Crypto Market Shows Signs Of Bottoming (BTC-USD)

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In the past month, major events in the blockchain industry were still affected by the aftermath of the FTX fiasco. Several market makers and exchanges, such as Genesis and BlockFi, began to suffer runs. The panic in the markets was so intense that investors began to worry that Digital Currency Group might be headed for bankruptcy as well.

Meanwhile, liquidity for altcoins has nearly dried up. But contrary to the sentiment indicators, price action across the market has not sunk further. Bitcoin (BTC-USD) fell less than 3% before bottoming out. Combined with more indicators and the broader environment, we can say that the market has entered a long grinding stage.

A narrow miner capitulation zone

If Bitcoin’s historical cycles are any guide, the shutdown price of the mainstream mining machine can serve as a bottoming indicator. According to F2pool, with bitcoin falling to $16,000, most mining machines with a unit power of more than 40 watts per terahash – including the popular Antminer S17 series, Hornbill H8 Pro, and Hummer H9 Pro – have reached shutdown prices based on $0.06/kWh electricity cost and the current mining difficulty.

Since $16,000 is roughly the shutdown price for mainstream mining machines, support at this level should be strong – even stronger than the psychologically important $20,000 level. Reflecting the shutdown of miners, the Bitcoin mining difficulty fell by a great margin on Dec. 6, which surpassed the 5.01% cut on July 21, making it the biggest drop in 2022.

In terms of technical indicators, the Bitcoin Hash Ribbon has formed a death cross with the hash rate 30MA falling below the 60MA, meaning that the market is entering a period of miner capitulation. It will be a buy signal when the market comes out of the miner capitulation. So far, with a majority of miners reaching their shutdown price, we believe Bitcoin is stabilizing at a more reasonable valuation.

As small and medium-sized bitcoin miners are eliminated, the remaining strong miners are more likely to avoid selling in low-price areas, reducing the pressure to sell. That could stop the price of Bitcoin from falling. And as miners choose to hold on to Bitcoins rather than sell them at a loss, the dynamics of supply and demand in the market could shift, increasing the chances of a recovery.

Who is the smart money?

The smart money’s allocation to stablecoin peaked at 38% on Nov. 9 before going into a sustained decline. Stablecoins now account for 27% of the smart money’s wallet balances.

Just as stablecoin holders choose to sell off Tether, crypto holders would sell crypto into stablecoins when the future value of crypto assets is under question. Investing in stablecoins helps crypto holders reduce risk while limiting potential portfolio shrinkage. What’s more, by keeping money on-chain, whales can easily reallocate capital as they adapt to the evolving market conditions. At present, stables appear to be in the “oversold” zone.

When stablecoins’ percentage in the total market cap drops, investors will be more inclined to invest in Bitcoin than in stablecoins. This could lead to increased demand for Bitcoin.

Variables in the macro environment

At present, the internal fragility and macro environment of the crypto market have become the main influencing forces. These two forces alternate over time. As the internal problems of the crypto market continue to burst out, the influence of the recovering macro environment on the crypto market becomes more and more obvious.

The minutes of the Fed’s November meeting showed that members agreed there was little sign that inflation was easing. A purposeful shift to a more restrictive monetary policy would be consistent with risk management considerations. Bringing inflation down to 2% remains the Fed’s long-term goal, and that hawkish stance has not wavered.

But, unlike the September meeting, the November meeting turned dovish: A majority of Fed members thought it would be appropriate to slow the pace of rate hikes in the near future. Some members even argued that continued rapid monetary tightening would increase financial market instability. Members also discussed the impact on U.S. financial markets of the collapse in UK government bonds and the pension boom. Combined with the U.S. Treasury Secretary Janet Yellen’s recent proposal to buy back U.S. Treasury bonds, it can be seen that the deterioration of U.S. Treasury liquidity has become a major risk point of concern.

Expectations for the new year

The Federal Reserve announced a 0.50 percentage point interest rate hike, in line with market expectations, on Dec. 14. Meanwhile, it lowered its growth targets and bumped its unemployment rate outlook for 2023. Also, the Fed chair noted that the pace of rate hikes remains less important than the destination of the federal funds rate, and the Fed will continue to be focused on curbing stubbornly high inflation and supporting growth.

As the rate approaches the expected terminal rate based on the FOMC’s dot plot, it is highly probable that the Fed will be finished with rate hikes in the first half of 2023. Although both the monetary policy and the economic growth are likely to come to a turning point next year, the recent rally in U.S. stocks indicates that the market has not yet fully reflected the drag from the tightened policy. Under the backdrop of fast-paced rate hiking by the Fed and the ECB, the risks for financial market turmoil caused by the liquidity crunch cannot be ruled out.

What’s more, this round of massive rate hikes at unprecedented levels could trigger a hard landing of the U.S. economy, leading to an inevitable economic recession. That’s what investors worry about the most. Before this round of rate hikes, the debt level held by U.S. companies had already reached record highs. And the rate hikes significantly increase U.S. companies’ debt burdens, which means a debt crisis is possible if things continue.

Also, the Fed’s policy of raising interest rates next year could be influenced by the legal limit on federal debt. If the Treasury cannot borrow as usual, then the Fed will be under pressure to lower its cash balance and might have to reverse its policy of raising interest rates. In addition, with Congress unlikely to raise the debt ceiling in this year’s lame-duck session and with it not expected to address the debt ceiling next year, there will be greater uncertainty about the Fed’s policy of raising interest rates in 2023. In a low-liquidity environment, a Fed rate hike next year could lead to increased volatility and a potential sell-off in Treasury maturities near the debt ceiling deadline.

In all, we predict that the U.S. economy will probably enter a recession in the first half of next year. Historically, when the U.S. economy recedes, the Fed lowers the interest rate within no more than two months. This was true even in the period from 1970-80 when inflation was at extremely high levels. Inflation in the U.S. is moving downward now, caused by falling energy prices, easing consumer demand, recovery of the global supply chains, etc. It might fall below 4% before June of next year. Therefore, we believe the Fed will only hike another 50 bps in 2023, with 25bps each in February and March, before stopping and turning toward rate cuts from the mid-year.

In conclusion, the 50bps rate hike in December was reassuring. We believe the macro environment is showing signs of turning around, which bodes well for the bottoming of Bitcoin. We believe the crypto market is entering a bottoming stage, and traders could consider buying the dip if more convincing buy signals appear.