Inflation will be back, macro=liquidity, hot crypto narratives
Our Annual Macro & Crypto Outlook report last month suggested we continue to DCA in BTC, ETH & Alts and that inflation would temporarily come off. While we were bang on the Macro and DCA front, we should have been more aggressive in hindsight. Like most investors and crypto colleagues, I did not take many large positions in December but some long term alts that we discussed in the report, paid well. Not just crypto, most risk asset has enjoyed a massive belated Christmas rally. Once again markets confirmed to us that you cannot be a Bull or a Bear maxi. Always be in a Kangaroo mentality — anticipating, watching and enjoying each ride (cycle) for a successful long term career.
As we approach end of February, every investor is trying to answer these basic questions:
- Am I too late to participate in this rally when some stocks are up 50% and some crypto are up 5–10X in January alone?
- What does it mean for remainder of the year? Both for macro as well for crypto?
- Do I become more aggressive on my Venture bets? Should I ask portfolio companies to launch tokens?
- Which narratives did well in January and what are the next narratives that I can catch early?
In this month’s report, we will try to answer these and build a mental mode around these.
TL;DR
- Risk assets continue to pump in Q1 in anticipation of US FED rate pause in March. But FED could delay a pause as inflation stays sticky or comes back. So we ned to be cautious post Q1. There could be little hiccups on the way as other CB’s turn hawkish & continue to pump liquidity into global banking system.
- Commodities & Chinese stocks continue to rally as China opens and demands more raw materials
- Global liquidity and Inflation starts to gradually come back in Q2/Q3 as Asia continues to fuel liquidity (China, Japan) and employment (and hence demand) stays strong. Extent of that comeback is still uncertain but should be clearer around March / April.
- If FED threatens to raise rates again, or actually does, will depend on how aggressive the new inflationary numbers are. Depending on how aggressive central banks get, something could fundamentally break in 2024. This should force FED to turn around and announce liquidity injection again in an election year (QE) and markets begin their rally again.
- As for Bitcoin & crypto in general, 50% rally in January gives good odds that we have transitioned from a bear market into the early stages of a new bull market which will peak post 2024 halving. We continue to watch closely but in the short term I think, there is room for little more upside towards 29K levels.
Macro = Liquidity, but not just US Liquidity
Macro is all about Liquidity — money in, and money out of the system. Keep an eye on factors that increase or decrease liquidity (i.e. credit in the system) and you have outrun majority of the crowd. That is why our Annual Macro & Crypto Outlook Report 2023 was titled “LIQUIDITY”.
When it comes to Liquidity — most of that is derived from central bankers printing machines, most important of all those being the Federal Reserve (FED) that has been on a massive tightening spree in 2022. However, FED is “considering” pausing that rate hike as:
- Inflation is spiralling downward (for now at least, temporarily in our opinion)
- US FED will be paying around 800 billion in interest payments alone, and rising.
- Debt ceilings are a constant threat and Treasury will have to spend about $500 million by July from reserves (liquidity injection)
- Countries are start to question the authority of the dollar which is one thing that US or the global financial markets cannot afford
- While markets are bracing for a soft landing now, any massive rate hikes and we could be in a severe recession mode — not good for risky investments
FED has to pause, and IMO will pause around Q2 unless inflation comes back roaring again and wages stay strong. As of now markets are pricing a soft landing, slowing inflation and pricing in another two hikes of 25 bps each.
Consequently, everyone is rejoicing US FED’s upcoming “pause” and markets are rallying again as if no one’s business. Randomly fooled? Or the intelligent investor? Putting my Kangaroo hat on, I believe you live in the moment. You can choose to jump into risky assets you love but most have rallied obnoxiously already. From here on, one should be very careful and narratives that excite you, but this rally has some legs. Barring any new war or escalation of existing ones, this could at least continue till March / April and perhaps beyond. We would be in a better position in our February and March monthly reports to assess that. For now, some long risk asset positions should not hurt. Longer than before.
Longer than before, but how long?
While shorter term markets look healthy, I am also paying close attention to what’s happening elsewhere — especially here in Asia. Recent dovishness by ECB, BoJ & China mean that globally inflation is still high, although coming off from the peak. Most central bankers are still pumping liquidity, including FED — if you take Treasury and Reverse Repo into account as well.
At the same time, China is opening and there will be a huge surge in demand as the government there pushes credit to its’ citizens. Also, keep in mind that a lot of USD bond interest goes to China. That is, China earns hundreds of billions of dollars in interest every year. They need an outlet to spend those. Gold? Commodities? Assets? Bitcoin via HK?
