Bitcoin gained 9.1% last week, closing at $41,250. Its price remained volatile at the start of the week before the Federal Reserve rate hike announcement. Mid-week, the Fed raised the U.S. benchmark interest rate by a quarter-point, which market experts anticipated. 

The risk-on assets, including the crypto market, staged a relief rally as the rate hike was not as aggressive as some feared, i.e., a 50-basis point rate increase to combat inflation. Bitcoin broke past $40,000 with a 4.7% increase on the announcement day.

Nevertheless, as mentioned last week, it is equally important to note the Fed’s future rate hike plans and their economic projection for the year. 

The Fed indicated that it would be raising the benchmark interest rate six more times this year. This suggests that there will be more than one hike announcement for two out of three remaining quarters, creating a headwind for the crypto market. 

Moreover, the deteriorating macroeconomic climate with the ongoing Ukraine-Russia conflict, the rise in energy and food prices, and the revival of COVID-19 cases in Asia pose further risk to investment in risk-on assets.

Expect More Inflation

Bitcoin has caught a marginal bid after the latest Fed policy meeting. However, I feel that the upside in BTC and the broader market could be limited. 

Just like the Bachman-Turner Overdrive song “You Ain’t Seen Nothing Yet,” I suspect that inflation is only just getting warmed-up. The recent increase in energy and food prices have yet to be priced-in in the Consumer Price Index (CPI) data. The next U.S. CPI report on Apr. 13 could see inflation in the double-digits.

Consequently, the risks of the Fed becoming far more aggressive towards rate hikes are very real. If I am correct, I believe the backdrop of “stagnation” and trouble in the bond market does not bode well for risk assets. Hence, I don’t think it is going to be crypto’s time to shine just yet. 

The downside risks prevail particularly until the Ukraine conflict ends. The war has caused major economic shifts in the world. Most importantly, the sanctions on oil imports from Russia, the confiscation of Russia’s fiat currency reserves by the U.S. and E.U., and the removal of Russian banks from the SWIFT banking network. 

Moreover, the latest round of COVID-19 in China has put 37 million people under lockdown, adding to the global supply-chain worries. The underlying weaknesses indicate that one more shock event in risk assets is likely due in the coming weeks. 

This week’s economic calendar is much lighter than last week. The main events include manufacturing output data from the U.S., which is not vital as America is largely a net importer. 

Hence, I think the market’s focus will likely turn back to the Ukraine conflict this week, and whether Russia and Ukraine can put an end to the war.

Important events for the week. Source: Forexlive.com

On-Chain Capitulation 

This week’s on-chain analysis will focus on long-term market trends and how I believe we’re in the middle of a bear market. Based on previous market cycles, there is a probability of one final bear capitulation before positive accumulation can begin. 

It’ll likely move many digital assets to a “value proposition” at significantly lower levels than where they are currently trading. I’ll also look at the rejection levels, where Bitcoin can reverse the negative trend and begin a parabolic move. 

Let’s begin with the 7-day exponential moving average of the Net Realized Profit/Loss (NPL) indicator.

The 7-day exponential moving average of net realized profit/loss. Source: Glassnode

During the previous two market cycles, the parabolic price trends ended with an extreme capitulation event marked by a spike in realized losses as the price fell from its peak. 

In May 2021, the weekly losses realized on-chain were more extensive than those in March 2020. This suggested a bear market capitulation and marked the beginning of a negative trend. Historically, bear cycles usually end with one final capitulation before bullish consolidation takes over. 

Comparing the time since the first and final flush out with 2018, we can see that the price formed a descending trend over 11 months before finally capitulating to lows of $3,250. From May 11, 2021, to March 21, 2022, over ten months have passed based on the time passed since the beginning of this bear cycle. 

Capitulation events cause a drop in open interest volumes on futures exchanges and a panic sell in the spot market. 

Below is a chart showing the 30-day moving average of net exchange flows. Focus on the last three liquidation events; you can see that there was a big flush out in the market with holders moving their Bitcoin to exchanges in a panic sell-off. 

