Monthly Chartbook - Crypto vs. Macro Battle Heats Up

The Monthly Chartbook is a collection of interesting charts and trends we’re watching across crypto and markets. This month’s edition focuses on:

• Market Bottoms & Macro Headwinds
• Crypto Market Review – Market Structure & On-Chain Observations
• L1s, L2s, & DeFi Analysis
• NFTs & Gaming Sector Breakdown

Market Bottoms & Macro Headwinds

In our latest Pro markets report, “Liquidity Runs The World”, we discussed the importance of global liquidity as a key determinant for the direction of asset prices. We noted how expansions and contractions in global liquidity are cyclical, and right now we’re still in the downtrend of the cycle.

We’ve likened the crypto market to one of the most levered bets on global liquidity expansion, and we cited the decline in global liquidity growth as one of the biggest risks to the crypto market at the start of the year.

This is critical now more than ever because everyone is focused on central bank rate hikes. While a pause in rate hikes may be the spear that pierces this bear market, in order for us to see a recovery like that of 2020-2021, we likely need to see a reversal in the trend of global liquidity. That’s the big kicker in our view, though we’re unlikely to see either until we get confirmation that inflation has actually peaked (or until something breaks).

This week’s CPI print was one of the most important yet as it added support for the camp who believes peak inflation is behind us. The deceleration in both headline and core CPI is breathing some relief into the market with crypto and equities rallying alongside a decline in UST 2-year yields and a weaker US dollar.

Regardless of whether CPI came in above or below expectations, we expected to see some short-term volatility after its release. Since the start of 2021, when inflation concerns really started bubbling up, BTC has significantly outperformed after headline CPI misses or comes in in line with expectations compared to instances where we get an inflation beat.

Some of today’s price action is being driven by repositioning, as last week’s blowout jobs report shifted market probabilities for a third 75bps hike in September to ~75%. Fed fund futures now indicate a ~44% chance of a 75bps move. The implied fed funds rate is down 10-15bps for every meeting beyond September compared to where futures were priced yesterday. Many were hoping the July CPI print would give us a better clue as to whether the Fed will be able to loosen its tight grip on financial conditions sooner rather than later. For context, US financial condition “tightness” peaked on the same day that BTC and crypto bottomed in June. The pullback in oil prices should provide some inflation relief for consumers. Yet core CPI, which removes food and energy prices, is still a problem. Concerns over services inflation and a potential wage-price spiral are a threat to the peak inflation narrative. Even though we saw a deceleration in the July CPI print, there’s still plenty of justification for the Fed to hike rates at least another 50bps in September, with the potential for more tightening before year-end.

The jury is still out as to whether the bottom is in or if this is just a bear market rally in risk assets. Interestingly, the volume of news stories citing the term “bear market rally” has surged, similar to what we saw back in Q1 2020, Q1 2019, and Q1-Q2 2016, all of which turned out to be early stage price recoveries. (For more on Market Bottoms, you can read our previous Pro report on it here.)

US equities are coming off their best month since November 2020. Similarly, July was the best calendar for BTC since October 2021. Yet bitcoin and the broader crypto market are still extremely oversold relative to historical norms… …but the market must get through the late summer / early fall period first, which tends to be a volatile time for BTC and crypt