Crypto's Recovery Mode

Bullish Reversal. Crypto assets rallied to safely secure a green week as TradFi stock indexes marched upwards to new all-time highs! What happened in markets this week?

BTC was retesting $60k last weekend, but has since rallied higher, gaining nearly 8% on Wednesday after U.S. consumer price index (CPI) inflation for the month of April came in line with analyst expectations.

Inflation continues to run above the American Federal Reserve's long-term 2% target, but Wednesday’s CPI print marked the first decline in three months. The release of this series coincided with April retail sales and oil stock data, which showed demand in decline, perversely giving investors cause for optimism by increasing the likelihood of rate cuts.

While market participants continue to operate on assumptions that future rate cuts are unequivocally bullish, as their decline decreases the risk-free rate and theoretically bolsters the relative attractiveness of risk assets, it is important to note that they are only one factor in the broader economic equation and that their arrival often coincides with peak recessionary conditions.

This week was extremely volatile for many investors, bringing impressive short squeezes to popular 2021 memestonk mania darlings GameStop and AMC (alongside other heavily shorted equities and certain commodities, including silver, orange juice, and cheese).

Back this time with hedge fund participation, both GME and AMC had surged 300% by Tuesday, but plummeted back into orbit during the latter half of the week after announcing significant share sale plans, erasing gains for bulls and smashing the enthusiasm among retail participants.

Although the prices of many assets – both of those listed above and stock indexes – have experienced erratic swings in recent weeks, implied volatility has been drained from the market, with the VIX index (a measure of the 30-day implied options volatility of the S&P 500) closing Friday at $11.99, just 1.5% above its 52-week low.

Record-high stock prices and a sub-12 print on the VIX suggest market participants are completely devoid of fear, but it is worth keeping in mind that VIX has a habit of rebounding sharply off support and has not traded below this level since January 2018…

On Crypto Twitter, Ethereum was the topic du jour (of the week) as prominent figures took to the platform to express their opinions on the future trajectory of ETH price ahead of the SEC’s first final decision deadline to approve or deny spot ETH ETFs on May 23.

The ETH/BTC ratio has puked throughout the month of May, breaking multi-year lows as traders continue to brace for seemingly inevitable denial next week.

Despite the overwhelmingly negative sentiment that has formed due to an absence of meaningful communication between the SEC and proposed issuers, the SEC’s decision to approve commodity futures-based ETH ETF products for trading last October appears to have provided clarity on ETH’s status as a non-security and suggests that spot instruments will receive approval.

Should the SEC deny spot ETH ETFs, it is likely that the agency will provide a justification for why Ether is a crypto asset security, a clarification which could wreak havoc on broader alt markets, however, given that consensus is heavily anticipating denial, an unexpected approval would come as a shock to markets and would likely cause ETH price to explode.