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Why BTC followed Wall Street sell-off – Can it still be an “inflation hedge”?

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Why BTC followed Wall Street sell-off – Can it still be an “inflation hedge”?

U.S.› Bitcoin › Analysis

Bitcoin drops below $37k as the market rethinks the FED inflation management policy. Is this the end of Bitcoin as an inflation hedge?

3 min read

Updated: May 5, 2022 at 9:15 pm

Cover art/illustration via CryptoSlate

After the post-FED meeting announcement, Bitcoin rose steeply to test the $40K resistance. However, market sentiment appears to have shifted today as it dipped back below $37k. Wild swings in the crypto market are common, but the difference is that now they seem to follow Wall Street as opposed to on-chain data or crypto-related news.

Bitcoin follows Wall Street

30-year treasury yields rose about 3% to the highest level since 2018. The move caused the Nasdaq to fall 4% within hours, and Bitcoin followed suit, dropping 7% in a similar period.

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Source: Bloomberg

The drop follows a growing trend that indicates the crypto market is acting more like a risk-on tech stock than a wholly separate asset class. The FED meeting on May 5th confirmed a 50bp rate hike to combat inflation. The stock market reacted positively as Jerome Powell seemingly took a higher 75bp off the table. The argument that this could be bullish for Bitcoin centers around the fact that Bitcoin has the highest LTV ratio in its history.

This means that more investors are using credit to invest in Bitcoin. A lower than anticipated rate increase may suggest that interest on loans would not go up beyond manageable limits. However, any increase in rates is done to combat inflation which Powell also noted was “much too high.” If Bitcoin is a hedge against inflation, why did it react positively to news of a plan to combat inflation?

Source: TradingView

Is Bitcoin still an inflation hedge?

Bitcoin is famously seen as an inflation hedge against traditional assets. Cathie Wood of Ark Invest recently said,

“If inflation is an issue, Bitcoin is a great hedge against inflation…it is a hedge against counter-party risk.”

However, this argument may be becoming harder to follow given that Bitcoin reacted even more aggressively than Wall Street to fears that the FED will not be able to curb inflation. Analysts are beginning to question the FEDs strategy and their ability to keep inflation under control. It is logical to assume that it should not follow the same trend for an asset class to be a hedge against something. If Bitcoin falls as inflation rises, it is no longer a hedge.

However, Michael Saylor, CEO of Microstrategy, recently told Bloomberg.

“it’s all timeframe. If you go back two years to when Microstrategy bought in, it’s up 400%… If you’re looking at it in a matter of days, or weeks or months, the traders control it.”

He seems to view even the month-to-month price action of Bitcoin as being controlled by traders. Indeed, Bitcoin has been up 400% since 2020, yet it is also true that billions more institutional money is now involved in crypto.

While many see the increase in investment from traditional corporations as a bullish signal for Bitcoin, it may have also had the adverse effect of correlating it more closely with traditional assets, at least in the short term. Even the announcement of another $1.5 billion in Bitcoin purchases from LFG has done little to stop Bitcoin from following Wall Street down.

A recent Coinbase Institutional report showed that Ethereum is more closely correlated to the S&P500 than Bitcoin. Is the future of Bitcoin, and the crypto markets at large, doomed to follow traditional assets, or can it decouple from the day-to-day swings in the lead up to the 2024 Bitcoin halving?

