Author: Wintermute

Translated by: Deep Tide TechFlow

Deep Tide Overview: This week, the market rebounded due to US inflation data meeting expectations and Trump's announcement of the end of the Iran conflict, with falling oil prices driving up risk assets. However, a genuine turning point for the crypto market requires seeing fund inflows, not just price rebounds—there has yet to be structural improvement in stablecoins, ETFs, and institutional funds. Don't be caught off guard by the volatile market before seeing these signals.

Macro Market

This week’s market rebound was driven by two factors, which, unusually, worked in the same direction.

First, the May CPI data.

Year-on-year at 4.2%, marking the third consecutive month of acceleration, reaching a new high for 2023, but meeting expectations. This "meeting expectations" is the whole story. The bond market had been preparing for higher inflation data, worried it would force Warsh to become hawkish sooner, but the data was not that bad. Core inflation fell to 2.9%, suggesting that energy-driven inflation is peaking, not spilling over into services and wages. After weeks of concerns over a secondary inflation spiral, a data point in line with expectations was enough to relieve some tension.

Second, and more importantly, the end of the Iran conflict.

After more than 100 days, Trump announced a deal on Sunday, authorizing the reopening of the Strait of Hormuz and lifting the maritime blockade, officially signing on June 19 in Switzerland. Brent crude oil has plummeted from lows of $110 to over $80 in the past month, dropping 6.6% just this week. The geopolitical risk premium that has driven the market since late February is rapidly disappearing, causing the dollar (DXY -1%) and yields (10-year back to around 4.50%) to decline. The drop in oil prices directly lowers the forward inflation path, explaining why this week's CPI data and ceasefire agreement reinforced rather than offset each other.

Cross-asset movements clearly illustrate this easing story. The Russell 2000 index led the way with +4.0%, Nasdaq +2.3%, altcoins +3.1%, BTC +1.9%, while Brent crude oil lagged. Risk appetite rotated out of energy premium. The only notable laggard was long-term government bonds: bonds with maturities over 20 years barely moved at +0.8%, as the overall inflation at 4.2% limited the downside room for yields, even as war premiums faded.

All of this creates a genuinely tricky situation for the upcoming FOMC meeting. The 4.2% overall inflation supports "higher for longer." Softening core inflation and plummeting oil prices suggest that the shocks are temporary, and the next step might even be a rate cut. No one expects a policy change on Wednesday, so the dot plot, updated forecasts, and Warsh’s first press conference are the highlights. How he frames this contradiction—whether anchoring on overall inflation or looking beyond the surface to core and oil prices—will set the tone for the second half of this year.

Digital Assets

To understand this week, one must look back two weeks when the entire sector fell over 10%, with BTC down 14% in one week. Those who only focus on crypto attributed it to Saylor selling 32 BTC and the accompanying capital concerns. The reality involves two other driving factors:

(i) Rising inflation concerns and broad risk aversion triggered by strong non-farm payroll data,

(ii) Plus the confirmation that the rally from $60,000 to $83,000 lacks further support. It was a bear market bounce, now confirmed.

This week was a rebound. BTC rebounded from the $60,000 low to close up +1.9%, altcoins +3.1%, benefiting from the CPI meeting expectations and the ceasefire agreement. ETH was clearly the laggard, falling 0.4% this week while everything else is rising, continuing its relative weakness. There is no structural change here. This is a response of high-beta risk assets to a better market environment.

Looking back, we have experienced three pullbacks of over 20% since last October. The differences lie in the characteristics. The first two were directional sell-offs. The recent decline from $83,000 to $60,000 was a bear market head fake, one that cut both bulls and bears in two directions. Perpetual contracts and options show little interest in directional exposure, which is normal at this moment. Unless there is significant news, the baseline scenario is volatility continuing into the summer.

The harder question is when to turn around, and the answer depends on liquidity. Cryptocurrencies are still macro assets, serving as a valve for excess liquidity, which reaches the market through three channels: stablecoins, ETFs, and DAT (Digital Asset Treasury Company). None are reversing yet. DAT's managed assets have fallen from about $220 billion to approximately $140 billion, with new fundraising essentially halted except for Strategy, Bitmine, and Strive. ETFs have just set a record for the longest outflow since their inception, and last week showed no signs of a turnaround. Stablecoin liquidity follows the same outflow trend.

It’s worth remembering how the last cycle actually started. There was a bottom and a recovery, but the real rally began in early 2024 with the approval of ETFs, which was traded ahead of time, along with the funds it brought in. If the argument is about bouncing back to $100,000, the question is where that funding will come from; currently, institutions are on the sidelines, and retail investors are busy trading leveraged ETFs and single stocks. Before this trend reversal, bottom-fishing judgments feel a bit premature. We need to see structural momentum changes behind stablecoin minting/redemption, ETF flows, and/or DAT activity.

Our View

Don’t let volatility cut your losses

The risk-reward ratio at the low of $60,000 is attractive for the long term, with each washout leaving behind a higher-quality and more conviction-driven holder base. This doesn’t mean the bottom has been reached. It’s not impossible to see trading around $50,000 before any improvement is seen. Positions have been cleared, net selling pressure has eased, but this is on a shrinking summer trading volume.

The only thing to watch is fund flows, not prices, not news. A shift in persistent inflows of ETFs and stablecoins will signal the real rally of the last cycle, but there are currently no signs of that. The advice facing this market is not to bet too heavily on any rebounds and risk getting cut in the volatility.

In the short term, Warsh's speech on Wednesday is a catalyst. A dovish interpretation of softening core inflation and lower oil prices will continue the easing; a hawkish interpretation of 4.2% overall inflation will end it. Besides that, Friday’s signing ceremony in Switzerland between the US and Iran is an important event.