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Market Lab Report - China on crypto; AI meme rockets; UK inflation calming

Market Lab Report

by Dr. Chris Kacher

The Web3 Evolution Will Not Be Centralized™

China's love-hate of cryptocurrencies

In September 2021, China banned cryptocurrencies that pushed crypto companies into locations such as Singapore, Dubai, and Malta. China has now given Hong Kong the right to allow retail trading of ten major cryptocurrencies. 

Hong Kong is also pressuring international banking giants such as HSBC and Standard Chartered to on-board crypto exchanges as clients. HSBC clients can now trade Bitcoin and Ethereum ETFs listed on the Hong Kong exchange from their bank accounts.

Meanwhile, the US with Operation Chokepoint 2.0 and the majority of the world are installing measures to cripple the industry, though the US is likely going to try to control it via major institutions such as Blackrock and Fidelity. 

China continues to print via QE to stimulate their economy while most other countries are tightening. China’s prime rate for lending from June 2018 to June 2023 continues to fall.

China Loan Prime Rate

Global liquidity had overall been shrinking but in early July, it started to expand again, likely due to China. But this expansion may be short-lived. We will continue to closely monitor the situation. We also received positive news that Ripple (XRP) was ruled in court not to be a security when sold to retail investors, but is a security when sold to institutional investors. Cryptocurrencies got ahead of themselves on the announcement as they quickly reversed the large one day gains the very next day. That did not stop Dan Morehead, founder of Pantera, with his admired track record from saying he believes the bear market in crypto is over because 1) he thinks bonds still carry high risk therefore capital will flow into crypto instead, and 2) he said, “Having traded 35 years of market cycles, I’ve learned there’s just so long markets can be down. Only so much pain investors can take. It’s been a full year since TerraLUNA/SBF/etc. It’s been enough time. We can rally now.”

This seems premature since Bitcoin's cycles are getting longer each time when taking a look at a weekly chart of Bitcoin. The bear market that began in Dec-2013 went for about 21 months before it finally got legs. The next major bear that began in Dec-2017 went 28 months. The current bear has only run 21 months. Plus liquidity in the form of both M2 and stablecoin USDT+USDC is lacking thrust when compared to prior bull markets.

Further, comparing realized cap to market cap, we get a relative historical valuation model of how high the current marginal trading price is relative to realized, which when divided by circulating supply can also be viewed as the aggregated cost basis of the market.
While some claim that most are bullish, this sentiment is not yet being reflected in the underlying derivatives data, at least relative to euphoric periods of speculative mania such as early or late 2021.

In consequence, we are likely still in the midst of this bear in the current Bitcoin cycle with the possibility of retesting cycle lows similar to March of 2020 still there.

On a daily chart, Bitcoin is currently attempting to hold support at the 20-dema which could be treated as a lower-risk long entry spot using the 20-day line as a selling guide but the overall lack of thrust and follow-through following Thursday's big-volume pocket pivot move is not constructive. Still, this ruling is considered a significant win for Ripple and the broader crypto industry, as it challenges the SEC's position on XRP.

AI-meme dance continues

The uptrend in the major averages that are heavily weighted in AI-meme stocks such as the NASDAQ Composite and S&P 500 continues. US liquidity is still lagging so may become an issue if it falls much further.

Meanwhile, major AI-meme heavyweights also continue higher overall. We reported on a few of these last month that offered lower risk entry points, typically by way of pocket pivot, volume dry up, or falling to a logical area of support such as a moving average that had not been yet violated for many weeks if not longer such as in the case of AAPL's, META's, and NVDA's respective 21-dema's. One could start a 1/2 position once any of these names violated their 10-dma then rounded out their position once it touched the 21-dema.

I remember in strong bull markets, a number of quality names would behave in this manner where I would use the 10-dma as a place to add to or subtract from positions. This worked well in the trending markets of the 1980s and 1990s but less so in the Era of QE until the AI-meme parade started. FAAMG tech juggernauts have monopolized such that their 10-dmas and 21-demas have not been violated for many weeks if not longer as they trended higher. Seykota's quote is a good reminder of the trend being your friend until the end when it bends.

UK inflation also calming

Finally, UK inflation figures released earlier by the Office for National Statistics showed that its CPI fell to 7.9% in the year to June from 8.7% in May. This was the lowest reading since March 2022 and below analysts’ expectations of 8.2%, but remains way above the Bank of England's 2% target. Meanwhile core inflation - which excludes energy, food, alcohol and tobacco - fell to 6.9% from 7.1%, versus expectations for it to remain unchanged.

The US, by contrast, has a rate of inflation sitting around 3%, but still also above the Fed's 2% target rate. CME Fed futures predict one more rate hike at the next meeting then a long pause before rates are reduced six times next year to a target rate of 375-400 bps.

This bodes well overall that the rate of inflation, that is, how much inflation is increasing, not the rate of the underlying inflation, on a global level from major countries is falling.
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