Monthly Macro Update - May 2022

The Lunaclipse: When the Moon (coin) darkens the world

We guess the phrase "sell in may and go away" lived up to its expectation this time around. In May we've saw the crypto market wiped off 380 Billion USD of its marketcap (-22%) as markets continue to tumble alongside with legacy amid a hawkish fed stance in curbing inflation. For those who have been living under a rock, Crypto markets have witnessed one of its "Lehman Brothers" (or I'd prefer to compare it with "Long Term Capital Management") moment when one of the Top 10 coin by marketcap have imploded into oblivion. Over 60 Billion USD value have evaporated, wrecking both institutional and retail money (that is just LUNA / UST alone, not counting the whole market in general)

DeFi TVL taking a bit hit in May. Close to 100billion USD value lost over a span of 1 month

By now every mainstream media would have already covered the timeline of events and an ELI5 of how LUNA and its algostable coin (UST) works. We have left links above for those who wants a more in depth read of the whole fiasco. Instead here at the desk we would like to share more on our thoughts and opinion on the implications and how is it going to affect the industry going forward.

Always question the status quo and never put your life savings into something until you fully understand the risks and how it works

While witnessing the carnage live we came across many stories (online and in real life) of people losing their life savings because they've converted most of their dollars into UST. There can be a debate in mis-selling or misrepresentation of how UST is perceived as stable and "always pegged to 1 USD", the fact that it is providing a ridiculous 20% APY should have you put on a devil's advocate hat to understand how and where the yield is generated. A few clicks through google or twitter would have already given you a few opinionated pieces on the sustainability of LUNA and UST which should give you a few warning signs. Took me less than 5 minutes on google to find a picture of how UST defends its peg; if you still couldn't understand how it works or where the vulnerability is then you should not have put money into this in the first place.

Unregulated markets in crypto foster innovation but are also subject to abuse of free markets

Part of why crypto grew so fast is because technically there are no rules in what you can build or create. LUNA and UST is the perfect example of how a social / economical model was marketed so well that its speed of acceptance and adoption outpaced any sort of critical protocol risk management. One can argue that in the “Wild West” of crypto the lack of risk and control is why there are asymmetrical returns in this space; however in our opinion this is valid only to a certain extent any systemic risk is non-existent. The moment a project or protocol starts to become ‘too big to fail’, there needs to be responsibility and accountability of the founders / team to ensure safeguards are in place to prevent any sort of attacks that could cripple the entire industry. From a business standpoint, similar to how a bank prevents a bank run, just a simple withdrawal limit/delay within Anchor protocol could have stopped the avalanche of UST exit while the Luna Foundation and Team buy time to build up a bigger reserve to protect its peg and not let LUNA fall into a death spiral.

Make no mistake Regulators will use the collapse of LUNA / UST as a clear case to hammer down strict regulations in crypto and even Defi.

There have been conspiracies where certain governments have instructed tradfi firms to carry out an attack on LUNA / UST just to use it as an excuse to regulate the industry. Many alleged firms such as Blackrock and Citadel have issued statements denying plus there has not been any hard evidence suggesting this is a coordinated attack. This doesn't mean legacy markets and regulators will not use this as an excuse to further exercise stricter rules in crypto market, as US Senators Cynthia Lummis and Kirsten Gillibrand introduced the latest Crypto Bill to the legislators recently. The focus will definitely be placed on decentralized governance/applications in their possible classifications of a security (or commodity), plus its requirements to register with US regulators. For those who don't want to read the whole bill here's the link for an overall summary.

So where do we go from here?

While we can accept that we are indeed in a bear territory, not all is lost as bear markets are always the best time for traders to play the chop, or long term investors to be shopping for undervalued assets as they accumulate over time.

From a high time frame on the weekly chart, Bitcoin managed to finally edge out a small green candle after 9 consecutive weeks of red. With RSI near the oversold region and MACD showing signs of recovery, with the confluence in D3 and D1 charts it looks like it's setting up for a possible bear market rally.

Looking a bit closer at D3 charts, momentum indicators pointing to a bullish divergence as the spot consolidates around 28-31k. It would be nicer for BTC to make a lower low in the next few candles to form a stronger divergence - of which we believe the bear market rally would have legs to go higher (possibly 35-36k). What you don't want is for spot to grind higher here, forming another possible bear flag.

If you haven't noticed BTC dominance has broken through some key resistance last month and rose from 42% to 47%. This is clearly reflected in ETH where it has still yet to find its weekly green candle (it is in its 10th consecutive red candle as of this writing).

Looking at BTC dominance specifically, we can see that it has rejected off the most recent high (47.72%) - All eyes are on whether it can break through this level and march onto the next key high which is 49%. However, we are in a critical level where if we dont close above 47% this week we could see a bearish divergence formed on dominance - which means alts will have some room to breathe (finally).

BTC Dominance Weekly: pushing to resistance, need another strong close to avoid bearish divergence

If BTC dominance does run out of steam at this level, we have our eyes locked on ETHUSD's price action. As mentioned although it has been on a 10-week losing streak, on D3 and D1 timeframe it is forming a very nice bullish divergence against RSI at the oversold levels. It would be nice if we have one more push to close below $1720 levels before we can possibly make our way up back to 2100-2150 area. For more information on trade setups, please contact us to receive the latest updates on the market.

The fate of crypto markets still lie with the Fed

Reflecting on the crypto market boom from 2020 to 2021, the market has been spoiled by "up only" narratives on the back of the USD money printer working to everyone's favor. Now that has just begun quantitative tightening, expect market conditions and liquidity to become more challenging and until we see the Fed turning a more dovish stance of rate hikes, we hate to say this but markets may continue to chop around for a while - and hence any perceived rally would be considered a bear market rally (as analyzed in the previous section above).

On May 4, 2022, the Fed announced it would be undertaking a “phased approach” of quantitative tightening measures beginning with a 3-month period of unwinding $30 billion of Treasuries and $17.5 billion in mortgage-backed securities beginning on June 1, 2022.

One can argue that QT may not be as bad as it seems; this is not the first time in recent history that the Fed performed rate hikes - as you can see on the graph above the fed hiked its fed funds rate from 0.25% to 2.5% from 2017 to 2019. You can see that the stock market, while choppy initially, did enjoy a nice run all the way to late 2018 before intense fears in the US-China trade war shook the market in December 2018.

Could this time be different? The market is still feeling the early effects of QT (not to mention crawling out of the LUNA bloodbath), and we know that the speed of QT is faster than the last cycle. We may need to take a closer look at how hiking rates will start to affect the credit markets to see if there will be some sort of contagion effect on the debt markets as the cost of funding continues to rise. As we have FOMC again in a week (June 14-15), in the meantime it is better to stay defensive until we see some encouraging signs coming from macro markets.