Digital Assets Morning Call: May 2, 2022

Written by Robert Lynch
on May 2, 2022

Macro turn keeps pressure on crypto assets

Little reprieve thus far from April’s sharp selloff

Global growth concerns increasing with China again in the spotlight

New York state wants crypto companies to use blockchain technology in compliance efforts

The steep selloff in US equities last week highlights the still-difficult investment climate for many financial assets, including crypto assets, resulting from the anticipated withdrawal of central bank liquidity, slowing global economic growth and high inflation.

April’s selloff in crypto and risk assets leaves a mark

Those themes and drivers look to remain front and center this week alongside the Federal Reserve’s policy meeting as well as those from a string of other central banks. That said, the scope of the market movements last month suggests that at least some of the more challenging investment backdrop is better factored into prices. In April, the Nasdaq fell 13.2%, S&P 500 fell 8.8%, Bitcoin (BTC) fell 16.2% and ether fell 15.4%. That certainly does not preclude the potential for further declines, but it opens scope for some corrective gains in the event that the news/data flow improves.

On the charts

Bitcoin made a marginal new low for the month-long selloff over the weekend at $37,426 and is testing support at the cluster of lows from late-February and March between $37,028 and $37,582. A sustained break of that support would open scope to the $35,000 area.

Ether (ETH) has now retraced about three-quarters of its March-April rally and has held under its 100-day moving average for three consecutive sessions, which now represents resistance at $2,904. That resistance area is reinforced by the downtrend drawn off the April 4 high which currently comes in at $2,919.

China’s covid wave may not be subsiding yet

Following last week’s surprisingly weak reading on US first quarter GDP (-1.4%), concerns about global growth have intensified. In China, authorities have begun to impose incremental covid restrictions in Beijing. To date, Beijing has been spared of the covid-related lockdowns imposed on Shanghai and other areas of the country. But if covid infections spread more widely and lockdowns were imposed on the nation’s capital, it would intensify concerns about China’s economic growth prospects.

Latest China economic data highlight downside risks to regional and global growth

China’s Purchasing Manager’s Indexes released over the weekend showed a concerning drop in the services sector, which plunged to 41.9 in April from 48.4 in March, much worse than expected and clearly impacted by covid restrictions. The Manufacturing PMI fell to 47.4 from 49.5, close to expected but still weak overall and leaving the indexes well below the 50% growth/contraction level.

The PMI’s are used as a proxy for future growth, and these readings suggest downside risks to the economy. Importantly for financial markets, including crypto investors, China is the world’s second largest economy and its performance absolutely has knock-on effects for global growth.

Regulatory news

The New York state Department of Financial Services (DFS) said that crypto currency firms should use blockchain analytics to manage financial risk and ensure compliance with AML and KYC regulations. Use of blockchain analytics could enhance oversight reporting in several ways, including improving real time tracking of the movement of funds, as well as tracing the “transaction lineage” in peer-to-peer transactions that take place outside of those conducted with non-custodial wallets. Note that NYS DFS regulations carry an outsized impact nationally given the high concentration of financial firms located in New York state.

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Robert Lynch

Robert Lynch

Head of Research and Strategy | Robert Lynch is an experienced financial market strategist, focusing on macro markets including currencies, interest rates, commodities and cryptocurrencies. He is trained and practiced in the analysis of economic developments, monetary and fiscal policy, political events and technical indicators in order to generate actionable investment solutions.