Week 18, 2023 - Weekly Market Outlook

TLDR

• Recent macroeconomic events impact crypto market
• US bank stocks decline, raising concerns about banking industry stability
• Federal Reserve raises interest rates to 5.25%
• US faces possible debt default if debt ceiling not raised
• Meme coins dominate crypto market, with frog-themed coins gaining popularity
• DeFi sector experiences growth in projects like Chronos on Arbitrum Layer 2 network

Introduction

As usual, the crypto industry has experienced an eventful week. This time, the market was primarily driven by macroeconomic factors, including banks failing, the Federal Reserve making interest rate decisions, and changes to the US Debt Ceiling. This article delves into these recent events, explores the impact on the DeFi market, and provides some market insights.

The U.S Banking System is Sound and Resilient

U.S. bank stocks have been nosediving all week. This added to the big drop on Tuesday when First Republic Bank failed, causing people to look more closely at the banking sector's future. Western Alliance Bancorp, Zions Bancorp, and Comerica also went down. On Tuesday, the whole sector had gone down, causing concerns about the banking industry's stability.

Federal Reserve leader Jerome Powell said bank conditions had improved since early March. However, he also said that problems in the banking sector were causing it to be harder for people and businesses to get loans. Due to the banking conditions, PacWest Bancorp, Western Alliance, Zions, and Comerica are all down this week. The KBW Regional Banking Index went down by 8.9% this week.

First Republic, bought by JPMorgan Chase & Co. on Monday, was the fourth U.S. bank to fail this year. People betting against regional banks has increased in the last week, which might add to the pressure on the stocks. The percentage of shares being bet against in the SPDR S&P Regional Banking ETF went up from 74% to 96%.

First Republic had problems because of bad investments and people taking their money from the bank. But other banks like PacWest and Western Alliance had better results last month, which is a good sign for investors. Even though stronger ones are buying failed banks, the negative feeling in the market can still hurt good banks like First Republic.

The FOMC Meeting

The Federal Reserve raised interest rates by 25 bps bringing the total interest rate to 5.25%. Powell mentioned that the rate-setting committee believes inflation will come down slowly. If their forecast is accurate, cutting rates would not be appropriate, and the Federal Reserve will not do so.

According to Powell, if the Federal Reserve members are correct, rate cuts may take some time to seem plausible. He mentioned that demand and labour market conditions would likely need to weaken further to see progress within non-housing services and deem rate cuts "appropriate." Powell expressed optimism that the cooling labour market might lead to the possibility of avoiding a recession. He pointed out that wage increases have decreased to more sustainable levels, which he sees as a positive sign.

Powell also mentioned that more data is needed to decide if the Fed funds rate is restrictive enough. The summary of economic projections from the Fed's March FOMC meeting showed that decisions made up until that point resulted in an appropriate level of rate increases. Powell said the committee would reassess the notion in June. Despite some improvement in inflation over the last year, Powell stated that the fight to tame price pressures is far from over. Inflation remains above the Fed's long-term goal of 2%, and bringing it down to the target level will be lengthy.

Crypto holders should pay attention to this economic data as it could significantly impact the crypto market. The increase in interest rates by the Federal Reserve could strengthen the U.S. dollar, which traditionally has an inverse relationship with crypto. If the dollar strengthens, we may see a decrease in the price of crypto as investors could shift towards traditional assets.

Debt Limit

The US is close to a fiscal cliff, with a possible default on debts as soon as June 1, 2023. The White House has invited top Republicans and Democrats to discuss raising the $31.4tn debt ceiling on May 9, 2023.

The debt ceiling limits the US government's borrowing. The government often spends more than it earns, causing deficits that add to its total debt. Currently, the debt ceiling is $31.4tn. The US debt increased due to tax cuts, wars, recessions, and the Covid-19 pandemic. The main government spending goes to social security, Medicaid, Medicare, and the military.

Congress isn't raising the debt ceiling because Republicans want spending cuts, while Democrats don't want to negotiate these cuts alongside the debt ceiling. The situation could lead to an economic disaster if not resolved.

