Welcome to this week's PokPok Pulse! 🐔 

We've got today packed with Strategy Updates for the week, some trade ideas and a beautiful micro-lecture to level up your knowledge. 🔥 

WHAT’S HAPPENING? ⌛️

• Ethereum Gas Issues Resolved? — Imminent Takeover or Death? 🔥 
• 👀 Market Eyes Fed Speeches as 50bps Rate Cut Probability Lowers to 28.5% 🏦 
• Big Players on Holiday as ETH Spot ETF underperforms
• (August 21) FOMC Minutes 🚨
• (August 23) Fed Chair Powell Speech 🚨

Today’s Micro-Lecture: Auction Market Theory & Smart Money 101 ✨

Got a lecture idea? Let us know!

Coming up this week ⭐️ 

The State of Ethereum — Gas Fee DROP 🔻 

If you’ve used the Ethereum Mainnet in the past — your most distinct memory is probably paying $50-100 just to sell $100 of a meme coin, leaving you with a few pennies to run away with.

This is the whole reason for Layer 2’s to exist, right?

• Improving the Scalability of Ethereum

Recently, though, we’ve had a surprise!

• Gas Fees averaging 2 gwei (~$2 per swap)

Surely this is a reason for Ethereum to take over the world, right? No more $100+ fees? 👍️ 

Well, you might be wrong. ❌ 

• Ethereum Mainnet TVL has seen a ~25% drop since BTC highs a few months back. (~$30B)
• However, chains such as Base, Arbitrum and Solana have had significantly less outflows in TVL.
• Note: We are in a low liquidity market, so we aren’t expecting TVL to increase.
• With other chains providing better scalability and incentives for project development, we may see further underperformance of ETH Mainnet in the future.
• Because of this, gas fees may not have even been “fixed” — while it is great right now, ETH Mainnet demand is LOW, which may mean we may have further surprises unless we have further scalability upgrades.

Will Ethereum ever die?

No. (firmly)

Layer 2’s are Layer 2’s for a reason. They are built on top of Ethereum.

They use Ethereum for gas.

Ethereum will always be in demand; perhaps the Mainnet will not be actively used in the long-term due to scalability issues, however, you will always be indirectly using Ethereum on a Layer 2 EVM.

You are stuck with Ethereum.

Big Brother is watching. 👀 

Ethereum Spot ETF 🎇

Why don’t we have a quick update on the Ethereum Spot ETF progress now that we have (a little) more data? 🫣 

Key Points:

• ETH’s spotty inflows continue to underperform the BTC Spot ETF 📉 
• Grayscale ETHE outflows continue at a relatively slow pace (~$20-30m daily)
• ETF Volume remains around $1B total daily volume (~40% relative underperformance against BTC ETF)

Why is the Ethereum ETF looking so dull?

• We just had one of the toughest “market scares” of the likes of 2020 and 2008 crashes — the market needs time to reassess smart liquidity.
• High ball traders are on Holiday until September — liquidity is low and price action is dominated by high-frequency algorithms. 🏖️
• September’s interest rate cut raises smart money appetite as it allows for cheaper borrowing for investments. (More liquidity injected into the market) — large players may be postponing inflows into ETFs due to this.

TLDR: The state of the ETF isn’t great (yet). But it’s important to consider everything that’s going on before making judgements.

ETFs don’t have to outperform immediately. Look at it from a macro perspective.

US Economic Events this week 📊 

We’ve got an important week ahead as we get an insight from the Fed on September’s rate cut and the state of the US Economy.

We’d love a 50bps rate cut, but, it seems like the tides have changed since we looked a few weeks ago, with only a 28.5% chance of a 50bps cut, the rest being a 25bps cut.

(August 21) FOMC Minutes

Key Questions to Answer:

• How hungry is the Fed to hit its 2% target? (How much risk are they willing to take)
• Clarity on how structured the rate cuts will be, and any target interest rate cuts for the year

(August 23) Fed Chair Powell’s Speech

Key Questions to Answer:

• How confident is Powell that inflation is coming consistently?
• Opinions on the risks of cutting rates, is it too early? (especially with the Japan Carry Trade still holding weight)

Will the market pump on September’s Rate Cut?

Not exactly. 👀 

Zooming into BTC’s historical price action during rate cuts, we’ve only had one period back in 2019-2020 when we’ve seen rate cuts happen.

When the Fed cuts interest rates, it’s usually because the economy is weakening, especially if they are cutting before hitting their 2% target. 👀 

This usually leads to short-term market downturns.

Sure enough, in 2019, we had a drawdown of over 50% for Bitcoin.

Of course, this drawdown was extended by the COVID Crash, which led to an aggressive drop in interest rates.

However, not to worry! The months leading after Interest Rate cuts were the beginning of our famous bull run to 69k 🚀 

Always remain risk-aware. We will be maintaining large cash reserves until our reassessment in November after Interest Rate cuts begin and the US Elections terminate.

This is in preparation for potential drawdowns in crypto to profit from lower lows.

Note: We’ve only got one data point for this so nothing is set in stone.

A Quick Strategy Update 💆 

Recap of Friday’s Market Analysis & Key Levels here.

An easy Monday. Grab a coffee and dig into our strategy update! ☕️ 🥐 

Not much happened last week, however, we’re keen on what the market has to offer this week, especially with the Fed events we’ve got later this week.

OVERSIMPLIFIED* Macro View: A great time to accumulate - not such a great time to go all in (yet).

