Continuing with 2022’s trend, there is a lack of positive excitement in the crypto market. While Bitcoin and altcoins have remained stagnant to start 2023, there are a few reasons why volatility could spike in January.
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Market caps during the 2022 holiday period. Source: Arcane Research
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Winklevoss Letter to DCG stirs up bankruptcy FUD
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On Jan. 2, Cameron Winklevoss, the co-founder of Gemini, penned an open letter to Digital Currency Group (DCG) founder Barry Silbert, demanding answers on the $900 million in locked customer funds. Gemini launched the “Earn” program in coordination with Silbert but $900 million of customer money has been locked since Nov. 16 due to DCG liquidity issues. After the letter, Crypto Twitter began generating FUD toward DCG, believing there to be liquidity issues akin to 3 Arrows Capital and FTX.
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The financial strain the large Gemini hole could place on DCG is significant because they may be forced to sell sizable GBTC and ETHE positions, along with other positions in trusts run by their sister company Grayscale. According to Arcane Research, another path for DCG to meet debt obligations would be to initiate a Reg M distribution, allowing holders of GBTC and ETHE positions to redeem them for the underlying assets at a 1:1 ratio.
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Vetle Lunde, senior analyst at Arcane Research, noted:
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“A Reg M would cause a massive arbitrage strategy of selling crypto spot versus buying Grayscale Trust shares. If this scenario plays out, crypto markets could face further downside.”
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Grayscale trust holdings of circulating supply. Source: Arcane Research
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Fear is high and liquidity is low
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The DCG and Gemini drama comes during a period in the market where sentiment is down. Despite evidence that investors plan to participate in crypto in 2023, most market participants are not feeling bullish and are reluctant to engage with risk assets. The index currently sits at 26 out of a 100-point scale, which is the same as in December.
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Fear and greed index. Source: Alternative.me
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Such a high level of fear is even more significant during periods of low liquidity. Market activity continues to fall, reaching volumes not witnessed since Binance introduced zero trading fees for BTC pairs on June 24. The low spot trading volumes suggest that muted market participation will continue in the early part of this year.
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BTC volume with and without Binance. Source: Arcane Research
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If DCG were to take the Reg M path and spot market volume remains low, a correction in crypto prices could sharpen in the short-term.
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The upcoming economic calendar hints at possible volatility
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As shown below, macro markets have a busy start to 2023:
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Wednesday, Jan. 4:
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ISM manufacturing PMI (US factory activity)
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US JOLTs (job openings)
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Federal Open Market Committee (FOMC) meeting minutes
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Thursday, Jan. 5:
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US balance of trade
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Friday, Jan. 6:
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Nonfarm payrolls and unemployment data
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ISM non-manufacturing PMI (a survey of business conditio)
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Sunday, Jan. 8:
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Gemini settlement offer to DCG expires
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Thursday, Jan. 12:
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US consumer price index (CPI) report on inflation
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Friday, Jan. 13:
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US banks start Q4 2022 earnings reports
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If the numbers are below expectations or anything out of the ordinary occurs, the equities market may react by selling off.
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Reduced spot volumes are coupled with BTC volatility reaching a 2.5-year low. According to Lunde, the low volatility period will not last too long:
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“These low volatility periods rarely last for long, and volatility compression periods have previously tended to be followed by sharp moves, even in stagnant markets.”
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BTC 7 and 30-day volatility. Source: Arcane Research
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Some analysts believe that the Jan. 12 United States CPI report will show a spike in inflation. If this is the case, the Federal Reserve may continue to raise interest rates, which has caused crypto’s market cap to decline in the past.
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With the possibility of further interest rate hikes combined with the current market sentiment, potential DCG bankruptcy and decreased market liquidity, the crypto market could react with another drop to the downside.
