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Back down the Bera Rabbit Hole We Go

by Zhong Yang Chan

Total crypto market cap dipped below $1T again today (August 29), the first time since July 16, wiping out gains made in the last six weeks. Total market cap at time of writing is now $994B.

Source: CoinGecko

The dip really began 2 weeks ago on August 16, after optimism surrounding the US’ July CPI print faded. Total market cap legged down from $1.2T to ~$1T, before taking another turn for the worse over the last weekend. 

The recent dip reversed most of the gains since mid-July. However just zooming out a bit, the broader crypto recovery started since mid-June (June 19) where total crypto market cap was $876B. Taken from that local bottom, the crypto market is still 12.5% up.

It is no surprise that BTC and ETH, which have been the bellwether for crypto, particularly during the bear market, suffered a similar fate. 

Source: CoinGecko

BTC price has now fallen below $20k for the first time since July 14. This represents a ~20% dip since the recent top of ~$25k just two weeks ago on August 15. 

Source: CoinGecko

ETH fell a bit harder relative to BTC, now trading below $1.5k, having declined ~25% from the recent ~$2k top. However measured from the mid-June ~$900 bottom, it’s obviously still up by >60%.

 

What’s Going On?!

Don’t Fight the Fed

Effectively what we’re seeing is the continued consequence of the current macro-economic situation. While the US July CPI print gave bulls some strong hopium that inflation *may* have peaked at least in the US, the Fed will want to see a period of sustained declines before even considering tapering off rate hikes. The current consensus seems to be that rate hikes will continue well into 2023 in order for inflation to moderate to something close to what the Fed would consider “neutral”. 

Source: Bloomberg, CME, via Bianco Research

Jerome Powell reiterated the Fed’s resolve at last week’s Jackson Hole conference, pretty much killing all hopes of a dovish pivot in monetary policy, thereby triggering the Friday and subsequent weekend dump. The S&P500 lost ~140 pts on Friday alone (-3%), retracing gains made since end-July. While there was no equities trading over the weekend, expect more volatility this week given the strong correlation between the S&P and crypto.

The macro-end will likely remain quiet for a while until the next CPI print on September 13, and FOMC meeting on September 21. This may mean markets remain in a holding pattern for the next few weeks, or bears may be out to have some dumping fun. 

 

Troubles Brewing Elsewhere

The conflict in Russia has led to a brewing energy crisis in Europe. While heatwaves during the summer may still be tolerated, the impending winter could prove fatal, particularly for the most at-risk members of society. To put into perspective how bad things are going (and are just about to get worse):

The same challenges (to put it mildly) are similar across Europe, in particular for countries heavily dependent on Russian energy.

Dutch TTF Gas Futures for December 2022, Source: ICE-ENDEX

The price for European Natural Gas Futures in December 2022, when winter hits, has already exceeded EUR300 for every megawatt-hour (mWh), an astronomical price that will make electricity and heating unaffordable to many. The energy crisis also extends to industrial sectors, which depend on reasonably priced, stable supply of energy to continue operating. Factories and plants may need to shut down production if it becomes unprofitable to do so, placing further strain on the economy. Finally with inflation in Europe showing no signs of abating just yet, and the European Central Bank having limited tools to break the cycle, it’s looking like painful days ahead for Europeans. 

An important sidenote here: While today came positive news that Germany’s gas reserves have been rising quicker than expected, this comes at the cost of developing nations in South Asia, who are unable to afford rising global gas prices. Countries such as Pakistan and Bangladesh are already facing outages, and the situation could well worsen closer to winter.

Heading to the East, China is still struggling with the COVID pandemic, while also being battered by heatwaves, droughts and floods. This has significantly dented its economy, with GDP only growing by 0.5% in Q2. Economists have already slashed their forecast for annual growth to ~3.5%, a far cry from the government’s initial target of 5.5%, despite a trillion yuan in economic stimulus. Obviously this isn’t good news for China’s domestic economy, but a broader China slowdown will definitely have knock-on effects for global supply chains, resulting in more uncertainty and risk. That’s not to mention increasing geopolitical tensions between China and the US. All eyes now on the 20th CCP National Congress, scheduled for the second half of this year, where President Xi is expected to be re-elected for an unprecedented third term. 

