May Outlook: No blow-off top

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Monthly Outlook

02 May 2023

May Outlook: No blow-off top – yet

May is shaping up to become a volatile month.

Preview

In Short

May is shaping up to become a volatile month. Macro tailwinds still exist, but debt ceiling developments may cause turmoil. I am preparing for a blow-off top in the near term, while I also expect the 2nd batch of Silk Road BTC to reach the market in May, likely pushing prices lower. In sum, the factors mentioned above suggest growing volatility ahead - creating actionable opportunities as IVs trend toward yearly lows.

Takeaways

Positives: No blow-off top yet. A final rate hike? Ongoing banking turmoil. A mesmerizing resemblance to 2019 recovery.
Negatives: Debt ceiling. Silk Road BTC. DCG/Genesis.
Action plan: Reduce exposure if we approach $40k. Accumulate if prices tumble towards H2, 22 range.

BTC reigns opaque, with both potential headwinds and tailwinds coming up in May. I am still neither a seller nor a buyer. Regardless, I will look to reduce exposure if prices move toward $40k and will resume accumulating if we revisit the H2 2022 range. Meanwhile, I flag the muted IVs in medium-term options as an attractive opportunity.

Still macro tailwinds for BTC, but debt ceiling developments may cause turmoil

The past week has seen yet another huge and promptly executed bank collapse, as the U.S. banking crisis reigns far from unresolved. As in March, BTC reacted positively to the turmoil before retracing as JP Morgan stepped in. The situation in U.S. banks represents a potential catalyst for short-term strength in BTC, and I will be monitoring this closely. Further, the Fed could push forward its final hike of this hiking cycle on Wednesday, representing a new valve of positivity into the market. Apart from the aforementioned positive U.S.-centric macro factors, headwinds could also ensue. The debt ceiling will likely be a hotly debated topic over the coming month, with Yellen stating that the government could run out of money by June 1 if Congress fails to raise or suspend the debt limit. In the short-term, fears of failure to meet an agreement could cause market headwinds related to a potential (albeit very unlikely) U.S. default. A secondary but essential technicality is that the U.S. government has run down its TGA account with the Fed as an extraordinary measurement since January, offsetting liquidity reduction effects from the Fed’s QT. Once the debt ceiling debacle is resolved, QT may resume contracting liquidity from the market in full force - a negative development for BTC.

I still find the 2019 fractal mesmerizing

The recovery of 2023 still follows 2019 closely. While the chart is simple, the dynamics behind it are worthwhile dwelling on. Both patterns follow a brutal bear market ending in mass capitulation on soaring volumes. In 2022, many focused on a $10-12k bottom, whereas the 2018 bear market saw traders positioning for $1k. Neither was right – and to add to that, the consensus behind these calls left many traders underexposed. A hated rally commenced, and FOMO gradually grew among those underexposed. In 2019, this FOMO caused a blow-off top at $14k with surging volumes. A similar high-volume blow-off has yet to be seen in 2023, and I could definitely see a similar reaction in 2023, pushing prices above $40k. Nonetheless, keep in mind that while the upcoming FOMC meeting might deliver the final hike of this cycle, previous dot plots have indicated that the Fed aims to keep rates high until 2024. Per the implied rate probabilities, the market disagrees and expects the Fed to cut rates this fall. Indeed, erupting instabilities could very well lead to extraordinary measurements. Still, I do not see this coming in the near term but rather in the final half of 2023. Until the Fed itself adjusts its stance, I hold my horses, as it’s far too early to celebrate the proper return of the bull.

Unpleasant observations

I expect the second U.S. government Silk Road BTC batch to be sold in May. In this weeks ahead of the curve, I briefly explain the Wednesday false alert on Silk Road coins being on the move. If this reaction reflects how the market will absorb the actual movement of said coins, we should all be prepared for downside.

Mispriced volatility

Regardless of where the momentum moves, I do not expect that the June review will be written with BTC priced at $28k with little to no volatility in between. All events mentioned above could juice momentum, and we can know with certain degrees of certainty that unknown events will abruptly cause whiplashes in the market. Based on these facts, I view the current IV of 50 for the 3mth BTC options expiry as underpriced, and neutral skews as a suitable environment to bet on a changing volatility structure in May.

Pulled in both directions -> Still currently neither a seller, nor buyer

No blow-off top yet, still banking turmoil, and possibly the final hike of this cycle. Three factors that disincentivize me from selling at current prices. I am expecting a push higher and will aim to reduce my exposure if we approach $40k in this odd run. Debt ceiling turmoil, Silk Road BTC, and a questionable outcome of DCG/Genesis’ loan due in May could cause headwinds and prices revisiting the H2, 2022 price range. If this happens, I resume aggressive accumulation.