Announcement post-FOMC meeting last week (3rd - 4th May) sent equities markets and crypto on a “relief bounce”, on news of a 50bps rate hike and the start of quantitative tightening (QT) in June. However the bounce was short-lived, lasting only a day before taking a big tumble straight after. A very solid jobs report published on Friday failed to arrest the dip, which extended into the weekend. At the point of writing, the market has now dipped to its YTD low at $1.62T.
Read on as we explain what happened, and what possibly lies ahead in the near future for crypto.
What has happened since the start of 2022
The crypto market has pretty much moved within a tight range since the start of the year, with total market cap essentially zig-zagging between $1.7T and $2.2T. These movements have been highly correlated with the US equities markets, with a correlation factor of 0.72.
Source: CoinGecko and Yahoo Finance
This has become even more apparent over the past week as major cryptos such as BTC and ETH exhibited similar price action. ETH has been holding up slightly better over BTC but not by much in the grand scheme of things.
From a market structure perspective, BTC has broken its monthly trendline at $38k, wicking down to $36k. Such wicks usually take a few days to play out before revealing whether it indeed is a structural breakdown, or merely a deviation. If it indeed is a breakdown, the next stop is probably the $28-30k range which has historically strong support.
When has this last happened
The last time the markets have traded within such a narrow range for such a protracted period of time have been between mid-August 2019 to mid-January 2020 in the midst of “crypto winter”, though the total market cap was close to 6-10 times smaller then (between $0.19T - $0.29T). The industry was also much less developed, as we have yet to enter “DeFi Summer” or “NFT Summer”. In lieu of these opportunities, the main use case for crypto have been trading, and that was also mainly in spot, as futures markets were just emerging as a force.
Fast forward to now though, and the picture is a bit more complex, and less rosy. Daily spot trading volumes have fallen to only ~7% of total market cap, compared to ~20% during mid-August 2019. Perhaps more worrying, despite the market cap growing by close to 6x, spot trading volumes have only doubled within the same period.
While you’ll also see from the chart above that derivatives trading volume has picked up the slack somewhat, and there are now days where derivatives trading volume has surpassed spot trading, bear in mind that these are typically on leverage. While we are a long way from when noobs will open 100x leveraged positions to get rekt, more advanced traders now frequently deploy leverage to maximize their potential gains, and also utilize derivatives to “short” assets.
How are Investors Feeling Since the Start of 2022
A quick glance at the Crypto Fear & Greed Index gives an indication of where market sentiment is, i.e. the Index has largely stayed in the territory of “Fear” to “Extreme Fear” for the first half of the year. While the Index is not perfectly correlated to performance, e.g. the market dipped during periods of greed in Jan / Feb, and there was a mini run-up in end-March where the Index was at “Extreme Fear”, it gives us a sense of whether traders are bullish on the market, or are in a more cautious mode, and may look to conserve capital or only make small moves at the margins. With the dip last weekend, we’re now in “Extreme Fear” territory.
This is re-affirmed by taking a look at the amount of BTC remaining on exchanges. Since the start of 2022, there has been a net outflow of ~179k BTC from CEXes, and a corresponding large jump in BTC addresses with ≥1k BTC balance. Despite large players such as MicroStrategy and the Luna Foundation Guard (LFG) gobbling up BTC in March and April, BTC traders have continued to withdraw their tokens from exchanges. While this could be seen as a hodl strategy against uncertainty, it definitely hurts liquidity on markets. Lower liquidity on markets decreases the chances of prices breaking past resistance, while also at the same time weakening support levels.
Source: Bloomberg, Coinshares
Interestingly, flows on crypto funds have proven to be more “diamond hands”. Up to 28 April 2022, YTD flows have been slightly net positive with +$270M in inflows, albeit against a total AUM of $50.4Bn. This indicates that institutions investing on a more longer-term time horizon via crypto funds may be more immune to short-term price volatility (a good thing!), and have largely hodl-ed throughout this difficult period.
Finally taking a look at the derivatives market. Funding rate for BTC perpetuals has remained extremely thin since the start of the year, with barely any days where it stayed above 0.01%. Open Interest is also down by ~20% since the peak in November 2021, further indication that traders are staying on the sidelines. However, funding rates did stay largely positive, perhaps indicating general bullish sentiment of traders that are still staying in the market. We’ll be watching this closely as BTC tests support levels.
Fear, Uncertainty and Doubt (FUD) is an overused crypto meme, but possibly for the first time since the creation of Bitcoin in the midst of the 2008 Global Financial Crisis, the crypto market finds itself truly in an uncharted environment where there are significant geo-political and macro-economic uncertainties. With not even bonds serving as a safe haven in these volatile times, investors are struggling to grapple with a new economic reality that could get much worse before it gets better.
Crypto is not immune to global conditions, and for now, the narrative of “Bitcoin as Digital Gold” seems to be well and truly smashed (GLD is up 3.3% YTD). Expect crypto markets to remain tethered to the equities markets along the course of this bumpy ride. If you want to know where the crypto markets are headed directionally each day, have a peek at S&P 500 and other similar equity index futures.
During tough market conditions, hodl is as good a strategy as any, but also consider switching out some of your portfolio into stables to realize gains, or cut losses. Measured since 1 Jan 2021, the market is still up by >2x, so it’s still not a bad time to consolidate your positions. While very real inflation will wreck real returns on stables, at the very least you’re mitigating certain volatility risks.
If you’re remaining in the market, note that bear market times call for caution and survival. The order books are very thin at the moment, which means any sudden movements from large whales could swing prices either way. It’s why we’ve been in this zig-zag pattern for a while now. If you have leveraged positions, make sure that you’re maintaining healthy margin / collateral to avoid being liquidated.
Catching the falling knife is a risky play. Unless there is some major reversal of the current macro sentiment (such as the conclusion of the Ukraine-Russian conflict which seems unlikely anytime soon), your safest bet is probably dollar cost averaging on assets where you have high longer term confidence in. Also consider hedging your positions, a small fee may help mitigate huge losses. Read more on how you can do this on-chain in our recent article.
What else are we paying attention to
1. How is everyone else doing outside of the US: Well that FOMC announcement turned out to be a painful one for the crypto markets. It probably didn’t help that the Bank of England also announced a rate hike of 25bps, and expectations that inflation in the UK would likely rise above 10% this year, with an ominous warning that the economy could plunge into recession at the end of the year. At the same time, with China still struggling with COVID, analysts have begun slashing their GDP growth projections, and the effects of a China slowdown will surely ripple across the globe.
2. Ethereum’s Merge Difficulty Bomb remains in place: In its latest All Core Developers’ Call on April 30, the Ethereum core devs have decided not to postpone the difficulty bomb for The Merge, originally scheduled for June. This is good news as it reflects the growing confidence of the devs in pulling off a successful Merge possibly during Q3 2022, particularly given the relative success of the two shadow forks, including one on mainnet. While the difficulty bomb may well be postponed in the future if the devs need more time, this indicates that we’re very very close to the finish line now for The Merge.
3. How does all this impact the NFT Market: Throughout this period, NFT sales seem to have largely held up against all the uncertainty. There have been a steady stream of significant drops over the last few months (Froyo Kittens, Moonbirds, Otherdeeds), buoying the NFT Market against downside pressure for now. Whether this can be sustained over a longer period of time remains to be seen, and we’re keeping an eye on whether prominent projects may push back launch dates due to adverse market conditions, especially GameFi and Move-to-Earn projects in particular.
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