Bitcoin and Ether staged a sharp rally that is now visibly petering out. The US Treasury's decision to increase the scale of bond buybacks sparked a surge in crypto prices, but questions remain about how long the move may last when it rests on a single supporting factor. Essentially, this was a black-swan event that arrived at an unexpected moment. Despite the strong gains in both cryptocurrencies, we do not believe the downtrend is over. The fundamental backdrop remains weak for the crypto segment, and downtrends are not broken for either ether or bitcoin. We still see no basis for a sustained advance. Sentiment around the crypto sector has become much more optimistic, but we warn traders that this could be a pump or manipulation.

Meanwhile, Bitwise chief investment officer Matt Hougan advised investors to hold greater exposure to Bitcoin and to stocks of companies developing artificial intelligence technology. Hougan said these two assets will help capital holders guard against losses from inflation and dollar debasement as US public debt exceeds $40 trillion. He also said the US government is targeting GDP growth of above 3% and aims to reduce the fiscal deficit. With the US labor market losing momentum and gains in productivity hard to achieve, Hougan suggested the White House may prefer to reduce the real burden of debt through inflation and by pushing the Fed to lower the policy rate. In that scenario fiat currency would be debased and risk assets would rise.

Hougan argued that nobody will aggressively fight inflation in the US, noting that Donald Trump has repeatedly called for lower Fed rates—a stance that implies higher inflation—and has said that current inflation levels are acceptable to him. Therefore, Hougan believes it is unlikely that inflation will return to 2% in the coming years. Some commentators once again portray bitcoin as an inflation hedge; we do not agree that it is inherently such. In principle any instrument that appreciates over the long run may serve as an inflation hedge if its return exceeds inflation—which raises the question: why are US equity indexes not considered inflation hedges if they rise almost every year?

Trading recommendations for BTC/USD

Bitcoin remains in a downtrend despite the strong rally last week. We continue to expect a decline toward $57,500 (the 61.8% Fibonacci retracement of the three-year uptrend), although that level has in effect already been worked off. Even so, we do not believe the downtrend is finished. The recent rise in bitcoin looks only weakly like a corrective move and is not a convincing reason to open longs. The current action looks more like a pump. Liquidity may be taken off the $82,850 high, which could trigger a decline and confirm a transition to sideways trading. On the 4-hour chart, expect a new leg lower from the latest bearish fair-value gap (FVG).

Trading recommendations for ETH/USD

On the daily chart, the technical picture for Ether has shifted significantly in just a few days. Ether may now be starting a new uptrend. However, traders should rely primarily on the weekly chart for positioning: Ether could head toward $4,800, the upper boundary of a five-year sideways channel. In any case, the market needs to calm and form clear new patterns before opening fresh positions. On the daily chart the nearest bearish FVG has been worked off, but that FVG belongs to the prior trend, and any reaction to it would most likely be corrective. We also note liquidity removal at the April 17 high and liquidity grabs on the 4-hour chart; bitcoin has taken liquidity on the 4-hour as well. Thus, a correction is likely, and a flat has formed on the 4-hour ether chart. Inside that flat, internal patterns have limited value, and a deviation below the lower boundary could paradoxically trigger an upside in Ether.

Explanations to illustration

CHOCH —a break in trend structure.

Liquidity — stop losses and pending orders market makers use to accumulate positions.

FVG — fair-value gap: an area of price inefficiency that price often moves through quickly because one side is absent; price later tends to return and react there in continuation of the main trend.

IFVG — inverted fair-value gap: on return to such an area, the price does not react but breaks through impulsively and then retests from the other side.

OB — order block: a candle where a market maker entered to take liquidity and form a position in the opposite direction.