June Crypto Market Report: The high interest rate environment of the US dollar is coming to an end

Written by: 0xWeilan Source: EMC Labs 

The information, opinions and judgments on markets, projects, currencies, etc. mentioned in this report are for reference only and do not constitute any investment advice.

After the COVID-19 crisis, the "story" that the United States used the status of the US dollar as the world's largest reserve currency to harvest other economies in the form of "dollar tide" seems to be becoming a reality. All economies are under pressure, and the exchange rate of the yen against the US dollar has fallen to a low level in 1986.

——On June 5, Canada cut interest rates, and on June 6, the euro cut interest rates. Why hasn't the Federal Reserve cut interest rates yet?

——Because only the yen exchange rate has collapsed, it is not full yet.

Europe can't hold on, Canada can't hold on, only the United States can hold on. The US dollar index continues to rise, causing great pressure on the equity market.

Under the huge pressure of macro-finance, the crypto asset market ended the rebound in May and fell 7.12% in June, continuing the deep consolidation after BTC hit a record high. This consolidation has lasted for nearly 4 months. There are few sectors in the entire crypto market that have gone out of independent market conditions.

Although the inflow of stablecoins on the capital side has recovered to 856 million US dollars compared with May, it still remains at a low level. The ETF channel funds are 641 million, far lower than 1.9 billion last month.

There is a two-level differentiation in on-chain activities. On the one hand, BTC data continues to deteriorate, and on the other hand, public chains such as Ethereum and Solana are still active. These data make people believe that the bull market is still there and the blood is not cold.

Macro Finance

On June 12, the US released the May CPI, which fell one percentage point from April to 3.3%, lower than the expected value of 3.4%. So far, the US CPI has fallen for two consecutive months in a high interest rate environment. At the same time, the PMI data on the corporate side fell from 49.2% to 48.7%, accelerating the contraction, which also provided support for the downward trend of CPI.

The downward trend of economic data exceeded market expectations, increased expectations for interest rate cuts, and caused the Nasdaq to continue to price in expectations for interest rate cuts. In the end, the Nasdaq closed up 5.69% in June, achieving two consecutive months of gains. Although the S&P 500 index did not hit a record high like the Nasdaq, it also maintained a monthly upward trend.

The new non-agricultural employment data released on June 7th greatly exceeded the forecast value (182,000), reaching 272,000. The market pointed out that this data has major problems in terms of statistical caliber, and there is a suspicion of suppressing expectations of interest rate cuts.

The market is choosing the direction it is willing to believe in, such as interest rate cuts. There is still money betting on two rate cuts in 2024 in the interest rate swap market, while UBS claims that the market underestimates the extent of this round of rate cuts, and even predicts that the "first cut" will still be in September. Against the backdrop of the US dollar index breaking through 106, the Nasdaq continues to hit new highs, which is the result of these long funds betting based on their own judgment.

The "hawkish" remarks released by the US government and the Federal Reserve in June may have reached the highest dose so far this year. US Treasury Secretary Yellen said that "there is no sign that the United States is about to enter a recession", while Federal Reserve Governor Bowman emphasized that "inflation still has an upside risk, and there may be no interest rate cuts in 2024."

Although CPI has been declining for two consecutive months, the strong employment data has enabled the Federal Reserve to buy more time to maintain high interest rates and wait for CPI to approach 2%.

The high interest rate environment of the US dollar has put tremendous pressure on the global capital market, and the crypto market is no exception.

EMC Labs believes that as BTC hits a record high, some investors continue to sell to lock in profits, while the high US dollar interest rate has significantly reduced the funds flowing into the crypto asset market, which ultimately leads to the inability of selling pressure to be absorbed by sufficient buying power. This is the fundamental reason why the current crypto market cannot effectively break through and even constantly challenges the lower edge of the adjustment box.

加密市场

In June, BTC opened at $67,473.07 and closed at $62,668.26, down $4,804.15 or 7.12% for the whole month, with an amplitude of 20.10%, and trading volume shrinking for three consecutive months.

In June, BTC diverged from the trend of the Nasdaq. Against the background of a strong rise of 5.69% in the Nasdaq, it fell 7.12% for the whole month, losing most of the rebound in May.

On the technical side, affected by the news of BTC issuance by the Mt.Gox exchange and the German government selling BTC, the BTC price stepped back on the rising trend line since October last year on June 24 and bottomed out. On the same day, the BTC price also completed the step back to the lower edge of the new high consolidation range (that is, $58,000). The support of these two technical trend lines is relatively strong. After that, the BTC price rebounded to above $63,000. There is no danger in the short term, but the mid-line is still confused.

Affected by the expectation that the ETF will be approved soon, ETH's trend is slightly stronger than BTC. This month, the ETH/BTC trading pair basically preserved the results of ETH's rebound in May, and did not give up significantly, indicating that the industry capital in the market is still betting on the online trading of ETH ETF.

ETH ETF is likely to be approved for trading in July. However, in the current context of severe capital shortage, once the good news is realized, ETH may face a large selling pressure in a short period of time. After the official trading, can ETH ETF bring a considerable net inflow of funds like BTC ETF? At present, it is not optimistic.

Fund Flow

The bull market is first of all a capital phenomenon.

Based on the source of funds, we can divide the trend of BTC since last year into 4 stages -

2023.01~09: Net outflow of stablecoins, buying power comes from the top-escaping funds in the market to cover positions, and the BTC price has risen from 16,000 to 32,000 US dollars;

2023.10~2024.01: In BTC Driven by the approval of ETF and the expectation of production cuts, the net inflow of stablecoins turned positive and continued to rise, pushing the price of BTC from $32,000 to $49,000;

2024.02~04: After the withdrawal of speculative funds after the approval of BTC ETF, the ETF channel fiat currency funds and stablecoin channel funds continued to flow in, pushing BTC to a new high of $73,000. Because the ETF channel funds exceeded expectations, BTC hit a new high for the first time before the production cut. Starting in January, long and short profit-taking began to sell in large quantities to lock in profits. The selling peaked in early March, and then the BTC price peaked on March 18 and started to pull back.

