Proceed With Caution
It’s been an interesting start to 2022. Most crypto assets have come down 50%-70% from their peak in November. Is the bull dead? Certainly not over the longest time horizon. Crypto assets will eventually attain a marketcap on the order of 100T USD as centralized networks are disrupted by decentralized applications built on proof of stake layer 1’s. These layer 1 native tokens will earn a monetary premium as the currency of new digital economies. The fact that real interest rates are structurally negative in the traditional economy is only going to increase the flow of capital to crypto networks that offer positive real yields.
While the long term picture is clear, the short term picture is not quite as obvious. Liquidity driven booms and busts are the normal state of crypto markets. Many crypto assets have enjoyed 10x — 100x gains from March 2020. Yet with most of 2021 being range bound, markets have had some time to digest the gains of 2020–2021. It’s possible that 2022 becomes a rare yearly bear market similar to 2018, it’s also possible that the market continues up to new highs in 2022. When one time frame is not obvious it helps as a trader to drop to a lower time frame where things are more clear.
First, let’s describe the setup on ETH/USD. The lower long term trend line connects the 2015 lows to March 2020 lows. The shorter term trend lines were drawn in early 2021. In 2020 while price was near the lower trend line I levered up my spot position. As price approached the top of the channel in Feb 2021 I cut my leverage and watched the price continue to rise into April as it hit the upper trend line. In summer 2021 many people were worried that we were beginning another bear market, but I viewed it as a natural correction in an uptrend as long as price remained in the ascending channel. I was able to add some leveraged longs in July as price got near the lower trend line and gave a clear level of where to cut risk. Price finally fell out of the lower trend line in December 2021. Tax considerations led me to hold into January, but all crypto positions were cut in the first week of Jan as it was clear that a much larger correction could be in the works.
The market almost immediately dipped another 30% after I cut risk, leading to earlier this week where we have what I would consider the first possible low early Monday 1/24/22. We have an increase in volatility, lower volume going into the low than coming out of it, along with a spike in VIX, all signs of capitulation by sellers and new buyers coming in. While the market may still go lower, this is a reasonable place to add some risk.
Should the market continue lower we have clear levels to cut risk at about $2,220 for ETH and search for a new potential bottom. In the worst case ETH could retest the lower long term trendline which is now sitting at ~$850. In fact, there are so many CDP’s on maker dao with a liquidation price near $1700 that it almost seem more likely than not that a test of 2021 summer lows would lead to a liquidation cascade that would send the price down to the $850-$1000 level similar to March 2020. There would be enough forced selling at $1700 to get to this nearly billion dollar CDP at $1361 in short order:
DeFi Explore - MakerDAO Vault stats
The easy way to check MakerDAO MCD positions and system stats.
Using the public maker dao info as a proxy for the market at large, many people think “safe” price levels exist just below the summer lows and previous all time high from 2018. That’s the kind of setup you need for a liquidation cascade.
In the time it took to write this I already cut the positions I took at the Monday lows at $2,621 for an 11% gain.
It looks like the market is rolling over again to find a new lower low, but regardless of whether that happens this is a good time to be cautious. Being a bit late to the start of a new up leg is good trade compared to the prospect of being caught in a further sell off with so many leveraged positions not very far below current prices.
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