Nobody was quite expecting a big news week in the days following Ethereum’s long awaited Merge event, and whilst the events since haven’t exactly been earth shattering, there’s been enough going on to unnerve the markets enough to potentially see some volatility incoming.
The main news of the week so far is probably the news that Wintermute was hacked to the tune of $160M from it’s DeFi market maker. The company has said that its CeFi and OTC (Over the Counter) operations are not affected, and with early reports suggesting a private key leak caused the attacker to gain access to the funds.
As we predicted at the time, the Merge was indeed the precursor to some pretty wild volatility on the markets, with Ethereum twice testing, and both times rejecting, the minor resistance level at $1655.
That was all it took. With buyers reluctant to step in, selling pressure took over, and the following few days saw the Number 2 crypto shed over 22%, dropping to a low of around $1280 on Monday.
Bitcoin, and other alts fared poorly too, seemingly following ETH’s cliff drop, with BTC shedding 10% to print what HODLers will hope is a new bottom at $18260, the lowest it’s closed since the great DeFi apocalypse in June 2022.
So what’s next for the crypto market? Are we going to see increased volatility, or are we to expect a period of calm after the continuing bear market stampede which was wiped out almost 1.5 trillion dollars from the crypto market this year. That’s right - to put that into perspective, that’s roughly equal to the total GDP of South Korea, Australia or Russia evaporated in just shy of 10 months.
At the time of writing this article, crypto enthusiasts, stock market investors and economists are waiting with baited breath for the Federal Reserves FOMC statement at 2pm EST. This is an unusual FOMC meeting, which is probably going to have a major impact on almost all money markets around the world. Given the unexpectedly high level of inflation as reported in the CPI (consumer prices index), it seems highly unlikely that the Fed’s previously Dovish position will continue, and many traders are expecting a 75 Base Point hike. Of course, nobody really knows what will happen next, but let’s take a look at both the thesis’ of both Bears and Bulls following the Merge.
If the Fed does indeed announce a 75bps (or potentially an even lower level) rate hike, we may actually see a push in both the stock market and, by extension, the crypto markets too. This is because most traders likely believe a 75 base point hike was already priced in by the massive dump earlier in the week.
Therefore, a still timid Fed, which some have speculated may be under a great deal of political pressure ahead of the November Mid-term elections, could possibly announce a lower level rate increase, and this will probably see dip buyers step in to gobble up the lows. Volatility works both ways, of course, and markets do thrive on a bit of good news (for a change).
The Bull thesis also rests on the idea that the bottom is already in. In fact, with the exception of a bit of short-term downside, it’s entire possible that, following a second bounce off of the support at $18260, forming a double-bottom inverse Head-and-Shoulders pattern, Bitcoin could indeed pick up some traction again - but only if volume levels improve dramatically.
Bearing in mind that over 60% of Bitcoin wallets have not sold during this years Bear market, with on-chain metrics indicating a five year long HODL record. Retail it seems, which likely accounts for the majority of individual wallets, has a positive long-term outlook.
It should be noted, also, that given world events at the moment, that we could be reaching a climax of peak fear - and this historically can be seen as quite positive for crypto - because after Peak Fear often comes massive FOMO.
And one more thing - Nothing has fundamentally changed for Bitcoin this year… other than more institutional interest. And now, even Blackrock is getting in on the action, launching its own private BTC spot fund last month. Where Blackrock goes, so much of the institutional market follows, and this could mean seismic inflows in the not-too-distant future.
However, it does seem as though the short-term Bull case probably does rest on the shoulders of Fed Chairman Powell today.
Escalating tensions and ramped up rhetoric from Politicians, out-of-control inflation leading to a tightening of the money supply, an energy crisis and talk of lean-times incoming are all fear indicators which could have a continuing negative effect on the markets.
The money printing machines have spent the last 2 years going “brr” and the money supply is so overheated you could probably fry an egg on it. This situation is not going to be fixed anytime soon.
The fact is that the traditional money market does affect the crypto market, especially when liquidity is getting squeezed. And right now, liquidity looks like it’s getting throttled by a 16-foot hungry Anaconda.
The bear case is simple. The Fed isn’t going to pivot, and there will be no timely “Fed Put” (the Fed Put is the idea that whatever happens, the central banks will simply print their way out of short-term trouble, which settles markets in the near term, but ultimately it really just kicks the can down the road, the prevailing and ongoing strategy which has been running for decades).
But one thing is for sure. If the FOMC announces a 100 base point hike today, or if it announces further rates this year, markets, all markets, will more than likely puke, and we are likely to see not only a continuation of the sell-offs, but potentially an acceleration. And if the hike is above this rate, well, frankly, all bets are off.
The Bear case is not pretty. In these scenarios, we might see a huge capitulation, with Bitcoin retracing to mid-2019 levels. What this would do to smaller market cap crypto’s is anyone’s guess.
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