Last week saw the market close pretty much flat, as Bitcoin and Ethereum very quickly reversed any gains made earlier in the week. BTC continues to trade in the range, while ETH seems to have also settled into oscillating around the $1,800 level. Decoupling from the S&P 500 continued for the second straight week.
Source: CoinGecko
However, over the weekend, BTC saw a short breakout to $31.5k, before breaking back down to 29.5k. Whales and market makers are lapping it up, punishing late shorters and longers accordingly. We see this often in crabbing markets where bottom believers get tempted to leverage up before getting rekt by stop hunts. Otherwise known as ‘Barting (named after Bart’s hairstyle from the Simpsons), prices will quickly pump to resistance points before falling sharply after a day or so of consolidation as whales lure in desperate longers.
Source: CoinGecko
ETH, however, was far worse and saw some relentless selling as US markets opened on Monday morning. The ETH/BTC ratio retraced back to the 0.06 mark and was trading around $1.76k at the time of writing
Source: CoinGecko
One of the most prominent sellers has been a whale on Binance, selling as much as 100k eth in 10 minutes.
Mostly spot $ETH on binance.
— Zaheer (@SplitCapital) June 7, 2022
~100k ETH sold in 10 minutes, -20k ETH on derivs. pic.twitter.com/keZopM3q5W
Many are attributing this volatility to the market reacting after the contents of the new US crypto bill entitled ‘Responsible Financial Innovation Bill’ was released over the last 24 hours. We have yet to read the bill in its entirety but a cursory overview suggests that a stronger regulatory regime is inevitable. Adam Cochran, CT’s threadooorrrr, already has a thread summarizing the contents.
1/12
— Adam Cochran (adamscochran.eth) (@adamscochran) June 7, 2022
Wow, so first read some good stuff that moves us forward, but a lot of rough stuff.
Overall this gives US crypto clarity but it will have a huge cost and growing pains.
Here's what I noticed in the first read. https://t.co/Cb1TM0DVJs
It is important to note, however, that a Bill almost never passes in its first iteration without any amendments. We're awaiting more clarity before commenting further on this.
Shut It Down!
BitMex Founder Arthur Hayes published one of his infamous blog posts last week titled “Shut it Down!”, articulating a possibility that the Fed and other central banks may ease their monetary tightening measures to prevent a complete cratering of the financial markets, as prices of foodstuff and fuel will remain stubbornly high given continued turmoil in Russia and Ukraine. Notably, Hayes has called the bottoms for BTC ($25k) and ETH ($1.7k).
Such sentiments were being whispered around the release of the previous FOMC minutes, with Atlanta Fed President Raphael Bostic quoted as saying that “a pause (of rate hikes) in September might make sense”. However equally this is balanced out by pronouncements from others such as Fed Governor Christopher Waller, Fed Vice Chair Lael Brainard, and Cleveland Fed President Loretta Mesler to continue rate hikes, even having “the policy rate above neutral”, in efforts to tame inflation.
Unfortunately, the taming of inflation through rate hikes is not an exact science; the theory goes that in the face of shrinking supply in the economy driving up the price of goods and causing high inflation, increasing the policy rate will tamper demand, thereby causing prices to moderate. However, the flipside of this is that economic demand is the main driver of jobs, and one of the Fed’s three key mandates from Congress is to maximize employment, alongside stable prices and moderate long-term interest rates. The Fed is in an unenviable position of having to thread the needle in terms of raising rates to achieve stable prices, though at the same time not overly impact employment by completely crushing economic growth and demand.
In any case, a global economic slowdown has already begun, and prominent VC firms have already issued strong warnings of tough times ahead and advised portfolio companies to scale back. We have already seen layoffs occur, particularly at growth-centric PLCs such as Peloton, Robinhood, and Coinbase (more on this later), but overall employment numbers are still holding strong for now. Some have taken this as a positive sign, such as Lloyd Blankfein, former CEO of Goldman Sachs, though we’re also watching retail consumer sentiment and demand, which remains mixed judging from commentary coming from large US retailers.
Dial back a bit the negativity on the economic outlook. If I’m managing a big company of course I’m prepping for the worst. But the economy is starting from a strong place, with more jobs than takers, and is adjusting to higher rates. Riskier times, but may yet land softly.
— Lloyd Blankfein (@lloydblankfein) June 3, 2022
You may have heard pundits predicting everything from a “soft landing” (inflation moderates without the economy ending in a recession), to the current du jour “soft-ish landing” (a quarter or two of recession but economic rebound after), to outright longer-term recession or even stagflation. While no one has a crystal ball to predict the future (anyone telling you they are probably lying), we would echo Arthur’s closing thoughts that if there are any changes to the Fed’s policy as they grapple with inflation, it will be clearly telegraphed ahead of time. For now, expect markets (including crypto) to continue to move according to the macro. It is futile trying to predict the bottom and expect BTC and ETH to test fresh lows a few more times before we’re out of the woods. Say a prayer for altchains experiencing their first bear market - hopefully, they’ve garnered a strong enough community of developers and users to survive.
Quick aside: While a lot of the focus has centered on the moves of the Fed and the US economy as a whole, we’re also paying attention to other major economies - Europe, Japan, and China, which are also major players in the crypto market. In particular, the Chinese government has just announced a major stimulus package to accelerate their economy’s recovery from the pandemic. Although crypto is officially banned in China, they still boast a strong community of miners and investors, and a struggling Chinese economy could spell more trouble for crypto.
