Assessing the state of the markets - Vetle's kool kornerIt’s been a rough start to the year for all risk assets. The outlook on further tightening monetary policies led Nasdaq to suffer its worst week since March 2020, while crypto has seen a correspondingly dreadful start to the year. All the largest cryptocurrencies have seen negative returns so far this year. BTC has outperformed most altcoins recently, as investors seem to be rotating towards safety. Fear is evident in the BTC derivatives market. The futures basis has reached lows not seen since July, while funding rates in the perpetuals have mostly remained below neutral in the last month. This suggests that traders are currently reluctant to enter longs. Similar tendencies are present in the options market, where the skew indicates high demand for hedging through near-dated puts. Meanwhile, the implied volatility was unusually low last week in the at-the-money options. The IV has climbed over the weekend but remains low compared to what we’ve seen in the past year. Traders are seemingly less willing to commit to directional bets. All in all, the derivatives market currently signals high uncertainty among traders.
A flight to safety
Bitcoin failed to maintain support above $40,000 last week and is down -14% over the last seven days. Most financial markets are unforgiving at the moment. The equity markets have been left in shambles in January, as Nasdaq last week saw its worst week performance-wise since March 16th, 2020.
Source: NYDIG Data
Overall, the wide-reaching asset sell-off seems to be caused by growing macro uncertainty. Market participants are paying close attention to the ongoing FOMC meetings, and further hawkish FED statements could be presented in tomorrow’s FOMC presentation. The growing market uncertainty has led bitcoin to become highly correlated with the stock market, challenging the asset’s digital gold narrative.
Altcoins currently underperform vs. BTC, and there seems to be a flight to safety in the crypto market as both ETH (-24%), and BNB (-20%) have seen a very dreadful week. All top 50 coins by market cap (excluding stablecoins) are in the red this week. ATOM (Cosmos) is the top performer, down 8.3% over the last seven days.
Source: Coingecko, Messari
January summarized: The smaller the coin, the bigger the loss
January has been a hard month for most cryptocurrencies, especially for the smaller ones, measured by market cap. Of the market indexes we follow, bitcoin has performed the “best” with a 26% loss, followed by the Large and Medium Cap indexes with 28% losses. The Small Cap Index is the worst performer, with a 35% decline. The bitcoin dominance just climbed above 40% and is sitting at its highest level since the end of November. The altcoin season is undoubtedly over for now. The crypto market is in a state of extreme fear right now. This fearfulness has prompted a flight to safety, as we see large increases in stablecoins’ market shares.
Source: Coinmarketcap, NYDIG, Bletchleyindexes
The crypto market is rarely in a more fearful state than right now. While some thick-skinned crypto hodlers seem to never be bothered by a bit of market volatility, the dark crypto winter with more than two months of extreme fear has undoubtedly scared away some inexperienced crypto investors. Historically, the market has rewarded hodlers for their perseverance during difficult market conditions.
Source: Alternative.me, NYDIG
Hear ye, hear ye! The sleepy spot market has awaken
After a few weeks of shallow bitcoin spot volumes, the volume exploded on Friday as bitcoin worth $11.7 billion changed hands as bitcoin dropped below $40,000. Since then, volumes have remained elevated, with Monday seeing a real trading volume* of more than $10 billion. As we explained in our previous report, market participants were waiting to make moves as the bitcoin price was in a state of limbo. Bitcoin dropping below critical support at $40,000 was all it took for traders to become active again.
Source: NYDIG, Skew
Last week we reported that bitcoin's 30-day volatility was the lowest in more than one year, and we warned that significant price movements often follow such sustained periods of low volatility. After the recent days' price action, the 7-day volatility climbed to 4.1% - a relatively high level historically. Is the market done with releasing pressure, or will we see a period of sustained high volatility?
Source: Tradingview (Coinbase)