Continuing the trend of 2022, there is a lack of positive enthusiasm in the crypto market. While Bitcoin (BTC) and altcoins were flat at the start of 2023, there are a few reasons why volatility could pick up in January.
Winklevoss letter to DCG stirs bankruptcy FUD
On January 2, Gemini co-founder Cameron Winklevoss wrote an open letter to Digital Currency Group (DCG) founder Barry Silbert, demanding answers about the $900 million in locked-up client funds. Gemini launched the “Earn” program in coordination with Barry Silbert and the $900 million in client funds have been locked up since November 16 due to DCG liquidity problems. Following the letter, crypto Twitter began generating FUD towards DCG, believing there were liquidity problems similar to 3 Arrows Capital and FTX.
The financial pressure that the large Gemini hole could place on DCG is significant, as they could be forced to sell sizeable positions in GBTC and ETHE, along with other positions in trusts managed by their sister company Grayscale. According to Arcane Research, another avenue for DCG to meet its debt obligations would be to initiate a Reg M.
Vetle Lunde, Principal Analyst at Arcane Research, noted:
“A Reg M would trigger a massive arbitrage strategy of selling spot crypto vs. buying Grayscale Trust shares. If this scenario plays out, cryptocurrency markets could face a further decline.”
There is a lot of fear and little liquidity
The DCG and Gemini drama comes during a market period where sentiment is on the downside. Despite the evidence that investors plan to get involved in cryptocurrencies in 2023, most market participants are not feeling bullish and are reluctant to commit to risky assets. The index currently stands at 26 on a 100-point scale, the same as December.
Such a high level of fear is even more significant in periods of low liquidity. Market activity continues to fall, reaching volumes not seen before Binance introduced zero trading fees for BTC pairs on June 24. Low spot trading volumes suggest that low market share will continue into early this year.
If the DCG were to go the Reg M path and spot market volume remains low, a short-term correction in cryptocurrency prices could become more pronounced.
The upcoming economic calendar hints at possible volatility
As shown below, macroeconomic markets have a very busy start to 2023 with notable events.
Piss. January 4:
- ISM manufacturing PMI
- US JOLTs (job offers)
- FOMC Meeting Minutes
Thu. January 5
- US trade balance
Fri. January 6:
- Nonfarm Payrolls and Unemployment Data
- ISM Non-Manufacturing PMI
Sun. 8 January:
- Gemini’s settlement offer to DCG expires
Thu. January 12:
- US CPI Inflation Rate Report
Fri. January 13:
- US banks begin Q4 2022 earnings reports
If the numbers are below expectations or something out of the ordinary occurs, the equity market may react with selling.
The reduction in spot volumes is coupled with the volatility of BTC, which has reached its lowest level in 2.5 years. According to Lunde, the period of low volatility will not last long.
lunde said,
“These periods of low volatility rarely last very long, and periods of volatility compression have previously tended to be followed by sharp moves, even in stagnant markets.”
Some analysts believe that the January 12 US Consumer Price Index (CPI) will show a pick-up in inflation. If this is the case, the Federal Reserve could continue to raise interest rates, which has caused the market capitalization of cryptocurrencies to decline in the past.
With the possibility of further interest rate hikes combined with current market sentiment, the possible bankruptcy of DCG, and declining market liquidity, the crypto market could react with another drop to the downside.
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