Week 15, 2023 - Weekly Market Outlook

Introduction

After the long Easter weekend, the crypto market returned to its usual pace, facing a busy week ahead. This week, several important updates and events occurred, including Ethereum’s Shapella update and the release of new inflation data, such as the Consumer Price Index (CPI) and Producer Price Index (PPI). In this article, we delve into the recent Ethereum update, inflation data, DeFi market data and market insights.

The Shapella Update

This major update to the Ethereum blockchain will introduce a series of improvements, with the most crucial element being the Ethereum Improvement Proposal (EIP) 4895. EIP-4895 has been specifically designed to allow validators to withdraw their staked tokens from the main network, addressing a long-standing issue faced by Ethereum's validator community, who have had their Eth locked up since 2020. The upgrade, which is a clever combination of Shanghai (execution layer) and Capella (consensus layer), is one of the most crucial upgrades that Ethereum has received since The Merge.

Now that people can take out their ETH, the network has finished changing to proof-of-stake.

With the new way to take out ETH, people can easily manage their assets. But, the release of ETH might make prices go down in the short term. Still, not all of the 18 million ETH ($33 billion) staked on the network can be removed immediately.

Partial withdrawals send ETH to validators, keeping their balance at the needed 32 ETH. Full withdrawals mean closing the validator and taking out all the staked balance.

Macro: PPI

In March, The producer price inflation index (PPI) plummeted to a 2.7% annual rate. The PPI is an important economic indicator because it provides insight into inflation and economic growth. Changes in the PPI can signal shifts in the supply and demand for goods and services and provide an early warning of potential changes in consumer prices.The Bureau of Economic Analysis reported Thursday morning that the monthly wholesale price index declined by 0.5%. This decrease is an encouraging sign that inflationary pressures are easing in response to the Federal Reserve's efforts to curb economy-wide spending by increasing interest rates.

However, inflation remains higher than the central bank's target, negatively impacting household purchasing power. Prices paid by producers eventually translate into prices paid by households. The trend over the past several months suggests that inflation, as measured by the PPI, has likely peaked and is now on a downward trajectory.

The Fed has been raising interest rates for over a year, and the minutes from the Fed's last meeting in March, released this week, revealed that the central bank's staff anticipates a recession this year. As a result, the current economic climate remains uncertain, with inflationary pressures seemingly easing but still running hotter than the central bank's target. The ongoing efforts by the Federal Reserve to slow down economy-wide spending by increasing interest rates are having some impact. Still, the full extent of their effectiveness remains to be seen.

Macro: CPI

Inflation data from March could influence the Federal Reserve to consider raising interest rates again next month. However, the most recent consumer-price-index (CPI) reading, released on Wednesday morning, may also reveal a significant enough slowdown in price growth for the central bank to pause subsequent rate hikes.

The CPI report for March showed a considerable drop in headline inflation, mainly due to decreasing energy prices. Nevertheless, core price growth, which excludes the volatile food and energy indexes, continued to exhibit strong numbers, driven by increases in shelter and other services.

Crypto Market data

Bitcoin finally broke out of its three-week range, and this is a bullish continuation. To remain bullish, I don't want Bitcoin trading below $28,500, and if we start seeing some daily closes below that level, it would be a sign of weakness in my eyes.

Ethereum is a much more interesting asset this week, and it has a much stronger narrative after the Shapella Fud. With the price currently trading at $2000, the next resistance is $2150. Any daily close below $1890 would show some signs of weakness and could trade much lower.

My biggest concern with this current Ethereum rally is the number of open new positions. Over 400,000 new positions were opened, with the majority being long. This is okay as long as the price keeps trending upward. If the price starts trading lower, it could be a small liquidation cascade.

The DeFi Sector and Solana

With Ethereum giving us more momentum this week, it also means that DeFi is getting its time in the sun. We have a sea of green for DeFi projects, with the Solana ecosystem being the biggest gainer in the last seven days. Solana is reaching about $300 million in TVL, with the biggest gainers being new projects. After the FTX collapse Solana also took a direct hit as Alameda Ventures was a lead investor in the chain. Now that Alameda is out of all their deals and valuations have cooled off.

While Solana’s daily active users have dropped off significantly their daily transactions have grown. Solana seems like a good ecosystem to start exploring.

The LSDfi Narrative

As the Shapella update and Ethereum has broken out of its range, the Liquid Staking Derivative Finance (LSDfi) narrative is gaining traction, with unshETH emerging as one of the top performers. In just two months, unshETH amassed an impressive $36.6 million total value-locked (TVL). The platform, which operates as a farming platform, allows users to deposit various LSD tokens and receive unshETH in return.

UnshETH could initiate a new LSDfi narrative by accepting forms of staked ether. LSDfi refers to a novel class of DeFi primitives built on top of liquid staking derivatives, enabling markets for staking yields, validator monopolies, slashing risks, and even validator censorship. As the LSDfi narrative evolves, unshETH's potential impact on the DeFi landscape could be significant.

Best and worst performers

For the first time since 2021, Radix is in the top gainers of this week. This surge is attributed to the launch of Babylon RCnet, Radix's latest milestone release.RCNet is an artificial neural network used in machine learning and AI research. It has been used for a variety of applications, including image and speech recognition, natural language processing, and predictive analytics.

There isn't any narrative when it comes to the losers. Most of these tokens went parabolic in the last few weeks and are currently having a pullback. It is worth watching if they exhibit a bullish trend.

The week ahead

Both Bitcoin and Ethereum finally broke out of their respective ranges. The real test comes from maintaining the trend and flipping a pivotal resistance point.

If we flip this, I can see BTC and the rest of the market running hard. If I were in any spot positions, I recommend taking some profit and leaving the rest to ride the market. After taking profit I would recommend having an invalidation. For BTC, this invalidation would be between $28k-$29k. For ETH, it would be at $1900. You can let the rest of your positions run as long as we don't get any daily closes below these prices. I would not recommend any leverage here, as it could be a choppy ride till we flip this vital resistance.

When it comes to narratives, I would be cautious here. I like the LSDfi narrative, but we are nearing resistance. Let spot play out.