A 6-year veteran of the crypto industry, Andrew Weiner serves as the Vice President of MEXC Global. As the former executive of RegTech and digital identity pioneer iComplyKYC, he worked with notable brands that include Thomson Reuters, ComplyAdvantage, IBM, Mastercard, Deloitte, and KPMG to deliver innovative solutions to Virtual Asset Service Providers in over 170+ countries.
The following is an interview with Andrew.
The crypto market is very close to the bottom, according to the latest lower then expected CPI data. BTC has a big chance of reversing in 2023. Due to the higher-than-expected terminal interest rate and the expectation of economic recession, the Fed has a high possibility to turn dovish monetory policy and start QE in advance. Meanwhile, a strong bull market must need the breakthrough in new technology.
The U.S. consumer price index (CPI) rose 0.1% in November from the month prior, slowing more than expected from October’s 0.4% pace, in a sign of progress in the Federal Reserve’s campaign to bring down soaring inflation.BTC jumped 1.6% in the minutes after the report was released, to about $17,930. This seems like a market reversal.
Following the CPI, the Federal Reserve published the rate hikes in December for 50 bp. BTC fell by 2.5% within an hour. Is the reversal really coming? Let’s look at the interest rate first.
What is the impact of the Fed’s interest rate hike on crypto markets?
Data from US.Department of Labor shows the unemployment rate at the time was much higher than the 3.5 percent that had prevailed without major signs of tightness before the pandemic.
Employment was still millions below its level on the eve of the pandemic. There is a significant and persistent labor supply shortfall opened up during the pandemic—a shortfall that appears unlikely to fully close anytime soon.
Both fuel and nonfuel import prices have fallen in recent months, and indicators of prices paid by manufacturers have moved down. The core goods inflation has fallen nearly 3 percentage points from early 2022.
All of the indicators and statistics show the possibility of economic recession.Therefore,market bets on a 50 bp hike in December rose to 77% from 66% previously,strengthening the market dovish expectations.
Bitcoin (BTC) jumped about 1% on the news to $16,982. Whereas,US stocks soared, led by the Nasdaq Composite, which was up as much as 4% after Powell’s dovish tone in the speech.The other major indexes also spiked on the Fed chief’s comments. The Dow Jones Industrial Average surged 737 points and the S&P 500 ended up more than 3%. BTC slightly decoupled from US stocks.
The cryptocurrency market’s price decline has become less and less affected by the Federal Reserve’s interest rate hike.
The Federal Reserve officially began to discuss the issue of interest rate hikes from January 25 to 26, 2022. The core issue is mainly solving the economic problems caused by the expansion of US dollar liquidity since 2020. According to MEXC,since the first rate hike announced on March 26, BTC prices have been increasingly unaffected by rate hikes.
When it comes to stocks, interestingly, looking at historical data from the US stock market, selloffs still happen even with super low interest rates, like we saw in the 1950s and again since 2004. Recessions followed rate hikes.
The average correction in the S&P 500 during rate hikes is around 15%. In contrast, when there is a recession (even if it overlaps with a rate hike cycle), the average drawdown in stocks is almost double (blue circles and bars).
Inflation conversion usually brings economic weakness. After quantitative easing(QE), US stocks often have room to decline, because the market perceives that the Fed has started to release liquidity due to the bad economy.
So, it seems we should worry much more about a recession after rate hikes. Based on the less and less relation between BTC and the marcoeconomy, can BTC decouple from US stocks and go out of the independent market?
What signals can stablecoins and TVL bring us?
Another factor to observe is stablecoin cap. After weeks of chaos, the crypto market continues to volitile.The general trend is still a bear market, and there has been a small rebound at the daily level, but the rebound is not a reversal.The market reversal signal needs to see the market cap of stablecoins grow, which means that new funds enter the market.According to data from DefiLlama, the total market cap of stablecoins is around 140 billion, only half of its peak,with a downside.We can’t see the money signals needed for a market reversal yet.
TVL is also a prensentive indicator to predict market flows.According to DefiLlama,the total TVL from the market is around 42 billion.
The total TVL from last week increased by $0.63b, and the overall weekly increase was 1.5%.Among them, the TVL of Ethereum rose by 3.72%. Solana gained 6.97% for the week after three weeks of declines, but only accounted for 0.72% of TVL.BSC fell by 4.02% last week, Layer2’s public chain Arbitrum rose by 2.25%, polygon rose by 0.94%, avalanche rose by 3.18%, and Optimism fell by 1.16%. Roughly flat TVL suggests no capital injection in the market,no signs of activity.
The potential risks from FTX aftermath
In addition to the lack of capital, there still exists potential risks from FTX aftermath.Since most of the liquidity in the crypto market is dominated by several large market makers include Alameda, Wintermute, Amber Group, Genesis, etc. When Alameda announced the suspension of trading, market liquidity plummeted.What’s worse is, following the FTX collapse, Amber Group, Wintermute and Genesis have also announced that their funds are trapped on FTX. Retail investors also fled in panic to avoid risks. The superposition of various conditions further exacerbated the market liquidity crunch crisis.
Alameda has invested in dozens of projects and holds millions of dollars. Meanwhile, Alameda is also the market maker to provide liquidity for these projects. As a result, market liquidity collapsed.
The collapse of FTX almost withdrew 1/8 of market liquidity.
Both Genesis and Grayscale belong to DCG. Genesis suffers a loss of $1 billion, Grayscale’s GBTC has lost its competitiveness due to negative premium,and no one subscribes to it anymore.Market could fall further if Grayscale’s locked BTC is redeemed.DCG may face a problem of insolvency,and results in further market panic.
When will the market reversal appear?
Macroeconomic recovery is a necessary factor. CPI data is a lagging indicator, which is a very good sign for cryptocurrency and other risk assets. It does not mean that the bottom of the cryptocurrency market is fully formed, but it is clear that the bottom is very close.
According to Powell’s speech on December 14, the extent of the rate hike in February 2023 depends on data and the labor market, with either 25 or 50 bp possible.The full impact of the tightening has yet to be felt, but the economy has slowed considerably compared to last year.The Fed wants a gentle way to recover price stability,but no one knows if the economy will go into recession.
From the latest forecast released by the Federal Reserve,most officials see terminal interest rates at 5%-5.5%, much higher than forecast in September.
The market will bear the risk of economic recession to a large extent. Therefore,the Fed has a high possibility to turn to dovish monetary policy.
Expectation for BTC reversal is based on the dovish monetary policy in 2023 to stabilize the U.S. Treasury market.We are not sure if $15,900 is the bottom. However, we are confident that the bear market is caused by forced selling due to the credit crunch. We are not sure when or if the Fed will start QE again.However, the US Treasury market will become dysfunctional sometime in 2023 as the Fed tightens monetary policy.At that point, we expect the Fed will restart QE.BTC and other risk assets will skyrocket by then.
The development of a bull market is inseparable from the birth of new assets and scenarios.The implementation of new scenarios requires stronger public chain performance support.With the birth of new public chains ,more maturity of Layer2,the improvement of infrastructure,the market will have hope of a bright start. The capital will have hope to tell a more vivid story.
In the final analysis, a strong bull market requires a breakthrough in technology and a loose macroeconomy.
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