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main conclusions
Crypto volatility has subsided and extreme on-chain activity has subsided in a period of relative calm Several developments related to Genesis, Gemini and DCG are still ongoing, however Volatility could also increase when US inflation data is released this week. period is reminiscent of the pre-FTX low-drama environment in October After a tumultuous roller coaster ride following the shocking demise of FTX, a period of remarkable serenity has descended on cryptocurrency markets. With 2022 being a complete and utter bloodbath, it almost seems suspicious that there are going to be a few low-drama weeks in the digital marketplace space. But the metrics show that the last few weeks have been the calmest in the past two years. Given the contagion fears stemming from the FTX collapse, that’s a good thing.
Fear still high in crypto circles
That said, there’s a lot to worry about right now. As Coinbase CEO Brian Armstrong stated yesterday when he announced that Coinbase was cutting an additional 20% of its workforce, there is likely “more water to roll” and “there is still a lot of market fear” out there. Crypto lender Genesis last week laid off 30% of its workforce and is considering bankruptcy. Crypto exchange Gemini, founded by the Winklevoss twins, has $900 million in client assets stuck in limbo with Genesis, its sole lending partner for its Earn product. The twins demanded that Barry Silbert, CEO of Digital Currency Group (DCG), which owns Genesis, resign, accusing him of defrauding Gemini Earn customers. DCG hit back, accusing him of “another desperate and unconstructive publicity stunt by Cameron Winklevoss to deflect blame”. It also stated that it was “preserving all legal remedies in response to these malicious, false and defamatory attacks”. DCG is also the parent of the Grayscale Bitcoin Trust, which has seen a huge discount to its net asset value, reaching 50% after the FTX collapse, as investors questioned whether the reserves were safe (I wrote about GBTC yesterday).
Markets remain firm for now
For the moment, while all these episodes unfold, the markets remain firm. The action was relatively quiet and, in fact, there was a tangible return to normal levels of a lot of activity in the chain that has gone crazy in recent periods. The print below shows the net transfer volume inside and outside the exchanges. Since the beginning of the year, the action has been lukewarm, reaching extreme levels in November and December when FTX collapsed and later when questions about Binance’s health arose.
This notion that activity has returned to normal is reinforced when looking at Bitcoin volatility. The world’s largest cryptocurrency has been trading sideways for some time now, and Pearson’s 30-day volatility measure shows how there has been a noticeable drop back to pre-FTX levels in December.
Macro climate looks more optimistic
It wasn’t just a break from crypto circles. The broader macro environment looks at least a little more bullish today than it did last month. Inflation is still rampant, but there have been two consecutive readings below expectations and there is renewed hope that it may have peaked. The most recent round of interest rate hikes lifted rates by 50 bps, up from 75 bps in the previous two months, and while Fed Chairman Jerome Powell and other central bank chiefs have said rates will continue to rise until the inflation is overcome, the market rose cautiously after European inflation reached 9.2%, compared with 10.1% last month. Next is the US CPI reading on Thursday, which will be – as usual – a vitally important day in the markets. Expect volatility in crypto markets as currencies look to the number and try to gauge what Jerome Powell might do regarding interest rate policy. After all, we now know that cryptocurrency is holding the stock market’s hand — except when, you know, high-level executives are revealed to be fraudulent (FTX) or one of the top 10 coins ceases to exist (LUNA).
There has never been a dull moment for a long time in crypto
At the end of October, Bitcoin was apparently stuck around $20,000. With traders growing impatient, I warned how the crypto could be one event away from a dire bearish wick. Three weeks later, FTX collapsed. I never imagined this would happen, and the timing was a coincidence, but the premise of the article reminds me of how I feel right now. It’s amazing how short memory is in the markets, but we’ve been here before. Crypto won’t be silent for long, and the asset class is still far from out of the woods. The aforementioned happenings around DCG, GBTC, Genesis and Gemini are just a few of the million things that could move south at any given time. There’s also the story about Binance boss Changpeng Zhao being under investigation for money laundering crimes by the SEC, there’s Coinbase laying off 20% of its workforce after a 905 decrease in its share price, and God knows there what will come out of the testimonies of the lawsuit of Sam Bankman-Fried. And then there’s the macro, where anything can happen with inflation, the Russian war in Ukraine or a myriad of other variables. It’s been a quiet couple of weeks, but don’t worry – the madness will be back soon.
