AGAM Monthly Macro Update (Jun 2022): Boulevard of Broken Dreams (and Arrows)



Most readers here who are Chinese will probably heard of the phrase "五窮六絕", which means "a very poor May, and a brutal June". The market surely lived up to its expectations by giving us one of the worst periods in crypto market history. Worst is, the rest of the financial markets aren't doing any better as they continue to bleed from the ongoing Quantitative Tightening. One word to describe the first half of 2022: Brutal.


Source: Tradingview


A perfect storm has struck crypto markets. Not only has crypto market been dragged by the correlation of legacy markets, the implosion of its ecosystem relating to LUNA and its algo stablecoin UST have triggered a massive credit contagion effect. Some would say we are witnessing a Lehman Brothers equivalent type of credit crisis. Ever since LUNA and UST collapsed in mid-May, many large and reputable crypto lenders started to issue statements to pause withdrawals. Widespread panic ensued as the market is trying to figure out who else is in trouble - only to realize the one of the biggest and most reputable crypto fund is deep underwater.


Crypto has came a long way since 2017 when it was all vaporware and scam ICOs that filled up the entire space. After 5 years there has been a significant influx of institutional money with people of institutional experience operating crypto related companies. Did the crypto market took all the bad apples from tradfi? Why did these "professionals" not learn from the previous global financial crisis and let such an incident repeat itself?

There are so many critical questions and self-reflections all crypto market participants need to ask themselves (including us). Did greed cloud our judgement to the point where we became irresponsible with risk management and assumed everything is "up-only" in crypto? Do we deserve to build and invest in an unregulated market only to ruin things for everyone in the end?

The confidence in crypto centralized finance (or "CeFi") has never been any lower since Mt. Gox exchange went belly up in 2016. Not only centralized crypto lenders exercised poor credit risk management in allowing such a significant amount of exposure in uncollateralized loans, but you also have fund managers potentially misrepresenting its financials to obtain an absurd amount of leverage from almost every major lender in the street without anyone else knowing? What's worse is that these companies were once valued at Billions of dollars from top tier VCs. Clearly there's a misalignment of money favoring portcos to push for growth with no regard for risk management.

Don't get us wrong; this has nothing to do with the issue with crypto. In fact, blue chip Defi protocols such as Maker, Aave, and Compound, all had an orderly liquidation process as per intended. In fact, there should be a stronger advocate for the greater adoption of Defi to restore confidence in the system.

This contagion "rinse" gave a massive wake up call to everyone. To those who don't practice good counterparty risk management; those who become 'degenerate' and over leverage in trading/investing in untested protocols; those who worshipped the 'leaders' of crypto space only to have its dirty secret revealed in a downturn.

As we are going through the second crypto bear market since 2017, it made us realize despite being in a new asset class, the market phenomenon always plays out similar to previous cycles. Over leverage and bad debt killed the traditional financial markets in 2008; the same happened this time but in crypto. History doesn't repeat itself but it often rhymes.


So where do we go from here?

The corn had one of its worst months in history (-37% month over month). As we broke through the 50-month moving average (light green line), a very last minute rally in the last hour of June 30th brought the price back above the previous cycle high (19.9k).


BTCUSD Monthly View


From our previous month's analysis, it appears all high time frame potential divergences (D1 and D3) are all invalidated. On a weekly timeframe, we still see BTC trading below the 200 week moving average (dark pink line) for the second consecutive week which is rather worrying. On the other hand, we see the RSI being in the oversold territory, not seen since the previous bear cycle in November 2018. We're also seeing fear and greed index being at depressed levels since early May. While everything about crypto does seem to be in a bad shape, it is worth noting that these are potentially high value areas from a long term horizon perspective.

As people always say "buy the fear, sell the greed". We're definitely in "fear" territory, but how much longer are we staying here and who will have the courage to buy it?


BTCUSD Weekly View - RSI in deep oversold


Crypto Fear and Greed Index


Looking at the BTC dominance we saw a very interesting phenomenon here where it played off the diagonal breakout plus bullish divergence against RSI; however there was a sharp drop in the last two weeks from 48% back down to 43% - this could be explained by the BTC liquidation cascade that was happening as various counterparties became insolvent, thereby rushing back into fiat or stablecoins - which technically is considered an 'altcoin'.


BTC Dominance Weekly


Looking into the daily timeframe the recent price action is rather ugly due to liquidity being non-existent after crypto users have been liquidated left right and center. Nonetheless, we see that there's a poor low that was formed on the swing low in 18 June, where it was only a few dollars from Dec 2020 Low (pink horizontal line) and would expect the price to gravitate towards that area. If that area is swept, we expect the bullish divergence to potentially form, which could set up for a nice relief rally in July. Until then, we continue to look for short term trading opportunities.



From a fundamental standpoint, nothing has changed much since last month - if not things have become worse as the crypto credit contagion is unravelling. As many firms are still battling for survival, we expect the pain to last for a little longer - combined with the Fed's continued hawkish stance to raise rates at 50-75bps in the next few meetings, we recommend to remain defensive until there are signs of reversal from legacy markets.