EMC Labs September Report: The Dust Settles, Chaos and Conflict at the Start of Monetary Expansion

Author: 0xWeilan

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

On September 18, the Federal Reserve initiated a rate-cutting cycle, with the first cut being 50 basis points. This marks the complete end of the rate-hiking cycle that began in March 2022 and indicates that the Federal Reserve and the U.S. government believe they have successfully completed the task of liquidity recovery against the excessive money supply caused by the pandemic, shifting their focus to the negative effects of this "strong medicine"—the harm to the economy and employment. One of the best ways to prevent economic damage is to return the money supply to an expansionary cycle.

On September 24, the Chinese government announced unprecedentedly aggressive monetary policies targeting the economy, stock market, and real estate market, increasing liquidity release on top of existing rate cuts and reserve requirement reductions. This means that the world's second-largest economy has decided to combat sluggish consumption, falling real estate prices, and rising unemployment rates by significantly increasing the money supply and driving up equity markets. The record strong rebound in the Chinese stock market (including Hong Kong stocks) has attracted the attention and capital flow of global capital markets.

With the European Central Bank already having cut rates, three of the four major central banks globally have initiated monetary easing policies. The total amount of money they control is approximately $23 trillion, accounting for about 20% of the total global money supply.

This is significant; 2024 is the year when major global central banks shift to monetary easing. This shift is a necessary means to revive the economy in the post-pandemic era and also marks the starting point for a new round of asset value reassessment.

As an emerging equity market, crypto assets will also undergo a value reassessment against the backdrop of monetary expansion. EMC Labs holds a cautiously optimistic view on the market outlook, judging that the crypto market, which has undergone sufficient internal adjustments, will enter the second half of a bull market during the rate-cutting cycle.

U.S. Dollar, U.S. Stocks, U.S. Bonds, and Gold

U.S. Dollar Index

Following the initiation of rate cuts, the U.S. dollar index rebounded slightly before returning to a downward trend, approaching the 100 mark again by the end of the month, reverting to levels seen in April 2022. As rate cuts continue, falling below 100 may just be a matter of time.

Thanks to the early pricing in of the equity market, U.S. stocks relatively "smoothly" navigated September, with the three major indices experiencing significant fluctuations in July, August, and September to rebalance the differing flows of funds. During the monthly cycle, the Nasdaq and Dow Jones gained 2.68% and 1.85%, respectively. However, due to early pricing, the indices did not achieve substantial increases. A reality that must be faced is that the current valuation of U.S. stocks already reflects a certain degree of rate cut expectations and does not appear "cheap." Traders seem to temporarily lack a basis for trading, which has become the biggest obstacle to the rise of U.S. stocks.

Regarding the outlook for the U.S. economy, market participants are still speculating and pricing based on CPI and employment data, with the biggest point of contention being whether the U.S. economy will achieve a "soft landing" or a "hard landing," as well as the extent of rate cuts in November and December. Currently, U.S. stock prices have basically completed pricing for a "soft landing," and if data worsens, there may be downward pricing to prevent investment risks triggered by a "hard landing." This is the greatest uncertainty, and the elimination of this uncertainty may not be completed until later in Q4.

U.S. 10-Year vs. 2-Year Treasury Yield Spread

With the rate cuts, the U.S. bond market has also undergone a trend change. Concerns about the long-term development of the U.S. economy have led to the 2-year Treasury yield being consistently higher than the 10-year Treasury yield since July 2022. This trend was reversed in September, and the spread between the 10-year and 2-year Treasury yields has now turned positive at 0.16. This indicates that bond investors have preliminarily confirmed a "soft landing" for the U.S. economy.

As another important investment target outside of U.S. bonds, London gold responded to the arrival of the monetary expansion cycle with a significant monthly increase of 6.21%. Such a large monthly increase indicates that substantial funds have chosen safe assets during times of economic uncertainty.

As a representation of the crypto market, BTC functions similarly to a major index. Currently, BTC's pricing is controlled by funds in the BTC ETF channel, but these funds seem reluctant to view BTC as "digital gold" and prefer to see it as a tech stock akin to the "Seven Giants." This linkage allowed BTC to stabilize in September and achieve a 7.35% increase, which was higher than the Nasdaq's increase, but it is still constrained by the Nasdaq's performance, stopping at $65,000 and not recovering its previous high.

There are two paths to breaking the previous high. The first is for the Nasdaq to recover its previous high, leading BTC to follow suit; the second is for on-site funds to regain pricing power. If the second path is realized, the trend in the second half of the bull market will be more positive. Based on cautious principles, we view "breaking the previous high" as a necessary condition for funds to resume inflow and for on-site funds to increase risk appetite to boost Altcoin targets.

BTC Supply Structure

We view market cycles as a phenomenon of value transfer between long and short positions within a temporal and spatial range. Since the long positions peaked in December, they have been continuously reduced until May, and from June onwards, the current upward cycle has seen a second increase in holdings, which had risen to 14.07 million by the end of September. This structural reorganization is conducive to price increases.

