Key question - At what point do these buyers capitulate? These preemptive purchases can act as additional fuel if prices continue to move against market participants.
Now that we have seen a continuation of deteriorating macroeconomic data, BTC has given back any price gains that it has made since June. BTC is at a crucial point with regard to market structure - how many more times will this $19k-20k level hold?
The more time support and resistance are tested, the weaker they tend to become. At each retest of these levels, buyers become increasingly exhausted, and at some point previous buyers become sellers.
BTC - Multiple Touches of Support Level at $19k
Support Levels
The below support levels on BTC and ETH represent the areas I expect the maximum number of participants to begin to build a position in the majors (i.e. large cap tokens). One of these two areas is most likely to form the ultimate bottom, around which price trades in a longer consolidation range and investors accumulate ahead of the next cycle. These will serve as posts in the ground for the purchases in my overall portfolio.
BTC
Support Levels:
$18.5k - $20k
$14k - $16k
$9k - $12k
ETH
Support Levels:
$1.25k - $1.4k
$950 - $1.15k
$500 - $750
Spot Purchase Plan
I believe there will be a more substantive sell-off that marks a true capitulatory event before the end of 2023. I expect ETH and BTC to hit at least the mid-range identified above, and likely the lower bound. That said, I could be wrong.
As such, I plan on initiating small purchases in some of the assets I am bullish on long term (mainly the majors), in advance of the Nov. 8 midterm elections. My reasons are as follows:
I do not currently have a spot position in any crypto assets.
I am already near the buy zone for half of the assets I hope to purchase, and I am bullish on these assets on a 2-5 year time horizon.
In the low likelihood event that the Fed is hiking aggressively ahead of midterms, and will pivot after elections, I want to have a position in assets I am bullish on at prices that could end up being the bottom.
My targets for all of these assets are ~10x, so in light of this, trying to capture the remaining 20-50% downside doesn’t seem prudent on a longer time horizon. I think this is a 20R trade at these price levels.
My ideal scenario would be to purchase these assets when BTC retests or breaks the $17.5k lows established in June. I believe that a sweep of these lows will present compelling buying opportunities for many of the major assets around which I have conviction.
In the event BTC does not sweep the lows, and we continue to range over the course of the next month, I will move into each asset on a case-by-case basis.
The above plan is subject to change, especially in the below scenarios:
In the event of a market rally from here, and a move above my buy zones.
In the event of a more aggressive market-wide sell-off, which could lead to shorter time windows for accumulating assets at significantly depressed prices. As shown in the charts above, the next two support levels for both BTC and ETH are approximately 20% and 50% lower, respectively. In the event these support levels are hit, I will be more aggressive with my purchase plan/timeline.
Macroeconomic factors that affect risk assets shift (favorably or unfavorably).
Crypto continues to be influenced by macroeconomic factors such as global liquidity, dollar strength, stock market returns, and central bank monetary policies. I am tracking all of this real-time, and taking this into consideration as I outline my long term spot purchase plan.