Over the last 40 days, $ETH has had a higher correlation with the S&P500 than it did with $BTC 📈

Some crazy stats from the latest Coinbase Institutional report… pic.twitter.com/twUPfbqBdu

— Coin Bureau (guy.eth) (@coinbureau) May 3, 2022

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Analysis

These indicators show how the equities sell-off is influencing crypto prices to fall down

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These indicators show how the equities sell-off is influencing crypto prices to fall down

Bitcoin · Ethereum › Analysis

US Equities correlations with cryptocurrencies is at an historic peak while most BTC holders are holding at a loss

3 min read

Updated: May 20, 2022 at 4:05 am

Cover art/illustration via CryptoSlate

Cryptocurrencies experienced on May 10 a large market crash, losing over 10% in a single day of most of the coins. This is the second time in 2022 that most cryptocurrencies have suffered a price loss of over 10%. Over the last month, BTC has accumulated a 23.57% loss while Ethereum has a 26.32%. Meanwhile, US equities suffered slightly more moderated losses: S&P 500 a -11.07% while Nasdaq 100 a -14.93%:

Price performance comparison with US equities according to IntoTheBlock Capital Market Insights.

As seen in the chart above, cryptocurrencies continue experiencing worse sell-offs than capital markets. The actual macro context of rising interest rates leads to most investors becoming averse to risky assets, which cryptocurrencies are due to their nature of highly volatile price performance.

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The origins of the May 10 price drop came from US equities markets turning back on their short-lived recovery of last week. As has been seen in the previous months, the 30-day correlation between the cryptocurrencies markets and US equities indexes continues to grow, and this week achieved an all-time high for both BTC and ETH, with around 0.9 points both for S&P 500 or Nasdaq 100:

Correlation Matrix with US equities according to IntoTheBlock Capital Market Insights.

A correlation coefficient close to 1 implies a strong positive correlation between the two prices, meaning that the price of BTC or ETH and these indices have a highly statistically significant relationship, so they will tend to move in the same direction. Understanding how these relationships evolve is essential to understanding how macro markets affect the cryptocurrency market and where to look for leading indicators of crypto price movements.

It is valuable to look internally at how crypto holders are reacting to the recent price moves despite external factors. Bitcoin continues dominating the crypto market, so it is worth looking at what its on-chain data shows us.

As studied before, investors are sensitive to react when their investments turn around and stop being in a profiting position. BTC is recently reaching a critical position, where almost half (47.8%) of the addresses holding BTC would be losing money if they would sell at current prices. This is something not seen since the Covid crash of March 2020:

BTC Historical In/Out of the Money according to IntoTheBlock Bitcoin Indicators.

This indicator that provides the variation of holders’ profits over time also shows the percentage of addresses that would have made money or lost money if they had sold at a particular time. Addresses are classified based on if they are profiting (in the money), breaking even (at the money), or losing money (out of the money). 

Addresses are a good approximation to single investors, although there is always a chance that a small minority of users are using several addresses. If we look at how long the BTC investors have been holding, we can see that the vast majority (26.74M addresses) have been holding BTC for more than a year. A metric with no signs of slowing down so far (blue line): 

BTC Addresses by Time Held according to IntoTheBlock Bitcoin indicators.

This depicts how the amount of BTC holders with a long-term perspective grows despite the recent market turmoil and crypto’s weak price performance. It is quite the opposite for short-term holders (classified as Traders, orange line in the chart): their number increases when significant price movements occur, and speculation fuels the whole ecosystem.

After the worst start of the year for US equities in 83 years, it remains open to question if the current market situation could be presenting an attractive buying opportunity for those looking to the long term. Crypto’s next price moves will undoubtedly be heavily influenced by what US equities do, although so far, at least the majority of BTC holders remain unfazed.

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Altcoins

Zcash [ZEC]: Breaking down the potential effects of the current bearish structure

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Zcash [ZEC]: Breaking down the potential effects of the current bearish structure

As the basis line (green) of the Bollinger Bands (BB) constricted the revival attempts for nearly seven weeks, Zcash [ZEC] bears pulled the altcoin down to yearly lows last week. The basis line has crippled the buyers’ ability to sustain a close near the upper band of the BB.

With the current rising wedge setup being solid, a recovery toward the $113-level could see a slowdown. At press time, ZEC traded at $103.9, down by 2.63% in the last 24 hours.