Long and Short Position Changes (Monthly)

Analyzing the distribution of all on-chain BTC, it can be found that as of September 29, over 87% of BTC is in profit. The distribution of chips in the "new high consolidation zone" between $54,000 and $73,000 amounts to 6.24 million, an increase of 238,300 compared to August 31. Currently, the maximum holding price has risen from $58,893 at the end of August to $65,518. The continuous upward shift in the price center helps alleviate selling pressure during the price increase process.

BTC Cost Structure

It is noteworthy that in late September, alongside BTC's rebound, long positions began to tentatively reduce their holdings again, while short positions started to increase. This "shift from long to short" is a signal of liquidity recovery and will also test buying strength again. If buying strength cannot absorb selling pressure, there is a possibility of fluctuations or even declines in the market. If fluctuations occur, long positions may return to accumulation, which would extend the time for the market to recover its previous high. As of now, we cannot definitively conclude that a new trend of "shifting from long to short" has begun.

Capital Flow

Monthly Capital Flow Statistics of Stablecoins and 11 U.S. BTC ETFs

In terms of capital, there has also been an optimistic performance this month, with both major channels recording positive inflows, totaling $3.788 billion, of which the stablecoin channel was the main inflow source, reaching $2.588 billion. The ETF channel, which was in a state of outflow last month, has returned to inflow this month, recording $1.2 billion.

However, there are also concerning aspects. Since the inflow scale resumed in July, the inflow scale in July, August, and September has shown a month-on-month shrinking trend. Against the backdrop of overall positive performance in various countries' stock markets, BTC urgently needs to break through previous highs to attract accelerated capital inflow.

During the six-month consolidation process in the "new high consolidation zone," the inflow scale of stablecoins and ETFs has exceeded $38 billion, which has absorbed the selling pressure in the "new high consolidation zone," refreshing the cost price of over 6 million BTC in this area to around $64,000.

Technical Indicators

BTC Price Trend (Daily)

Technical indicators are important trading tools for short- to medium-term traders. Currently, the market is in the early stages of sustained capital inflow and liquidity recovery, and the decisions of short-term traders have a significant impact on market trends.

$64,000, $66,000, $70,000, and $73,000 are key short-term prices to watch, representing short-term cost pressure, downward trend line pressure, upward trend line reversal pressure, and new high pressure, respectively. This month's breakthrough of the 200-day moving average, which has shown a downward shift, is of great significance; this $64,000 price is also the short-term cost price and the high point of the August rebound. "Effectively" overcoming this threshold is very important, after which the breakthroughs of $66,000 and $70,000 will follow. Currently, three out of four key price levels have yet to be broken, and hope lies in the funds from the BTC ETF channel.

An effective breakthrough at $73,000 would indicate the awakening of the most conservative funds in the market and the gradual entry of external funds.

Possibilities for the Second Half

In previous reports, we have repeatedly mentioned that the momentum of the first phase of the bull market primarily comes from the replenishment of positions by on-site funds and the new funds added before and after the approval of BTC ETFs. As major global central banks enter a phase of liquidity expansion, EMC Labs judges that the upward momentum for BTC asset prices will mainly come from value reassessment triggered by monetary expansion and the new allocation of traditional capital to BTC ETFs.

As risk appetite gradually increases, in the second half of this Crypto bull market, attention and funds will gradually flow into well-adjusted Altcoins. We judge that BTC's market share will gradually decline from nearly 60% at this cycle's peak to around 40%. Altcoins will gradually differentiate after a broad rally. We will focus on blockchain infrastructure and Web3 applications that represent industrial development directions, possess technological or model innovations, have user acquisition capabilities, and feature token models that are friendly.

Conclusion

Currently, the eMerge Engine developed by EMC LABS shows that the upward index has been restored to 0.75, gradually entering a mild expansion state. The restoration of this indicator marks a significant repair of the BTC ecosystem and market structure, and it is also a reiteration of our emphasis that the internal structural adjustment is complete, and BTC is ready to mark higher prices under greater liquidity shocks.

Predicting and participating in market development with action will yield rich rewards. We believe that enhancing risk appetite, maintaining a positive attitude, and taking decisive action have become the optimal choices at this stage.

The biggest concern comes from whether the U.S. economy will experience a "hard landing." If a "hard landing" occurs, the decline in risk appetite will lead to an undervaluation of asset values, and U.S. stocks may experience a weak annual trend, making it difficult for the crypto asset market to achieve an independent trend.

Additionally, the crazy rebound in the Chinese stock market has also attracted a certain inflow of international capital. Considering that this rebound stems from the unprecedented monetary policy input from the Chinese government (with various fiscal policies also set to be introduced in October), we believe that the rebound in the Chinese market has a certain degree of sustainability, and the inflow of international capital will continue. This will undoubtedly affect the rebound and stability of U.S. stocks, which may, in turn, impact BTC and the entire crypto market that have higher demands for risk appetite.

This negative impact arises from the inevitable chaos and conflicts that occur during the global monetary policy shift. In the short term, this will inevitably lead to continued fluctuations in BTC prices, but it does not change our judgment on its long-term trend.