Global markets were sent reeling overnight as notes from a December U.S. Federal Reserve meeting revealed it was planning on raising interest rates sooner and faster than expected — and the crypto market was not spared the downturn. Participants at the Dec. 14-15 meeting said the rate increase could be brought forward due to the strengthening economy and higher than expected inflation, according to reporting by Al Jazeera.
“Lower rates are supportive of higher prices, it makes the whole situation, the whole environment, a bit easier to manage,” said Justin d’Anethan, crypto markets analyst who will soon be joining Amber AI as institutional sales director, in an interview with Forkast.News. “When the Fed starts to increase the rates, it means the easy money environment that we’ve been in for the past two or three years or actually more, depending on how you look at it, is slightly coming to an end. And that’s of course scaring those people, the investors, the business holders, the stakeholders of the economy all around.”
Most major tokens were down at least 6% overnight, with top 10 tokens Solana, Terra and Polkadot all dropping around 11%. Market leader Bitcoin had dropped as much as 8% within the past 24 hours, after trading sideways for most of the past week. Bitcoin was trading at US$43,170 as at press time, down close to 40% from its all-time high that it set in November last year, according to CoinMarketCap.
Charting a similar path, Ethereum lost almost 10% within the same time period and was trading at US$3,461 at press time. Like Bitcoin, Ethereum too had been trading sideways for most of the year, as some industry watchers speculated the poor price-performance was tied to lingering concerns of a rate rise revealed this morning but hinted at by the Fed for several months. Similarly, Ethereum is currently trading 30% below its all-time high from November, according to CoinMarketCap.
This morning’s sell-off is just the latest in a series of market crashes that are heavily correlated to traditional markets or external factors. There were several instances in the closing months of last year over the discovery of new Covid variants or lingering doubts on Chinese property giant Evergrande’s ability to meet debt repayment cast a shadow over global markets — and crypto followed suit. But it’s not all bad news, from d’Anethan’s point of view.
“The silver lining for me is that I think it’s actually positive for crypto long term,” d’Anethan said. “It essentially says crypto markets aren’t this small, isolated asset that large investors aren’t preoccupied with, but rather it has become something that large funds, large investors are looking at or invested in. And so, when there’s a broad market sell-off, it does impact Bitcoin as well, and so crypto markets as a result.”
Another industry analyst told Forkast.News that as the market and existing fundamentals continue to evolve through the rise of decentralized finance, play-to-earn gaming and non-fungible tokens (NFTs), many older patterns of market analysis are losing relevance — as the market has grown in size, there are now more competing narratives than ever before.
“Usually, when Bitcoin investors respond to macro events, for example with a sell-off, altcoin markets undergo an amplified sell-off with capital taken out of highly speculative risk tokens in favor of safer crypto assets, including stablecoins, but also Bitcoin and Ethereum — usually this results in a dominance reset,” said Ben Caselin, head of research and strategy at cryptocurrency exchange AAX, in a written statement to Forkast.News.
“This time around, however, as more participants have come into the market, including VC investors, businesses and entire swathes of people that have come into the space through NFTs, a meme or a game token, market dynamics are changing.”
More than US$800 million has been liquidated from crypto markets in the past 24 hours, though that rate does appear to be slowing down, according to aggregation site CryptoMeter. While there was some initial concern that 24-hour liquidation levels may reach US$1 billion, d’Anethan believes the worst is behind us, and that such levels are generally only reached when markets are much more leveraged than they currently are.
“I don’t think the liquidations were triggered by market manipulators or whales trying to push prices down,” d’Anethan said, “they were just a reaction to what happened in macro markets. So, it might go down if macro markets keep on going down and people keep on selling, obviously. But I think we’ve seen the worst for now in the short term.”
One token alone is making the bulk of these liquidations, however; memecoin SHIB has accounted for over US$400 million of the total liquidations, and almost entirely from one exchange BitMex, according to CryptoMeter. SHIB’s price dropped more than 10% in the past 24 hours and was trading at US$$0.00003006 at press time, almost 70% below its all-time high level it set in October, when the coin leapt over premier memecoin Dogecoin to enter the crypto top 10, according to CoinMarketCap.
Despite these large sell-offs, one industry watcher remains positive on the impact on crypto market, highlighting that as the total market capitalization increases, the context of these large liquidations changes as well.
[“US$800 million] is quite a bit higher than normal, but as a factor of total market cap these spikes are smaller than they used to be,” said James Quinn, managing partner at Q9 Capital, in a written statement to Forkast.News. “They are less impactful. It’s notable that despite the liquidations that BTC is down just more than 5%. This is quite close to an average day expected volatility.”
Most tokens hit their lowest point around 6 a.m. HKT and stabilized throughout the Asia trading day. While D’Anethan described investors in the continent as typically less bullish than those in Europe or the U.S., it appears as though they have stepped up to stem the losses — potentially as bearish fears were from external factors unrelated to market fundamentals.
“Right now, it looks like during Asian hours, Asian investors are buyers, but that just might be because the retracement was somewhat unjustified,” he said. “If you’re looking at crypto-specific fundamentals and people were looking to buy, if that sustains during the Asia hours, then you would expect that during U.S. trading hours, things would kick off even further, meaning we would buy even more.”
Despite this recent price sell-off and the downward price trajectory of the past couple of months, Caselin remains optimistic for the outlook for both Bitcoin and Ethereum, suggesting that especially during times of high inflation, investors will continue to turn to Bitcoin as a new competitor to gold as an inflation hedge.
“Bitcoin is still the safe haven asset and while much public attention is diverted to altcoin projects and concepts such as the metaverse, institutional investors including legacy institutions still deem Bitcoin a separate and unique crypto asset that continues to rise against gold,” he said. “In these inflationary times, asset inflation affects everything, including the most senseless tokens, but these price bubbles are in fact transitory. Bitcoin’s relatively tempered price movements indicate decreased participation from speculators which have moved to other tokens that thrive on hype.”