ZEC Daily Chart

Source: TradingView, ZEC/USDT

Since its multi-month April highs, ZEC bears have persistently steered the price south after propelling an up-channel breakdown. On its way down, the price action underwent strong liquidations whilst the basis line of the BB constricted the bullish comebacks.

Consequently, the alt was down by nearly 67.42% (from 28 Mar) and dropped to hit its 16-month low on 12 May. After the $83-baseline posed some hurdles for the sellers, the bulls quickly provoked a short-term string of green candles. After forming a morning star candlestick pattern, the altcoin continued its oscillation in a bearish rising wedge. 

A continued trajectory in the current pattern could face strong barriers in the $113-zone. This area represented a host of barriers that includes the upper fence of the Pitchfork, the 38.2% Fiboancci resistance. Any reversal from this zone could result in a breakout from the wedge and find testing grounds in the $96-zone. In an unlikely event of invalidating the strong bearish tendencies, any close above the $113-level could test the $126-level.

Rationale

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The Relative Strength Index depicted a gradual uptrend from its oversold lows. As far as the 41-support stood strong, the buyers still had conceivable means to stall the near-term liquidations. But with the -DI line looking north, keeping a check on the selling pressure could be a menacing task for the bulls.

Conclusion

In light of the confluence of multiple hurdles in the $113-zone, ZEC could see a short-term pullback. Any close below the wedge could result in a pathway to its $96-zone lows. To alter the existing narrative, the bulls have to find a spot beyond its Pitchfork and the 38.2% level.

Finally, keeping an eye on Bitcoin’s movement and the broader sentiment would be important to complement the aforementioned analysis.

With a background in financial analysis and reporting, Yash is a full-time journalist at AMBCrypto. He has a keen interest in blockchain technology, with a primary focus on technical analysis of cryptocurrencies.

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Altcoins

Polkadot: Why DOT can be expected to lead the upcoming bull run

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Polkadot: Why DOT can be expected to lead the upcoming bull run

Polkadot’s native cryptocurrency DOT has so far managed to remain on the list of top 20 cryptocurrencies by market cap. The latest market events have forced investors to re-evaluate their portfolios in favor of digital currencies that have strong fundamentals, but does DOT fit these criteria?

Polkadot’s multi-chain approach can provide better insights into whether investors consider DOT to be worth having in their portfolio. It announced that interoperability and multi-chain as the future of blockchains are among the key areas of focus during the WEF22 conference on 16 May.

Polkadot’s ecosystem has been growing rapidly as it continues to onboard more projects through para-chain auctions. While this approach bolsters the interoperability agenda, it also boosts organic demand for DOT from projects running as parachains. The para-chain approach allows the community to support projects that align with Polkado’s values and can provide value to the ecosystem.

DOT’s price action and on-chain metrics 

Although DOT is slated to leverage organic growth as the Polkadot ecosystem continues growing, it is also heavily correlated with Bitcoin. It struggled to maintain a healthy recovery after last week’s market crash in which it bottomed out at $7.30. However, it bounced back to $10.07 at the time of writing.

Source: TradingView

It seems DOT’s recovery is currently limited by low buying volumes. It is currently trading at a 58% discount from its April 2022 top. DOT’s price is also at an 82% discount from its current ATH of $55.09 which it achieved in November 2021.

DOT’s supply held by whales metric registered an uptick between 16 May and 17 May, courtesy of slight accumulation. However, the same metric recorded outflows which have so far pushed back to monthly lows. The metric shows that whales are selling and it reflects the lack of adequate buying volumes and failure to register a significant rally.

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Source: Santiment

DOT’s developer metric achieved a significant uptick and is currently in its highest monthly range. The uptick is due to the recently announced Polkadot which also highlights the network’s commitment to security.

Michael is a full-time journalist at AMBCrypto. He has 5 years of experience in finance and forex and more than two years as a writer in the crypto and blockchain segments. Michael’s writing at AMBCrypto is primarily focused on cryptocurrency market news and technical analysis. His interests include motorcycles and exotic cars.

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