EMC Labs June Report: The high interest rate environment for the US dollar is about to end, and BTC is likely to start its autumn rally

Author: 0xWeilan, EMC Labs

++The information, views, and judgments regarding markets, projects, currencies, etc., mentioned in this report are for reference only and do not constitute any investment advice.++

After the COVID-19 crisis, the "story" of the United States harvesting other economies through the "dollar tide" by leveraging the dollar's status as the world's largest reserve currency seems to be turning into reality. Economies are under pressure, and the yen-to-dollar exchange rate has fallen to its lowest level since 1986.

------On June 5, Canada cut interest rates, and on June 6, the eurozone followed suit. Why hasn't the Federal Reserve cut rates yet?

------Because only the yen's exchange rate has collapsed; it hasn't had its fill yet.

Europe can't hold on, Canada can't hold on, only the U.S. can. The dollar index continues to rise, putting immense pressure on equity markets.

Under the immense pressure of macro-finance, the crypto asset market ended May's rebound with a 7.12% decline in June, continuing the deep consolidation after BTC reached an all-time high. This consolidation has lasted nearly four months, with few sectors in the entire crypto market showing independent trends.

Although the inflow of stablecoins has recovered to $856 million from May, it remains at a low level. The ETF channel saw inflows of $641 million, far below last month's $1.9 billion.

On-chain activity has shown a bifurcation. On one hand, BTC data continues to deteriorate; on the other hand, public chains like Ethereum and Solana remain active. These data points lead people to believe that the bull market is still alive, and the blood has not yet cooled.

Macro Finance

On June 12, the U.S. released the May CPI, which fell by one percentage point from April to 3.3%, below the expected 3.4%. Thus, in a high-interest-rate environment, the U.S. CPI has now declined for two consecutive months. Meanwhile, the PMI data from the corporate side dropped from 49.2% to 48.7%, accelerating contraction, which also supports the downward trend of the CPI.

The economic data's decline exceeded market expectations, raising rate cut expectations, causing the Nasdaq to continue to price in rate cut expectations. Ultimately, the Nasdaq rose 5.69% in June, achieving two consecutive months of gains. Although the S&P 500 index did not reach a new all-time high as strongly as the Nasdaq, it maintained a monthly upward trend.

In June, the Nasdaq surged 5.96%, setting a new all-time high

The newly released non-farm payroll data on June 7 greatly exceeded the forecast (182,000), reaching 272,000. The market pointed out that there are significant issues with the statistical methodology of this data, which may suppress rate cut expectations.

The market is choosing the direction it wants to believe in, such as rate cuts. The interest rate swap market still has funds betting on two rate cuts in 2024, and UBS claims that the market has underestimated the magnitude of this round of rate cuts, even predicting that the "first cut" is still in September. Against the backdrop of the dollar index breaking 106, the Nasdaq continues to set new highs, indicating that these bullish funds are betting based on their own judgments.

In June, the U.S. government and the Federal Reserve released "hawkish" statements that may have reached their highest levels this year. Treasury Secretary Yellen stated, "I see no signs that the U.S. is about to enter a recession," while Federal Reserve Governor Bowman emphasized, "Inflation still has upward risks, and there may be zero rate cuts in 2024."

Although the CPI has declined for two consecutive months, the strength of employment data allows the Federal Reserve to buy more time to maintain high interest rates, waiting for the CPI to approach 2%.

The high-interest-rate environment of the dollar puts immense pressure on global capital markets, and the crypto market is no exception.

++EMC Labs believes that with BTC reaching an all-time high, some investors are locking in profits and continuing to sell, while the high dollar interest rates significantly reduce the funds flowing into the crypto asset market, ultimately leading to selling pressure that cannot be absorbed by sufficient buying power. This is the fundamental reason why the current crypto market cannot effectively break through and is even continuously challenging the lower bound of the adjustment box.++

Crypto Market

In June, BTC opened at $67,473.07 and closed at $62,668.26, down $4,804.15 or 7.12% for the month, with a volatility of 20.10% and trading volume shrinking for three consecutive months.

