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It has been a rather testing time for the latest and newest cohort of crypto owners (especially those expecting quick and easy gains), because aside for major breakout at the start of the year, and a second one in the middle of 2021, bitcoin is where it was in February and ether, is at levels first hit in May. In its latest Crypto Compass note, UBS writes that extending weakness in major coin prices can be blamed on many things including Fed chair Powell’s latest hawkish pivot and options market fragilities.

But the single best and most reliable relationship remains with inflation expectations, which in US 10y break-even terms has fallen back to late-September levels of just over 2.4% (Figure 4).

This is roughly one standard deviation above its post-2000 average of 2.0%, so mildly elevated but by no means as alarming as end-October when they were approaching 2.8%. That would have constituted a 20+-year breakout.

And while over the longer-term cryptos are clearly an inflation hedge – and with China about to push their credit impulse into overdrive (we will discuss this shortly), we expect much more inflation in the coming months – a different pattern emerges in the daily trading cycle.

As UBS notes, in the past month hourly price action has been characterized by lurches lower at times of relatively thin liquidity through APAC trading hours, almost as if some Asian central bank (coughpbocough) is doing everything it can to crash and discredit cryptos during times of lease resistance, but the dip gets immediately bought by crypto-native whales in North America.

And while so far the whales have been clearly correct to bid every dip, UBS points out that insofar as such appetite rests on the logic of cornering supply ahead of TradFi market entry now that 90% of all bitcoins there will ever be have been mined, the Swiss bank cautions that whale dip-buying may be vulnerable to timing inconsistencies which could be set back further by regulatory rulings in 2022. On the other hand, should the US regulatory regime seek to take the opposite track of the scroched earth crackdown approach used by China, we may see a prompt doubling in price, especially since many have pointed out that bitcoin is now late for its traditional havening surge…

… while ETH’s eventual transition to ethereum 2.0 will catalyze dramatic inflows into the web3-backing token.


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