Core Strategy: Focus on Majors, Keep Head on Swivel Until Bonds/DXY Relent

We think it’s right to expect a bounce into year-end, potentially starting tomorrow if PCE data comes in soft. In our view, this cycle is far from over, but until bonds find a bottom and the USD tops, it’s likely best for the more tactical investor to stay nimble and prepared for opportunities upon confirmation of this trend reversal. With that in mind, we raised our allocation to stables to 25% in our Core Strategy Portfolio.

Taking Inventory

Pre-FOMC, we anticipated that heading into year-end, with the market pricing in an elevated level of hawkishness (only two cuts were priced for next year in the futures market, and the 10Y was approaching YTD highs), a hawkish Fed would result in a “buy the news” event. Alas, it did not, as Jerome Powell donned his best hawk costume and took a bite out of rate-sensitive assets. Below, we take stock of how we got here and where we might be heading next.

Why We Have Been Bullish

To begin, it’s essential to revisit why we’ve been bullish so we can assess whether these reasons remain valid.

• Regulatory Risk Repricing – This is an obvious but difficult-to-quantify factor. Over the past four years, the government has exerted significant pressure on the industry. However, this is no longer the case under a Trump-led White House and a Republican-led Senate. Thus far, cabinet, agency, and committee appointments—Bessent (Treasury), Atkins (SEC), and Hill (House Financial Services Committee)—have been favorable for the industry (at least on paper).
• Corporate Buyers – This has had a visible impact on order books. Since the election, Michael Saylor has purchased $17 billion in BTC—$14 billion from proceeds of their ATM equity offering and the remainder from a convertible note issued in late November. Additional participation has come from Marathon Digital, Hut 8, Riot Platforms, Semler Scientific, and Metaplanet.

• Positive Seasonality – Q4 has historically been crypto’s time to shine. While seasonality is more of a correlative factor, it’s a consistent relationship worth respecting. Fortunately, Q1 is also a historically bullish period for crypto, while Q2 and Q3 warrant caution due to potential negative seasonality.

• Goldilocks Economic Data – Recent economic data reflects a Goldilocks environment: the economy is growing but not at a torrid pace, the job market is softening without significant deterioration, and inflation—while sticky in recent months—is still rolling over. Notably, the primary factor sustaining inflation is the flawed use of market-rate rents in CPI calculations.

• The Bridge – Since late September, liquidity conditions have not been ideal for crypto. Yields have risen, the DXY has climbed as other economies falter and accelerate their cycles, and U.S. central bank liquidity remains flat to lower due to ongoing QT, a stagnant RRP balance, and an elevated TGA.

Do These Points Still Hold?

Here’s an updated assessment of these factors post-FOMC:

• Regulatory Risk Repricing – In the short term, the immediate price bump from the election appears priced in. However, this remains a critical long-term tailwind for crypto. While it doesn’t provide near-term price guidance, it justifies staying invested.
• Corporate Buyers – With only seven trading days left this year, time is running out for companies to raise capital and purchase BTC. Given the recent equity market selloff, it’s unlikely new equity offerings will be well-received. MicroStrategy could raise a convertible note, but prospective buyers may wait for market stability before committing.
• Positive Seasonality – This factor remains valid. Seasonality is generally bullish for crypto in both Q1 and Q2.
• Goldilocks Economic Data – Goldilocks data hasn’t changed, and the Fed’s trajectory remains downward, even if their risk assessment has shifted. If inflation were a genuine market concern, we’d likely see oil attempt to reestablish its correlation with the 10Y yield. The key change is that the Fed has reasserted its relevance, necessitating adjustments to their reaction function.

• The Bridge – The “bridge” of crypto-specific tailwinds through deteriorating liquidity conditions wasn’t long enough to sustain higher prices unscathed. However, hawkishness is now embedded in the market, with elevated yields and a DXY above 108. Constructive data would likely push these metrics lower. Whether this happens is the key factor moving forward.

The Path Forward

For several months, we’ve largely ignored the Fed due to their dovish tone and balanced view of labor market and inflation risks. Election-related tailwinds also shifted focus away from them. However, after yesterday’s FOMC statement and press conference, the Fed must once again be central to our market framework.

Our “Fed and the Plane” diagram becomes relevant once again: we aim for inflation to ease and growth to stay solid but not overheated, landing us in the soft-landing box. Currently, with the projected path of cuts and yield levels, we’re squarely in “no landing” territory.

Tomorrow’s PCE and consumer spending data could nudge us toward a soft landing if PCE is soft and consumer spending is solid but below market expectations. This scenario would likely boost crypto prices into year-end.

If not, more pain for crypto prices is likely. A sustained 10Y yield above 4.5% would likely pressure the market to reprice lower.

Positioning and Sentiment: Bullish Factors to Consider

Outside of macro conditions, the current setup looks favorable from a positioning perspective:

• Year-End Dynamics – Many traders likely took profits by selling into recent strength (when MSTR was buying) or liquidated positions during the past 48 hours to lock in gains. New buyers are less likely to exit positions two weeks before year-end.
• Liquidations – Over $1 billion in liquidations in the perps market over the past two trading days have reset funding rates. While this doesn’t dictate price direction, it mitigates downside risk.

• Sentiment – Sour sentiment creates opportunities. The VIX surged 75% in a single day this week—the largest increase since 2018. Historically, post-spike BTC returns have been strong, excluding VIX spikes amidst regime shifts (2021) or pre-COVID panic (for more details on this see our crypto comments video from 12/18).

Strategy: Focus on Majors, Keep Cash on Hand

I think it’s right to expect a bounce into year-end, potentially starting tomorrow if PCE data comes in soft. That said, given the uncertainties around this event, it’s prudent to raise some cash while staying mostly allocated. In our view, this cycle is far from over, but until bonds find a bottom and the USD tops, it’s likely best for the more tactical investor to stay nimble and prepared for opportunities upon confirmation of this trend reversal.

Tickers in this report: BTC -3.03% , XRP 0.36% , SOL -2.42% , ETH -1.53% , HNT 1.50% , STX -11.94% , MKR, BNB, CORE, JTO 0.05% , BONK -2.04% , RAY, MSTR, SMLR, COIN, HOOD, MARA, RIOT, WGMI, CLSK, WULF, IREN, CORZ, BTDR, BTBT, HUT, HIVE, AVAX -1.17% , XRP 0.36% , GDLC, BITW, OP -2.90% , MKR