A very happy new year to all our clients and readers! May 2023 for crypto be nothing like 2022.
We’re off to the typically volatile start to the year for macro assets as money managers deploy what they need to for the year.
So far it looks like the themes are:
1. Continued rotation out of tech – with big tech now the big casualties
2. Continued surge in global yields on the back of the BOJ policy shift
3. Start of year allocation into alternative assets
Number 3 is what has been benefitting Gold in particular – which seasonally sees its best month in Jan each year, and is now up 15% in the last 2 months!
Gold’s rally is even more impressive considering the rise in global yields these past few weeks. The question that remains is whether this will hold up if we start to see our expected Wave 5 rally in the USD now (Chart 1: Gold – Purple, USD – Yellow, 10y yields – Purple, BTC – Orange, ETH – Blue).
Crypto Outlook
The other pertinent question is whether this will translate into the other alternative stores of wealth.
NFTs for one is starting to show a resurgence – with many blue chip floors up 2-3x in Q4 alone.
This is especially surprising considering NFTs would be the asset that is most sensitive to liquidity injections or withdrawals.
And overall liquidity, measured by M2 YoY growth, has shrunk to 0% for the first time in history! (Chart 2) Not to mention the liquidity within crypto itself which is an even smaller factor of that.
Nonetheless, in line with Gold and NFTs, BTC and ETH are playing catch up to some extent at the start of the year.
Despite the mini rally, BTC is still trading in an extremely tight falling wedge – with 18k the key breakout level to the topside. In the medium-term, 28k is looking more and more key – as the Head and shoulders neckline, and 61.8% fibonacci retracement level of the $3,858 2020 low to $69,000 2021 high (Chart 3).
ETH continues looking decidedly more bullish than BTC, although it too is still trading within a consolidation pattern. The top of the triangle comes in at 1,400 but the big resistance zone lies between 1,700 to 2,000 to the topside. On the downside we expect 1,000-1,100 to be very decent support (Chart 4).
With these levels, 2 trades we like to start the year are:
1. Selling BTC end-year 25k calls which are still paying a very decent ~10% annualised yield, a great return for a level we are very comfortable selling spot at anyway.
2. Selling ETH rolling bi-weekly 1k/1,100 puts – for a very solid ~20 yield
Other more structural trades we like for 2023 are listed in our recently released Just Crypto #5: The Ghosts of Arthur Burns.
Macro Summary
In this piece, we explained that our thesis for the year will be disinflation, but not enough to reach the Fed’s 2% target.
This will cause the Fed, haunted by the ghosts of the double dip inflation era of the 1970-80s, to delay cutting rates as long as possible.
By being blinkered to current inflation prints, they will be making another policy error in the other direction – this time by loosening policy too late.
In a sad twist of fate, they will again wait too long and have to go into overdrive again.
Hence we like selling physically settled puts at key levels in ETH, expecting a sharp reversal once the bottom is in.
We expect this could only come in Oct-Nov again this year, but remain open minded to markets bottoming sooner than that.
