Dear friends, thank you for your continued loyalty to the State of the Crypto.
It has been an exciting few weeks in the crypto markets and there are a number of topics I would like you to consider this week.
In this edition I discuss:
The implications of the US-China economic war for crypto assets
The likelihood of a market retracement and the next overhead resistance
The impact of halvings and the importance of understanding them
As I am sure some of you are already aware, the long-anticipated US-China trade deal has been delayed by at least several months. At the same time, the Trump administration has decided to significantly increase tariffs on Chinese exports to the US.
The renegotiation of trade deals has been a hallmark of this administration so far with deals struck with Canada, Mexico, and South Korea, while negotiations with the EU, Japan, and China are ongoing. President Trump is intent on securing better deals for the US, with a larger goal of returning manufacturing jobs in particular.
The trade deal with China has always been considered the most important to secure, yet most difficult to strike. However, analysts focusing purely on the trade dynamic have really missed the picture about what this dispute is actually about.
The US administration is for the first time, seriously and in a coordinated manner tackling the issues of intellectual property theft, forced technology transfer and the perceived national security threats of Chinese technology companies. In addition, many China hawks see this period as an opportunity to take on China’s grander geopolitical ambitions in the South China Sea and its threats to Taiwan as well as its desire to cement economic control over sovereign states through its Belt and Road initiative.
In short, all of the above, are the targets of the Trump administration's negotiations.
This dramatic escalation both in tariffs and now of the boycotting of Chinese technology companies like Huawei could not come at a worse time for the Chinese government.
Despite the establishment narrative of the past decade regarding the inevitable rise of Chinese power, much of its apparent economic growth has been built on a house of cards.
For a start, most of the economic data on China that we rely on in the West comes from Chinese authorities themselves. Much like how the Soviets dubbed many Western economists in the 1970s and 1980s, we should generally have much more scepticism about the data that the Chinese Communist Party relays.
Notwithstanding this reliability problem, China for the first time is moving into a position of having twin deficits both in terms of their current account and fiscal balance. This means that they are increasing their national debt (spending more than they receive in taxes) while also importing more than they export.
One of the biggest problems with this situation is that China has to pay in US dollars for the vast majority of its imports. Due to the enormous amounts of yuan the Chinese central bank ($30 trillion since 2001) has printed, foreign companies have little faith in the currency and thus insist on being paid in dollars. The current account deficit, therefore, means that China is at risk of running out of US dollars and other foreign exchange reserves at an alarming rate. This is the very same problem you would see in a traditional emerging market crisis, only it is beginning to happen to the world’s second-largest economy…
While this change is taking place, the US in deciding to effectively shut off a large number of Chinese exports from the US market while also pressuring Japan, UK and other allies to cut ties with Huawei and other banned companies, is exploiting China’s current account issue with immense pressure. It is clear which side has the leverage. Simultaneously, the continued slowdown in Europe that we talked about previously, exacerbates this problem further by reducing European demand for Chinese products.
If you want to learn more about this, I would highly recommend listening to Kyle Bass at Hayman Capital.
What this Means for Crypto
It is my opinion that this escalation and bubbling crisis in China is going to lead to more pressure on Chinese nationals to accumulate safe haven assets at the expense of the yuan, Chinese real estate, Chinese stocks as well as government and corporate bonds. Essentially we are likely to see a major risk-off period emerge within China.
It is hard to say which asset class will be the main benefactor of this capital exodus. However, due to China’s strict capital controls and authoritarian measures, it makes a lot of sense for crypto assets, especially those boasting strong privacy and fungibility to attract much of this capital. I would expect Chinese investors and citizens to migrate towards crypto monetary assets such as Bitcoin, Bitcoin Cash, Litecoin and Monero more than platform protocols like Ethereum and EOS with assets like Monero and Zcash outperforming due to their enhanced privacy.
At the same time, one cannot discount cultural and linguistic biases. It is reasonable to expect Chinese nationals to be attracted to those crypto assets that are more Asian and Sino-centric with powerful brand recognition.
The global and decentralized nature of most crypto assets makes them an attractive escape route for otherwise censored capital since they offer a route out of China with far less friction. At the same time, the near-instant and completely portable properties make them highly attractive. Indeed the same cannot be said for precious metals which can be easily confiscated and are hard to export.
Since my previous update, we have seen significant gains for Bitcoin, with the asset sitting at $8,020 as of today. As you will recall I pointed out that Bitcoin had to break through a wall of resistance at $6,000-6,700. To my surprise, BTC broke through this wall at blistering speed with minimal pullback and consolidation on the way. Frankly, this has made me suspicious about the health of this move and I would like to see a deeper pullback before we test the next levels of resistance.
You can see in the chart below where Bitcoin is likely to find support at.
The first major support area is the $6,000-6,700 region already discussed. If however, Bitcoin was to break below this, I would expect it to bounce at either the 0.618 Fibonacci level around $5,150 or the 0.786 level at $4,250. I suspect that over the next two weeks we will likely see a retest of one of these lower areas. Following this consolidation, we can think about the next upside targets. Personally, there are 4 main areas of resistance that will serve as my targets for the next leg. These are at $9,000, $9,850, $11,700 and $12,800 as is indicated below.
Aside from Bitcoin, I think we will actually see significantly more volatility and potentially a lot more upside movement in both the medium and small-cap altcoins.
Since the start of May, Bitcoin has actually significantly diverged from the rest of the market, increasing its market dominance and exhibiting the most strength as you can see in this chart.
This trend is actually typical in the crypto markets, and there is often a multi-week lag between Bitcoin and the rest of the market. Indeed over the next two weeks at least, I suspect that the rest of the market will outperform Bitcoin.
The Impact of Halvings
You may have noticed that out of all the altcoins, Litecoin has been performing particularly well. In fact from its lows in December, it is up an impressive 350%, compared to just 143% in the rest of the altcoin market.
The main reason for this aside from continued technical progress and merchant adoption is the upcoming halving event in August. A halving occurs when the block reward that miners receive gets cut in half. So in this case, Litecoin miners will receive 12.5 Litecoin for every block they successfully mine compared to 25 Litecoin. Essentially this means that the inflation rate is cut by 50% and therefore there is far less selling pressure on the market, which leads to significantly higher prices.
This event is not exclusive to Litecoin and happens with many crypto monetary assets, including Bitcoin and Bitcoin Cash.
The point here is that we can use halvings to time the market better and pivot in and out of positions based on this metric. Indeed, it is one of the most important fundamental analysis indicators that we have available and one I am always considering.
Studying and timing halvings is one of the most important things to do in this market.
I hope that you found this edition useful and informative. As ever, none of this is investment advice, please do your own research!
I would love to hear your feedback on these newsletters. If there is a particular topic or angle that you would like me to discuss, then do please let me know and I will be sure to tackle it in future editions.
If you know someone who could benefit from this information now or in the future, do please share it with them.