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BTC Monthly Chart

In June, BTC's performance diverged from the Nasdaq, which surged 5.69%, as BTC fell 7.12% for the month, losing most of May's rebound.

++Technically, influenced by the BTC distribution from the Mt. Gox exchange and the German government's BTC sell-off news, BTC's price retraced to the rising trend line since October last year on June 24 and rebounded from the bottom. On the same day, BTC's price also completed a retracement to the lower bound of the new high consolidation zone (i.e., $58,000). These two technical trend lines provide relatively strong support, and thereafter, BTC's price rebounded above $63,000, temporarily safe, but still uncertain in the medium term.++

BTC Daily Chart

Due to expectations of an imminent ETF approval, ETH's performance was slightly stronger than BTC's. This month, the ETH/BTC trading pair basically retained the gains from May's ETH rebound and did not significantly retrace, indicating that industry capital in the market is still betting on the launch of the ETH ETF.

The ETH/BTC trading pair has basically retained the gains from May's ETH rebound

The ETH ETF is likely to be approved for trading in July; however, under the current background of severe funding shortages, once the good news is realized, ETH may face significant selling pressure in the short term. After formal trading begins, will the ETH ETF bring in a considerable net inflow of funds like the BTC ETF? Currently, the outlook is not optimistic.

Capital Flow

A bull market is primarily a phenomenon of capital.

Based on the sources of funds, we can divide BTC's performance since last year into four stages------

BTC Market Phases from January 2023 to June 2024

2023.01~09: Net outflow of stablecoins, with buying power coming from on-site profit-taking funds replenishing positions, raising BTC's price from $16,000 to $32,000;

2023.10~2024.01: Driven by BTC ETF approval and halving expectations, net inflow of stablecoins turned positive, leading to continuous price increases, pushing BTC's price from $32,000 to $49,000;

2024.02~04: After speculative funds withdrew following the approval of the BTC ETF, fiat funds and stablecoin channel funds continued to flow in, pushing BTC to a new high of $73,000. Because the inflow of ETF channel funds exceeded expectations, BTC reached a new high for the first time before the halving. Starting in January, profit-taking from both long and short positions began to sell off massively to lock in profits, peaking in early March, after which BTC's price peaked and began to correct.

Statistics on Long-term and Short-term Investors Selling BTC

Although in March and April, the stablecoin channel saw net inflows of over $8.9 billion and $7 billion respectively, massive sell-offs consumed all buying power, and BTC's price stagnated at $73,000.

2024.05~06: After March, BTC's price entered a new high consolidation area. The previous large-scale clearing led to a complete extinguishing of market bullish sentiment. Under the pressure of high dollar interest rates, the inflow of fiat funds and stablecoin channel funds rapidly shrank to $3.41 billion and $8.56 billion in May and June. After constructing a new high between $58,000 and $73,000, BTC is now consolidating and waiting for new funds to enter.

Monthly Changes in Major Stablecoin Supply (Chart by EMC Labs)

A bull market is characterized by new funds flowing in under an optimistic backdrop, re-evaluating and pushing asset prices higher, while long-term holders sell to lock in profits after prices rise. During the development of a bull market, sell-offs often occur in several rounds; what recently happened was just the first round, and the next sell-off will occur after achieving higher prices.

Statistics on Inflows and Outflows of 11 BTC ETFs in June (Chart by EMC Labs)

Since the approval of operations in January, BTC ETFs have been seen as an important new inflow channel for the crypto asset market. Since January, a total of $13.882 billion has flowed in across all channels, but starting in March, as BTC's price stagnated at $73,000, the inflow scale has shown a gradual downward trend.

In June, the inflow of ETF channel funds was $641 million, which is quite close to the $856 million from the stablecoin channel. In last month's report, we suggested that "ETF channel funds are expected to become an independent force for pricing BTC." With the growth of scale and the gradual independence of decision-making, the funds from this channel are expected to take on this responsibility, and its scale and behavior deserve continuous attention, but it is still difficult to bear this responsibility at present.

Market Supply

In a bull market, long-term and short-term investors adopt different valuation systems for BTC, and ultimately, after the price rises, BTC flows from long-term investors to short-term investors, and value is transferred accordingly.

