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The Crypto Weekend Watch: April 1, 2022



The last few weeks have been quite bullish for risk-on assets as the Russia-Ukraine war and sanctions shock seem to have been pushed to the back of investors’ minds while the Fed policy path has shoved its way to the front. As inflation continues to rear its ugly head, are markets responding favorably to the Fed’s less ambiguous policy guidance or is it just temporarily shrugging off the risk of increased monetary tightening?


That’s the setup as we enter Q2, but here’s what you need to know going into the weekend.


Crypto


This past week, the representative crypto sentiment indicator Crypto Fear & Greed Index entered “Greed” territory for the first time since November. As of this writing, sentiment has shifted downwards slightly along with the markets and sentiment is currently in “Neutral” territory.


That being said, Bitcoin did reach $48K earlier in the week before falling back to the $45K level as of this post. Is this just a pullback before moving higher or was the break-out fake all along?


Hard to say, but it should be noted that the recent rally was characterized by altcoins performing stronger than Bitcoin. In past altcoin seasons, Bitcoin would rally first and then take a breather while investors rotated out of Bitcoin into the riskier altcoin class. This time altcoins led which could mean the risk-on sentiment got a little ahead of itself or maybe investors just saw better risk-reward in altcoins, especially as Ethereum’s upcoming “Merge” has dominated the news cycle. This dynamic should be followed closely.


Now Bitcoin did have many reasons to rally recently, including statements from Russia that they would accept Bitcoin as payment from “friendly” countries for energy, but the more compelling and likely reason was Terra’s foundation buying hundreds of millions of dollars worth of Bitcoin per day earlier in the week to back Terra’s native UST stablecoin. It appears they have already purchased around $1.4B worth of Bitcoin out of the planned $2.5B allotment. But with the recent rally, it’s possible they will wait to spend the last billion once prices pull back a bit.


Going into the weekend, it would be quite bullish if BTC could stay above $45,900 as this was the average price paid by investors after BTC’s all-time high last year according to Glassnode.


Lastly, investors should keep an eye on these five cryptos below as their social chatter as measured by Crowdsense has been getting super positive.

Macro


Investors have been chatting away about various yield curve inversions in the US, a tell-tale sign of a coming recession, but the sign isn’t always 100% accurate. However, what it signals does matter since even if no recession ends up occurring, the truth is the direction always matters more than the destination.


And with recent economic reports showing that US consumer spending slowed to 0.2% in February from 2.7% in January while inflation in February hit 6.4% - the signs are not telling the story of a strengthening economy.


Moreover, CME Fed Futures are estimating a 70% probability of the Fed tightening by 50 basis points in its May meeting and a 60% probability of a 50 basis point hike in its June meeting. Indeed, the Fed has been guiding more hawkish and the bond market has responded. The yield on the 10Y UST even reached as high as 2.5% this past week before pulling back.


And as the bond markets sold off, that money had to go somewhere. Even if rising rates generally presage lower prices for risk-on assets, risk-on markets likely benefited somewhat as this money had to find a new resting place - with equities and crypto being the beneficiaries.


But how long can this last is the key question.


One thing to keep an eye on however, is mortgage rates; they have been rising - and quickly. As most people’s wealth is largely tied to their homes, if housing turns over while inflation is turning up, discretionary income will be smashed - not a good development for risk-on assets such as crypto. That is the horrible thing about stagflation, there are very few winners. Crypto would do well however if it does end up de-coupling from risk-on stocks and fulfills its role as an inflation hedge, but that has not been its history as of yet.


Going forward, NY Fed President and FOMC voter John Williams will be speaking this Saturday at 1pm ET. Investors should pay attention.


Geopolitics


Although Russia stated that it would accept Bitcoin as payment for its energy from friendly countries, this likely will have little practical use. Who are the friendly countries that would prefer to use Bitcoin over their own currency? China and Turkey don’t exactly have a favorable stance on crypto. Regardless, it doesn’t hurt the Bitcoin narrative.


What is more interesting is Putin’s demand that Europe now pay for its energy in Rubles by April 1st or no more gas. Already, European countries are setting up emergency plans if Putin were to carry through with his threat. This demand has strengthened the Ruble greatly and appears to be a master chess move by Putin, but if the Europeans don’t play ball, Russia will be taking away one of its major sources of revenue which it needs to fund the Ukraine war.


Investors should watch out for any spillover effects in case no compromise or delay is put into effect and energy prices skyrocket further.


Lastly, investors should watch developments relating to Bitcoin mining in Russia. Recently, their Deputy Energy Minister urged the government to legalize crypto mining “as soon as possible.” This is relevant from multiple angles since if Russia were to mine Bitcoin in mass, it would give them access to “virgin Bitcoin” - coins that have no history and that are essentially untraceable since they haven’t yet been spent. If this were to happen however, increased sanctions and regulations from the West would not be unexpected.



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