Tag: calm

  • Don’t be fooled by Bitcoin’s recent calm, volatility is coming: Opinion

    Don’t be fooled by Bitcoin’s recent calm, volatility is coming: Opinion

    Key Takeaways

    • Bitcoin has been tightly range-bound for last month, its 10% fall this week its biggest move since the banking crisis
    • Dan Ashmore, our Head of Research, warns that volatility will return before long
    • Over 50% of stablecoins have left exchanges and orderbooks are thin, he writes, meaning there is less needed to move the price
    • T-bills paying 5% have pulled capital from the space, leaving Bitcoin more open to big price moves
    • Direction will depend on interest rate policy, with economy at crucial juncture

    Bitcoin has pulled back over the last week, the orange coin dipping 10% from just north of $30,000 to $27,200. But the remarkable thing about this price move is how unremarkable it is. 

    Bitcoin has been extremely tightly bound since the banking crisis subsided over the last month, its daily moves notably gentle compared to its usual extreme volatility. This relatively benign 10% move – Bitcoin has printed a 10% candle in seconds before – amounts to the largest move since the banking crisis subsided and Bitcoin propelled upwards as interest rate forecasts softened. 

    In fact, when you plot the average of the last 30 days of price moves, this past month is now close to flat, but history shows that it has never stayed around that placid level for long. 

    We can be particularly certain that volatility will return this time around. That is because one of the key factors in heightened volatility is as prominent as ever in the Bitcoin markets: a lack of liquidity. 

    With less liquidity, there is less money needed to move prices. And right now, liquidity is as thin as it has been in quite a while. 

    Since the exit of Alameda in the aftermath of the disastrous FTX collapse, order books have been shallow. Looking at stablecoin balances on exchanges is another indicator of this. I put together a deep dive recently analysing the extraordinary outflow of stablecoins from exchanges: 45% of the total balance has fled exchanges in the last four months. The updated figure is over 50% of stablecoins gone since December. 

    In a world where interest rates have ballooned at the fastest rate in recent memory, while yields in the crypto space fall, perhaps this is not surprising. T-bills are now paying over 5%, while crypto investors have seen countless blowups in the space – Celsius, Terra and FTX – while sentiment has collapsed and fear flooded the market. 

    When there is a US government-guaranteed investment paying 5.1%, why would anyone hold a stablecoin with the risks that flooded the market over the last year?

    And so, while Bitcoin has been trotting a relatively peaceful path over the past month, the party on the charts will return before long. With thin liquidity comes heightened volatility, meaning if there is a trigger in the market, Bitcoin’s price could very likely move further than what it otherwise would. 

    In fact, looking at the volatility metrics, while it has dipped in the last two weeks, realised volatility was the highest since June 2022 earlier this month. So while the price moves have been cancelling each other out as Bitcoin oscillates within a tight window, counter-intuitively, the volatility is still high. 

    The trillion-dollar question, of course, is which direction will it go.

    I’m not smart enough to predict that with any degree of confidence in the short term, but whichever way it moves, it will depend on macro conditions. Bitcoin continues to hold the stock market’s hand, its correlation with the tech-heavy Nasdaq especially high. 

    With financial markets still so dependent on interest rates, the word of Jerome Powell and the Federal Reserve will remain key. Backing out probabilities from Fed futures, the market seems to be betting that the Fed has perhaps one more hike in it before shutting up show on this period of tight monetary policy. 

    As we saw last month with the banking crisis, this plan could change quickly. It really is a macro climate of unprecedented nature, this mix of high inflation and generationally quick rate hikes, even if coming from such a low base. 

    Risk assets will have their day again, it’s just a question of when. In the short term, it is hard to say, but whichever way the sentiment goes, don’t expect Bitcoin to remain asleep for very long. 

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  • Its the calm before the storm in crypto markets

    Its the calm before the storm in crypto markets

    Key Takeaways

    • Crypto volatility has come down and extreme on-chain activity subsided in period of relative calm
    • Several concerning developments around Genesis, Gemini and DCG are still ongoing, however
    • Volatility could also spark up once the US inflation data is revealed this week
    • Period is reminiscent of the low drama environment pre-FTX in October 

     

    After a tumultuous rollercoaster following the shocking demise of FTX, a period of notable serenity has descended upon cryptocurrency markets. 

