As we’ve said, and you’ve undoubtedly heard parroted endlessly since October 2021, that fall is mainly due to the Federal Reserve’s attempts to tamp down inflation. Those attempts have proven to be largely insubstantial thus far, requiring a further rate increase of 75 BPS at a time with no end.
Compounding the correlation issue was that many large institutional crypto bulls built heavily leveraged positions they were then forced to unwind to avoid margin calls, ultimately driving the price down further as the assets were sold for relative scraps.
Some call this nuclear fallout in the crypto sphere, aptly, a crypto winter. Some, like Three Arrows Capital, even lost their entire firm as they unwound too slowly — the firm lost more than $3B of investor money before collapsing.
Going back to Ayyar, the stability indicates an “accumulation period.” That accumulation may indicate a willingness to tentatively return to bitcoin for funds, firms and investors, as the modeling shows the $20,000 range undervalued.
“The fact that bitcoin is trapped in such a range makes it boring, but this is also the point at which retail investors lose interest, and smart money begins to amass,” Ayyar said.
Not only that, but many family offices are expanding their crypto holdings as they, too, seek diversification and increasingly move towards alternative investments for clients. Digital asset management fund president Matteo Dante Perruccio reinforced this trend by pointing to a “counterintuitive spike in demand” from big money and smart money. This could be a move towards diversification or, just as likely, seeking substantial upside as they think the bottom is in.
Bitcoin miners, too, have reduced their crypto sales. As this happens, selling pressure also falls, another harbinger of positive movement in the coin’s future and the mining industry at large. Analysts from Goldman Sachs say that publicly traded bitcoin miners sold around 3,000 bitcoins in September compared to 12,000 in June.
Back to Perruccio: he predicts that the crypto winter will break in Q2 of 2023. “For the market to advance,” he said, “we’ll have seen a lot more failures in the DeFi [decentralized finance] arena and a lot of the smaller firms.”
Even financial service providers haven’t abandoned crypto.
Joining the trend, Mastercard just rolled out options for banks that enable crypto trading alongside traditional accounts. Also, Visa is collaborating with the FTX exchange to bring debit cards to market that direct links to trading accounts and help users ensure cash flow as they speculate, spend, and manage the transition from cash to crypto (and vice versa).
Fed Watch Head of Crypto Research at the alternative asset management company CoinShares James Butterfill is a bit more cautious, reminding investors that it’s difficult to make too many predictions before more information and data come out. “We err on the side of higher upside possibilities rather than further price declines,” he said.
“The largest fund withdrawals recently have been in short-bitcoin positions , whereas we have seen tiny but consistent inflows into long bitcoin over the last six weeks,” he said to CNBC via email. He later added, “A statement from the Federal Reserve that it intends to ease its aggressive tightening would be the major factor driving uptake of bitcoin.”
The Fed is expected to continue the 75 BPS incremental hikes. Still, some also see a pivot on the horizon back to the days of easy (or easier) money: “Clients are telling us that they will start increasing positions to bitcoin once the Fed pivots, or is close to it,” Butterfill said. “The recent liquidations of net shorts are consistent with what we observe in terms of money flows and suggest that short sellers are starting to give in.”
Conclusion So what’s the bottom line? Unfortunately, the future is impossible to predict, and we can only manage expectations in line with past trends, data, and our thesis about the coin. For bullish investors, though, the recent reduction in volatility is a good sign indeed – and institutions appear to agree.
Addendum – FTX And Its Dramatic Effect On The Crypto Capital Market Sometimes you speak too soon, and in the case of Bitcoin’s reduced volatility, unforeseen circumstances are forcing the metaphorical groundhog back into his hole for another extended period of crypto winter.
Midway through the month, the cryptocurrency exchange FTX, previously the third largest and seen as broadly beyond reproach, collapsed in a spectacular mess of financial mismanagement and tabloid-style personal intrigue.
While the latter is undoubtedly good for gossip fodder, the crux of what happened and how it will affect Bitcoin moving forward lay in the former. In short, the appearance of mismanagement led to the uncovering of real abuses as the largest exchange, Binance, announced they’d be closing their positions in FTX’s proprietary coin FTT based on perceived conflicts of interest between FTX and trading firm Alameda. That announcement led to an effective bank run on FTX as thousands of customers pulled or cashed in their coins, triggering a liquidity crisis as FTX failed to deliver on customer withdrawals.
I told you it was complicated, and that’s just scratching the surface. But what matters now is the effect we see on Bitcoin capital markets.
Despite a period of consolidation and accumulation as Bitcoin stayed effectively “flat,” the news of FTX’s collapse and shadow of doubt cast over the crypto arena. After just a week of increasingly concerning information, Bitcoin fell to a two-year low of $15,480, bringing the total market loss for the year to a round $1.5T.
Some look to the FTX collapse as a final nail in the crypto coffin, rounding out stablecoin UST’s loss of stability and widespread failure of former monolithic crypto-focused funds that appeared to bring legitimacy to the markets as a safe(ish) store of value. It’s unclear whether the winter will continue. Still, increased regulations are almost a sure bet as agents from the Securities and Exchange Commission, Department of Justice, and other government giants converge on the scraps of FTX to find out what happened and how to prevent it in the future.
Even the most optimistic Bitcoin bulls see the crypto winter extending through 2023, so it’s best to be prepared to hunker down for another rough ride.
This is a guest post by Francois Moreau . Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
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