China, Japan and ECB are doing what they know best — pump liquidity and print more. All of them have a different set of problems but similar tools. Japan is trying to control the yield by pumping hundreds of billions of dollars every month. China is trying to revive their economy after COVID stalled them for years and need to bring back industries and jobs. ECB is still fighting inflation and have their own geopolitical and war related issues and have taken a hawkish stance. Global liquidity is still on rise. That means inflationary pressures could come back soon.
Playbook — When inflation comes back
1. Risky assets should continue their run into Q1.
2. Commodities should catch a bid soon as China reopens. That should stay the case for remainder of the year I believe. Gold & Silver should do well as countries try to eliminate their dollar risk by buying diversified assets & commodities. Perhaps even Bitcoin. I believe oil, food, agri and fertilisers will pump more vs other commodities as we adapt to a new regime of deglobalization, constant war in CIS, higher borrowing costs and higher raw material demand from China. I am looking at the following:
a. Long. Oil
b. Long Gold, Silver
c. Long Fertilizer
3. Higher commodity prices could lead to inflation in China, which eventually means global inflation.Emerging markets get hit the hardest as countries like India, Pakistan, Philippines etc import most of their finished goods from China. There is very little local manufacturing of quality goods that is unmatched to Chinese scale, quality, prices and delivery. US & Europe are also hit but. Central bankers response would depend on extent of these inflationary pressures. At that point, numbers should speak for themselves. One should be properly hedged for that scenario later on in the year and first whiff, completely out.
4. Eventually higher inflation kills this rally. One should however, keep in mind that relief rallies are notorious for continuing farther and stronger than you can stay solvent. That is why a Kangaroo mentality is apt for years like these. But keep an eye on global inflation numbers, stay hedged and you should be OK. The inflation that we are seeing today is a result of 30 years of excess liquidity, followed by Covid and suddenly a move away from globalisation. The world is gradually moving away from manufacturing in China. But is that really a viable option? Something that took Beijing 20 years to build, cannot be replaced elsewhere in few months. The price you pay for that shift is higher raw material costs aka structural inflation.
5. US FED & other CB’s start to think about hiking again as inflation makes them uncomfortable. FED has other tools mind you and just the fact that they can talk hawkish should be good enough for market to stall. Timing wise I am no God, but if you were to put a bullet on my head — I would say to coincide with BTC halving in May 24 and an election in Nov 24.
6. Dollar rises, and risky assets fall. Something breaks. On a larger scale this time. BoJ / JGB, ECB/ Guilts, sovereign defaults, banks or private markets? This should give you a chance to back up your trucks and be real heroes once again (or real Bulls this time leaving the Kangaroo behind for sometime)
7. US FED goes Brrrrr as something breaks and we are back to a Santa rally
Crypto — Pump the narrative and rotate
Not Financial Advice, DYOR, Read Disclaimer in the end
Most guys I know have been side-lined in this monster January crypto rally. What we collectively failed to acknowledge was a simple fact that there are hardly any sellers left after such a massive FTX November fiasco. If BTC absorbed such a shocker, then I believe we have seen the bottom already.
BTC and ETH
Where do we go from here? Everyone is still hoping that by some miracle, we see $20K BTC again. Barring any negative news on the war front, we seem to be slowly grinding higher from here. Inflation, employment, DXY, Powell, all look supportive at the moment. Where do we go from here? Everyone is still hoping that by some miracle, we see $20K BTC again.
Current support is around 22.5K and then around 20K levels for now. I believe lot of liquidity is waiting to pounce upon that if we see that number. After a little bit of consolidation around these levels, I think BTC could easily head back to $27K and then $29K levels by q1, if not before. Flip side is that we never go back as Macro is so supportive and there seems to be no negative news. We straight way rally to 29K? If 16K to 24K was possible within a month, why can’t we see 35K by March?
ETH seems to be consolidating below $1650 area. It would be a good level to buy below $1600 ETH. Also, With ETHBTC ratio below our levels of 0.069, some DCA back from BTC to ETH wouldn’t hurt for medium-long term holders of ETH. But keep an eye on Shanghai upgrade that will allow users to unstake their ETH
FED has to pause at some point like we said above, but we do not see FED cutting unless inflation and wages both really come in control. With rates mourned 5.25%, economy starts to gradually grind as inflation starts to come back driven by Asian demand and de-globalization in general.
If you believe in trading crypto narratives – then this is a great on from one of my favourites Ansem
L1s & L2s / Arbitrum / Zk Rollups / Scalability
1. We shall soon have Zk Rollups on ZK Sync and Polygon in March as announced. That might give a good bump to $Matic & some Polygon related coins and some Zk tokens $LRC, $MINA, $IMX, $DUSK
2. Matic seems to be ticking all the right boxes – be it gaming, NFTs, Zks, corporate partnerships etc. Don’t fade it. Ive been a big believer in the team for a long time and its paid off very well. Much more to come
3. OP & $Arbi ecosystem coins did well in January but very hard for this narrative to continue to pump from here on. In the end, we need users for these Apps, there aren’t enough of them. Plus markets always moves to new shiny narratives.
