Crypto Assets Attempt To Form A Bottom Now That The Bitcoin Halving Event Has Passed
After last week’s sharp correction, crypto assets have stabilized and appear to be attempting to form a local bottom. Bitcoin, for example, managed to bounce after testing support around $59-60K and rallied all the way up to $67K before correcting to around $63K as of this writing. The question facing crypto investors is whether last week’s lows can hold, or whether prices break lower and experience a longer and deeper drawdown.
Figure 1. Bitcoin has managed to bounce off the lows around $60K and appears to be trading within a range.
One of the major forces that could catalyze the next move for crypto assets is the trajectory of the US and global economy in the face of geopolitical and macroeconomic headwinds. Just today, for example, the US Q1 GDP numbers came out much lower than expected. Q1 GDP growth in the US was 1.6%, compared to an expectation of 2.4%. This disappointing miss is troubling because it comes at a time when there is growing concern about stubbornly higher inflation rates.
A slowing economy with rising inflation numbers could signal that a “stagflation” scenario, in which persistent inflation is paired with slow or negative growth, is possible. This would be a terrible outcome for risk assets due to higher for longer interest rates and slower economic growth. This scenario is well outlined by the below chart, courtesy of The Kobeissi Letter X account, which highlights the fact that while US Core PCE Price index rose from 2.0% to 3.7%, the US GDP growth rate fell from 3.4% in Q4 of 2023 to a disappointing 1.6% in Q1 of this year. While not everyone agrees with this analysis and the risks of stagflation, the prospect of this outcome places the Federal Reserve and investors in an uncomfortable position. With this macroeconomic backdrop in mind, investors must weigh the chances of unpleasant surprises against the odds that risk assets will continue to climb higher despite (or perhaps because of) the prospects of higher levels of inflation going forward.
Figure 2. Today’s GDP numbers have some analysts concerned about the prospect for “stagflation”.
Another macro force that investors must keep in mind is the strength of the US dollar. The USD/JPY pair, for example, broke through multi-decade highs recently and does not appear to be slowing down. This surge in the US dollar against the Japanese Yen could have major implications both in terms of economic developments and geopolitical considerations for China, which may feel the need to lower its own exchange rate to remain competitive. This is especially troublesome if one considers the brewing tensions between Chan and the US.
Just this week, the US government passed legislation that could expel the social media app TikTok from US markets. The law was passed as a part of a $95 billion foreign aid package that provided much needed military aid to Ukraine and Israel. There is growing concern coming out of Washington that China has been helping Russia and even perhaps Iran in their aggression against Western countries. Reports that the US is preparing sanctions against Chinese banks that are suspected of supporting Russian war efforts increase the chances of rising animosity between the two nations, which could have implications for geopolitical stability and capital markets.
Figure 3. The USD/JPY has not shown signs of reversing the multi-decade breakout we saw this month.
Turning our attention back to the crypto markets, several altcoins are beginning to look appealing following the major correction we experienced last week. Solana, for example, fell nearly 50% from its local top in a very short period of time and has since rebounded impressively. While a 50% drawdown is jarring, these types of corrections are not uncommon for smaller market capitalization crypto assets. A move above $160 could signal that the L1 “Eth killer” has a chance to challenge the local top made around $205 this year.
Figure 4. Solana has reversed some of last week’s losses, though a move above $160 would help solidify this rally.
Zooming out to look at the total market capitalization of crypto assets, we can see that, despite the recent correction, the value of all crypto assets sits around $2.3 trillion or 17% below this year’s high of $2.7 trillion. Given the fact that the index peaked around $3 trillion during the 2020-2022 bull run, the asset class as a whole appears to be maintaining its overall uptrend and has a chance to make new all-time highs this year.
Unfortunately for crypto investors, new highs for the asset class will not come without many perilous drops like the one we experienced last week.
Latest Crypto Developments
In this section, we highlight the latest developments that may be significant in either the price action or the trajectory of the crypto space overall.
Consensys Challenges SEC Over Ethereum's Security Status
Consensys has filed a lawsuit against the SEC, arguing that Ethereum should not be classified as a security. The legal challenge highlights concerns that such classification could severely disrupt the Ethereum network and hinder its operation in the U.S. This action follows the SEC's aggressive regulatory approach, including a recent Wells Notice to Consensys, suggesting potential legal action related to Ethereum's staking features.
Morgan Stanley Considers Broker Recommendations for Bitcoin ETFs
Morgan Stanley is reportedly preparing to allow its 15,000 brokers to recommend spot Bitcoin ETFs to their clients, marking a significant policy shift aimed at integrating crypto more deeply into traditional investment portfolios.
Stripe Reintroduces Crypto Payments with USDC Stablecoin
After a six-year break, Stripe is re-entering the crypto payments sphere, initially supporting transactions in USDC stablecoin on the Solana, Ethereum, and Polygon blockchains. This reintroduction, announced by co-founder John Collison at Stripe's Connect developer conference, marks a significant shift from their 2018 cessation of Bitcoin transactions due to its volatility.
EU Anti-Money Laundering Legislation Tightens on Crypto Firms
The European Parliament has passed new legislation requiring crypto asset service providers to implement enhanced due diligence and customer identity checks to combat money laundering, with the regulations set to formally take effect three years after adoption.
BlackRock's Spot Bitcoin Fund Drives Significant ETF Flows
BlackRock's IBIT spot bitcoin fund has significantly outperformed, accounting for 20% of the firm's total ETF inflows. Since its inception in January, the fund has attracted over $18 billion in assets, making it one of the most successful ETFs in history.
Hong Kong Set to Launch Spot Bitcoin and Ether ETFs
Hong Kong is introducing six new spot ETFs trading Bitcoin and Ether, starting April 30. This move is part of Hong Kong's strategy to establish itself as a global hub for crypto assets, offering in-kind funds that differ from the cash-only creations typical in the U.S. market.
Blockchain Association and Texas Group Sue SEC Over Dealer Rule
The Blockchain Association and the Crypto Freedom Alliance of Texas have filed a lawsuit against the SEC, challenging the newly adopted dealer rule, which they argue could significantly hinder the operational flexibility of crypto firms.
SEC Lawyers Resign After Criticism Over Handling of Crypto Fraud Trial
Several SEC lawyers have resigned following a judge's harsh criticism of the agency for its overreach and abusive behavior during a crypto fraud trial, highlighting ongoing tension between regulatory actions and the crypto industry's response.
Market Returns
That's Some Good Content!
Recommended articles, podcasts, and other content from this week:
A16z blog - How bad policy favors memes over matter | Chris Dixon
Lightspeed podcast - The Solana End Game | Anatoly Yakovenko & Lucas Bruder
Forward Guidance podcast - Can The U.S Handle High Interest Rates Past 2024? | Ben Miller
The Breakdown podcast - SEC Lawyers Resign, But Is It Enough?
On the Margin podcast - The Bitcoin Halving Impact | Weekly Roundup
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