This article is a compilation of two market analysis articles published by 10x Research last night and this morning. The first article analyzes the bearish reasons for ETH’s future market, while the second article predicts a new high for BTC.
Regarding ETH: Why are we bearish?
In the past month, Ethereum’s market value has increased by 22% to reach $454 billion, while its fee income has decreased by 33% to only $128 million. Fundamentally, this is because Ethereum has become relatively insignificant in terms of transaction activity, and most meme activities have shifted to Solana or Layer 2 networks. For deep value investors, this may not be surprising.
From a technical analysis perspective, if ETH falls below $3,725, it may trigger a large number of stop-loss trades. The current trend of ETH is very fragile, failing to further rise, and many newly established long positions have reached or fallen below breakeven points. Cryptocurrency enthusiasts often refer to this technical pattern as a “Bart,” where the price of a token needs to consolidate after a significant increase, and during this time, the price may sharply drop due to triggered stop-loss trades. Our three reversal indicators have all turned bearish.
Historically, June has been the second worst month for ETH performance, with an average return of only -7% (September being the worst at -12%), while the average return for the other ten months is positive.
In conclusion, from different perspectives such as fundamentals, technical analysis, and cyclical patterns, it is not the best time to hold ETH. Another piece of evidence for this conclusion is the excessive long positions in the futures market.
Editor’s note: In financial market terms, “excessive long positions” is usually used to describe a phenomenon in which there are a large number of positions in a specific direction (long or short) in an asset or investment product. When most market participants tend to take the same trading direction, excessive long positions imply the risk of excessive bias towards that direction.
The open interest of futures contracts has increased from $8 billion in mid-May to $12.8 billion. The financing rate once exceeded 20%, but it has now dropped to 11.9% because there are no new longs being deployed, and holding long positions is very expensive. Due to the uncertainty of when ETF approval will be granted, there may be more traders choosing to close their positions.
The net inflow of Ethereum ETFs may also be disappointing. Similar to GBTC, we may see a capital outflow of 50% ($4-5 billion) in Grayscale’s ETHE, while the capital inflow level of other ETFs may only reach 20% of the BTC ETF ($2.7 billion). The inflow of $2.7 billion compared to the outflow of $4-5 billion from ETHE may put pressure on ETH’s price.
For institutions or asset managers, the reasons for adding ETH to their multi-asset portfolios are not sufficient. ETH is not positioned as digital gold, and its trading volume only accounts for a small fraction of Bitcoin’s, posing liquidity risks. The current risk-free rate in traditional finance is around 5.2%, while the staking yield of ETH is only 2.6%. Therefore, the incentive for traditional finance to buy ETH ETFs is also small, not to mention the current ETFs do not allow staking.
It is still uncertain when the SEC will finally approve the spot Ethereum ETF (S-1), and US President Biden has just vetoed the Congress resolution aimed at overturning the SAB-121 decision, reaffirming the government’s opposition to cryptocurrencies. ETFs must wait for the effectiveness of the S-1 form before they can start trading, but the timetable for the SEC’s approval of these S-1 forms has not been determined yet (it could be today or several months later). On May 23, the positive impact of the 19b-4 approval caused ETH to jump from $3,000 to $3,600, and then climbed to $3,800 in the following days. Considering that the US government has just conveyed unfriendly new information about cryptocurrencies (Biden’s veto), is this more than 25% increase reasonable?
We prefer Bitcoin, even if the S-1 is approved, the conversion outflow of ETHE will put selling pressure on ETH. Taking everything into account, the trading strategy of “long Bitcoin, short Ethereum” or “sell Ethereum call options, buy Bitcoin call options” may have a better chance of winning.
For ETH, $3,725 will be a critical level (at this point, we will close all long ETH positions). If ETH falls below this level, we may see a large number of stop-loss trades being triggered, pushing the price of ETH further down, which may even hinder Bitcoin from reaching a new high.
Regarding BTC: Will a new high come?
In our reports on May 21, May 26, and May 30, we emphasized the bullish reasons for BTC.
For traders, it’s time to take risks for greater beta. As we predicted, Bitcoin mining-related stocks are also rising. Influenced by a $100 million financing from Tether (which may increase by another $50 million), Bitdeer rebounded 13% last night, and Bitfarms, as one of the major participants in the industry, also rebounded.
The US economy is slowing down, but it is currently seen as a good thing. GDP growth is only slightly above 1%; the ISM manufacturing index has been in a contraction state for several months; employment is weakening, which has a negative impact on consumer spending; and last night, another key and forward-looking employment indicator, job vacancies, slowed significantly. All of these will lead to a decrease in inflation.
We will get more employment data this Friday, and next week we will get the CPI inflation report. The trend of Bitcoin will adjust its direction based on the changes in CPI (if CPI rises, Bitcoin is bearish; if CPI decreases, it is bullish). If the growth rate of CPI is 3.3% or lower, it is likely to push Bitcoin to a new all-time high.
On May 15, when the inflation rate reached 3.4%, lower than the previous month’s 3.5%, we turned bullish, and Bitcoin’s price was close to $62,000 at that time. This price also coincided with our model. Our medium-term trend model originally predicted that if the price of Bitcoin could reach $65,000 on May 16, it would turn bullish, and if the closing price exceeded $71,500 (the recent price was $70,500), it would trigger another buy signal.
Bitcoin has already broken out of the smaller triangle range (purple line) in the chart, and the larger triangle range (purple dashed line) may also be broken around $71,500. If the decrease in the US employment rate or the decrease in inflation can make the closing price of Bitcoin above this line, we will firmly set the target price at the new high, which may be achieved between this Friday and next Wednesday. Therefore, we expect Bitcoin to reach a new all-time high (over $73,500) by next weekend.
The SEC recently issued risk warnings about cryptocurrencies, a pattern that has occurred before the approval of Bitcoin spot ETFs and other SEC-regulated crypto products, which may mean that the S-1 form of the spot Ethereum ETF will be approved soon. However, we still prefer Bitcoin, and our positions will return to Bitcoin.
Since Saturday, the additional exposure of Bitcoin futures contracts has increased by $1.6 billion. Last night, Fidelity’s spot Bitcoin ETF saw an inflow of $378 million, Ark’s ETF saw an inflow of $140 million, and BlackRock saw an inflow of $275 million (a total of $880 million inflow in one day), the second-highest in history.
The options market predicts that the volatility of Bitcoin will be around ±6.6% until next weekend, and if it rises, the target price will be $76,000. Implied volatility is still relatively expensive, around 52-53%. It may be a better strategy to build long leverage through perpetual futures or Bitcoin mining companies.
In summary, Bitcoin may soon reach a new all-time high, and it is now time to take on more risk and build larger positions.
