LK Venture Research Report | Why are we still optimistic about BTC's performance in the second half of the year?

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Recently, the US SEC sued Binance and identified multiple tokens as securities, triggering a sell-off of altcoins in the market and spreading panic. In our opinion, the bottom may be approaching, and the funds of altcoins are gathering towards BTC and ETH. The market will complete the bottoming out through fluctuations. Looking forward to the macro environment in the second half of the year, we analyzed three scenarios of US economic development and their impact on the crypto market. Although the process may not be smooth, BTC will rise again after experiencing fluctuations.

The market may continue to fluctuate in the short term, but it is close to the bottom.

SEC regulatory incident triggers altcoin sell-off, short-term focus on whether BNB stabilizes

The SEC filed a civil lawsuit against Binance and identified tokens such as ADA, SOL, and MATIC as securities, which rekindled market concerns about regulation. For compliance reasons, some institutional investors had to sell off their altcoins, and even the trading platform Robinhood will remove these altcoins, bringing short-term selling pressure to the market.

ADA, SOL, MATIC and other tokens that the SEC has identified as securities have fallen sharply

BNB's maximum decline also exceeded 20%. Its trend can be used as a market vane, representing the market's interpretation of regulatory events. When Binance FUD triggered a wave of withdrawals in December last year, BNB fell to as low as $220, and then rebounded and stabilized. $220 is an important price barrier, which is not only the support level of the previous low, but also the widely watched "liquidation price" of the Venus hacker (in fact, Binance said it has taken over the hacker's position and no liquidation will occur). This time, BNB backtested the low of $220, and then rebounded quickly. Binance also took the opportunity to launch a new Launchpool to boost BNB prices. If BNB can stabilize and fluctuate for a period of time, it means that the market is gradually digesting the negative impact of the SEC.

BNB finds support at previous low of $220

The altcoin fell back to a low level, BTC price remained strong, and the bottom may be near

From the price point of view, many altcoins have returned to the lows before the rise in January, and even many altcoins have fallen below the bottom of November last year. This Binance regulatory incident is completely different from the FTX crash last year. There is no sign that Binance misappropriated user assets and caused losses. The worst result may be that Binance closes the US site, so the impact on the market will be smaller than it was at that time. Considering that altcoins have fallen back to the previous lows, there is not much room to go down. We may be close to the bottom.

The total market value of cryptocurrencies excluding BTC and ETH has fallen to the level after the FTX crash in November last year

At the same time, the prices of BTC and ETH are relatively strong. Even in the face of negative regulatory conditions, the year-to-date increase is still around 50%, indicating that large funds still have strong confidence in the market. Funds on altcoins may not have flowed out of the market, but instead gathered towards BTC and ETH.

BTC and ETH have increased by about 50% since the beginning of the year

Of course, there is a small possibility that the SEC will increase sanctions on the crypto industry, but after a round of decline, the risks have been released and there is limited room for further decline. In the short term, the market is likely to bottom out through fluctuations, thereby digesting the negative impact.

Three scenarios for crypto market gains in the second half of the year

Looking ahead to the second half of the year, the overall macroeconomic situation will gradually develop in a favorable direction. The United States is still the country with the greatest impact on the crypto market in the world. According to the economic situation in the United States and the corresponding monetary policy of the Federal Reserve, we may encounter three situations: 1) The U.S. economy does not decline, the U.S. stock market enters a bull market, and funds overflow into crypto assets; 2) The U.S. economy is in a shallow recession, the Federal Reserve starts to cut interest rates at the end of the year, and BTC will benefit from the easing expectations and rise in advance; 3) The U.S. economy is in a deep recession, triggering a liquidity crisis, and the Federal Reserve restarts QE, and BTC will usher in a rapid rise similar to this March.

The US economy is not in recession, and the bull market in US stocks has brought capital outflow

Since the beginning of this year, U.S. inflation has fallen beyond expectations, and employment data and the performance of large technology companies have also performed well, showing that the U.S. economy is very strong. Driven by the AI ​​boom, the Nasdaq index has risen strongly, with an increase of more than 30% from the low point in January, and Apple and Nvidia have hit record highs. This rise is mainly driven by large technology companies. If the U.S. economy does not decline, U.S. stocks will continue the trend and enter a full bull market. In the middle and late stages of the bull market, overflow funds from U.S. stocks will enter the crypto market, pushing up market prices.

Looking back at the last bull market, crypto assets rose in the early stage of the U.S. stock market, but it was basically a follow-up logic and did not significantly outperform. In the middle and late stages of the U.S. stock market bull market, funds began to overflow from U.S. stocks and flowed to smaller crypto assets. Crypto assets ushered in the period with the largest and fastest overall increase. BTC rose from $10,000 to $60,000 in 5 months. Therefore, if the U.S. economy does not decline and the U.S. stock market re-enters the bull market, funds will also overflow into crypto assets in the middle and late stages of the bull market.

BTC accelerates its rise in the middle and late stages of the US stock bull market

The US economy is in a shallow recession, and the Fed's interest rate cut brings easing expectations

Due to the Fed's rapid rate hike, the US economy has a high probability of going into recession, but the extent of the recession will not be too deep. In the event of a US recession, the Fed will not be able to maintain interest rates at a high level and may start to cut interest rates as early as the end of the year. Cutting interest rates means lower costs for funds, which is conducive to the flow of funds to risky assets. It also means that the Fed has started an easing cycle. BTC will rise in advance because the market expects the Fed to cut interest rates.

Looking back at the last round of interest rate cuts, the Fed raised interest rates for the last time in January 2019 and began to cut interest rates for the first time in July 2019. During this period, benefiting from the easing expectations brought about by the Fed's interest rate cuts, Bitcoin rose from $3,300 in February to $13,000 in June. Therefore, after the Fed stops raising interest rates, the market will expect the Fed to start cutting interest rates at some point, and BTC will benefit from the easing expectations and usher in a wave of increases.

When the Fed stopped raising interest rates in 2019, BTC rose from $3,300 to $13,000. The white line is the effective U.S. federal funds rate.

The US economy is in deep recession, and the Fed restarts QE to save the market

Although there is almost no data indicating that the US economy will have a "hard landing", from a probability perspective, we cannot rule out this possibility. Especially when the market does not fully anticipate it, once the US economy enters a deep recession, there is a high probability of a liquidity crisis, at which time all assets will fall, forcing the Fed to restart QE to save the market. Crypto assets will first fall due to liquidity and risk aversion, and then benefit from the increase in liquidity released by QE.

Looking back at the US banking crisis in March this year, BTC first fell due to market panic and risk aversion, and then the Federal Reserve urgently launched liquidity tools to rescue banks, and the balance sheet expanded again. BTC benefited from the liquidity released by small QE, and it rose from $20,000 to $28,000 in just one week. Therefore, if a liquidity crisis occurs, the Federal Reserve is likely to restart QE, and BTC will then repeat the rapid rise in March.

When the banking crisis broke out in March, BTC fell first and then rose

Conclusion

In the short term, BNB rebounded quickly at the key support level of $220, and is expected to stabilize and fluctuate, helping the market digest the negative impact of regulatory events. Altcoins have fallen to the lows at the beginning of the year, and there is limited room for downward movement. Funds are gathering towards BTC and ETH, and the market may bottom out through fluctuations. Looking forward to the second half of the year, although the uncertainty of the macro environment still exists, no matter how it develops, BTC is expected to usher in a wave of increases, and we are still optimistic about the performance of the market in the second half of the year.