Text: KYLE WHITE
Bitcoin volatility is at historic lows, spot market inflows remain subdued, and this week’s economic calendar suggests volatility will shake up crypto markets.
Continuing the trend into 2022, there is a lack of positive excitement in the crypto market. While Bitcoin and altcoins still start 2023 with little volatility, there are several reasons why volatility could spike in January.
Market cap during year-end 2022 Source: Arcane Research
Winklevoss letter to DCG sparks bankruptcy scare
On January 2, Gemini co-founder Cameron Winklevoss wrote an open letter to Digital Currency Group (DCG) founder Barry Silbert, asking him to answer the question of $900 million in locked client funds. Gemini partnered with Silbert to launch the “Earn” program, but since November 16, $900 million in customer funds have been locked due to DCG liquidity issues. After this letter, Crypto Twitter began to generate FUD on DCG, believing that there was a liquidity problem similar to that of Three Arrows Capital and FTX.
The debt owed to Gemini could place significant financial pressure on DCG as they could be forced to sell large positions in GBTC and ETHE, as well as other positions in trusts run by their sister company Grayscale. According to Arcane Research, another avenue for DCG to meet its debt obligations is to initiate a Reg M distribution, allowing holders of GBTC and ETHE positions to redeem the underlying assets at a 1:1 ratio.
Vetle Lunde, senior analyst at Arcane Research, noted:
Reg M will lead to a massive arbitrage strategy of selling cryptocurrency spot and buying shares of the Grayscale Trust Fund. If this happens, the crypto market could face further downside.
Circulating supply held by Grayscale Trust Source: Arcane Research
Fear runs high, liquidity languishes
The DCG and Gemini events come at a time of depressed market sentiment. Despite evidence that investors plan to participate in cryptocurrencies in 2023, most market participants are not optimistic and are reluctant to invest in risky assets. The Fear and Greed Index reading on January 3 was 26 out of 100, unchanged from December.
This high level of panic is even worse during times of low liquidity. Market activity continued to decline, down to volumes not seen since Binance implemented zero transaction fees for bitcoin trading pairs on June 24. The lackluster spot trading volumes suggest that the lackluster participation in the market at the start of the year will continue.
Bitcoin trading volume with and without Binance
Source: Arcane Research
If DCG goes the way of Reg M and spot market volumes remain low, the correction in cryptocurrency prices could intensify in the short-term.
Upcoming economic calendar hints at possible volatility
As the chart below shows, macro markets are off to a busy start in 2023:
Wednesday, January 4:
ISM Manufacturing PMI (U.S. Factory Activity)
US JOLTs (job vacancies)
Federal Open Market Committee (FOMC) meeting minutes
Thursday, January 5:
U.S. trade balance (net exports)
Friday, January 6:
Nonfarm Payrolls and Unemployment Data
ISM Non-Manufacturing PMI (Survey of Business Conditions)
Sunday, January 8:
Gemini’s settlement offer to DCG expires
January 12 (next Thursday):
U.S. Consumer Price Index (CPI) Inflation Report
January 13 (next Friday):
Bank of America begins reporting fourth-quarter 2022 earnings
If the numbers are lower than expected or if anything unusual happens, the stock market may react by selling off.
The reduction in spot trading volumes coincided with a two-year and five-month low in BTC volatility. Lunde believes that the period of low volatility will not last for too long:
These periods of low volatility rarely last for long, and periods of volatility compression are often followed by large swings, even in stagnant markets.
BTC 7-day and 30-day volatility source: Arcane Research
Some analysts believe the January 12 U.S. CPI report will show a surge in inflation. If so, the Fed may continue to raise interest rates, which has caused the market capitalization of cryptocurrencies to decline in the past.
The possibility of further rate hikes, combined with current market sentiment, a potential DCG bankruptcy and reduced market liquidity, the crypto market could be headed for another downturn.