In This Issue:
This week’s major crypto events:
- Bitcoin’s network difficulty dropped 16.05%, the 2nd largest in its history due to migrating farms in China
- October 31st marked the Bitcoin whitepaper’s 12th anniversary – Upward and onward!
This week’s major legacy events:
- The U.S. Presidential Election is still too early to call as of Wednesday with an extremely tight race between the two candidates
- The U.S. Fed is scheduled to announce its interest rate decision on Thursday, with expectations that rates will be held at .25%
Panic and bad takes were plentiful across social media as Bitcoin endured its second largest network drop as the hash rate has declined over the past couple of weeks. The drop is mainly due to large mining operations moving their machines from hydro power-based locations to more competitive areas during the dry season. This is typical behavior and given the pattern of weather cycles in China, the trend will likely continue in the future. While the scale of mining operations will continue to expand in China and Mongolia, we are now starting to see a slow migration of the total network hash rate to North America as energy prices have become more competitive in the past year. The infusion of large sums of cash from companies like Foundry, which is the mining arm of Digital Currency Group (DCG), aim to further secure the network by decentralizing the hash rate, as around 60% of the total hash rate is still in east Asia.
BTC/USD – W (BNC:BLX)
POINTS OF DISCUSSION
S = $12,800, $11,500
R = $14,000, $16,000
1) Bitcoin remains bullish in the short term while holding above $12,500 and must now close above the former 2019 highs at $14,000.
2) Bitcoin diverged from its normally tight correlation with the SPX500 in recent times, signaling that the asset is beginning to function independently and furthering the ‘safe haven’ narrative.
Bulls maintained control over the Bitcoin markets as price ran up an additional 10%, breaching the 2019 highs across all spot exchanges, with futures extending a couple of hundred dollars higher due to a short cascade of stop losses above the 2019 highs at $14,000. More importantly, Bitcoin is accelerating its march down the road to becoming a sovereign asset, operating without a tight correlation with the legacy markets, and in particular, the SPX500. If you were looking for signs of a maturing asset, decoupling from the legacy markets would be it, and for the first time in a long time, Bitcoin did just that; moving up more than 10% while the SPX500 tumbled over 6% to end the week.
This is an important divergence to monitor, as it is an early sign that Bitcoin could be taking on the ‘safe haven’ narrative, which would back up the long-forged narrative of it becoming a digital hedge against impending global inflation. With the U.S. presidential election up for grabs, expect more volatility than usual. Bitcoin had little movement during the 2016 election but given its recent tight correlations with legacy markets, and price reactions to macro policy statements, it’s plausible that Bitcoin will also have a reaction to the outcome of the election, given its macro impact.
ETH/USD – W (GEMINI:ETHUSD)
POINTS OF DISCUSSION
S = $360, $320
R = $395, $420
1) Ethereum’s range-bound price action continues, but the range is contracting, with a focus on the $420 resistance level and $365 support level. Expect range expansion soon!
2) ETH 2.0 will be a strong fundamental bullish driver as it removes supply from the market, but we will need to wait for the release of Beacon’s deposit contracts.
While Bitcoin has the institutional bid behind it, driving it to 2019 highs, Ethereum’s main fundamental driver – ETH 2.0 – is getting closer. Beacon deposit addresses were supposed to go live last week but were delayed due to the calls for an audit on some of the contract code. In a recent dev call, they stated that the audit was going well, and they were expecting to launch the deposit contracts for staking relatively soon. Ethereum’s major releases tend to face delays, so it was not unexpected, but will be a news headline to watch for closely, as we would expect a sharp bullish price reaction, assuming contract deployment goes smoothly.
Moving back to a technical view, Ethereum is still in a wide, but contracting range between $445 and $320, with the first major daily resistance sitting at $420. Bulls will need to flip this level to support in order to confirm the momentum and a short-term market structure break to the upside, which would then open up the next daily resistance level to be tested at $445 and $480 respectively. If the bears step up to the plate, they will need to aggressively close below the key weekly support at $320. The sensible downside target is the untested bullish throwback level at $280ish, where we would expect at least a bounce back to the former weekly support at $320. From there, if it were to close back above that level, it would paint a swing failure pattern, which is a strong reversal signal. Until either $420 gets reclaimed as support or $320 falls as resistance, swing traders will need to be patient.
