Source: Coinbase

Compiled by: Golden Finance

Coinbase believes that this week's macro data has weakened the market's expectations for significant interest rate cuts, leading to a stronger dollar and a tightening financial environment.

The U.S. Bureau of Economic Analysis (BEA) has revised its third estimate of the annualized GDP growth rate for the second quarter to 3.8%, indicating that underlying demand is stronger than previously suggested by the data. Meanwhile, durable goods orders rebounded by 2.9% month-on-month in August (excluding transportation, it grew by 0.4%), and core capital goods orders (a key indicator of business investment) increased by 0.6% month-on-month. Initial jobless claims fell to 218,000, indicating a weakening labor market, but the extent of the deterioration has not reached the levels suggested by previous data.

Overall, we believe these data indicate that economic growth and labor conditions are stronger than expected, reducing the likelihood of a rapid easing of monetary policy in the context of persistently high inflation. The market seems to be digesting this shift: interest rates have risen slightly, the dollar index is nearing a three-week high, dollar liquidity has tightened slightly, and cryptocurrency prices have retreated.

From a more global perspective, Coinbase's customized M2 liquidity index suggests that liquidity headwinds will begin to emerge in November. Our customized global M2 liquidity index (which optimizes the growth of the money supply, with global M2 supply leading Bitcoin by 110 days) is expected to turn downward starting in November. Given that this index has a correlation of about 0.9 with BTC over a time frame of 1 month to 3 years, we believe the turning point is likely to signal liquidity headwinds by the end of the year (Figure 1). However, the index also indicates that liquidity conditions are good in October, which may support risk assets in the short term.

Figure 1. M2 Liquidity Index Expected to Decline Starting Early November

Aside from macro factors, we believe that this week's cryptocurrency liquidation was caused by position pressure that has persisted for several weeks and has sent warning signals. As we discussed in previous articles, the dominance of altcoin open interest is far above the threshold of 1.4, which typically signals the occurrence of large-scale liquidations. Last weekend, this ratio reached 1.7, and subsequently, we saw about $1.8 billion in long positions being forcibly liquidated as long positions across the market were cleared (Figure 2).

Even after the liquidations, the ratio remains high at 1.6, which we believe highlights the need for cautious positioning ahead of the upcoming data releases that may impact interest rates and the dollar.

Figure 2. Dominance Ratio of Altcoin Open Interest

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