There hasn't been much to cover as far as new developments in the cryptocurrency market are concerned.
Bitcoin, Ethereum, and friends have been consolidating and correcting for the better part of two months now. We experienced some volatility in early December, but the damage was quickly repaired. Outside of this, things have been quiet. It's really just been a slow grind lower or sideways for most cryptos since November.
We continue to believe this is a messy market, and patience is the best course of action for a large majority of coins.
Let's recap some of the things we're looking for to signal the recent corrective action has passed. Then we'll check in on some of the leaders as we want to focus on these pockets of strength as they should continue to outperform when the current selling pressure subsides.
Two weeks ago, we detailed why we're sitting on the sidelines with an expectation of sideways price action to close the year.
Fast-forward to today, and the same diagnosis applies for Bitcoin and the broader crypto asset class. The macro risk environment is beginning to favor the bear camp, and it's certainly not a time to be aggressively pushing longs.
Meanwhile, the spot flows seen on-chain continue to diverge from price action, suggesting that once this consolidation phase is complete, an upward break appears to be the higher likelihood scenario.
We're watching for Bitcoin to reclaim 53,000 before we put our elevated cash back to work in positions.
Until then, we're avoiding a good majority of trading action in this low-conviction tape where whipsaws have become commonplace.
With soaring prices across the globe, inflation is cementing itself as the topic du jour to end the year.
Bitcoin continues to appear in the conversation as the new and upgraded gold. Proponents argue that Bitcoin is the superior inflation hedge.
The simple fact of the matter is that the "Bitcoin inflation hedge" story is just another narrative that we don't see being supported with sufficient evidence.
We've seen a lot of chatter from the Twitterati about the Crypto Fear & Greed Index in recent weeks.
We've already made our thoughts pretty clear on the traditional CNN Fear & Greed Index and how it likely does more harm than good to investors. So, we thought we'd compare the construction of the two indexes, focusing on why the updated Crypto Fear & Greed Index does a better job quantifying investor sentiment than the CNN equivalent in the stock market.
We've already broken down the CNN Fear & Greed Index in a previous post. Here's a quick summary of how it's constructed:
The simple fact of the matter is these last few weeks have been an environment of low liquidity where we've had little to no conviction in maintaining aggressive long crypto positions.
There's zero edge in trading right now, on either the long or the short side. Sitting out this messy price action is the prudent strategy, in our view.
Bitcoin is still below 53,000 and likely needs to contract and build out a base for at least another few weeks. We're more than happy to pay a higher price for an entry with greater conviction. This has been the case for the last two weeks, and there's nothing to provide updates on.
The bottom line is we're in elevated cash positions looking for a higher-conviction entry.
The most probable outcome is that we see a contraction of volatility in Bitcoin while it ranges for the remainder of 2021. If this is the case, whipsaws are likely to be highly concentrated, and there'll be no edge in trading lower time frames or maintaining highly aggressive long positions.
But, as far as the structural picture is concerned, there's little to suggest that much damage has been inflicted on the HODLers, and spot flows continue to paint a bullish picture for 2022.
In today's report, we'll outline why this recent selloff doesn't have the characteristics leading to a deeper correction similar to what took place in May.
In the stock market, we have software, internet, homebuilders, and gold miners. The powers at be do their best to classify all the publicly listed companies into industry groups. This allows us to break them into various baskets and analyze them at the index level.
In crypto markets, there are tokens focused on decentralized finance, the metaverse, smart contracts, and more. But unlike the stock market, the crypto asset class is still in its infancy. As such, there is no industry standard for how to group these different tokens based on what they do.
In our analysis, we'll often discuss what some of these tokens do. We use some indexes that are offered from data providers, as well as create custom indexes of our own as we see fit.
The reason we do this is for information. Aggregating tokens into groups and analyzing them as a whole allows us to glean insights about the strength or weakness of different areas of the crypto market.
This week we've been clarifying our multi-time-frame view of the market.
The point is there isn't much edge in being involved in this messy action, which will likely involve a high concentration of whipsaws in the coming weeks while Bitcoin builds out a base following its liquidity crunch.
Indeed, sometimes the best trade is no trade at all.
We can either wait for Bitcoin to contract and buy the break with some level of conviction or just blindly BTFD like the El Salvador guy. I know what I'd rather be doing right now.
But, in keeping with our multi-time-frame approach, the long-term bull case still stands moving into 2022. And, for long-term spot holders, there doesn't seem much to be concerned about in this low time frame price action.
For now, we're avoiding what's likely to be a messy end to the year.
The most likely scenario in our minds is that we see a sideways consolidation in a regime of negative funding while spot flows remain intact. Patience and sitting on the sidelines when whipsaws are dominant on price action can go a long way in saving financial as well as emotional capital.
This message of "sitting on the sidelines" has primarily been geared toward a time frame looking ahead for the coming weeks and the next month.
But, looking longer term, there are plenty of data points right now suggesting this recent selling pressure isn't the beginning of a deeper correction, which remains encouraging for those with a longer-term time horizon looking out into the next quarter and into 2022.
In yesterday's note, we outlined our neutral approach, pointing out that sideways, messy action looks to be the most likely scenario for Bitcoin.
We're currently in elevated cash positions, sitting on the sidelines waiting for a higher-conviction entry before moving back into aggressive long positions. It appears as if these next few weeks could involve a high concentration of whipsaws in the context of choppy price behavior.
But today is when we publish our full crypto chartbook, so we thought we'd share how we're approaching new longs, despite the evidence pointing to this being a messy market for Bitcoin.
There's really a common pattern appearing in the alts right now.
