Market Lab Report - Forced hikes; BTC drops when Fed is hawkish; FAQs

by Dr. Chris Kacher

Forced Hikes

Given strong jobs report on Fri Feb 4, the CME Fed Fund futures is now pricing in 5 rate hikes or possibly even 6 by Dec-2022. But they cant raise this many times without tanking markets because higher rates push the already overwhelming deficit higher which slows GDP. If you plot the 30y Treasury against the fed funds rate, you see this downtrend that started in the 1980s. The downtrend suggests the 30y will not be able to rise above 2.5%. It currently stands at 2.23%. The Fed is boxed in. This suggests tapering then tightening of even a couple rate hikes will ultimately result in further downtrending stock markets.
 BTC drops when Fed is hawkish

Crypto does not fare any better. In the periods where bitcoin's monthly returns exceeded -30% over a rolling 30-day period such as in 2018 and Mar-2020, the main culprit was a hawkish environment of less QE. This also happened in 2014 (not shown below). Thus, 3 out of 5 times since 2014 when bitcoin's monthly returns exceeded -30% over a rolling 30-day period was due to diminishing QE by way of the suggestion of tapering, actual tapering, balance sheet normalization, or tightening. 1 out of 5 was due to the black swan C19, and 1 out of 5 was due to an overleveraged/overbought crypto market. (We count the two arrows in 2018 as one time since the Fed was tightening all year.)

Also, the on- and off-chain metrics which suggest major lows in bitcoin fail to see the bigger picture. While Dec-2018 and Mar-2020 were major lows, it was because the Fed rushed in and saved the markets by reversing their hawkish position with respect to QE. Today, we have soaring inflation and far more debt thus the Fed has little choice but to tighten. There is no "uncle" point for Powell until he has perhaps hiked rates at least a couple of times.


(For reference:)


FAQ

Q: If we do get the bearish scenario for crypto, would you begin rebuilding positions in some of the established altcoins at strong support levels and/or considerable weakness, down 70%+?  Or would you still be waiting for BTC and ETH bullish price and volume action before re-entering into altcoins?  

You had mentioned the following leading altcoins in various groups:

• layer 1s (BTC, ETH, SOL, ATOM), gaming/NFTs (SAND, MANA, ENJ, AXS),  DEXs (UNI, SUSHI),  Web3 (DOT, THETA, HNT), and DeFi (LUNA, LINK, AVAX)

Curious if your crypto bear strategy may change at all this cycle due to more institutional interest and established altcoin projects.  Thanks again for all of the knowledge and information you provide.

A: I prefer to use BTC and ETH as the two main guides. At the same time, I do look for high quality coins bucking weakness in BTC and/or ETH. There are also times when BTC and ETH may lag or trade sideways while a couple leading altcoins are moving higher. For example, during the mini-top in June-2017, NEO which was called Antshares back then, was bucking the trend due to it being the first Chinese blockchain. China was formidable then since they had yet to ban ICOs and miners and other aspects of blockchain. NEO soared several hundred percent in the coming weeks despite both BTC and ETH still healing their wounds from the mini-climax top in June.

As for institutional buying, there is far more utility among the top alt coins than ever before spread across DeFi, DEXs, DApps, DAOs, NFTs, gaming, and an evolving metaverse. The crypto cycles are getting longer and less volatile as a consequence. Indeed, bitcoin's volatility should continue to diminish in the coming years to where it can become a more reliable store-of-value. But my overall strategy has not changed materially in how I scout for outperforming altcoins when the window of opportunity is open. One useful daily task is to go to arrange the top 200 performers over the last 24 hours on coingecko.com. Then delve into the names that look interesting based on fundamentals and technicals.


Q: Your thoughts on quantum computing as risk to BTC?

A: New technologies that can crack existing algorithmic systems have always been met with newer technologies designed to resist such cracks. The same goes for quantum computing with respect to cryptocurrencies. Ethereum is already designing quantum secure systems that are resistant to quantum invasion. NIST has initiated a process to solicit, evaluate, and standardize one or more quantum-resistant public-key cryptographic algorithms.