Although in March and April, the stablecoin channel alone had a net inflow of more than 8.9 billion and 7 billion US dollars respectively, the massive sell-off consumed all the buying power, and the BTC price stopped at US$73,000.

2024.05~06: BTC price entered a new high consolidation area after March. The previous large-scale clearing caused the market's long enthusiasm to be completely extinguished. Under the pressure of high interest rates of the US dollar, the capital inflow of the stablecoin channel and the fiat channel quickly shrank to 341 million US dollars and 856 million US dollars in May and June. BTC built a new high and then consolidated at US$58,000~73,000, waiting for new funds to enter the market.

A bull market is a process in which new funds pour in under an optimistic background, revaluation pushes up asset prices, and long-term holders sell after prices rise to lock in profits. In the process of a bull market, selling is often carried out in several times. The one that happened not long ago was just the first wave, and the next sell-off will happen again after a higher price is achieved.

Since its approval for operation in January, BTC ETF has been regarded as an important new channel for capital inflows in the crypto asset market. Since January, a total of $13.882 billion has flowed into all channels, but since March, the scale of inflows has gradually declined as the BTC price stopped at $73,000.

In June, the ETF channel had a fund inflow of US$641 million, which is quite close to the US$856 million of the stablecoin channel. In the May report, we proposed that "ETF channel funds are expected to become an independent force in pricing BTC." With the growth of scale and the gradual independence of decision-making will, the funds in this channel are expected to take on this important task. Its scale and behavior deserve continuous attention, but it is still unable to do so at present.

Market supply

In the bull market, long-term investors and short-term investors use different valuation systems for BTC targets. After the price rises, BTC flows from long-term investors to short-term investors, and the value is transferred accordingly.

According to this, two phenomena are bound to occur in the bull market, "capital inflow" and "BTC holder group transfer". The two phenomena influence each other and jointly shape the market trend. In the previous section, we analyzed the capital inflow situation. In this section, we focus on the changes in the BTC holder group.

Analyzing the positions of long-term investors, short-term investors, exchanges and miners since last year, we found that in the first 11 months of 2023, long-term investors were increasing their positions, while short-handed investors were reducing their positions. The turning point occurred in December, when the price of BTC approached the previous high. Long-term investors began to distribute their chips, while short-term investors began to increase their holdings. With the BTC price hitting a record high in March, this chip exchange game reached its peak. After that, the price began to collapse, and the scale of long-term investors' selling in April shrank rapidly. In May and June, this selling completely ended, and long-term investors began to increase their holdings again.

From March to May, the exchange of chips by all parties in the market around the previous high price of BTC of $69,000 was one of the main activities in the market cycle, and its occurrence meant the first stage of the bull market. The chips held by low-frequency traders (long-term investors) flowed into the hands of high-frequency traders (short-term investors), and the market liquidity suddenly flooded. The new funds were consumed by the hard work, the price fell, the speculation cooled, and the market returned to the stage of hesitation after the passion.

Will the bull market come to an abrupt end? We will look at the previous rounds of bull markets.

As indicated by the green box in the above figure, in the past three rounds of bull markets, we have observed that long-term investors will sell their chips in two rounds of large-scale to lock in profits after taking advantage of the price increase. The first round of selling will press the pause button on the price increase, and the second round of selling will destroy the market. The first round of selling in history lasted for 3 months, 9 months and 4 months respectively in chronological order. This round from December last year to March is also 4 months, the same as the previous cycle.

According to historical rules, after the first wave of selling, the long-term group returns to the accumulation state and waits for the price to rise. As shown in the red box in the above figure, when the price continues to hit a record high, it returns to the state of reducing holdings and sells ruthlessly. This method of selling in batches to lock in profits is in line with the behavior pattern of long-term investors and the law of market movement. Therefore, we believe that this selling law is still applicable to the current crypto asset market.

Based on this, EMC Labs judges that the big sell-off that occurred not long ago was only the first wave of selling in the bull market. With the long-term investor group returning to the accumulation state, the market selling pressure will decrease, and the market will pick up the upward trend after the funds return to the inflow. At that time, the market will usher in the second and most fertile and violent stage of the bull market. The end of the high interest rate environment of the US dollar is likely to occur in the second half of this year. Therefore, although the market confidence is low and the trading is light, we are still optimistic that BTC is likely to start the market in advance in the fall.

Conclusion

Market movement is a process of interaction between internal and external factors.

In the first half of 2024, long-term investors in the market carried out the first round of selling and locked in tens of billions of dollars in profits, which have now returned to accumulation.

After the approval and operation of 11 BTC spot ETFs in the United States, nearly $14 billion flowed into the ETF channel, and 240,000 new BTC positions were added, with cumulative positions reaching 860,000, totaling $53.1 billion.

Considering that this record was achieved in an environment of high interest rates in the US dollar, such market performance is already very outstanding.

The US dollar has not yet started to cut interest rates, and the capital pressure in the global capital market has reached an unprecedented level.

The first phase of the bull market is ending, and the second phase has not yet begun. We judge that the variables are likely to occur in the fall.

The biggest risks are the Fed's unexpected interest rate hike and the increase in the scale of selling US bonds, Mt.Gox BTC issuance and the US government selling its BTC.

Now should be the most depressing and painful moment before the heavy rain.