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☕️ Espresso | Blog
December 24, 2023
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8 min read

Formless

Formless

Il Capo of Crypto, a popular influencer on X, earned his fame from shorting the market.

He had some good calls, but froze like a computer on his last one… Which was over a year ago. And from his latest remarks, he is still frozen in time.

He believed the market would form a new low. Something he still believes today.

And at this point, he likely needs the price of Bitcoin to drop over 300% before he’s in the black again.

Watching a trader hold such a bias with such stubbornness provides us with a great lesson. Remain flexible. Don’t marry your positions. And don’t be willing to go insolvent to prove a point.

As Bruce Lee says, be like water… Formless. Avoid being trapped in a certain mindset. 

Which brings me to the current hate on Ethereum. Many on Crypto Twitter are adamant about how Ethereum is dead. Solana will outperform Ethereum. And how much each SOL will be once Solana’s market cap equals that of Bitcoin.

I’m sure some of the comments are simply people having fun, which is great to watch, but most are serious.

It’s enough for me to stop and ask, is it possible? I don’t believe so right now, but I’m willing to think harder about it if the token moves to higher forms of usage (M2), earns more users than Ethereum this cycle, and begins to see a diverse base of developers arrive over the next couple years.

For now, no. I think it’s a less than 5% chance. Ethereum has a ton of mindshare, an extremely diverse set of usage, and monster network effects with EVM capabilities across crypto.

And if the price of ETH begins to turnaround and catch a bid in the coming weeks, you’ll see Solana zealots still bashing Ethereum. 

Be formless. Don’t be the couch analyst practicing warrior moves on your keyboard. Just understand price can change in an instant… And in that instant, everybody’s perception changes. 

I’m hoping some projects looke to create price stability modules in their networks, but most tend to think volatility is what wins developers, so I might not every get to see if my theory is true. But we can save that for another day.

Instead, I wanted to bring a view on the global economy that should help us stay formless in the year to come. 

Reason being, things will move very fast. The crypto market is piping hot, memecoins are running, and equities also have juice. 

If equities realize a pullback, the dollar runs, and crypto continues to rise… Will your analysis hold weight? For me, I’d need to tweak things a bit. But we need to expect those moments will arise very soon. 

I’ll show you why. (For those that don’t care about macro, find the crypto update near the bottom.)

Transitory

There’s a narrative that is bubbling up on Wall Street.

Remember when Jerome Powell said inflation was transitory? In the weeks that followed, we said he was full of cow patties.

Part of why we all said this was that he blamed inflation on lockdowns ending. This created supply chain congestion and then pricing issues. He didn’t mention a thing about the insane growth of money supply that may have led to the increase.

That’s bulbul guano.

Anyways, there are some pockets forming in finance where this belief in inflation being just a supply chain issue is gaining traction.

Reason being is that inflation has come down as quickly as it has. And things are rather ok at the moment. 

It’s a line of thought that acts as rationalization for the Federal Reserve being able to cut rates, the market rise, and the economy not be in trouble. 

And some of the logic makes sense…

Real rates, the difference between US Treasury yields and inflation, are positive. They are just below 2% and the highest its been in 14 years. This alone means savers are not losing money against inflation. 

It also means the Federal Reserve can cut 100bps and real rates still be positive.

There’s also the fact that other countries began to cut rates months ago. Names include countries like Brazil, Hungary, Peru, and Portugal. You can see it in the chart below. The U.S. is the orange line that is elevated, but hasn’t started to cut rates.

What is interesting here is that those countries are gaining ground with their currency. In the chart below, we can see those country’s currency value rising. It’s valued against a basket of more than 50 other countries - fun little bis.org tool here. 

This creates conditions I’ve mentioned before in pieces like The Double-Bounce Effect

Countries were printing money just like the U.S. But the U.S. dollar was incredibly strong at the time. 

So it seemed like global net liquidity wasn’t being impacted since we all measure it in U.S. dollars. 

But now that those currencies are rising in value as the U.S. dollar drops… And those countries continue to front-run the Federal Reserve in cutting rates… each dollar that was printed now creates greater impact in global markets. That’s the double-bounce effect.

These are all arguments for very bullish conditions for 2024. 

On the other hand, you have alarmists always watching Federal Reserve vehicles like BTFP and RRP. Most of that is not the smoke that they will lead you to believe.

RRP draining is slowing down because credit spreads are arising in the market… This is healthy in small doses. The market was over reliant on the Federal Reserve for too long, and now the rest of the market has caught up.

Here’s the New York Federal Reserve discussing it three days ago - notice how Finance Twitter alarmists still haven’t caught on yet - they are not formless.

This is good in many ways.

But a worry is that money is in fact moving at a rapid pace across the market. This speed and volume of money being moved tends to cause issues.

You can think of it like a pool with lots of waves. Water is splashing above the wall in areas, and well below the wall in other areas… These waves create movements that can expose water pumps to air, causing damage to a system that is inundated with liquidity… At a time when everybody is having fun.

It might seem like the type of concern an over worrisome Mother might have, but the speed of money will mean it runs at any sign of danger. 

And when it comes to the U.S. Treasury market, that was the main place for yield. Commercial debt was another area…

And as money runs into other assets or private markets as reliance on the Federal Reserve wanes, don’t be surprised if we experience trouble in the market if corporate earnings are down a bit. Spreads might appear, and liquidity will slosh away.

This is the exact scenario that prompts the Federal Reserve to intervene, rates to drop faster, and meltups to ensue. 

Right here we can see a whipsaw of emotions from Jerome Powell crushing it, to things breaking, to holy smokes new paradigm shift all-time highs.

Stay formless.

Alright… enough of the macro. Quick update with some charts on crypto…

Crypto Update

Cumulative Volume Delta is still trending sideways for spot. On this week’s episode of The Trading Pit, I mentioned that CVD started going sideways a couple days before the most recent move this week… It’s still moving sideways. However, I would have liked to see a bigger move higher on this trend.

Spot demand helps push markets into new trading ranges higher. It is sustainable momentum when we realize it. That’s why I’m a big fan of keeping an eye on this metric.

CVD is the main metric I’m watching to get a sense on whether or not the market can continue its push.

The other main item on the forefront of my mind besides the Bitcoin ETF is the options market.

It is wise to keep an eye options and futures flow because we have a massive expiry coming up. Here’s the open interest chart below for Deribit. You can see the end of the year expiry showing up there.

Even Coincall has some sizable action as they start to draw more traders to their platform.

Again, if you want to try them out, please support us when you open an account by using our referral link.

The movement around this expiry will likely start on Tuesday or Wednesday next week. So pay attention there.

Otherwise, funding rates are elevated, but that’s not a predictive measurement to watch for price reversals. However, it is helpful to better find altcoin opportunities and perhaps hedge your position (ie - short a high funding rate, long a neutral).

And as always, be prepared for an ETF approval at any moment. 

Until next time…

Your Pulse on Crypto,

Ben Lilly

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