US DOLLAR – W (FX:USDOLLAR)
POINTS OF DISCUSSION
S = 1970, 11860
R = 12080, 12140
1) USD remains bearish short term while below the bearish throwback level at 12,100 – A move above would signal a bullish trend change.
2) The U.S. election has historically been a catalyst for a midterm trend to form on the U.S. dollar. We anticipate a repeat of this market behavior once the results are settled.
The U.S. dollar has been in choppy waters for that past two months, ranging between the key bearish throwback level at 12,140, which while price remains pinned below, signals that the current downtrend it has been stuck in since April is well intact. Bears will need to close below the current weekly support at 1,970, which has held up for the past month. If bears close below the weekly support level, we would anticipate a retest of the September lows near 11,870. From a monthly timeframe perspective, the key range lows to hold are the 5-year running support at 11,530. If the price moves below that level, there is likely a lot of chaos in the world, as a sharp devaluing of the USD would send commodities such as gold and Bitcoin ripping upwards.
With the U.S. presidential election finally here, it’s useful to look back at previous U.S. elections to see how markets reacted, which for the past two elections, served as a bullish catalyst for a multi-week bullish run-up. Arguably, the world is a much different place than 2012 and 2016, but regardless of the outcome, we expect that a multi-week trend will form on the heels of the election results. Brace yourself, volatility will soon return to currency pairs.
SPX500USD – W (OANDA: SPX)
POINTS OF DISCUSSION
S = 3230, 3130
R = 3500, 3580
1) U.S. equities continue to remain range-bound into the U.S. election, but expect this range to be broken with vigor following the confirmed results
2) Traders should avoid trading short-term market action until the election results are clear, to avoid the colossal whipsaw that we saw back during the 2016 elections.
The world is collectively holding its breath as the U.S. presidential election is upon us, but regardless of the outcome, expect massive volatility in the short-term, which will be paired with a range expansion move, which would trigger either above 3,500 or below 3,230. The VIX recently made four-month highs, which was expected, as historically, volatility spikes during the presidential elections. We expect this volatility to remain until the final decision has been made and a victor is declared.
The first early signal of bulls regaining momentum would be a close above the former all-time highs at 3,400, which has proven to be a strong resistance and support level while the market has been ranging for the past three months at these levels. If the market moves below the key weekly support at 3,230 and flips it to resistance, it would confirm the range expansion move to the downside, with targets being back at the daily support at 3,130 and weekly support back at 3,000. On the bullish side, a close above 3,400 will signal an imminent run up back to the 3,500 daily resistance level, and if broken, the start of a new range expansion into fresh bullish price discovery. The play here is to now wait on the election results to finalize and play the swing trade once the range expands.
XAUUSD – W (OANDA: XAUUSD)
POINTS OF DISCUSSION
S = $1,800, $1,760
R = $1,945, $2,000
1) No reasons to be macro bearish above $1,750-1,800, but bulls need to regain the bearish throwback at $1,945 to reignite the short-term momentum
2) Fundamentals are all in bulls court as fiat inflation risks grow after the Fed’s recent policy shift, but this will most likely take time to develop
Markets hate uncertainty, but the uncertainty around the U.S. presidential election is about to come to an end. That is, as long as we don’t see a repeat of the of the Bush/Gore ticket, where the election results were contested, resulting in a drawn-out process. At this point, we can not rule out a contested election. The play on gold has not changed for us, and as long as the price remains below the bearish throwback level at $1,940, the short-term market structure remains neutral/bearish. A move above that level will signal that bullish momentum is back and will open up upside targets back to $2,000 and beyond. Gold has proven to trend hard once key market structures are broken, and we expect no difference here. Our long-term view and current bias remain bullish. It is only a matter of time until inflation across many countries catches up with the exuberant QE policies that governments/central banks have had to take up to cope with the economic slowdowns, caused by their rash decisions to lock down entire economies.
As we have stated before, we are not that interested in the USD pair for gold, as its price movements are inferior to that of weaker currency pairs like the Turkish Lira or any emerging market fiat pair. Better to trade against the weakest pairs, as those economies descend into greater inflation and fiat devaluation, the price of gold against those pairs will increase substantially.
