Market Trends and Macro

Since entering April, after the short-lived frenzy brought by the meme season, the market volatility has quickly cooled down and the popularity has gradually waned. Based on the current volatility, there will be significant fluctuations in the market in the next week or two to boost short-term volatility levels.

From the market structure shown by the S&P encrypted index, the rebound from the beginning of the year still belongs to a stock game dominated by Bitcoin and rapid rotations of themes. The continuous rise in Bitcoin Dominance also confirms this judgment.

Although the market seems to have gone through a vibrant five months, the early popular projects in our focus token list have all fallen by more than 50% from the highest point of the rebound, and most of them have even returned to the prices at the start of the mid-January market.

From the perspective of theme rotation, we have also observed a clear cycle from Bitcoin leading, LSDfi, AI concepts, DWF collaboration concepts, Hong Kong concepts, Arbitrum Season, to the Meme Season led by Pepe, and even recently, funds have begun to flow back to the LSD concept and even explore smaller LSD-Fi projects. This round of theme rotation has completed its diffusion from large to small, from point to area, with frequent positive news for most thematic tokens and the peak of unlocking, fully completed the speculation, and when a certain theme rises, it will inevitably drain the previous themes, fully reflecting the characteristics of stock game.

From the emotional level, market greed is declining, but overall it remains at a medium to high level. The recent unfavorable start of the Zksync ecosystem and Sui ecosystem has had some impact on market sentiment.

Quantitatively speaking, the current contract position is similar to the peak before the US banking crisis in March, with a slight positive basis in the June quarter. Since May 10th, the market has seen continuous increase in long positions, but it has also encountered heavy selling pressure in the spot market and significantly inadequate liquidity. If these long positions in the contracts cannot be effectively cleared in the near future, it will be difficult for the market to see a trending upward movement.

From a financial perspective, according to Glassnode data, the funding situation in the cryptocurrency market has not reversed its decline. Although the outflow of stablecoins is easing, it still faces continuous pain and bleeding. From our research with some market makers on the front line, we can also intuitively feel that the liquidity of small and medium market cap coins is relatively bleak at present.

Looking at the comprehensive leverage ratio indicator we are focused on, this indicator describes the level of bubble in the cryptocurrency market supported by one unit of stablecoin. Currently, this indicator has reached the upper boundary of the long-term trend. After the recent market rebound, the level of bubble in the market has reached the peak of March and September 2021, which is contrary to intuitive perception. However, the current market is still in a high bubble stage, and the driving force for further upward movement is beginning to show signs of inadequacy.

As mentioned earlier, the cryptocurrency market has entered a historically low volatility zone. In fact, not only the cryptocurrency market, but also traditional equity and commodity markets have experienced the same low volatility state, where all major asset classes seem to be waiting for some kind of signal from the Federal Reserve's monetary policy. The market has entered a period of obvious disorder.

Recently, macro attention has mainly focused on the US debt ceiling and the timing of interest rate hikes, but the market reaction has been intriguing.

For the US debt ceiling issue, if the US cannot repay the debt, then it needs to reduce people's livelihood and ensure interest payments, which is a huge positive for US bonds; Conversely, if the US successfully solves the debt ceiling problem, then debt repayment is more secure, which is an even bigger positive.

Regarding the issue of stopping interest rate hikes, if the US continues to raise interest rates but the economy continues to not decline, it is a big positive for US stocks; If the economy does indeed decline, then interest rate cuts are even more positive.

When both sides of an issue are explained as positives, it is obvious that there is a problem. The lack of substantial improvement in liquidity is the problem leading to the current chaotic era in the general asset markets.

In this chaotic era, the short-term trends of the market are increasingly unpredictable. We can only observe the current market conditions from the perspectives of funds, chips, and sentiment. More importantly, we need to identify the current position in the market cycle.

In previous reports, we have analyzed the on-chain profitability level and the structure of short and long-term holders. The bottom in December 2022 is already the absolute bottom of this bear market cycle, and it is unlikely to fall to new lows in the future. This is also consistent with the halving pattern of previous cycles. The market will stop declining about a year before the halving date and continue to fluctuate for half a year until there is accelerated upside movement after the halving event.

The next six months will be generally within a wide-ranging consolidation range before the halving event. This kind of consolidation is a sufficient prerequisite for the start of the next bull market. From the perspective of chip structure, the conditions for launching a bull market are met only when the average costs of short-term and long-term investors' positions are almost the same.

If we use moving averages as an approximate reference to the average costs of short-term and long-term investors' positions, with the 25-week weekly moving average as the short-term investors' position costs and the 120-week moving average as the long-term investors' position costs, each previous market trend needed a period of consolidation to bring the WMA 25 (blue) and WMA 120 (black) closer together. The essence of this trend is through medium- to long-term chip turnover, allowing long-term holders to exit at a loss and short-term investors to enter and turnover, gradually aligning the costs of short- and long-term investors.

From the chart below, we can see the current position in the cycle. In fact, the strength of this Echo Bubble relative to previous ones is relatively weak, and both BTC and ETH rebounds have failed to reach the WMA 120. Long-term investors will need to wait for the trend to improve before entering the market with confidence.