Article Summary
- The recent slump in Bitcoin’s price has left many investors wondering what caused the decline and what the future holds for the crypto market.
- Various factors may have contributed to this recent downturn, including increased government regulations, with the passing of the MiCA regulation in Europe and crackdowns seen in the U.S.
- K33 Research believes that the crypto market’s correlations with U.S. equities will grow in the coming weeks, primarily due to multiple banking holidays outside of the U.S. shortly.
Though the cryptocurrency market has started the year bullish, a new report by K33 research reveals that the cryptocurrency market is losing its momentum with the recent crash in Bitcoin’s price over the past two weeks.
It is important to remember that as with any investment market, the crypto market is not immune to volatility and fluctuations. On April 23rd, 2023, the crypto market experienced a significant dip in prices, with Bitcoin, the largest and most well-known cryptocurrency, dropping by 10%. This sudden slump has left many investors wondering about the major cause of the decline and what the future holds for the crypto market.
Various factors may have contributed to this recent downturn, including increased government regulations, with the passing of the MiCA regulation in Europe and crackdowns seen in the U.S. In this article, we will dive deep into the current market conditions and project where the cryptocurrency market will likely end up at the end of the second quarter.
Key Facts
After a large sell-off on April 19, BTC slumped lower before stabilizing at $27k over the weekend, leading BTC to see a 7% downside in the past seven days. ETH underperformed, seeing losses of 12%, as open interest in ETH derivatives quickly retraced. The week has seen several dormant wallets being activated, leading to growing fears of more supply reaching the market. We have also observed that certain commentators suggest that the U.S. government has been selling more Silk Road bitcoin, which seems unlikely given that the Silk Road-related wallets have yet to see any withdrawals.
The macro calendar is once again turning busy. As pointed out by Noelle Acheson, the former head of research at CoinDesk, explained that the 10y1m yield curve has been un-inverted, which has previously been a recession indicator. U.S. GDP numbers will be released on Thursday, while U.S. Core PCE numbers will be released on Friday. Both releases are potent volatility catalysts as we approach the May 3 FOMC interest rate decision, where the market is expecting a 25-bps hike.
K33 Research believes that the crypto market’s correlations with U.S. equities will grow in the coming weeks, primarily due to multiple banking holidays outside of the U.S. shortly. May 1 is a banking holiday in most European countries, in addition to South Korea, China, and Brazil. China, Japan, and South Korea will face additional banking holidays in the coming week, furthering the importance of U.S. market flows.
Ether, the native token of the Ethereum blockchain, has retraced some of its upsides following the initial post-Shanghai upgrade strength, currently trading at 0.066 vs. BTC, down from 0.071 last Tuesday. The underperformance has been accompanied by a complete retracement of Ether’s CME OI (derivatives).
The Ether OI has fully retraced from the past week on CME. Last week we noted burgeoning open interest at CME, seeing a weekly growth of 44% following the Ethereum Shanghai upgrade. This growth was very short-lived, and CME’s Ether OI has fully retraced, sitting at 207,550 ETH, lower than the pre-Shanghai upgrade levels of 220,800 ETH.
The OI in CME’s Ether futures fell rapidly on April 19 and April 20, coinciding with the days ETHBTC experienced the most significant intraday volatility over the past week. This could indicate that the previously noted burgeoning OI in CME’s Ether futures was a short-term momentum play, and we now stress that short-term institutional speculators have largely reduced its exposure.
The downside experienced in the past week has caused BTC to erase all upside experienced since late March. The Large Caps index outperforms the rest of the market, fueled by the excess strength experienced in ETH following Ethereum’s Shanghai upgrade.
Last week’s broad market sell-off coincided with growing volumes, leading the 7-day average daily volume to climb a further 9% in the past week. The 7-day average BTC spot volume currently sits at an April high of $4.4bn, following an unusually slow month, primarily caused by the slow market during the Easter holiday.
BTC’s 30-day volatility remains at 3-month lows of 2.1%. While BTC’s 30-day volatility trends lower, with BTC seeing a stale performance over the past month, the 7-day volatility climbed higher after BTC’s April 19 sell-off. The weekly volatility has pushed to 2.8%, an April high.
BTC has oscillated between $27-28k since the weekend, a price range we became accustomed to in the three weeks from March 18 to April 8. The falling volatility and BTC revisiting its consolidation range have caused implied volumes across tenors in BTC options to trend towards attractive price levels to revisit straddle strategies.
The slowing momentum and the prevailing contango have likely been key contributing factors in the negative flows from futures-based ETFs in the past week. BITO saw outflows amounting to 765 BTC in the past week, whereas BITI has seen inflows amounting to 505 BTC.
In addition to outflows from futures-based ETFs, active market participants have also taken their foot off the pedal over the past week. The active market participation share has declined to 41% as open interest falls back to 70,000 BTC. This week’s futures roll, BTC’s worsening momentum, and approaching macro catalysts with next week’s FOMC approaching may be factors leading to reduced exposure.
Coinbase and Gemini announced in the past week that they intend to launch offshore derivatives exchanges, seeking to gain market share in the lucrative perp market. Coinbase has yet to see a meaningful adoption of its BTC futures, with its volume fluctuating at 0.5% to 2% of the CME volume. Expanding offshore to perps may represent a promising opportunity, particularly following the void that erupted past FTX.
What to Expect
Currently, BTC, ETH, and BNB represent the three largest. Both ETH and BNB have a thriving DeFi user base and unique drivers of price and demand, which could generate temporary or long-term correlations within crypto to decline as trading opportunities arise or spread trade opportunities. Investors, should they choose to invest in the market, should consider these coins to base a majority of their portfolio in.
For the quarter, analysts have suggested that with the current market trend and the possibility of a recession, the second quarter will likely be bearish for the market that has already rallied over 50% Year-to-Date.
Conclusion
In conclusion, the recent 10% slump in Bitcoin’s price has caused the cryptocurrency market to lose its momentum, with concerns over the increased government regulations contributing to the decline. The market is currently experiencing fluctuations, and several factors may influence its future, such as the U.S. government’s economic policies and banking holidays.
It is essential to remember that the market is not immune to market fluctuations. Investors need to stay informed about market conditions and make informed decisions to minimize risks. Despite the recent slump, some experts predict that the crypto market will bounce back, and investors who remain patient and stick to their investment strategies may be able to reap the benefits in the long run.