The total market capitalization (TMC) is sitting at key resistance near the $400B mark. A move above $420B will signal a substantial break to the upside and we would expect strong rallies across most crypto assets
At these levels, it is prudent to preserve dry powder and wait for a clear break of current ranges before blindly jumping into the next swing trades. Capital preservation is just as important as capital growth.
It is safe to ignore the wick to the upside that is shown in that chart, as crypto did not bubble 100% of its total market cap over night. We are sitting at a key resistance block here at the $420B mark, and if we begin to close above these levels, it will be safe to assume that the crypto space is about to enter an extended period of growth and price appreciation across many assets in the space. This trend confirmation will allow traders to then dive into the sectors and coins that continue to have strong network effects and fundamentals going into the next bull cycle. With the majority of the Defi space continuing its slow bleed out, use this time to identify those projects with high TVL’s, active GitHub’s, and most importantly, projects that solve tomorrow’s problems. Projects that launch with the intention of solving problems that exist in the present are easily reiterated and replaced as many of these projects are not future proof, or do not have a clear path to scale. As a general rule of thumb, if the projects you invest in don’t have a clear path to scalability, then they aren’t going to be great long-term holds, as they will suffer from bottleneck issues eventually if their user load increases.
Gem Hunters (Extended)
As the crypto space continues to mature, seeing crypto-focused companies listed on legacy exchanges such as the TSX or Nasdaq, etc., will become more common and present new opportunities.
Successful execution of this strategy all comes down to your due diligence process into the companies. Once that is satisfied, investors only need to watch the performance of the underlying asset.
There is little doubt that crypto is here to stay, and the infrastructure that powers the networks will only continue to scale and grow, and as most companies need funding to scale, many will look to the public markets to raise additional capital. Identifying correlations between crypto markets and companies that operate in the space is a simple strategy to gain exposure to alternative sectors in the space. Today we will analyze this idea by looking at mining companies such as Bitfarms or Hut 8, both of which operate out of Canada and operate large installations across Quebec and Alberta, which boasts some of the cheapest power rates in Canada. Generally, when the price of Bitcoin is on the rise, mining companies that are stable tend to do quite well and often outperform the underlying asset of which they are mining – In this case, BTC. While Bitcoin enjoyed a 35% rise in October, Bitfarms moved up more than 100% and Hut 8 increased by 65% in the same amount of time. This correlation has proven itself in the downside of the market as well, with similar results. While some additional due diligence is required into the health and state of the company’s financials and operations, a lot of this information is publicly available, and once understood, taking the trades becomes easier as uncertainty is removed from the equation. This strategy mirrors that of buying gold mining stocks when the price of gold is increasing, and vice-versa when prices are trending down. The key to the successful execution of this strategy is doing proper due diligence into the companies you’re looking to trade – Once you have a firm grip on the companies’ financials, it’s just a matter of following the trend in the underlying assets.
The DeFi space continues to bleed out across most projects, and while Uniswap volumes have remained depressed, liquidity and TVL in the DeFi space remain high, signaling the underlying demand to capture yields.
The next big/hot trend will be decentralized margin trading. Utilize our previously mentioned strategies of monitoring volumes/TVL to identify the early winners and position yourself accordingly.
Even if we see a continued downtrend in the DeFi space, the time to be taking massive short bets has passed, as the majority of coins and the indexes are down over 80% now from their previous summer highs. Despite this, DEX volume remains significantly higher than where it was a year ago, and the TVL across the DeFi space, and in particular, Uniswap, continues to sit near all-time highs, signaling the underlying confidence in the space, as well as the incentives to capture additional yields via providing liquidity.
The next big trend to keep an eye on will be decentralized options and trading. While the decentralized options space is getting crowded, there will be one or two winners that pull away from the rest, so monitoring platform volume/liquidity will be the greatest tool in deciding with whom to place larger bets. Liquidity and high TVL pulls in greater liquidity, creating a positive feedback loop. Decentralized margin trading from projects such as Injective Protocol and Derivadex will be ones to watch as they battle it out for market dominance. Essentially these guys are decentralized BitMEX platforms, and if the success of BitMEX is any indication of market demand for products like these, getting exposure to this vertical is a no brainer.
This commentary is provided as general information only and is in no way intended as investment advice, investment research, a research report or a recommendation. Any decision to invest or take any other action with respect to the securities discussed in this commentary may involve risks not discussed herein and such decisions should not be based solely on the information contained in this document. Past performance is not indicative of future results.
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