Crypto Ecosystem

Crypto Ecosystem Update #24 (July 29, 2022)

, July 29, 2022

Bitcoin reached $24,400 on July 20 following a June low of $17,600.  Subsequently, the anticipation of the U.S. Federal Reserve meeting on July 27 outweighed the brief optimism that pulled Bitcoin from its bottom. The drop in risk appetite consequently led to a correlating drop in Bitcoin price below $21,000, as of July 26.

Although an interest rate hike of 75 basis points (0.75%) from the Fed was predicted and accounted for in recent market corrections, concerns about an unexpectedly higher rate hike dominated the markets until after the July 27 meeting. 

But, the Fed ultimately increased the federal funds rate by 0.75%, in line with market expectations. The announcement was immediately followed by a 7.5% increase in the price of Bitcoin (from $21,200 to $22,800). 

There is one more critical announcement that arrived this week with the potential to impact the crypto market’s next major move – the U.S. gross domestic product (GDP) figures for the second quarter. 

According to the commonly accepted definition, an economy is in a recession if it generates two consecutive quarters of declining gross domestic product. In the first quarter of 2022, the U.S. GDP shrank by 1.6% and the July 28 report indicated another decline in economic activity by 0.9%. This could technically mean the U.S. economy is undergoing a recession. Will markets, famous for their aversion to uncertainty, respond with a similar recession in optimism?

Bitcoin price analysis

Bitcoin has been moving inside a parallel rising channel since dropping to $17,600 on June 18. Parallel rising channels can be very tricky because they often end up as bear flags, which has been the case during both Bitcoin’s crash from $48,000 to $27,000 in May, and the crash from $30,000 to $17,600 in June.

Bitcoin was rejected at the resistance line of the current channel three times in a row (circled in orange in the chart below), which raised concerns that the channel could end up as another bear flag. 

The three rejections at the resistance line of Bitcoin’s parallel rising channel. Source: Tradingview 

However, Bitcoin bounced back with a very strong green candle following the Fed’s rate hike announcement, without even touching the lower support line, as you can observe in the chart above. This increases the likelihood that Bitcoin could break above the current rising channel, and invalidate the bear flag. 

Bounce from the 0.5 Fibo level 

During price corrections, the 0.618 and 0.382 Fibonacci retracement zones are the most commonly observed levels by traders to long or short an asset. But Bitcoin often surprises its investors by doing the unexpected and this time, the price bounced off exactly the 0.5 Fibonacci level, the perfect middle between the 0.618 and 0.382 zones.

Bitcoin/U.S. Dollar price chart with the 0.5 Fibonacci retracement

Major resistance at $29,000

If Bitcoin breaks above the parallel rising channel, $29,000 will act as major resistance since that level was very strong support during the 2021 bull run. The breakdown of that support resulted in last month’s capitulation event. 

When such long-term support breaks down, it usually turns to strong resistance so Bitcoin will likely face major headwinds if it reaches $29,000. 

Bitcoin/U.S. Dollar price chart with the $29,000 support/resistance line 

Although the price can temporarily exceed $29,000, it is very critical to watch candle closings on larger time frames, such as weekly or monthly. If Bitcoin climbs as high as, let’s say, $32,000, but closes the month below $29,000, this could suggest that the uptrend has run out of steam. 

Bitcoin/U.S. Dollar price chart with monthly candles

3-day stochastic RSI

Stochastic RSI is a momentum indicator used to determine overbought and oversold price levels for an asset. The values of the indicator can range between 0 and 100, where 0 indicates an oversold price and 100 indicates an overbought price. 

Bitcoin’s stochastic RSI in a three-day time frame, which is statistically significant for gauging Bitcoin’s momentum indicators, has already hit 90. This suggests that the next leg up can happen relatively quickly (compared to the climb from $17,600 to $24,000) if Bitcoin breaks out of the rising channel and continues its uptrend.

3-day stochastic RSI chart for Bitcoin

Ethereum price analysis

Ethereum has outperformed Bitcoin following the June market bottom. However, it has recently hit a very major resistance point in the Ethereum/Bitcoin parity. If ETH/BTC closes July above the current 0.07 level, it could mean a highly positive outlook for both Ethereum and altcoins in general. 