4. It could be time for ATOM and $OSMO ecosystem to rise an shine again as Atom interchain security is a major upgrade that will enable smaller chains to inherit the Cosmos Hub’s security.
DeFi / Stablecoins / Liquids Staking
- AAVE is soon going to launch other LSD’s as there are three ongoing proposals to deploy rETH, sfrxETH, and cbETH.
- Dopex is planning to bring synthetic assets and improved tokenomics and could push the Arbitrum/options/dopex narrative again
- Liquid Staking – The hottest narrative currently. But these LSD wars are heating up and we are seeing several innovative solutions daily. FXS has been a great hit as it offers best yields for now. Other LSD’s – RPL, LDO, FXS, SD have done extremely well and we believe this narrative shall continue till Shanghai upgrade. Potential launches from CRV & AAVE are expected soon as well
NFT / Gaming / Metaverse
- $BLUR has been the darling and most happmning narrative in in crypto this month and looks continue to do so for now with som hoping that it readches $10
- This should be great for other marketplace tokens like $LOOKS, $XMON, $X2Y2,$NFTB, $JPEG, $BEND, $NFTX
- NFT lending is another narrative with growing interest especially with tools like NFTFi
Generally – I believe that when it comes to buying NFT projects, keep buying great ith blue chip NFT’s with die hard communities. A project that rewards its holders, is the one to look out for. While BAYC ecosystem, and like of Pudgy Penguins and deGods saw a great rally recently, the one that I think will surprise many is Azukis. We are still down by about 50% but we have also almost tripled from recent lows. If ETH corrects, we might see some correction in blue chips and that might be a good entry point. But if you are a long term investor, that shouldn’t matter at floor of around 15ETH. NFT pumpnomics is different from crypto narratives. It’s about communities and tribes. They are die hard fans and you develop that over time.
As far as Web3 Gaming is concerned, Bankless had an excellent article recently on how we can progress to truly on-chain games. Real web 3.0, not 2.5 state that we are currently in.
It’s worth noting that web 2.5 games still offer stronger ownership rights than traditional games. Web 2.5 games at least avail to players a freedom of exit. Unlike traditional games where assets are protected as intellectual property and cannot be sold, players can sell their in-game tokens and be rewarded for their time.
However, the very thing that makes web 2.5 games better than their traditional counterparts is also what comes up short compared to fully on-chain games. Off-chain game logic deters the game from fully leveraging the potentials of blockchain technology. Only fully on-chain games seriously harness the human ingenuity that open and permission-less blockchain infrastructure allows.
– Bankless
Other Narratives I am Watching
- MEME Coins on new ecos e.g. Canto – with a 300% increase in daily active users and 450% surge in daily active addresses – a favourite amongst De-Fi influencers, a perfect recipe for pumpanomics – high mindshare, solid project fundamentals, etc.
2. Casino / Gambling – Personally, I think the asymmetric upside here is obvious – with 1000x leverage, easy user-onboarding, and smooth payment top-up options, Rollbit RBL is an easily accessible bet on the gambling thesis.
3. DEX & DEX derivative exchanges not only produce revenue but in light of centralised frauds like FTX & Celsius, have seen tremendous growth in transactions and revenue. Some important narrative coins here include:
- $GMX final audits for the synthetics contracts expected to be done soon.
- SUSHI — to launch DEX for perp trading on upcoming Sei Network chain so that could be a good play as well.
- $GNS pumped to ATHs this week, and with their recent launch on Arbitrum + peoples’ belief that this follows a similar performance to $GMX, it’s worth looking into.
4. AI Coins – With the surge of generative Al, projects such as $IMGNAl and $CAl may have a sustained momentum
5. Elon Pump – never fades and is always one tweet away from the almighty. SDOGE and $MASK may catch a bid after Elon Musk’s talks of enabling crypto payments on Twitter
6. Bitcoin NFT’s / Ordinals – could easily be the next narrative that catches fire and th eonly one to play that is to accumulate STX. Thank me later.
But it is OK to miss these smaller relief rallies if you are playing the long term game. What is important however is that when you have 100% conviction – you catch the narrative and play it. If you believe in crypto, and if the markets are down 90% and we have seen the worse already, there is limited downside. Pick your narratives and get your conviction out and go all in to earn outsized returns. This is not financial advise and I am more wrong than right. But don’t be a Tesla shorty either 🙂
