Here's Why It’s Time to Wake Up Again…

In my latest letter, Sell in May and Go Away, I highlighted that we were heading for the low liquidity season of the year and that the crypto markets would need a pause before trending higher. At this moment in time, I think the sluggish summer may finally be coming to an end.

Uncertainty regarding the U.S. elections is in front of us, and given the many events that unfolded this month, I think we can expect plenty more volatility where investors will be “trading the election” until we see the results in November.

Trump Going to the Oval Office?

Trump is likely to become the next president. Following the assassination attempt, prediction markets put his likelihood at 71%, and now with Biden’s withdrawal, that has fallen to a comfortable 60%, with Kamala Harris looking like the second most obvious choice with a 38% probability currently.

Digital Assets is the Talk of Town

What’s interesting about this election is that digital assets have become a topic for candidates to discuss. Apparently, the political elite has finally understood that the +50M crypto holders in America represent a big voter base.

This weekend, Trump and R. Kennedy Jr. are both speaking at the Bitcoin2024conference. Kamala Harris was also expected to speak there but declined the opportunity just a few days ago.

Another interesting aspect is Trump’s choice of running mate, JD Vance. JD Vance is a self-proclaimed BTC holder, has been a strong proponent of the crypto industry in the Senate, and one of Gary Gensler's most vocal critics in recent years.

A bitcoiner on the running card. How about that?

Is it Finally Time to Lower the Rates?

It’s now been a year since the Fed raised its benchmark rate to between 5.25% and 5.5%, holding this target range steady to date. In the meantime, Jerome Powell has said again and again that rates would not be lowered before something would either break or before the Fed would have been convinced inflation rates would trend lower towards the target rate of 2%.

The most recent economic data signals that the Fed could soon start cutting rates:

• The Fed is getting closer to its 2% inflation target. In June, the monthly CPI fell by 0.1%, while the annual CPI rose by 3%.

• The U.S. economy is finally softening. GDP growth slowed to an annual rate of 1.4% in Q1 2024, down from 3.4% in the previous quarter.

• The labor market is also cooling down; June’s unemployment rate spiked to 4.1%, the highest it has been since November 2021.

  
  

Additionally, Jerome Powell appeared on Capitol Hill this month and warned that “reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

Is the “higher for longer” regime coming to an end?

It is still quite a balancing act for the Fed, but it seems inevitable that something has to move sooner rather than later. Currently, the market is predicting a 95.3% chance of a rate cut in September’s FOMC meeting.

Bitcoin Remains Resilient Despite Sell-offs

Bitcoin’s price has remained range-bound between $60K and $70K for most of the summer despite the drying liquidity from Bitcoin ETFs, which had propelled the price from lows of $42K before the approval to record highs of $73K in March.

But what’s more remarkable is BTC’s resilience following the recent $2.87 billion sell-off by Germany’s Saxony state.

That said, there's a risk of additional selling pressure. Mt. Gox, the defunct crypto exchange, has started its repayment plan, which aims to reimburse creditors around $9 billion worth of Bitcoin and Bitcoin Cash. 140,000 BTC; this is worth over $9 billion at the current market price. So far, over 40% of the repayments have already been distributed to the creditors.

On the brighter side, repayments in-kind does not equal selling pressure as creditors may decide to HODL their BTC.

On-chain data shows that BTC withdrawals on Kraken spiked after the exchange completed distributing its share of allocated repayments. This is a sign that a good number of Mt. Gox creditors could be moving their repayments to cold wallets for long-term HODLing.

Personally, I remain optimistic that BTC’s price will trend higher in H2 based on its current resilience amid the much-awaited Mt. Gox repayments, which most had predicted would be a huge sell-off event.

Additionally, there are some macro and industry-specific factors that could be catalysts in sustaining the current price levels or pushing BTC higher:

• A good number of the creditors might decide to HODL onto their BTC, causing only short-term downward pressure on BTC’s price.

• Once the uncertainty over Mt. Gox repayments is over, there is no big expected selling pressure.

• There is a high chance that the Fed will cut rates in September, likely triggering a rally in risk-on assets.

• Liquidity is gradually returning to the market. Blackrock’s Bitcoin Spot ETF recently recorded a daily net inflow of $526 million, the largest since March 13th.

• The crypto market could soon play catch-up with the S&P 500, Nasdaq, and Gold, which showed strength in Q2 while BTC lagged over the past three months.

• The crypto markets are favoring the Republican Party, and currently, it remains likely that Trump will take office.