    With 2022 being a complete and utter bloodbath, it almost feels suspicious that there is even a couple of weeks of low drama in the digital market space. 

    But the metrics show that the last few weeks have been among the quietest of the last couple of years. Given the fear of contagion that transpired out of FTX’s collapse, that is a good thing. 

    Fear still elevated in crypto circles

    Having said that, there is plenty to be concerned about right now. As Coinbase CEO Brian Armstrong stated yesterday when he announced Coinbase was cutting an additional 20% of its workforce, there are likely “more shoes to drop” and there is “still a lot of market fear” out there. 

    Crypto lender Genesis last week laid off 30% of its workforce and is reportedly mulling bankruptcy. Crypto exchange Gemini, founded by the Winklevoss twins, has $900 million of customer assets stuck in limbo with Genesis, its sole lending partner for its Earn product. 

    The twins have demanded Barry Silbert, CEOP of Digital Currency Group (DCG), which owns Genesis, to step down, accusing him of defrauding Gemini Earn customers. 

    DCG fired back, calling it “another desperate and unconstructive publicity stunt from Cameron Winklevoss to deflect blame”. It also affirmed it was “preserving all legal remedies in response to these malicious, false, and defamatory attacks).  

    DCG is also the parent company of the Grayscale Bitcoin Trust, which has seen a massive discount to its net asset value, peaking at 50% in the aftermath of the FTX collapse as investors questioned whether reserves were safe (I wrote about GBTC yesterday).  

    Markets stand firm for now

    For now, while all these episodes play out, the markets are standing firm. Action has been relatively muted, and in fact there has been a tangible return to normal levels for a lot of on-chain activity that went wacky over recent periods. 

    The below snapshot shows the net transfer volume in and out of exchanges. Since the start of the year, the action has been tepid, having spiked to extreme levels in November and December as first FTX collapsed and then the questions spiked about the health of Binance

    This notion that activity has returned to normal is reinforced when looking a the volatility of Bitcoin. The world’s biggest cryptocurrency has been trading sideways for a while now, and the 30-Day Pearson measure of volatility shows how there was a perceptible drop back down to pre-FTX levels in December. 

    Macro climate looking more optimistic

    It hasn’t just been a respite from within crypto circles. The broader macro environment is looking at least a bit brighter today than it did last month. Inflation is still rampant, but there have been two consecutive readings below expectation, and there is renewed hope that it may have peaked.

    The most recent round of interest rate hikes kicked rates up 50 bps as opposed to 75 bps in the two prior months, and while Fed chair Jerome Powell and other central bank chiefs have affirmed that rates will continue to rise until inflation is conquered, the market has moved cautiously upward after European inflation came in at 9.2%, compared to 10.1% last month.

    Next up is the US CPI reading on Thursday, which will – as always – be a vitally important day in markets. Expect volatility in crypto markets as coins stare at the number to try to assess what Jerome Powell may do with regard to interest rate policy.

    After all, we know by now that crypto is very much holding the stock market’s hand – apart from when, you know, high-profile executives are revealed to be fraudulent (FTX), or top 10 coins cease to exist (LUNA).

    Never a dull moment for long in crypto

    Back in late October, Bitcoin was seemingly locked in crab motion around $20,000. With traders getting impatient, I warned how crypto could be one event away from a nasty downward wick. T

    Three weeks later, FTX collapsed. I never imagined this would happen, and the timing was coincidental, but the premise of the piece reminds me of how I feel now. It’s amazing how short memories are in markets, but we have been here before.

    Crypto won’t stay silent for long, and the asset class is far from out of the woods yet. The aforementioned ongoings around DCG, GBTC, Genesis and Gemini are just a few of the million things that could turn south at any moment.

    There is also the story around Binance chief Changpeng Zhao being under investigation for money laundering offences by the SEC, there is Coinbase laying off 20% of its workforce following a 905 drawdown in its share price, and God knows what will come out of testimonies in the Sam Bankman-Fried court proceedings.

    And then there is macro, where anything could happen to inflation, the Russian war in Ukraine or myriad other variables. It’s been a quiet couple of weeks but don’t worry – the madness will return soon.

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