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January 17, 2023
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Is the Crypto Winter Thawing?
by Steve Walters
The past week has seen a strong performance from the crypto market. Is it the beginning of a possible bull run?

While I think it’s too early to bring bulls into the conversation, it's looking as if bitcoin and other major cryptos are continuing to respond to macro-economic cues.

The rally we’ve seen over the past five days was kicked off by the latest consumer inflation report. Late last week, the U.S. reported its Consumer Price Index (CPI), a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods, dropped for a sixth consecutive month.

The December CPI reading came in at 6.5%, while the core CPI, which excludes volatile food and energy prices, fell to 5.7%. By contrast, the November readings were 7.1% and 6%, respectively. At its June 2022 peak, consumer inflation was running at 9.1% annually.

The State of the Crypto Rally

Initially, there was little movement in markets following the release of the CPI report, but later in the day, bitcoin and Ethereum began to rally. That triggered a massive number of short positions to liquidate.

Data shows bitcoin liquidations of $125 million on January 14 alone and $775 million in total liquidations over a three-day period. In addition, roughly $225 million in bitcoin was withdrawn from exchanges and put into personal custody.

Exchange withdrawals are often seen as a bullish sign for bitcoin, as it means investors are accumulating bitcoin with no intent to sell.
Massive short liquidations helped lift BTC price. Image via Coinglass

Overall, bitcoin is up 23% over the past seven days, while Ethereum has gained over 18% in the same period. Both bitcoin and Ethereum are holding their weekend gains as of Tuesday, January 17.

However, there are a number of challenges facing crypto markets in the coming months, and these keep us from being fully bullish.

For one thing, even though inflation appears to be receding, the Federal Reserve is still likely to continue hiking interest rates for the foreseeable future. With an inflation target of 2%, the Fed is well aware that more needs to be done to bring inflation fully in check.

Markets are now expecting another 0.25% rate hike at the Fed’s January 31/Feb 1 meeting, though there’s a chance the central bank could hit markets with another 0.50% rate hike similar to the one delivered in December. This would almost certainly hit not only traditional financial markets, but also crypto.

Along with the near-term interest rate expectations, the crypto markets continue to face looming regulations not only in the U.S., but globally. There are also concerns over the reserves held by centralized exchanges, and the FTX FUD is far from over.

While the boosts in bitcoin and crypto this past weekend have certainly helped many crypto firms, there’s no guarantee more bankruptcies aren’t right around the corner.

One issue of particular concern is the trouble facing Digital Currency Group. The most recent developments have Gemini's founder Cameron Winklevoss accusing DCG CEO Barry Silbert of fraud. It certainly bears questioning as there have been many unanswered questions regarding the relationship between DCG and its subsidiaries Genesis and Grayscale.

Some of those questions are likely to be answered in the coming months, as last week also brought news that the U.S. Department of Justice will be looking into the intercompany dealings at DCG. In addition, the Securities and Exchange Commission filed suit against both Gemini and Genesis, claiming they were selling unregistered securities as part of the Gemini Earn program.

Adding additional stress to DCG are claims the company owes more than $3 billion to creditors and that it could be looking to offload some of its assets to satisfy those creditors. Such large-scale selling would undoubtedly do damage to crypto markets.

The greatest worry is how DCG plans to deal with the Grayscale Trust. If it was deemed necessary to unwind that fund, it could have profound impacts on BTC and the broader crypto market. While I remain cautiously optimistic, it's tempered by a healthy dose of skepticism.

Investor Confidence Appears to be Returning

The larger market does seem more sanguine however, as shown by the Crypto Fear and Greed Index.

That reading has been firmly in the "fear" portion of market sentiment for some months. However, the recent gains sent the index soaring above the 50 reading, giving us a neutral read on fear and greed in the crypto markets for the first time since March 2022, when bitcoin went from $38k to $47k over the course of roughly two weeks.
Liquid Staking and Derivatives

While the headlines have been mostly for major coins like bitcoin and Ethereum this week, the bigger story might be in the smaller liquid staking and derivatives platforms.

Over the past 30 days, the largest market cap growth has come from liquid staking platforms Lido Finance and StakeWise. Leading the pack has been Orca, the Automated Market Maker (AMM) decentralized exchange (DEX) built atop the Solana blockchain. The dominance of Orca is likely due to the more than 90% gains seen in Solana (SOL) over the past 30 days.

In addition to market cap growth for liquid staking platforms, we’ve also seen strong growth in the daily active users for derivative trading platforms like Perpetual Protocol and Synthetix. Decentralized options exchange Lyra has also seen a jump in its user base. NFTs seem to be coming back into favor as well, with smaller platforms Blur and X2Y2 seeing impressive 30-day growth in active users.

And let’s not forget OpenSea, which has seen a 36.6% increase in daily active users over the past 30 days. Overall, DeFi seems to be making a comeback even before the recent crypto rally.
Bitcoin Still Better than Stocks

I was curious to see how the recent rally might have impacted regular investor portfolios. At BMJ we have both a Blockchain Believers Portfolio and a Future Winners Portfolio, both of which take conservative approaches to investing in cryptocurrencies.

The factor that ties both of these portfolios together is their reliance on regular, similar investments: a practice known as “Dollar Cost Averaging” or DCA.
As you can see by looking at our recent Q4 2022 update, a DCA approach to bitcoin and crypto would have been a very good approach over the past five years, but how has the past year, one that has been characterized as a “crypto winter,” treated DCA investors?

There’s good news on that front. A quick modeling over at dcaBTC shows buying $100 in BTC each week from January 17, 2022 through January 17, 2023 (total $5,300 invested) would have resulted in a portfolio of 0.1271 BTC worth $5,295 (roughly).
I call that good news because if you had done the same with the S&P 500, the SPDR S&P 500 ETF (SPY) specifically, you would have just $5,005.68 on January 10, 2023 (a loss of $194.32).

It’s obvious that despite the challenges faced by the nascent crypto markets, they've still provided smart investors with better alternatives to equities.
Health, wealth, and happiness,

Steve Walters
BMJ Market Analyst
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