If the US defaults, it could harm the economy, causing job losses and a loss of faith in the US dollar. This would affect risk assets and crypto, making them less attractive to investors.

Crypto Market data

For the past week, Bitcoin has ranged from $27,700 to $29,300. It's been great just trading the range, but if you're trying to establish a long-term bias here, you will flip your bias after every 1-minute candle. Two possible scenarios: 1. Bitcoin is breaking $30K, which would keep the bullish trend intact. 2. Bitcoin retracing back to $26,700. Till then, there is no diddling in the middle. Losing $26,700 would make me bearish, and $25k would be the next target.

Ethereum is only interesting until we clear $1982. If we can break above $1982 and hold above it, I would buy some spot ETH. Buying at $1982 means I would sell between $2300 and $2500.

Meme Coin Mania

The last few days in crypto have been filled with meme coins. Every type of meme is being created. We have a Turbo Toad Token (Turbo) originating from a Chat-GPT4. The creators asked Chat-GPT 4 to make the next meme coin with a budget of $69. Guess what? It worked. Turbo grew to a market cap of about $60 million, up over 3000% from launch.

That isn't the only frog that jumped. PEPE has grown to a top 100 meme coin and is currently doing more volume than Shiba and Doge. As an experienced trader, I'd like to know when the music stops.

These meme coins have been in the spotlight for about one week now. It's just a matter of time before it comes crashing down. Before it comes crashing down, PEPE will have a blow-off top filled with euphoria. These wallets hold millions in PEPE; will they realize their profit, or will they fumble the bag?

The DeFi Sector and Arbitrum

With Ethereum taking a back seat this week, it also means that DeFi could have been better. The strongest chain has been Arbitrum, and Arbitrum has outperformed other chains because of the amount of Meme coins and new DeFi Projects launching.

Chronos is the biggest winner of the last 7 days. Chronos is a community-owned decentralized exchange (DEX) and liquidity provider constructed on the Arbitrum Layer 2 (L2) network, aimed at fostering DeFi growth through sustainable liquidity incentives. Chronos is a community-owned decentralized exchange (DEX) and liquidity provider constructed on the Arbitrum Layer 2 (L2) network, aimed at fostering DeFi growth through sustainable liquidity incentives.

Chronos’ goal is to become a reliable entry point for both new and established protocols that seek sustainable liquidity incentives on Arbitrum and, in so doing, help create significant value not only for users but for the ecosystem as a whole. Chronos is up over 6000% in the last week.

The Narrative

It's meme coins. Meme coins have been going parabolic for the last week. As a trader, your job is to find the next big meme coin. Currently, frogs have been doing very well.

Bob is another example. Bob is a meme coin associated with the "Explain This Bob" Twitter bot, which utilizes OpenAI to provide users with insightful and accurate answers. Users can receive explanations on various topics by tagging or replying to the account.

As the bot's popularity soared, so did the value of its associated meme coin, BOB. Over the last week, BOB's price increased by more than 1,000%. Coingecko shows a supply of 690 billion BOB tokens, with 23.5% of the volume held in the 19 largest addresses. At the moment, 7,683 addresses are holding BOB.

This rise in BOB's value is another example of the Frog coin mania, where frog meme coins go parabolic. Find the next one to try to profit from it before the music stops.

Best and worst performers

The narrative is meme coins. How long this narrative lasts is unknown. We are playing a game of musical chairs, and you do not want to be left holding the bag when the music stops. Especially if you have made a significant profit, take some profit so you don't feel bad when it ends.

There isn't any narrative when it comes to the losers. Seeing Level on here is not surprising. The reason is that there was a hack causing the project to lose its treasury. This led to millions of dollars being stolen, but it has rebounded quite well. The hacker is all out of tokens, so seeing what happens in the future will be interesting.

The week ahead

As mentioned, Bitcoin is still ranging. I believe the range resolves in the coming week. The reason I think it resolves is because of the upcoming macro events.

The upcoming week will be exciting to watch. It will be filled with inflation data. This time it's interesting because the data will include the recent surge in oil and gas prices. This could lead to a higher-than-expected inflation rate. This could lead to a price decline over the coming week, but you never know with this market.