22 Aug 2022

Bitcoin crumbling as dollar strength pushes towards 20 year high

It’s been a rough week in the market, with BTC breaking its strong uptrend momentum after a steep correction on Friday down towards $21,000, ending the week seeing losses of 11%.
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The Friday sell-off coincided with the release of a record high German PPI leading investors to shy risk as expectations of further tightening commenced. ETH saw an even steeper sell-off, likely exaggerated by an extended bullish sentiment ahead of the merge, as we briefly noted when commenting on the ETHBTC strength in our last market update. Macro headwinds are once again breezing in the market, as the dollar strength index has pushed beyond the yearly high towards a new 20-year high this week. The strengthened dollar has generated a shaky environment for various assets. Since the Friday close, SPX is down 2%, Nasdaq is down 2.44%, while BTC is up 0.78%. Nevertheless, BTC’s leg down early Friday might have foreshadowed the ensuing sell-off in equities, and it is far too early to make any decoupling-related victory laps.
Source: Tradingview (Coinbase, Binance US)
This week’s key macro event is the annual Jackson Hole Symposium, with central bank officials from FED, BoE, and ECB attending. Jerome Powell’s speech on Friday might offer guidance on FED’s policy onwards, which could ignite volatility in the market.
And back we go to risk-off
After weeks of strengthening sentiment in the crypto market, market participants are returning to old habits in reducing their risk exposure.As we approach the end of August, all the indexes are in similar territory performance-wise, declining between 7% and 8%.The month started with brewing optimism as market participants began to get ready for Ethereum's merge. The Small Caps Index outperformed and was up a maximum of 12% in the middle of the month.
Source: Bletchley Indexes, Tradingview (Coinbase)
Last weekend, the market suddenly went risk-off again, erasing the month's gains in a few days. During this risk-off period, the smallest coins fell the most, and bitcoin kept its value the best. These dynamics are just what we expect during a worsening market sentiment.ETH, which has significantly outperformed BTC during the past couple of months, saw its market share peak above 20% seven days ago. ETH has underperformed against all the major cryptocurrencies over the past seven days, leading its market share to drop by almost one percentage point.Who has stolen this market share from ETH? As usual during market turmoil, traders have sought refuge in stablecoins, with the market shares of USDT and USDC growing by 0.77 and 0.5 percentage points.
Source: CoinMarketCap
Market sentiment retracts after almost hitting ‘greed’
In July and parts of August, optimism was building up in the crypto market, and we saw the Fear and Greed Index climb slowly but steadily from the extremely fearful territory towards the greedy area. The index hit a peak of 47 in the middle of August, just three points shy from greed. As we explained last week, market participants want to be careful in showing bullish tendencies, and the index quickly fell towards the extreme fear area just after testing the greed territory. As measured by the Fear and Greed Index, market sentiment is now at 28 – barely clinging above extreme fear.
The bitcoin spot volume stays elevated
The elevated activity in the bitcoin spot market continues, as the spot volume keeps at among the highest levels of the past year. As we have explained in several of our recent market reports, the high volumes are caused by Binance's fee removal, which attracted massive trading activity to the exchange. Spot volumes remain depleted in other venues, and we also see little activity in the bitcoin derivatives markets. In addition, the bitcoin on-chain activity is very muted, with few large transactions taking place, indicating that Binance's surging volumes may not be organic.
Source: Skew, Tradingview (Binance, Binance US, Bitfinex)
Big daily price decline leads bitcoin’s volatility to grow
Last week we explained how bitcoin’s volatility was staying at among the lowest levels in 2022 and warned that bitcoin rarely experiences such low volatility environments for prolonged periods. As we anticipated, it didn’t take more than a few days before bitcoin was violently awakened from its slumber, seeing a 10% daily price decline last Friday as it fell from $23k to below $21k in its fifth largest daily downwards price movement of the past year.
Source: Tradingview (Coinbase)
This was our spot market update, but lots are happening in the derivatives markets as well! Click here to read our weekly crypto derivatives update.
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