Accordingly, two phenomena must occur in a bull market: "capital inflow" and "the transfer of BTC holders," which mutually influence each other and shape market trends together. In the previous section, we analyzed the capital inflow situation; in this section, we focus on the changes in BTC holder groups.

By analyzing the holdings of long-term investors, short-term investors, exchanges, and miners since last year, we found that in the first 11 months of 2023, long-term investors were increasing their positions while short-term investors were reducing theirs. The turning point occurred in December, when BTC's price approached previous highs, and long-term investors began to distribute their chips while short-term investors started to increase their holdings. As BTC's price reached an all-time high in March, this game of chip exchange peaked. Afterward, the price began to collapse, and the scale of long-term investors' sell-offs rapidly shrank in April. In May and June, this selling completely ended, and long-term investors began to accumulate chips again.

Analysis of Changes in Holdings of Long-term Investors, Short-term Investors, Exchanges, and Miners (Chart by EMC Labs)

From March to May, the chip exchange around BTC's previous high price of $69,000 was one of the main activities in the market cycle, indicating the progress of the first phase of the bull market. Chips held by low-frequency traders (long-term investors) flowed into the hands of high-frequency traders (short-term investors), leading to a sudden flood of market liquidity, which consumed all new funds sold vigorously, causing prices to drop, speculation to cool, and after the passionate frenzy, the market returned to a stage of hesitation.

Will the bull market come to an abrupt halt? We turn our attention to previous rounds of bull markets.

Statistics on Long-term Investors' BTC Distribution

As indicated by the green boxes in the chart above, in the past three bull markets, we have observed that long-term investors tend to conduct two rounds of large-scale chip sell-offs to lock in profits after price increases. The first round of sell-offs pauses the price increase, while the second round destroys the market. Historically, the first round of sell-offs lasted 3 months, 9 months, and 4 months, respectively, and this round lasted exactly 4 months from last December to March, matching the previous cycle.

According to historical patterns, after the first round of sell-offs, long-term holders return to an accumulation state, waiting for price increases. As shown in the red boxes in the chart above, when prices continuously set new all-time highs, they return to a reduction state for ruthless selling. This method of phased sell-offs to lock in profits aligns with the behavior patterns of long-term investors and the laws of market movement; therefore, we believe this selling pattern still applies to the current crypto asset market.

++Based on this, EMC Labs judges that the recent large sell-off was just the first round of selling in the bull market. As long-term investors return to an accumulation state, market selling pressure will decrease, and once funds flow back in, the market will regain upward momentum. At that time, the market will welcome the second and most lucrative phase of the bull market. The end of the high-interest-rate environment for the dollar is likely to occur in the second half of this year; therefore, although market confidence is currently low and trading is light, we remain optimistic that BTC is likely to start its rally in the fall.++

Conclusion

Market movement is a process of interaction between internal and external factors.

In the first half of 2024, on-site long-term investors conducted the first round of sell-offs, locking in over $10 billion in profits, and have now returned to accumulation.

After the approval of 11 BTC spot ETFs in the U.S., the ETF channel has seen nearly $14 billion in inflows, with an additional 240,000 BTC holdings, bringing the cumulative holdings to 860,000 BTC worth $53.1 billion.

Considering that this record was achieved in a high-interest-rate environment for the dollar, such market performance is already quite remarkable.

The dollar has not yet initiated rate cuts, and the pressure on global capital markets has reached unprecedented levels.

The first phase of the bull market is coming to an end, while the second phase has yet to open. We judge that the variables are likely to occur in the fall.

The biggest risk is an unexpected rate hike by the Federal Reserve and an increase in the scale of U.S. Treasury bond sales, along with the distribution of BTC from Mt. Gox and the U.S. government's sell-off of its BTC holdings.

Now is likely the most oppressive and painful moment before the heavy rain falls.

EMC Labs (Yongshi Laboratory) was founded in April 2023 by crypto asset investors and data scientists. It focuses on blockchain industry research and crypto secondary market investment, with industry foresight, insights, and data mining as core competencies, aiming to participate in the thriving blockchain industry through research and investment, promoting the benefits of blockchain and crypto assets for humanity.