MEXC Opinion: The Crypto Market Still Needs Periods to Rebound

Fed Chair Jerome Powell, during the eighth and final meeting of 2022 on November 30, implied that the Federal Reserve is likely to increase interest rates by another 50 basis points. The previous Fed rate hikes were for 75 basis points.

Going through the data from the U.S. Department of Labor shows that the unemployment rate was significantly higher than the 3.5 percent that had been normal without showing any significant indicators of tightness before the pandemic.

Andrew believes that millions of jobs were empty due to the pandemic’s eve. A significant and continuing labor supply shortage has been created due to the pandemic, a gap that seems unlikely to close anytime soon fully.

Source: Congressional Budget Office

Import prices for fuel and non-fuel have declined recently in a few months, and so do the indicators of prices paid by manufacturers too. From early 2022, the core goods inflation has decreased by almost three percentage points.

Adding further, Andrew mentioned the possibility of recession as per the indicators and statistics. As a result, market predictions for a 50bp increase in December increased from 66% to 77%, reflecting its dovish character.

Bitcoin (BTC) surged about 1% over the news to $16,982. On the other hand, US stocks soared, driven by the Nasdaq Composite, which was up as high as 4% after the neural tone of Powell during the speech. Over the Fed Chief’s comments, other important indexes showed a moment upward. The S&P 500 ended up more than 3%, while the Dow Jones Industrial Average increased by 737 points. BTC was a little decoupled from US stocks.

The Federal Reserve’s interest rate hike had the least impact on the price drop of the cryptocurrency market.

The Federal Reserve's interest rate hike has a decreasing impact on the price fall of the cryptocurrency market.

From January 25 to 26, 2022, it was noticed that the Federal Reserve officially started to discuss the matter of interest rate hikes. The major hurdle is fixing the economic problems caused by the increase in US dollar liquidity starting in 2020. From the very first rate hike announced on March 26, it can be seen that the BTC prices have gradually increased, totally unaffected by the rate hikes.

Moving further Andrew also comments that when talking about the stocks, surprisingly, going through the historical data from the US stock market, even with very low-interest rates, selloffs continue to happen as we saw in the 1950s and again since 2004. Recessions followed rate hikes.

During the rate hikes, on average, the correction in the S&P 500 is nearly around 15%. Contrarily, during the recession  (even if it coincides with a cycle of rate increases), the average fall in stocks is almost double (blue circles and bars).

Source: Nasdaq Economic Research

If we see economic instability is usually brought on by inflation.  US stocks frequently have space to fall after the quantitative easing(QE), as the market assumes that Fed has begun to remove liquidity as a result of the weak economy.

Andrew’s views are that now we need to worry a bit about a recession after rate hikes. Can Bitcoin detach from US equities and leave the independent market, given the decreasing relationship between Bitcoin and the macroeconomy?

One more point to observe is the stablecoin cap. The cryptocurrency market has been unstable for weeks and is still volatile. Even though there has been a slight increase in the daily trend, the overall preference is still one of a bear market. For the market reversal signal, it needs to see the growing stablecoin market capitalization, which indicates that new funds are entering the market. As per the data taken from DefilIama, the overall market cap of stablecoins is nearly 140 billion, only half of its peak, with a downside. Currently, we can hardly see any sign of the money signals needed for a market reversal yet.

Source: DefiLlama

A predictive indicator for predicting market flows is TVL. The market's total TVL is around 42 billion, according to DefiLlama.

Source: DefiLlama

The overall weekly rise for TVL was 1.5%; on the other hand, last week, it grew by $0.63b. The TVL of Ethereum grew by 3.72% among them, and straight after three weeks of decline, Solana surged 6.97% for the week but only contributed 0.72% to TVL. Layer2’s public chain Arbitrum rose by 2.25%, polygon rose by 0.94%, and avalanche rose by 3.18%, but BSC and Optimism fell by 4.02% and 1.16%, respectively, last week. Roughly flat TVL claims there has been no market capitalization and no signs of activity.

Source: DefiLlama

In addition to the lack of financing, there still are risks from FTX's aftermath. As most of the liquidity in the crypto market is with major big market makers, including  Alameda, Wintermute, Amber Group, Genesis, etc. Market liquidity collapsed after Alameda announced the suspension of trading. The worst part is, following the FTX collapse, Amber Group, Wintermute, and Genesis also declared that their capital was trapped on FTX. Retail investors also ran into a panic to avoid risks. The market liquidity crunch situation was made worse by the presence of several factors.

In dozens of projects, Alameda has invested millions of dollars. Alameda also acts as a market maker to supply liquidity for these projects. As a result, market liquidity eventually collapsed.  The loss of FTX largely eliminated 1/8 of the market's liquidity.

Grayscale and Genesis both belonged to DCG. Genesis loses $1 billion, Grayscale's GBTC no longer has any subscribers, and it is no longer competitive due to the negative premium. We will see a further fall in the market if Grayscale's locked BTC is redeemed. DCG is expected to face the issue of insolvency, which would further the market's uncertainty.

So when will the market reversal be seen? The annualized return on US Treasury bonds has surged to 4.7%. However, DeFi's is only approximately 2%. The two yields might flip, which would prevent the market from turning around by pushing money out of the cryptocurrency market.

Until the U.S. inflation subsides, the financial market will be more positive. However, cryptocurrency markets usually recover before traditional finance markets do. While the cycle for US stocks normally lasts 12–15 years, it is often only 3–4 years for Bitcoin. Once we see a stabilization in the macro economy, there will be a high possibility of a turning point.

Deleveraging is another crucial component. High leverage is closely related to the bull market's prosperity. If we take an example, 3AC is famous for its highly leveraged bets, borrowing a lot of funds from various companies and investing in different projects. Its assets under management reached $10 billion in March 2022, and it included tokens such as Avalanche, Solana, Polkadot, and Terra in its investment portfolio. After its collapse, the BTC fell by more than 30%.

When compared with conventional finance, the crypto sector is often more leveraged.  The process of deleveraging is relatively more severe and acute in the setting of restricting global funds.

However, the actual reversal point will happen after deleveraging. After a long period of volatility at the bottom, it will lead to a rebound.

The evolution of a bull market is inseparable from the birth of new assets and scenarios. To build a strong public chain, performance support is needed for the implementation of new scenarios. Stronger public chain performance support is required for the implementation of new scenarios. With the arrival of new public chains, increased Layer 2 maturity, and improved infrastructure, the market will have the potential for a successful start.

Andrew’s final conclusion is that, at last, technological advancement is required for the growth of the bull market.