Will the Crypto Lame Duck Ever Take Off?

This past November, major events in the blockchain industry were still affected by the aftermath of the FTX fiasco. Several market makers and exchanges, such as Genesis and BlockFi, began to suffer runs. The panic in the markets was so intense that investors began to worry that Digital Currency Group might be headed for bankruptcy.

Meanwhile, liquidity for altcoins has nearly dried up. But contrary to the sentiment indicators, price action across the market has not sunk further. BTC fell less than 3% before bottoming out. Combined with more indicators and the external environment, we can say that the market has entered a long grinding stage.

A narrow hash rate surrender zone

If Bitcoin’s historical cycle is any guide, the shutdown price of the mainstream mining machine can serve as a bottoming indicator. With bitcoin falling to $16,000, most mining machines, including Ant S17 series, Hornbill H8 Pro and HummingBird H9 Pro, have reached shutdown prices based on $0.06 / KWH electricity and current mining difficulty, according to F2pool.

Since $16,000 is roughly the shutdown price for mainstream mining machines, support at this level should be strong, even above the psychologically important $20,000 level. The Bitcoin network hit a difficult correction on December 5. The magnitude of the adjustment surpassed the 5.01% cut on July 21, making it the biggest drop in 2022.

The Bitcoin Hash Ribbon has formed a death cross in terms of metrics, which means the market is entering a period of miner surrender. The Bitcoin network has seen a steady decline in computing power recently as more miners shut down. That means a lot of miners have shut down and Bitcoin is at a more reasonable valuation.

As small and medium-sized bitcoin miners are eliminated, the remaining strong miners are more likely to avoid selling in low-price areas, reducing the pressure to sell. That could stop the price of Bitcoin from falling, and as miners choose to hold on to Bitcoins rather than sell them at a loss, the dynamics of supply and demand in the market could shift, increasing the chances of recovery.

Who is smart money?

After Smart Money peaked at 38% on Nov. 9, stablecoin allocations began a sustained decline. In the latter part of November, Smart Money moved from a higher concentration of stablecoins in its portfolio to its current reduced level. Stablecoins now account for 27% of Smart Money wallet balances.

Just as Stablecoin holders sold off Tether, crypto asset holders turn to stablecoins when the future value of crypto assets is called into question. Investing in stablecoins helps crypto holders reduce risk while limiting potential portfolio shrinkage, and keeps money in the chain, allowing Orca users to easily reallocate capital as they adapt to market conditions. At present, this figure is trending toward the bullish zone.

If stablecoins’ market cap drops, then investors may be more inclined to invest in Bitcoin than stablecoins. This could lead to increased demand for Bitcoin and encourage stronger demand for Bitcoin purchases.

Variables in the macro environment

At present, the internal fragility and macro environment of the crypto market have become the main forces influencing the crypto market. These two forces alternate over time. As the internal problems of the crypto market continue to break out, the influence of the macro market warming on the crypto market is gradually highlighted.

The minutes of the Fed’s November meeting showed that members agreed there was little sign that inflation was easing. A purposeful shift to a more restrictive monetary policy would be consistent with risk management considerations. Bringing inflation down to 2% remains the Fed’s long-term goal, and the hawkish stance has not wavered.

But unlike the September meeting, the November meeting began dovish: a majority of Fed members thought it would be appropriate to slow the pace of rate hikes in the near future. Some members even argued that continued rapid monetary tightening would increase financial market instability. Members also discussed the impact on US financial markets of the collapse in UK government bonds and the pension boom. Combined with the US Treasury Secretary Janet Yellen’s recent proposal to buy back US Treasury bonds, the deterioration of US Treasury liquidity has become a key concern of the Federal Reserve risk point.

New Year’s Expectations

The Fed maintained a hawkish tone at the Federal Open Market Committee meeting from Nov 1–2, meaning it wants to keep inflation at bay at all costs. Powell said the committee would like to reduce the pace of rate hikes at some point, but did not give a specific timing. Markets have repriced the December FOMC meeting to price in about an 80% chance of a 50 basis point hike and about a 20% chance of a 75 basis point hike.

That’s a change from expectations just a few weeks ago and could signal new expectations for the Fed’s rate hike trajectory. The news points to a continued hawkish Fed and the possibility of a rate hike at the December FOMC meeting, but market expectations for this have changed. That could influence the market’s reaction and lead to a change in investors’ expectations for Fed policy.

The Fed’s policy of raising interest rates next year could be influenced by the legal limit on federal debt. If the Treasury cannot borrow as usual, then the Fed will be under pressure to lower its cash balance and may have to reverse its policy of raising interest rates. In addition, with Congress unlikely to raise the debt ceiling in this year’s lame-duck session and not expected to address the debt ceiling next year, there will be greater uncertainty about the Fed’s policy of raising interest rates in 2023.

In a low-liquidity environment, a Fed rate hike next year could lead to increased volatility and a potential sell-off in Treasury maturities near the debt ceiling deadline. In short, the Federal Reserve raising interest rates by 50 basis points in December has become a probability; the macro environment has shown signs of easing, the US stock market rebounded sharply, and Bitcoin has also seen a large rise. In a sense, the macro environment has started to turn very dramatically, which also sets up a favorable macro environment for Bitcoin to bottom out.

By Kyle, Investment Manager@Bing Ventures

Also published here.