Market Lab Report
by Dr. Chris Kacher
The Web3 Evolution Will Not Be Centralized™
Bitcoin and altcoins dump
The recent selloff in Bitcoin is due to miner capitulation. This has resulted from the halvening event where weak miners get weeded out. This has happened in prior cycles though difficult to estimate the magnitude which is typically contained. As they die, they dump BTC. The price rebounds afterwards. But we also have the degen open interest in futures bets on the long side as traders try to catch the price of Bitcoin's falling knife so expect more liquidations before Bitcoin finds its floor. Here's a view of paper bet open interest on Bitcoin. The solid yellow chart is a z-score oscillator looking at how significant it is locally. We need a solid amount of liquidations before we get the all clear for further bullish activity.
Bitcoin will also be influenced by global liquidity since the two roughly correlate, especially on a monthly basis. So far this year, we had the recent mild uptrend but it remains unknown whether it will continue.
That said, stealth QE remains fully intact. Central banks have no choice as their respective governments are broke so must create fiat to service record levels of debt, expanding war efforts, global warming, and unfunded liabilities among other things.
Tightrope balancing act
Over in central bankland, the Fed must balance two key risks:
1) High borrowing costs bringing pain to banks, businesses, and households
2) Cutting rates acts as jet fuel for portfolios and spending, reigniting inflation
This balance act is treacherous but major averages continue to rally despite the extreme narrowness of the rally. The 10 biggest stocks in the S&P 500 now make up over 36% of the index’s entire value, the most in over two decades, according to FactSet.
Yet overall, investors are seeing a resilient despite slowing economy, upbeat earnings, AI-fueled enthusiasm, and the Fed’s view that rate hikes aren’t happening, though rates will be kept higher for longer as the Fed's dot-plot now shows only 1 rate cut as the most likely outcome for the remainder of the year. Meanwhile stealth QE continues to create fiat globally which sustains markets.
Growing our way out?
Post World War II, debt was massive from war expenses but the US grew its way out of the debt crisis as technologies were put to use to greatly boost productivity in the non-wartime economy. This created huge gains in GDP will paid down the debt.
While Ray Dalio et al have voiced concerns about the never ending debt spiral when debt gets this huge, if we compare today to past long-term debt cycles, we have existing companies that are leveraging AI internally to improve operations. These companies can now get more done with less people or less capital. This efficiency boom in productivity will lead to an increase in GDP. So the new killer app may yet to be seen in the form of a quantum jump but rather a gradual but powerful increase in efficiencies which allow more to get done with fewer employees or finances. Of course it could be argued that the killer app was generative AI such as ChatGPT that led to this powerful increase since prior to such innovations this seemed impossible. Indeed, early data shows GDP growth could overcome US debt growth. Time will tell as it is still too soon to make any firm conclusions. Such would help improve the debt:GDP ratio that is out-of-control.
Over a million new tokens have been created since April. Many are memecoins on Coinbase's base platform. The more tokens that launch, the more cumulative supply pressure on the market. And many projects from 2021 are still unlocking, with supply "stacking" across every subsequent year (2022, 2023, 2024). All these projects suck up liquidity, so without global liquidity on an uptrend, the supply:demand favors the bears for most altcoins. Only the top quality names will survive and potentially thrive over time. Bitcoin, Ethereum, and Solana have ground their way higher since Jan-2023 helped by emergency QE in Mar-2023, global liquidity in late 2023, and stealth QE throughout.
That said, scam coins are getting crazy. We have one that has 27 trillion in circulation, unlimited supply cap, only 1 node, 25% of supply minted in the last 6 months, and 1% of holders own 30%. These tokenomics would spell death for any altcoin. Any guesses as to what this is? It's the good 'ol Uncle Sam's US dollar.