Dollar Index Weakness Tempts Crypto Bulls

28.11.22 12:59 AM By Stormrake

After a brutal year for crypto investors, there may be some hope left in 2022 as the Dollar Index parabolic run looks to have come to a close. We remain hopeful that a Christmas rally is set to be delivered to risk assets and it begins with continued weakness in the US dollar.

The information contained here is for general information only. It should not be taken as constituting financial advice. Stormrake is not a financial adviser. You should consider seeking independent financial advice prior to making any personal investments.

DXY Breaks Parabolic Run

Interactive chart: click on image for higher resolution

An incredible amount of strength and demand had been ushered into the US dollar as the FED raised rates and began its tightening cycle. This created a structural bid on the USD and caught many large institutions and sovereign states short on liquid USD. When taking into account large USD denominated debt that has become a lot harder to service due to rising rates, the increased demand for liquid USD also rises to meet this debt obligations.
All of this created a parabolic run for the most of 2022 but had become broken towards the end of October, this caused Bitcoin and other crypto assets to track higher throughout Q4. We unfortunately had met the FTX collapse and deleveraging which has understandably sent prices across the crypto industry a lot lower. With that risk and potential contagion now known, we're well set up for a Christmas rally should continued USD weakness remain.

wBTC Latest Contagion Victim

Image Credit: @Messari_Jack on Dune Analytics

Alameda research was one of the largest merchants taking on wbTC/BTC conversions. The tokens are “minted” when a user makes a request to a merchant, who then makes a transaction with a custodian who sends them wBTC in exchange for the $BTC which will be held in custody. When the user wants to redeem their BTC, the merchant will initiate a “burn” transaction with the custodian, returning the original asset and burning the wrapped token. The problem here lies with the fact that Alameda research, the defunct trading arm that allegedly embezzled client funds as FTX had sent them user deposits, so there are now concerns that the wBTC transactions are either fraudulent or have no Bitcoin backing. This has led to a stress test and slight depegging of the wBTC/BTC price. Impacts are yet unbeknown but we will be watching this development and update through our morning note accordingly. For brave arbitrageurs there is an opportunity here but should be aware of the significant risk of further depegging before wading into arbitrage waters.

BTC/USD key levels

Bitcoin is now well and truly entrenched at the key level of $16,500 USD having traded within a tight 2% range of that price for close to a week. For any meaningful move to the upside to occur, we need to see $17,189 get a strong test, if we close above this level then a sharp move to $18,217 cannot be ruled out. To the downside, we will be watching for a break and close below $15,588. Should we close below this level (2022 low) then the next level of support comes in at the critical level of $14,444.

ETH/USD key levels

Ethereum is currently testing its key pivotal level of $1,190 USD. Should it manage to hold above $1,190 and close the daily chart above this level, then we will watch for a strong move to $1,333. If the upside momentum is particularly strong, a retest of $1,472 cannot be ruled out. To the downside, if we lose $1,190 then we will look for a move to $1,071. The next major level support comes in at $1,000 even and could occur if we close below $1,071 on the daily chart. Currently ETH is deflationary since post-merge but the slowdown in network activity has led to a net increase in supply emissions over the last 7 days.

Activate Your Brokerage Account

Get Started

If you enjoyed this Morning Note, feel free to open an account and gain access to more proprietary research and work with your very own dedicated crypto broker.

No Advice Warning

The information in this newsletter is general only. It should not be taken as constituting professional advice from the author - Stormrake PTY LTD.

Stormrake is not a financial adviser and does not provide financial product advice. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your unique circumstances. Stormrake is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by this newsletter.

Disclaimer

All statements made in this newsletter are made in good faith and we believe they are accurate and reliable. Stormrake does not give any warranty as to the accuracy, reliability or completeness of information that is contained here, except insofar as any liability under statute cannot be excluded. Stormrake, its directors, employees and their representatives do not accept any liability for any error or omission in this newsletter or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided in this newsletter is owned by Stormrake. You may not alter or modify this information in any way, including the removal of this copyright notice.

Copyright © 2022 Stormrake Pty Ltd, All rights reserved