Key Levels needed to be broken to increase confidence in the market. 🔨 

*Sometimes it’s better to oversimplify on a Monday.

• BTC Summary
  •  We’re prepared for increased volatility this week as we continue in a range downwards.
  • MUST HOLD @ 57.5k — we will scale out of short-term longs and prepare for lower if we see a significant close below this level. 📉 
  • MUST BREAK @ 61.9k — in order to have increased confidence in any long exposure in the market, we need to close above this level. 📈 
  • Our current high of ~62.7k is at significant resistance, we can expect to continue ranging around these levels going into September (which poses potential interest rate cut dumps too — be careful)
  • WEEKLY TARGETS
    • 🔼 63.4k (break out)
    • 🔽 54.5k 👀 (break down)

Trade Idea: Open a position at our weekly target levels given a large reaction. (If there is a delta/demand, see Auction Market Theory Micro-Lecuture for details)

E.g: Long @ 54.5k | Short @ 63.4k

• ETH Summary
  • Ethereum has developed a really tight range, signalling the potential outperformance of BTC in the short term.
  • MUST HOLD @ 2550 📉 
  • MUST BREAK @ 2720 📈 
  • WEEKLY TARGETS
    • 🔼 2800 (break out)
    • 🔽 2300 👀 (break down)

Trade Idea: A large reaction at our weekly targets, 2800/2300 would be key levels to open a position.

E.g: Long @ 2300 | Short @ 2800

(OPTIONS) Trade Idea: Strangle on ETH

Expiry: August 30
Asset: ETH

1x Long Put @ 2500

1x Long Call @ 2700

(see payoff example below)

• Altcoin Summary
  • Significant developments in altcoin relative performance against BTC, a potential breakout of strength to the upside over the next two weeks would signal us to increase altcoin exposure in our portfolio
  • For now, we are holding back and limiting ourselves to Ethereum for short-term positions.

Trade Idea: A weekly close above our “BREAK” level for TOTAL3/BTCUSD would be a great opportunity to develop long-term long positions in Bluechip altcoins (Ethereum, Solana, BNB, AVAX etc.)

Micro-Lecture 📝 

Auction Market Theory & Smart Money 101 ✨ 

Maybe you’re new to trading or perhaps even a veteran in the trenches — not everyone has heard about Auction Market Theory.

Think about it as the (pseudo)science of how smart money works.

Smart Money usually works to kill retail investors, and the aim of the game is to become smart (and not die).

You do this by understanding how smart money works.

Money follows Liquidity — You are liquidity.

Liquidity is money in the market, this might be limit orders, market orders or position liquidations. Large players usually trade in the tens of millions, so they need opposing liquidity for them to enter large positions.

For example:

• Smart Money wants to buy: Pushes market higher to a point of liquidity where sellers are positioned.
• Smart Money wants to sell: Pushes market lower to a point of liquidity where buyers are positioned.

This is exactly why we look at where the most liquidations occur in the market, this is usually where all the fun happens. 😍 

Using advanced software such as Exocharts which allows players to see Order Flow (usually used in Wall Street Trading by Banks), everyone can see the market’s intentions: where people are buying/selling etc.

This is where Auction Market Theory comes in.

The Market is an Auction — it seeks bids (or balance).

Every market: crypto, stocks, and your local whiskey auction; all seek a bid for demand.

Price usually moves towards liquidity to gauge demand. If there is no demand for an asset at a price (usually a key level), it will likely reverse from a high, or continue lower at a low.

We can inspect demand through Volume and Long Delta (positions) for price action, or simply market structure.

Key Points:

• The market seeks “fair value” and “demand”
• When a market develops a range, like now in BTC, we can inspect where demand is located and the Fair Value of an asset is through Volume Profiles (you can also use Time Profiles and Delta Profiles for confluence but these are slightly more advanced)
• A Volume Profile has a Value Area High, Low and Point of Control (VAH/VAL/POC). The market will range until there is significant demand to break out of the range.
• When the market breaks out of a range, it enters price discovery until a new range is found when demand changes.

Failed Auction Example

A Failed Auction is when the price tests a key level but sees no demand at this level to continue.

You’ll need to inspect this through Delta or Order Flow for more detail, but it could be from no buying demand or excessive shorting/selling at that level, causing exhaustion in price action.

Below we have an example of a Failed Auction where there was no demand to go higher.

As price action takes the liquidity level, making a higher high, it fails to make significantly higher closes above and shows a weakening market structure.

This occurred over ~16 hours and could be seen as a prime location to take a short.

For a confirmation higher, we would like to see a high long delta coming in (buys) at a point of liquidity, and strengthening market structure.

This is why it’s important to be responsive to demand in the market, rather than solely breakouts or candles. This is how most people get rekt. 👀 

Swing Failure Pattern Example

A swing failure pattern is similar to a failed auction, however usually happens much quicker when a key level is taken.

If there is a strong reaction (extremely fast wick generated) with little or no buying/selling pressure, the price will often reverse as there is no market demand for a continuation.

This provides a great opportunity for longs/shorts in the market, and often at AMAZING prices.

We will refer to ideas such as SFP, FA (Failed Auction) etc. during our Trading Analysis.

We find it important that you understand these concepts, they will not only improve your trading, but give you a better understand on how free markets work in life.

Thanks for reading today’s publication! We crave your feedback — got any suggestions or questions for us?

Get in touch with at contact@tagoresearch.com or pop us a message on X at @tagoresearch.

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