Ethereum/Bitcoin parity chart with the two major resistance lines

ETH/BTC parity began an uptrend in June after bottoming at 0.05. This means Ethereum has outperformed Bitcoin in terms of its U.S. Dollar value. At 0.07, the parity hit a point where two major resistance lines intersect with each other, as you can observe in the chart above. These lines consist of the rising channel resistance from 2021 and the diagonal resistance from the November 2021 top.

The double resistance could make it difficult for Ethereum to pass the 0.07 level by July’s close. When Bitcoin makes an accelerated move to the upside, it typically creates FOMO in the market, causing people to switch from altcoins to Bitcoin. If that happens, ETH/BTC may drop back below 0.07. The U.S. Dollar price could still increase, albeit in a smaller percentage compared to Bitcoin.    

On the U.S. Dollar trading pair, Ethereum is close to hitting the 2021 bull market support, which is approximately $1,725. It can surpass that level if Bitcoin makes a large move, but as discussed, candle closings on large time frames will likely dictate the sustainability of the move. 

Ethereum/U.S. Dollar price chart with daily candles   

Bitcoin dominance

Bitcoin dominance is the ratio of Bitcoin’s market capitalization against the total cryptocurrency market value. Thus a higher Bitcoin dominance means a weaker altcoin market. 

During the 2021 bull market, Bitcoin’s dominance created a higher low figure, compared to its January 2018 bottom. This marked the end of 2017’s ICO hype (see the chart below).

The fact that altcoins have not created more value versus Bitcoin since January 2018 (despite having 10 times more altcoins in circulation) is a bit concerning for that market. This suggests that in the long run, the oldest and largest cryptocurrency has continued generating the highest returns, regardless of the new products and use cases introduced to the crypto market in the last four and a half years. 

Bitcoin dominance made a triple bottom during 2021’s altcoin rally, which further increases concerns about the possible strength of the altcoin market in the upcoming months. The triple bottom is typically a very strong reversal pattern, and if Bitcoin surges to its 2021 bull market support ($29,000), the dominance could finally break out of the horizontal range that it has been following since May 2021.

 Bitcoin dominance chart with weekly candles

SEC lists 9 cryptocurrencies as securities

The Securities and Exchange Commission (SEC) recently classified nine cryptocurrencies as securities: 

  • AMP (AMP)
  • Rally (RLY)
  • DerivaDAO (DDX)
  • XYO (XYO)
  • Rari Governance Token (RGT)
  • LCX (LCX)
  • Powerledger (POWR)
  • DFX Finance (DFX)
  • Kromatika (KROM)

A security, by definition, is a centrally regulated investment contract that represents a fractional ownership right and is backed by an asset. Most cryptocurrencies are not backed by another asset, and they do not give their investors ownership rights since the usage of a cryptocurrency network and the accumulated fees on the network are what drive a cryptocurrency’s value. 

So if cryptocurrencies are legally classified as securities, their fundamental use case may become jeopardized. 

On the bright side, the Lummis-Gillibrand bill, introduced in the U.S. last month, proposes to classify Bitcoin and Ethereum as commodities

Former SEC Chairman Jay Clayton once said that Bitcoin is not a security. Following Clayton, the former SEC Director of Corporation Finance, William Hinman, said that Ethereum does not exhibit the properties of a security. However, the current SEC Chairman, Gary Gensler, recently undermined the latter view, saying Bitcoin is the only token that he felt comfortable calling a commodity. 

In the past, the SEC sued Ripple for allegedly selling unregistered securities, referring to the XRP token.

Harmony proposes minting to reimburse hack victims

Harmony, a popular blockchain that features trustless cross-chain bridges, has proposed minting billions of new ONE tokens (the native currency of the Harmony blockchain) to reimburse the victims of its bridge hack last month.  

In June, a hacker stole $100 million worth of crypto assets locked in Harmony’s Horizon bridge on Ethereum. 

On July 27, Harmony’s core team suggested that instead of refunding users from treasury funds, the community should mint a fresh supply of ONE tokens to pay victims. The rationale was that treasury funds should exclusively be reserved for project development and ecosystem growth plans.  

However, the proposal instantly received a lot of criticism in the Harmony Community Forum due to the possible inflationary impact of minting new tokens. And it is not a small amount we are talking about. 

If the plan is approved, the Harmony team will inflate ONE’s current supply of 13.1 billion tokens by anywhere between 19% and 38% over the next three years. This supply increase could be highly detrimental to the price of the ONE token.

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