 

Spate of Bad News for Crypto

While bulls may be looking for local crypto news for hopium, since mid-August, it’s just been a continued procession of bad news. The last bit of positivity came with the successful Goerli Merge (August 11) and the Ethereum Core Devs setting the TTD for mainnet Merge. Since then, we’ve had the following happen, which we’ve covered over the past few weeks:

As if things weren’t bad enough on the macro-end already, such developments inevitably dent the confidence and optimism of bulls, making them more hesitant to deploy capital.

Source: CoinGecko

Since the Goerli Merge, trading volumes have fallen off significantly after the exuberance of mid-July to mid-August. Volumes even dipped below $50B on August 29, where the last time this happened was June 5, 2022, and before that November 16, 2020. 

 

Looking for Silver Linings

For the market to bounce, it’s not enough for bears to stop dumping - there needs to be some form of copium, e.g market has been oversold or shorts become overextended, or hopium, e.g. some form of bullish news or narrative emerges. Without either, it’s hard to see any meaningful relief from rangebound oscillations, and the risk of further dips remain prevalent, particularly in a low-liquidity environment that we saw last weekend.  

As mentioned above, we’re likely going to have two quiet weeks on the macro-front. However, September 9th is when the Ethereum mainnet Merge kicks off with the Bellatrix upgrade, with the final Merge TTD expected to to be reached around September 15th, coinciding closely with the August CPI data release. In the most optimistic scenario, a smooth Bellatrix upgrade, followed by a better-than-expected August CPI print, and an uneventful successful completion of the mainnet Merge would likely send the bulls out in force. 

However beyond that, the FOMC meeting on September 21st looms, where economists are currently leaning towards a prediction of a 75bps rate hike, given Chairman Powell’s latest comments. Whether ETH, and the crypto market can build up some bullish momentum, and sustain that across an extended period of time remains to be seen.

 

Other Things We’re Watching  

1. Funding Rate for Ethereum perps are currently in the red at ~-0.02 across all futures exchanges. Based on data from Coinglass, funding rate was significantly negative on BitMEX compared to the other exchanges, though this seems to have moderated. 

Source: Glassnode

The last time it was this low was 14 months ago, according to CryptoQuant analyst Maartun. When funding rates are negative, shorts are paying longs to keep the contracts going (i.e. more shorts than longs in the market). There are two possible theories to this - one, obviously it could mean that traders are bearish on the outlook for ETH price, or two, ETH traders are taking a delta-neutral strategy to the Merge, i.e. longing spot and hedging via futures. 

In either case, this does set up an intriguing possibility for a short squeeze, which was what happened 14 months ago. It’ll be interesting to see how this position develops through out the week. 

 

2. ETHPoW, the proposed Proof-of-Work fork for Ethereum, launched its first testnet, dubbed Iceberg, last Friday, and interested parties can already connect to it. 

Since we last updated on this, Bitfinex and Phemex have also launched similar ETHW IOU trading pairs, and you can track the price action across all exchanges here. While there has been some dips and troughs, and daily trading volumes don’t exactly inspire much confidence, the price has fairly consistently hovered around $50, representing roughly a 3% ETHW:ETH ratio. As the Merge date gets closer, ETHPoW will also be rushing towards the finish line to launch their own mainnet, and we’ll see if more speculators pile in to this PoW fork. 

 

3. This week’s macro events to watch out for:

  • Tuesday, Aug 30: CB August Consumer Confidence 

  • Wednesday, Aug 31: Europe August CPI

  • Thursday, Sep 1: US Initial Jobless Claims

  • Friday, Sep 2: US August Nonfarm Payrolls; US August Unemployment Rate

 

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Zhong Yang Chan
Zhong Yang Chan

Zhong is CoinGecko's Head of Research. Prior to CoinGecko, he led the Innovation Department at the Securities Commission Malaysia and was a key driver in the formation of policies regarding cryptocurrencies, the classification of cryptocurrency as securities, and the implementation of crypto-related regulations. Follow the author on Twitter @zhongychan

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