Last week the constant sideways movement finally turned to the downside. Post CPI data and terminal rate announcement from the US, commentary from the EU on keeping the intense hike, and quantitative tightening commentary caused the markets across the board to drop severely.
Varied spending by Japan and US
The Bank of Japan announced a hike in its bond yield range for the first time in decades. Across the time for hyper-growth, Japan has sustained sub-zero interest rates for the longest time possible. The announcement is to buy heavily from the dormant bond market and increase the yield range to 50 BPS on each side from its prior range of 25 basis points. Which, in turn, will have a similar effect on BTC and another risk on assets that the increasing yields had in the US. As more money flows to the safer space, money in risk-on investments will deplete and create a bad environment for growth stocks and technologies.
While the effects of the buying will occur with time, the immediate effect on BTC and ETH was positive and better than the S&P 500. While the short-term pain will stay, long-term inflation control is crucial for the overall stability of the economy and markets. A possible factor in the opposite direction is also coming from the US. An immediate bill for funding various initiatives and operations will be presented on coming Friday. The spending of this has already been decided, where a portion of the same can land up in capital markets too. This will create a scenario similar to the start of 2020’s epic bull run and can cause a broad market rally for a short period.
Various macroeconomists have suggested an overall market melt up for quite some time, but the macro sentiment has declined this year. The following two months will be full of volatility, affecting the markets throughout the year. Next year, a sharp drop in valuations across the board is expected, but the timeframe for relief before that is hard to gauge. February will see extreme volatility from the distribution of more than 100k BTC to the users of hacked exchange Mt. Gox, which along with many other unlocks and the unlocking of stacked ether in the ETH 2.0 update, can create immense sell pressure and bring down the prices in the crypto space. While bullish upgrades and developments continue in the space, short-term pain is evident across cycles.
Risky Employment Data
A consistent commentary we have maintained is around the heavy job losses or unemployment that will occur next year. But a recent report by the Philadelphia Fed has brought up the difference in job market participation by the BLS (Bureau of Labour Statistics). The report outlines the difference in the method implemented by the two bodies and that there’s a possibility of approximately 2.7 million jobs in the market that don’t exist. According to this report, the number or average jobs created across states is around 10k and not more than 1 million for the earlier quarters of this year, and the data for current months is set to release sometime in Feb next year. This vast delta of job reporting can fuel the market’s recent volatility.
Essentially the rigidness of this study has the potential to highlight that FED has been raising rates on inaccurate data and needs to pivot around immediately, not push the economy into a deadlier trench of depression. Employment data will be a crucial deciding and navigating factor for the next two quarters.
Showdown nears for crypto bankruptcies
This week a massive drop in altcoins was seen due to a considerable sell-off from the cryptos held by Digital currency group DCG. This move was a possible path to sustain and support genesis trading. The GBTC trust also came to investors’ attention when grayscale started approaching investors to buy the underlying BTC at a discount to the GBTC value, thus creating more liquidity to support the business.
This move denotes a modus operandi to lose a few battles to win the crypto prominence war and not let markets destabilize from the collapse of Genesis trading. All strategies across the board see this ambiguity of genesis and the looming covid resurgence fears as the most negative catalysts possible that can drive the market lower faster than expected. Amidst all this, Sam Bankman Fried (SBF) has been extradited to the US and will face hearings for all the charges against him by various government bodies and regulators.
The FTX ex-employees and teammates of SBF, Gary Wang and Caroline Ellison, have taken a guilty plea and agreed to testify and help the authorities in the case related to FTX’s collapse and to prosecute SBF on all charges possible. While the bankruptcy process is still taking its due time, these hearings have the potential to reveal graver truths about the whole process and how everything went south. But the main things to look at here are how these will affect the upcoming crypto regulations and the tussle between the establishment and the emerging asset class.
Even though the market has seen multiple structural centralized failures and bankruptcies, the reaction of crypto assets would have been similar with or without them as a response to the grave macroeconomic conditions that have emerged this year. While prices are essential, crypto’s resilience starkly differs from other assets and has a different prominence in its portfolio.
Bitcoin returns were -5.7% for this week. The Alpha Blue Chip Focused Strategy returns were -16.77% during the same period ( 15 DEC – 22 DEC ). The Top Cap Digital Assets Strategy and Arbitrage and Balanced Opportunities Strategy returns were -10.39% and -2.59%, respectively.