The 30-day moving average of net flows from exchanges (green: inflows, red: outflows.) Source: Glassnode

One more final liquidation event is likely due during this bear cycle. 

Notably, in contrast to the last two negative trends, the outflows from exchanges have been significantly larger than inflows, which is a positive sign of buyer resilience. However, the size of the outflows has decreased since the start of 2022. 

Investors will likely square their losses with every uptrend. This is what happened in September 2021, when the exchange flows were positive as Bitcoin headed towards $53,000, pointing towards profit booking. The late autumn surge to $70,000 was surprising because it defied the previous bear cycle pattern. 

A breakout above $53,000 is the first hurdle to another parabolic run. Failure to break above $53,000 signifies a dominant seller trend. 

Bitcoin’s Negative Inclination

I am struggling to get excited about the latest recovery, despite the monthly candles showing similarities with last summer, where BTC formed a monthly price base at $35,000 and then went onto a 2x rally.

Could Bitcoin get to $45,000? Quite possibly. Could Bitcoin get to $47,000? Maybe. Will Bitcoin go and hit a new all-time high? I don’t think so. 

The macro backdrop is very different from last year, and the downside risks are enormous under the current macro environment.

The price action is also different from last year, where you could positively feel the energy and momentum pulsing through the market. The latest move higher feels much more like a correction within a bear market.

The Median indicator is flashing a sell signal on the monthly time frame on the technical front. The attached chart shows that the current inclination is towards the purple line at $17,000 while the mid-band is still pink, i.e., still in sell mode.

BTC/USD Monthly price chart. Source: Trading View

ETH is No Longer a Leader

Ethereum is having a terrible year so far. Its inability to move past the $3,000 level and failure to take the lead on the altcoin front in terms of price gains—compared to competitors Terra and Avalanche—does not bode well for its medium-term outlook.

Like Bitcoin, you could make the case that a monthly base is forming around $2,700. However, many other technical sell signals are firmly in place on the monthly time frame. One clear example is the Median indicator (chart attached.)

Ethereum has two cards to play here. It could go down to a lucrative value proposition level over the coming months, where ETH moves close to $1,500, or dare I say it, $1,000. Or else, ETH/USD could follow BTC/USD higher, and we get the long-awaited retest of $3,600.

I prefer the first scenario and remain sidelined until I see the bulls or bears play their hands.

Moving to either side of $2,500 to $3,000 will probably set a directional momentum for the next $500 price move. Like the title of one of Pro BTC Trader newsletters last week, my current stance with ETH/USD is….Not at these levels!

ETH/USD Monthly price chart. Source: Trading View

Is LTC Cheap?

I noticed that Litecoin and other not-so-solid fundamental coins, such as EOS or Bitcoin Cash, for example, over the last few months, have been rapidly slipping lower back towards their 2020 valuations before the mega bull trend.

The critical point to note is that unlike other young upstarts in the crypto industry, the fundamentals for these tokens have arguably worsened. Thus, they will probably be some of the worst affected in a bear market 

The LTC/USD pair has had many chances to rally. The nail in the coffin was after the Walmart debacle and its failure to hold onto its gains.

I am going to use the value proposition example here again. Litecoin has to reach bargain-basement levels—between $70.00 to $50.00—to get me excited for an LTC/USD long trade. Even then, it is a very risky buy.  

Overall, Litecoin tends to perform better than Bitcoin in a bull market and, consequently, worse in a negative trend. The case for trading LTC is then strong. However, holding LTC as a long-term investment in a bear is a very different scenario. And one that becomes hard to justify right now.

LTC/USD Monthly price chart. Source: Trading View

It’s not difficult for me to take a contrarian stance at this stage and talk down the recent recovery. I am not feeling the bull case for this recovery after the Fed meeting. 

Under current circumstances, I would have trouble sleeping if I held a long BTC from these levels. With the ongoing war and rising COVID-19 cases in Asia, I don’t think it’s a great time to buy riskier asset classes. 

The genuine risk of a market capitulation-type event is at the forefront of my mind. Thus, I prefer to be on the short side until the fundamental conditions change and the market proves me wrong.