China Is Opening the Floodgates
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| By Juan Villaverde & Alex Benfield |
This week, the People’s Bank of China announced a 10-basis-point rate cut on its seven-day repo facility, later extending the cuts to additional credit facilities.
Accompanying this, an unnamed source tipped off Bloomberg that the Chinese government has a substantial stimulus package in the works.
While critics argue that these measures won’t rejuvenate China’s COVID-19-battered economy, there’s more than meets the eye. Namely, this meager rate cut coupled with stimulus rumors suggests China's economy needs bolstering.
Although I doubt these measures will spark an immediate economic upswing, it sends a clear signal: China is gearing up for more significant stimulus efforts.
Don't make the mistake of thinking China's situation won't affect you; it will.
I've repeatedly mentioned the significant low that major asset classes hit around last October, which aligned with the reactivation of China's monetary printing presses. While this week's steps by the PBoC may seem minor, they're a clear sign that Beijing has more up its sleeve.
Shifting focus to the Western Hemisphere, the Securities and Exchange Commission's enforcement actions have ignited panic in altcoin markets. Since last week, the combined market cap of crypto assets — excluding Bitcoin (BTC, “A-”) and Ethereum (ETH, “B”) — has plunged roughly 15%, barely exceeding $300 billion.
Worryingly, altcoins are teetering on the edge of their bear market low, which we saw last December.
Many leading altcoins have regressed to March 2020 levels, effectively erasing their entire bull market run. This may seem alarming, but it's just another day in the volatile world of crypto.
You see, a large portion of these altcoins were never destined for success. Particularly, the numerous "Layer-1 blockchains," or Ethereum competitors.
Despite their claims of faster and cheaper operations than Ethereum, many of these altcoins are rendered redundant by the Ethereum network’s Layer-2 solutions. These solutions offer the same advantages while benefiting from the Ethereum mainnet's superior security — something these Ethereum rivals lack.
Experienced crypto enthusiasts may be reminded of the wave of "Bitcoin killers" that sprung up during the 2016 and 2017 bull markets, most of which collapsed when the bear market resurfaced. This is why we concentrate on crypto's heavy hitters and will continue to do so given the market's current fragility.
Returning to the SEC lawsuits, expect this tug-of-war to characterize crypto's future. We will likely see surges in government spending — funded by central bank money printing — causing currency devaluation and driving up crypto prices.
Simultaneously, efforts to regulate the industry will intensify, aimed at preventing investors from seeking refuge in hard assets as alternatives to fiat money.
At its core, crypto is a disruptive technology that aims to uproot traditional financial and monetary systems.
If you assumed the established powers in Washington would relinquish control without a fight, think again. Crypto's threat to their supremacy has only recently become evident, prompting the SEC's civil enforcement.
The silver lining is that the genie is out of the bottle: Humanity has figured out how to manage money and finance without a centralized, government-controlled clearing system. We're not regressing.
While we may experience road bumps on the path to mass adoption, new technology usually prevails over the status quo.
If you need a reminder, consider how the Catholic Church resisted the printing press. Until this technology was invented and made books less expensive, Roman Catholic priests essentially monopolized having direct access to the Holy Bible. This opposition is now a mere footnote in history books.
In the end, markets always find a way. Wealth will seep from fiat to crypto, despite the strenuous efforts of governments to confine it within their deficient government bond markets.
Now, let’s turn to Alex to see how the crypto market has digested all this news.
Crypto’s Future Remains Bright
The past couple of weeks have cast a looming shadow over the cryptocurrency market, with unprecedented regulatory actions from the SEC sending ripples of fear throughout the industry.
With both Binance and Coinbase (COIN) caught in the crosshairs, investors were thrown into a state of panic, leading to a mass liquidation of many altcoins.
Although this onslaught has triggered a temporary downtrend, the future of cryptocurrencies continues to shine bright. The industry's overall growth trajectory still slopes upward, and the dust will inevitably settle from the current regulatory storm.
Despite the fear-driven response to regulatory actions, the financial landscape still gives reason to be optimistic.
Namely, recent news regarding a decrease in inflation and the possibility of a pause in interest rate hikes has been received positively, even if it has not yet managed to send prices upward.
However, a turnaround is on the horizon: Crypto prices are primed for a rally, and we expect to see a bounce of at least 10% once the market has fully processed the regulatory news.
But be prepared for a seesaw of ups and downs this summer, with low volatility hinting at a neutral crypto market overall. While the year kicked off with a blistering rally that saw most cryptocurrencies surge over 50%, it seems the momentum might be tapering off for the remainder of 2023.
Interestingly, but perhaps not surprisingly, it seems the SEC's actions could be paving the way for TradFi giants to gobble up crypto market share.
Yesterday, BlackRock (BLK) — a colossal investment management firm with over $10 trillion under management — submitted an application for a spot Bitcoin exchange-traded fund. If successful, it would be the first of its kind.
In the past, numerous crypto firms have tried and failed to gain approval for a similar offering. But BlackRock's impressive track record of 575-1 ETF approvals in its 35-year history paints a promising picture.
Moreover, the investment titan has chosen Coinbase to be the custodian of the ETF — an intriguing development to say the least.
The outcome of BlackRock's application could be a game-changer. Its approval could channel a tsunami of capital back into the crypto market, creating a much-needed spark of positive energy.
However, we will have to sit tight and watch how this unfolds.
Turning to price action, over the past two weeks, Bitcoin has lost some very key support levels. This has made us rethink our medium-term outlook on the market.
Now, BTC is indeed long overdue for a rally. However, that rally is unlikely to last too long or break above the 2023 high water mark.
So far, $25,000 has held up as a support level, and we will look to see if that holds over the next week. There is a lot of resistance on the chart between $27,000 and $28,000, and that looks to be our target for the potential upcoming rally. That is also the mark for a 10% bounce off Wednesday’s lows.
Keep your eye on that range.
Click here to see full-sized image.
While the current landscape of the crypto market might seem daunting, it's crucial to take a step back and look at the bigger picture.
The recent upheaval is but a ripple in the grand ocean of the cryptocurrency revolution. There are still promising signals of growth on the horizon, and the potential success of BlackRock's Bitcoin spot ETF application is a tantalizing prospect.
Despite the SEC's offensive, the resilience of the crypto industry is not to be underestimated. In the face of regulatory uncertainty, the potential for positive change and growth remains.
Best,
Juan & Alex
