10x Research: Bearish on the outlook for ETH, expecting new highs for BTC - ChainCatcher

Author: Markus Thielen, 10x Research

Compiled by Azuma, Odaily Star Daily

Editor’s note: This article is a compilation of two market analysis articles released by the well-known research institution 10x Research last night and this morning. In the first article, 10x Research mainly analyzed the pessimistic reasons for the future market of ETH; in the second article, 10x Research predicted that BTC will soon reach a new high.

The following is a summary of the core content of two articles from 10x Research.

About ETH: Why are we resolutely bearish?

In the past month, the market capitalization of Ethereum has risen by 22% to $454 billion, while the fee revenue of Ethereum has decreased by 33% to only $128 million. Fundamentally, this is because Ethereum has become relatively ‘irrelevant’ in terms of transaction activity, with most meme activities shifting to Solana or Layer 2 networks. For deep value investors, this may not be anything new.

From a technical analysis perspective, if ETH falls below the 3725 US dollar level, it may trigger a large number of stop-loss trades. The current trend of ETH appears to be very fragile and has failed to further rise. Many newly established long positions have reached or fallen below breakeven. Cryptocurrency enthusiasts generally refer to this technical pattern as ‘Bart’, which means that the price of a certain token needs to consolidate after a sharp rise, and the price may plummet due to the triggering of stop-loss trades. Our three reversal indicators have all turned bearish.

Historically, June is the second worst performing month for ETH, with an average return of only -7% (September being the worst, at -12%), while the average return for the other ten months is positive.

All in all, from different perspectives such as fundamentals, technical analysis, and cyclical norms, now is not the best time to hold ETH. Another piece of evidence for this conclusion is the excessive stretching of holdings in the futures market (biased towards long positions).

Note: In financial market terminology, ‘overextended position’ is usually used to describe a phenomenon in the market, where there is a large amount of holdings in a specific direction (long or short) in a certain asset or investment product. When the majority of participants in the market tend to take the same trading direction, ‘overextended position’ implies the risk of excessive bias towards this direction.

The open interest of futures contracts has increased from $8 billion in mid-May to $12.8 billion. The financing rate once exceeded 20% for a few days, but has now dropped to 11.9% because no new long positions have been deployed and holding long positions is very expensive. Due to the uncertainty of the approval timing of ETF, more traders may choose to close positions.

The net inflow of spot Ethereum ETFs may also be disappointing. Similar to the case of G BTC, we may see a capital outflow of 50% (4-5 billion US dollars) on Grayscale’s ETH E, while the capital inflow level of other ETFs may only reach 20% of BTC ETF (13.5 billion US dollars in five months), which is about 2.7 billion US dollars. The inflow of 2.7 billion US dollars, compared to the outflow of 4 billion US dollars on ETH E, may put pressure on the price of ETH.

For institutions or asset managers, the reasons for adding ETH to their multi-asset portfolios are not sufficient. ETH is not positioned as digital gold, and its trading volume only accounts for a small fraction of Bitcoin, which poses a certain liquidity risk. The current risk-free interest rate in traditional finance is about 5.2%, while the staking yield of ETH is only 2.6%. Therefore, the incentive for traditional finance to buy ETH ETFs is also small, not to mention that staking is not allowed for ETFs at the moment.

It is still uncertain when the SEC will finally approve the spot Ethereum ETF (S-1), while U.S. President Biden has just vetoed the Congress resolution S AB-121 aimed at overturning it, once again confirming the government’s opposition to cryptocurrency. The ETF can only start trading after the S-1 form becomes effective, but the timetable for SEC approval of these S-1s is still uncertain (it could be today or several months later). Under the favorable impact of the approval on May 23rd of the 19b-4, ETH jumped from $3,000 to $3,600 and climbed to $3,800 in the following days. Considering that the U.S. government has just conveyed new information that is not so friendly to crypto (Biden’s veto), is this over 25% increase reasonable?

We prefer Bitcoin, even if S-1 is approved, the outflow of ETH E will also put pressure on ETH. Overall, ‘going long on Bitcoin, shorting Ethereum’, ‘selling Ethereum call options, buying Bitcoin call options’ may be a more winning trading strategy.

For ETH, $3725 will be a crucial level (at this point, we will close all long Ethereum positions). If ETH falls below this level, we may see a large number of stop-loss trades being triggered, pushing ETH’s price further down, which may even weigh on Bitcoin’s struggle to reach new highs.

About BTC: Will there be a new high?

We have emphasized the reasons for being bullish on BTC in our three reports on May 21, May 26, and May 30.

For traders, it’s time to take on more risk to get a bigger Beta. As predicted, Bitcoin mining-related stocks are also pumping. Influenced by Tether’s $100 million financing (possibly increasing by another $50 million), Bitdeer rebounded by 13% last night, and Bitfarms, as one of the major participants in the industry, also experienced a rebound.

The U.S. economy is slowing down, but currently, this is actually a good thing. The GDP growth rate is only slightly above 1%; the ISM manufacturing index has been in a contraction state for several months in a row; employment is continuously weakening, which has a negative impact on consumer spending; last night, another key and forward-looking employment indicator appeared - job vacancies have significantly slowed down. All of these will lead to a decrease in inflation.

We will get more employment data this Friday, and next week we will get the CPI inflation report. The trend of Bitcoin will adjust its direction based on the level of CPI (Bitcoin will be bearish if CPI rises; bullish if CPI falls). If the growth rate of CPI is 3.3% or lower, it is likely to push Bitcoin to a new all-time high.

On May 15th, when the inflation rate reached 3.4%, lower than the previous month’s 3.5%, we turned bullish, and the price of Bitcoin was close to $62,000 at that time. This price happened to coincide with our model, as our medium-term trend model originally predicted that if the price of Bitcoin could reach $65,000 on May 16th, we would turn bullish. If the closing price exceeds $71,500 (the recent price is $70,500), it will trigger another buying signal.

Bitcoin has now broken through the smaller triangle range (purple line) shown in the chart, and the larger triangle range (purple dotted line) may also be broken around $71,500. If the decline in US employment or the drop in inflation can allow Bitcoin’s price to close above this line, we will firmly set the target price at a new high, which may be achieved between this Friday and next Wednesday. Therefore, we expect Bitcoin to reach a new all-time high (above $73,500) by the end of next week.

The SEC recently issued a risk warning about cryptocurrencies. This pattern has appeared before the approval of Bitcoin spot ETF and other SEC-regulated cryptocurrency products, which may mean that the S-1 form of the Ethereum spot ETF will be approved soon. Nevertheless, we still prefer Bitcoin and will return to Bitcoin position again.

Since Saturday, the additional open positions of Bitcoin futures contracts have increased by 1.6 billion US dollars. Last night, Fidelity’s spot Bitcoin ETF saw an inflow of 378 million US dollars, Ark’s ETF saw an inflow of 140 million US dollars, and BlackRock saw an inflow of 275 million US dollars (a total inflow of 880 million US dollars in one day), the second-highest value in history.

The options market expects that the volatility of Bitcoin will be around ± 6.6% by the end of next week. If it rises, the target price will be $76,000. The implied volatility is still relatively expensive, around 52-53%. Building a long leverage position through perpetual futures or Bitcoin mining companies may be a better strategy.

In short, Bitcoin may soon reach a new historical high, and now is the time to take on more risk and build larger positions.