It’s the start of a new year, but crypto markets are finding it hard to leave behind the performance drivers from 2022. That includes a macro environment focused heavily on slower global growth as well as crypto specific concerns over contagion. For example, a resolution to the Genesis Global Trading situation doesn’t appear to be any closer, while Silvergate reported a decline in deposits from its digital asset customers.
On the upside, the ETH/BTC cross appears to be breaking higher, which typically happens during periods of more favorable market sentiment. This could also be a reflection of positive expectations with regards to staked ETH withdrawals potentially being enabled in March as well as progress on the network’s upgrade roadmap for scaling.
Finally, please read our 2023 Crypto Market Outlook, where we present the key themes that we expect to prevail this year as well as the major trends in Bitcoin, Ethereum, L1s/L2s, stablecoins, regulation and more.
Market View
Macro vs contagion risks
Macroeconomic drivers continue to dominate crypto performance, as global growth is expected to slow in 2023. Fears of recession are prevalent. IMF Managing Director Kristalina Georgieva (January 1) said activity in all regions will take a hit and that a third of the world will be in recession this year. Expectations are particularly bleak for Europe, although it’s still possible for the US to avoid a hard landing in our view. The reopening in China on the other hand is likely to (eventually) boost activity in the region in the medium term, even if higher covid-19 cases weigh on sentiment in the short term.
The December US Federal Reserve (Fed) meeting minutes (released January 4) indicate that the likelihood of a pivot anytime soon is low. But in our view, market players are less focused on the central bank’s forward guidance and more on the economic data. Plus, we will see a change in the board’s composition that may tilt it away from its current hawkish bias, starting in February. Fed fund futures are pricing in a 25bps cut in 4Q23, which we think could support a sustained recovery in risk asset performance if it materializes.
Meanwhile, the lingering risk of contagion in crypto markets continues to keep aggregate transaction volumes low, looking at the on-chain data (see chart 1). Digital assets exchange Gemini has been publicly applying pressure on crypto lender Genesis Global Trading and its parent company Digital Currency Group (DCG). Genesis’ Interim CEO Derar Islim has signaled that finding a suitable outcome for affected clients will take “some additional time”, which in our view sounds more like a matter of weeks rather than days. We believe that a resolution here is necessary for BTC and ETH prices to break out of the tight ranges they’ve been trading in since mid-November 2022.
Chart 1. BTC on-chain volume of transactions
Separately, Silvergate Bank’s preliminary 4Q22 financial metrics revealed that total deposits from its digital asset clients fell to US$3.8B as of end-4Q22 compared to $11.9B as of end-3Q22. The WSJ linked this to an $8.1B bank run associated with the collapse of FTX during the previous quarter. Earlier this week, the Fed (together with FDIC and the Office of the Comptroller) published a joint statement to warn US banks against the risks stemming from the digital assets sector, although they didn’t offer any specific policy proposals.
Derivatives
The ETH/BTC ratio is one of the key indicators of risk on/risk off sentiment in the crypto market, in our view. Looking at the technicals, the cross recently broke out of its triangle formation to the upside (favoring ETH), which typically happens during periods of more favorable sentiment. This could also be a reflection of positive expectations with regards to staked ETH withdrawals potentially being enabled in March as well as progress on the upgrade roadmap for scaling.
Chart 2. ETH/BTC cross breaks out of triangle formation
Nevertheless, funding rates on BTC and ETH perpetual swaps have continued to hew close to zero for the last two weeks, with futures open interest on these assets staying relatively stable at $9.1B and $5.4B respectively. Among altcoins, the funding rates have been acutely negative on SOL and BNB for idiosyncratic reasons, with open interest on the former having increased from $185M to $448M over the last two weeks while decreasing for the latter. We think it’s important to pay attention to over positioning in these perps, as it may portend a short squeeze.
Meanwhile, BTC options open interest declined from over $5.5B at the end of last year to $3.4B as of January 5, while ETH open interest fell from $5.1B to $3.2B over the same period. The 25D 1m put-call skew for both BTC and ETH dropped sharply to 5% and 9% respectively this week before retracing higher towards 11% (for both), suggesting we may be seeing a pullback from peak short-term demand for put downside protection.
Coinbase Exchange and CES Insights
Through the holidays and the new year, weekly volumes were below trend, which is expected this time of year. Traders are also dealing with a good deal of uncertainty over future price action, which is likely contributing to those subdued volumes. While we did see two encouraging inflation prints in December and there are hopes that we are getting closer to the end of the tightening cycle, there is still concern over further contagion from the FTX bankruptcy.
The asset mix trading on exchange is typical of what we have seen in recent months, with BTC and ETH trading the top spot back and forth. Solana has also seen good interest lately, becoming the third most traded asset over the past 7 days. In late December, two of its top NFT projects announced they were leaving for other blockchains which caused further price declines. However, Ethereum founder Vitalik Buterin tweeted some encouraging words and said he hopes the community gets a chance to thrive. That led to a large rally and increased interest in the protocol.
On the CES desk, institutions have been pretty quiet over year end. Hedge funds have been net sellers while Traditional VC have been on the buy side. Smart Contract Platforms and Liquid Staking were the most active sectors.
Bitcoin Technicals
The BTC technical chart is likely to remain range bound for the foreseeable future with a bias to the bearish side. For the last month, BTC has traded in a fairly tight range ($16.5k to $17.5k) and given that the MACD has flatlined since, we wouldn't expect BTC to make a meaningful move over the coming weeks. Also, note that the StochRSI on the daily timeframe is steadily approaching overbought levels, although BTC would likely need to test the support at $16.1k before retesting the 2022 lows. But if BTC can successfully retest the EMA50 ($17.1k) and close above that level, a retest of resistance at $17.8k would be in play, albeit we find that unlikely at the moment. It is worth nothing that BTC has closed below its EMA100 for two consecutive months for the first time in its history. The chart remains structurally bearish.
