Crypto Market Musings

We’re in uncharted territory. There have been other crypto bear markets. But this is the first time that crypto has navigated an economic down cycle. And we’re discovering that crypto — including bitcoin — can’t escape the gravitational pull of macroeconomic headwinds.

The crypto markets fell when we found out that the personal consumption expenditures price index (excluding food and energy) increased 0.6% in January. That increase was higher than what “the experts” were expecting and an indicator that inflation isn’t under control yet.

The crypto markets (and stock markets overseas) rallied when data showed manufacturing in China was rebounding.

This up and down behavior is becoming the norm for crypto in this economic down cycle. And what it appears to show — for now — is that short-term investors are treating crypto like a risk asset while long-term investors have moved into an accumulation phase.

As of this writing, bitcoin is down around 2.6% over the last seven days. Ethereum is down about 1.6% over the same period of time. And Monero is down about 1.1%.

I fully expect this market yo-yo to continue as long as inflation continues to be a problem. And right now, there’s little evidence to suggest that inflation will show a significant downward trend anytime soon.

What I'm Thinking About

Crypto is a volatile asset class. A 10% swing in the stock markets is a cause for panic. A 10% swing in crypto prices feels like a normal day at the office. But as volatile as crypto is, bitcoin had an interesting February. It closed the month up just 0.03%. There was plenty of movement in the 28 days of February, but it remained essentially flat. That’s not what people expect from crypto.

Combine February’s essentially flat month with what appears to be low bitcoin liquidity levels in the market (basically, there isn’t much bitcoin available to trade because long-term holders are at an all-time high), and you get very interesting market dynamics.

Any significant trading activity in a low-liquidity market can have an outsized influence on the market. Prices can rise and fall dramatically because of a few transactions rather than general market belief or movement. And it’s difficult for institutional traders to trade without directly influencing the market. This sort of environment is ripe for big daily swings — and possibly some market manipulation. So while I believe bitcoin and ethereum will likely trade either sideways or a little lower over the near term, the trading environment is ripe for a few days of fireworks.

And Finally…

Bitcoin NFTs took off in January. But like all NFTs, they were incredibly popular — until they weren’t. Decrypt has a good story on the two-month roller coaster and Bored Ape creators Yuga Labs deciding to move into this space. But what I find more interesting is how NFTs on the bitcoin blockchain have caused a rift in the normally "conservative" bitcoin community that mostly believes bitcoin should only be about decentralized money. This Forbes piece does a great job of explaining the rift and is definitely worth the read.

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