Bitcoin Miners Selling
Bear markets affect us all and miners are no different. On-chain data indicates miner flows to exchanges are rising every time there is a BTC dump. The negative correlation suggests that lower prices are forcing miners to sell BTC and cover their expenses.
Source: Compass Mining (as reported by CoinDesk)
It doesn’t help that either the difficulty adjustment algorithm for BTC has dropped since 26 May 2022, indicating that fewer mining rigs are being turned on.
Source: blockchain.com
Other big players like Argo Blockchain (ARBK), Core Scientific (CORZ), Riot Blockchain (RIOT), Cathedra Bitcoin, and Marathon Digital have also admitted to selling some BTC or plan to do so in the near term. This has prompted financial analysts to project negative forecasts of up to -70% for some of these publicly-traded BTC mining companies.
The pessimistic outlook is that everyone is scared and selling. Miners, in particular, will find it difficult to raise in an increasingly illiquid and risk-averse environment. Optimists, on the other hand, will say that BTC has held up surprisingly well, despite the onslaught of miner selling.
Crypto Layoffs
The slowing of crypto markets has finally begun to take a toll on the industry. Over the last few weeks, we have begun to hear of crypto companies, particularly exchanges, starting to lay off their workforce. Of note:
Source: layoffs.fyi
The news has sent ripple effects across the industry, particularly as exchanges are supposed to be amongst the most lucrative businesses in crypto. In 2021, Coinbase (not specifically picking on them but as a PLC their financials are publicly available) posted revenues of $7.4B and a Net Income of $3.6B; though this has been followed by a $0.55B Operating Loss in Q1 2022 alone. It’s interesting to speculate why exchanges are the ones cutting back now. On one hand, it’s possible that they may have significantly expanded their workforce in order to handle customer acquisition, onboarding, and servicing during the bull market, but once the bear market hit and volumes started dwindling, there wasn’t a need for such headcount anymore.
We are just a few months into the bear market and exchanges are making people redundant and rescinding offer letters. How badly are you guys managing your finances and headcount? You guys are in one of the most profitable sectors of crypto making billions just last year. 🤦♂️🤦
— Bobby Ong (@bobbyong) June 4, 2022
On the other hand, one could argue it was obvious that a bear market was incoming, and exchanges being so close to the pulse of the market, should have taken the effort to plan out their manpower and headcount better, instead of having to undertake sudden wholesale cuts. It’s also pertinent to point out that these cuts in the 10% range, are unlikely to make much of a dent in a company’s bottom line, or survivability in times of a severe downturn. For comparison, airbnb laid off ~25% of staff at the start of the pandemic.
Every company’s financial situation is going to be different, and particularly for those that may have overextended themselves during the bull market, it may be tough times ahead. While near-term market conditions for crypto are definitely choppy to say the least, and it’s reasonable to expect companies to reduce their expenses when the outlook is unclear, equally true is the oft-repeated mantra to BUIDL during bear markets. At times, crypto being a 24/7 market with an unhealthy obsession for “numbah-go-up” have sidetracked projects from focusing on longer-term sustainability. A quieter bear market where there are fewer such distractions should provide ample opportunity for teams to refocus efforts on building out greater products and services. Reducing workforce now may mean missing out on such opportunities that may pay off in the future.
At the same time, anecdotal evidence across crypto job boards suggests that there is still hiring demand across a variety of projects. For those who may have lost jobs or offers during this period, we extend our sympathies and urge you to explore these available opportunities. There are still lots to BUIDL and no better time to do it. #wagmi.
What else are we paying attention to
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US May 2022 CPI Data Release (June 10): As we’ve mentioned earlier, it’s all eyes on macro for now, and the CPI data will be crucial to gauge whether the Fed rate hikes are starting to have their intended effect on inflation. This is also the last major data point we’ll have going into the next FOMC meeting scheduled for June 14 - 15 the following week.
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Ropsten testnet Merge (June 8 - 9): One of Ethereum’s public testnets, Ropsten, will be undertaking its Merge around June 8 - 9. The planned Ropsten Merge earlier hit a snag earlier as the chain actually hit its Merge TTD (terminal total difficulty) way ahead of time before a Ropsten Beacon Chain has been deployed, but a new TTD has now been set. Given that there have been numerous shadowfork successes in the past, we’re optimistic that this Merge will also proceed smoothly, ticking off another key milestone in the path towards the eventual mainnet Merge.
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Whale watching: Markets are controlled by whales but they often tie their decisions to magic TA lines or developing news, creating a self-fulfilling effect. Sometimes it is pure manipulation, while other times it is in response to changing circumstances. Each trader will have their own bias and swear on their own indicators. However, it is difficult to deny that you often see overlapping relationships between them which were evident over the past week. Keep a close eye on order books across key exchanges like Bitfinex, Binance, Coinbase, and FTX. Look for breakouts in either direction as oscillation within rangebound prices compresses.
This article was produced in collaboration with Zhong Yang Chan. You can follow him on Twitter here.
Benjamin is an ex-consultant who is tapping into his legal roots to explore the world of crypto. Follow the author on Twitter @NeBB399
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