Market Wrap: Bitcoin Inches Higher but Sluggish Volume Shows Reluctance to Invest

Price Action

Bitcoin (BTC) and Ether (ETH) traded higher early Wednesday, pausing a slide that began late the previous day.

• As U.S. traders began the day, bitcoin (BTC) was up 1.8%, rising for four consecutive hours between 12:00 and 16:00 UTC. Trading volume for BTC was below normal, when compared to its 20-day moving average for volume. The lower-than-normal volume shows a lack of investor conviction. The largest cryptocurrency by market cap is now trading below $19,000, and is down 59% year to date.
• Ether (ETH), the second-largest cryptocurrency by market cap, followed a similar path to BTC, although its upward trend began during the 11:00 UTC hour. ETH volume was a bit stronger than BTC’s, with its trading volume exceeding its 20-day moving average. Ether is now down 58% in value for 2022.

Despite the prolonged downturns in both BTC and ETH, some investors see current levels presenting an attractive buying opportunity.

Economic Calendar: Today’s economic calendar is light on key data points that could influence crypto markets, but investors will be eyeing the 22:00 UTC (10 a.m. ET) release of the Federal Reserve’s “Beige Book.” The “Beige Book” is a report that summarizes information on economic conditions throughout the U.S., and is released eight times per year. Fed officials Thomas Barkin, Loretta Mester, Lael Brainard and Michael Barr are scheduled to make speeches on Wednesday as well.

A preview of Federal Reserve Bank of Cleveland President Mester’s speech highlighted the Fed’s continued focus on taming inflation. Mester noted that “it is far too soon to conclude that inflation has peaked, let alone that it is on a sustainable downward path” to 2%.

U.S. Equities: Traditional financial markets rose across the board. The Dow Jones Industrial Average (DJIA), S&P 500 tech-heavy Nasdaq composite index rose 1.4%, 1.8%, and 2.14%, respectively.

Commodities: Crude oil prices reversed course from the prior day, falling 5.6%, while natural gas fell 4%. The price of traditional safe-haven asset gold rose 0.92%, while copper futures declined 0.6%

Altcoins rose, as Polkadot (DOT), Avalanche (AVAX), and Uniswap (UNI) were up 3.5%, 2%, and 2.7% respectively.

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Technical Take

Bitcoin’s relationship to dollar strength highlights macro hurdles.

The strength of the U.S. dollar appears to be one of the only metrics that matters at the moment. In a vacuum, the technical indicators we have referenced often (Relative Strength Index, Bollinger Bands, etc.) indicate that bitcoin remains an undervalued asset. Bitcoin has fallen 59% in value for the year.

Bitcoin’s past RSI readings above 70 and below 30 have occasionally provided signals that bitcoin has been over and/or undervalued. Examples of this occurred in March 2020, April 2021 and November 2021, when BTC prices reversed course following a breach of those benchmarks.

RSI is a technical indicator that captures signals where BTC prices have accelerated too fast in one direction. BTC’s current RSI level of 31 is generally viewed as a signal that the crypto is undervalued and poised for a potential move higher.

Still, whether an asset is undervalued, and the time that asset remains undervalued, are separate questions.

A look at the relationship between the U.S. dollar index (DXY) and the price of bitcoin highlights the inverse relationship between the two assets that began in April and accelerated throughout the year. BTC’s correlation coefficient with DXY in early March reached 0.12, while it currently reads at -0.77. The correlation coefficients range between 1 and -1, with the former indicating a direct relationship, and the latter signaling an inverse relationship.

The Consumer Price Index for August was 8.5%, remaining at a 40-year high. The U.S. dollar index has plunged 14% year-to-date compared to BTC’s more precipitous decline. It has been buoyed both by increases in the Fed funds rate and the commencement of quantitative tightening (QT) by the Fed.

Quantitative tightening is an exercise by which the Federal Reserve reduces the size of its balance sheet by removing liquidity from financial markets.

Ultimately, while BTC technical indicators are signaling traders to buy, Fed actions and the strength of the U.S. dollar suggest that traders should wait.

Additionally, on-chain data also shows a 2% increase in BTC balances on exchanges since Aug. 29. Increased exchange balances suggest bearish signals, as investors often send BTC to exchanges for the purpose of exiting their positions.

Altcoin Roundup

• Binance Introduces Ether Staking in US as It Steps Up Competition With Rivals: Binance will start offering 6% annual percentage yield (APY) to its U.S. customers from as low as 0.001 ETH. Read more here.
• Ether, ADA Lead Steep Crypto Slide Amid Dollar Strength: Some analysts said impending monetary tightening could add to a global rout across major asset classes such as equities and crypto. Read more here.
• Staked Ether Price Discount Widens to Most Since June Ahead of Ethereum Merge: The discount in Lido's staked ether (stETH) is widening, perhaps due to holders switching to ether (ETH) ahead of the Merge. Read more here.

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