10x Research: Why We Are Bearish on ETH and Bullish on BTC

This article is from: 10x Research; Original author: Markus Thielen; Translation: Odaily Planet Daily Azuma

Editor’s note: This article is a compilation of two market analysis articles published by well-known investment research firm 10x Research last night and this morning. In the first article, 10x Research mainly analyzed the pessimistic reasons for the future market of ETH; in the second article, 10x Research predicted that BTC will soon reach a new high.

The following is a selection of the core content of two articles from 10x Research, compiled by Odaily Star Daily.

About ETH: Why are we firmly bearish?

In the past month, the market value of Ethereum has increased by 22% to $454 billion, while the fee revenue of Ethereum has decreased by 33% to only $128 million. Fundamentally, this is because Ethereum has become relatively ‘irrelevant’ in terms of transaction activity, with most meme activities shifting to Solana or Layer 2 networks. This may not be something new for deep value investors.

From a technical analysis perspective, if ETH falls below the $3725 level, it may trigger a large number of stop-loss trades. The current trend of ETH appears very fragile, unable to further rise, and many newly established long positions have reached or fallen below the breakeven point. Cryptocurrency enthusiasts generally refer to this technical pattern as “Bart”, where the price of a certain token needs to undergo a certain consolidation after a sharp rise, during which the price may sharply decline due to the triggering of stop-loss trades. All three of our reversal indicators have turned bearish.

From a historical perspective, June is the second worst performing month for ETH, with an average return of -7% (September being the worst at -12%), while the average return for the other ten months is positive.

Overall, from different perspectives such as fundamentals, technical analysis, and cyclical patterns, now is not the best time to hold ETH. Another evidence of this conclusion is the overextended long positions in the futures market.

• Odaily Note: In financial market terminology, ‘overstretched position’ is often used to describe a phenomenon in the market, where there are a large number of positions holding a specific direction (long or short) in a certain asset or investment product. When the majority of market participants tend to take the same trading direction, ‘overstretched position’ implies the risk of excessive bias towards this direction.

The open interest of futures contracts has increased from 8 billion US dollars in mid-May to 12.8 billion US dollars. The financing rate has exceeded 20% in some days, but it has now dropped to 11.9% because there are no new long positions deployed. The cost of holding long positions is very expensive. Due to the uncertainty of the timing of ETF approval, there may be more traders choosing to close their positions.

The net inflows of spot Ethereum ETF may also be disappointing. Similar to GBTC, we may see a 50% (4-5 billion USD) outflow of funds on Grayscale’s ETHE, while the inflow level of other ETFs may only reach 20% (about 2.7 billion USD) of BTC ETF’s five-month 13.5 billion USD. The inflow of 2.7 billion USD and the outflow of 4 billion USD on ETHE may put pressure on the price of ETH. 01928374656574839201

For institutions or asset managers, the reasons for adding ETH to their multi-asset investment portfolio are not sufficient. ETH is not positioned as digital gold, and its trading volume accounts for only a small fraction of Bitcoin’s, with certain liquidity risks. The current risk-free rate in traditional finance is about 5.2%, while the staking yield of ETH is only 2.6%. Therefore, the incentive for traditional finance to purchase ETH ETFs is also small, not to mention that current ETFs do not allow staking.

It is still uncertain when the SEC will finally approve the Ethereum ETF (S-1), and President Biden has just vetoed the Congressional resolution to overturn SAB-121, reaffirming the government’s opposition to cryptocurrencies. The ETF can only start trading after the S-1 form is effective, but the timeline for the SEC’s approval of these S-1s is still uncertain (it could be today or several months later). Benefiting from the positive impact of the 19 b-4 approval on May 23, ETH jumped from $3,000 to $3,600, and then climbed to $3,800 in the following days. Considering that the US government has just conveyed new, less crypto-friendly information (Biden’s veto), is this over 25% increase reasonable?

We prefer Bitcoin, even if S-1 is approved, the outflow of ETHE conversion will also put pressure on ETH. Taking a comprehensive view, a more winning trading strategy may be “long Bitcoin, short Ethereum”, and “sell Ethereum call options, buy Bitcoin call options”.

For ETH, $3725 will be a critical level (at this point, we will close all long Ethereum positions). If ETH falls below this level, we may see a large number of stop-loss trades being triggered, pushing ETH’s price further down, and this may even drag Bitcoin down from reaching new highs.

About BTC: Will the new high come?

We have highlighted the reasons for being bullish on BTC in our reports on May 21st, May 26th, and May 30th.

For traders, it’s time to take on risk for greater Beta. As predicted, Bitcoin mining-related stocks are also rising. Influenced by Tether’s $100 million financing (possibly increasing by another $50 million), Bitdeer rebounded 13% last night, while Bitfarms, as one of the major participants in the industry, also rebounded.

The US economy is slowing down, but it is actually a good thing. GDP growth is only slightly above 1%; the ISM manufacturing index has been in contraction for several months; employment is weakening, which has a negative impact on consumer spending; last night another key and forward-looking employment indicator emerged - job vacancies have significantly slowed down. All of these will lead to a decrease in inflation.

We will get more employment data this Friday, and next week we will get the CPI inflation report. The trend of Bitcoin will adjust its direction according to the high and low of CPI (CPI rises, Bitcoin goes down; CPI falls, then goes up). If the growth rate of CPI is 3.3% or lower, it is very likely to push Bitcoin to a new historical high.

On May 15, when the inflation rate reached 3.4%, lower than the previous month’s 3.5%, we turned bullish, with the price of Bitcoin close to $62000 at the time. This price also coincides with our model, which originally predicted that if the price of Bitcoin can reach $65000 on May 16, we would turn bullish. If the closing price exceeds $71500 (most recent price is $70500), it will trigger another buy signal.

Bitcoin has already broken through the smaller triangle range (purple line) in the chart below, and the larger triangle range (purple dashed line) may also be broken around $71,500. If the decline in US employment or the decrease in inflation rate can make Bitcoin’s price close above this line, we will firmly set the target price at a new high, which may be achieved between this Friday and next Wednesday. Therefore, we expect Bitcoin to reach a new all-time high (over $73,500) by next weekend.

The SEC has recently issued a risk warning about cryptocurrencies. This pattern has previously appeared before the approval of Bitcoin spot ETFs and other SEC-regulated cryptocurrency products, which may mean that the S-1 form of Ethereum spot ETF will be approved soon. Nevertheless, we still prefer Bitcoin and will allocate our positions back to Bitcoin again.

Since Saturday, the additional open position of Bitcoin futures contracts has increased by $1.6 billion. Last night, Fidelity’s spot Bitcoin ETF saw an inflow of $378 million, Ark’s ETF saw an inflow of $140 million, and BlackRock saw an inflow of $275 million (a total inflow of $880 million in one day), the second highest in history.

The options market expects Bitcoin’s volatility to be around ±6.6% until the end of next week, with a target price of $76,000 if it rises. The implied volatility is still relatively high at around 52-53%. Building long leverage through perpetual futures or Bitcoin mining companies may be a better strategy.

In summary, Bitcoin may soon reach a new all-time high, so it’s time to take on more risk and build a larger position.