Cryptocurrency Market Analysis

High inflation worries many investors today. One would expect that rising inflation would play into Bitcoin’s hands, but recently the asset has been showing a correlation with risky assets and stock markets such as the S&P500. In recent weeks, this correlation has weakened slightly, but this does not mean that Bitcoin is now immune to any major macroeconomic events.

People are also worried that the Federal Reserve will raise interest rates, possibly as early as March. However, some analysts suggest that perhaps this is already embedded in the price.

In general, the picture with Bitcoin remains the same. The data on the network still shows a very bullish picture, as HODL hold their BTC tightly. However, there is still a lack of new demand. This divergence, combined with significant resistance zones just above the current price, may lead to Bitcoin moving mainly sideways for a long time.

But, let’s look at the market in more detail.

The last 7 days on the cryptocurrency markets

Cryptocurrency markets, according to data provided by Coinmarketrate.com, remain in a stable neutral position. The inflation indicator published last Thursday, which increased by 7.5% year-on-year, scared both traditional and cryptocurrency markets. Traders appreciated the prospect of a rapid rate hike.

In addition to the (increasingly) usual volatility caused by macroeconomic factors, the cryptocurrency industry was surprised by the news that US law enforcement agencies seized stolen Bitcoin worth $3.5 billion from a not very smart couple. In addition, Binance invested $200 million in Forbes, a publication they once sued for libel. Finally, KPMG – one of the largest accounting firms in the world – announced the inclusion of Bitcoin and Ethereum in its balance sheet.

• Bitfinex Exchange tokens have reached a historic high

Exchange tokens – cryptocurrencies issued by exchanges have outpaced other sectors of the crypto industry since the beginning of the year. They allow their owners to enjoy lower transaction fees, vote for new coins and receive bonuses for passive bets. To better understand this trend, the above is a graph of tokens on Binance, FTX, Huobi, Bitfinex and Okex. Although exchange tokens provide tangible benefits to owners, they also serve as an indicator of the success of the exchange and often correlate with news events.

The LEO by Bitfinex and the FTT token by FTX showed the strongest growth over the past year, rising by 69% and 18%, respectively. Last week, Bitfinex’s LEO token reached a historic high after the US Department of Justice confiscated almost $3.6 billion as a result of the Bitfinex hack in 2016. Initially, the token was issued to refinance Bitfinex after the hack. They did this with a promise to redeem the tokens and destroy them if the exchange returns the funds. The FTX token also rose after the exchange’s recent $400 million funding round, which brought its valuation to $32 billion.

• The average transaction size on Curve exceeds 1 million US dollars

Curve is one of the most popular decentralized exchanges for swaps with stablecoins, thanks to its unique liquidity mechanism, which allows you to detect prices more effectively compared to competitors. DEX attracts large traders who want to exchange stable coins without the risk of slippage, and currently has the highest average transaction size among all liquidity pools. In November, the average daily trading volume on Curve exceeded $1 million for the first time, and is now well above the 2021 average.

In general, the trading volume on Curve remains relatively low compared to other DEX, but it has found its niche in large swaps of stable coins. Despite a relatively small market share in terms of volume, Curve owns the largest share of DeFi Total Value Locked (TVL) on Ethereum (13%) – more than twice as much as TVL Uniswap.

For other DEX, the average size of transactions compared to them is negligible and amounts to $5-25 thousand. However, they are much larger than the size of trading on CEX. High fees for transactions with Ethereum make trading on DEX prohibitively expensive for many small traders, which contributes to high transaction sizes.

• Coinbase’s Market Share is Growing as Exchanges Find It Difficult to Compete in the Regulated US Market

Competition in the vast US cryptocurrency market is intensifying as global giants such as Binance and FTX open regulated branches in the US focused on a more institutional type of traders.

Coinbase’s market share reached an all-time high of almost 60% in December, and fell back to 51% in January. The growth was due to high trading activity on the BTC-USD Coinbase markets during the omicron sale and the low turnover Christmas period. Bitfinex’s market share has plummeted from over 50% in 2018 to just 14% in 2022. In contrast, LMAX Digital and Kraken were able to retain their share for the most part.

Although in recent months they have been actively investing in expansion in the US, Binance.US and FTX.The US is still relatively small in terms of trading volume. However FTX.US It seems to be gaining momentum and has overtaken in just a few months Binance.US (3%) and Gemini (4%).

• Funding rates return to neutral territory

Bitcoin futures financing rates have returned to neutral territory after turning negative and reaching their lowest level since the January sell-off. Futures rates are the cost of holding a long position and an indicator of the general mood of the market and growing demand. When they are negative, it means that short positions pay for long positions, and bullish demand is muted. In early February, funding rates were changed to neutral on all exchanges except Okex. Open interest in perpetual Bitcoin futures remained relatively stable and hovered around $9 billion, which indicates a relatively low level of leverage.

Meanwhile, the put-call ratio continued to grow last week, which indicates a more bearish sentiment in the options market.

The coefficient is calculated based on the ratio of trading volumes for puts (bearish bets) and call (bullish bets) options, and when it rises, it indicates an increase in demand for bearish bets. Over the past month, the demand for puts has increased compared to call, as traders have been looking for protection from volatility and a decrease in risk appetite.

• Inflation reaches 40-year high

Inflation in the US rose by 7.5% in January, reaching another multi-year high, showing no signs of slowing down. The growth exceeded market expectations and was caused by an increase in spending on goods and services, which is a sign of increased inflationary pressure. It can be noted that for most of last year, the BTC price moved in tandem with rising costs, and in November there was a denouement. As inflation continued to rise, cryptocurrencies fell along with shares of technology companies, as the US Federal Reserve adopted a restrictive course – abandoned the concept of “temporary inflation”, and began to reduce monthly bond purchases.

Although the correlation between Bitcoin and stocks has decreased slightly over the past two weeks, the overall macroeconomic background for risky assets seems to be negative. Strong inflation figures and a tightening labor market speak in favor of an aggressive Fed rate hike in March by 50 basis points instead of the usual 25 basis points.

However, as central banks around the world synchronously stop monetary stimulus during the pandemic, fears are growing about a policy mistake – too much tightening, which will lead to a recession. In early February, consumer sentiment in the United States fell to its lowest level in 10 years, indicating that demand is already weakening.

Stock market volatility amid growing concerns about policy tightening

The Fed’s restrictive turnaround and growing inflationary pressures have led to increased stock market volatility in recent weeks. The 20-day moving volatility of Bitcoin, Ethereum and major US stock indexes is shown above.

We note that in January, the volatility of both Bitcoin and Ethereum increased sharply, but remained at a lower level compared to the summer. But the volatility of both the technologically heavy Nasdaq 100 and the broader S&P 500, on the contrary, has steadily increased since the beginning of July, as expectations rose from near zero to seven rate hikes in 2022.